UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31 , 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _____ to _____
Commission File Number 001-36708
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(Exact name of Registrant as specified in its Charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
Registrant’s telephone number, including area code: (501 ) 850-0820
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
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 o
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| x | Accelerated filer | o | |||||||||
| Non-accelerated filer | o | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Global Select Market on June 30, 2022 was $1,388,293,808
The number of shares of the Registrant’s common stock outstanding as of February 17, 2023 was 237,252,934 .
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements as defined under U.S. federal securities law. Forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements regarding: our expectations regarding the settlement we have entered into with Windstream Holdings, Inc. (together with Windstream Holdings II, LLC, its successor in interest, and its subsidiaries, “Windstream”); the future prospects and financial health of Windstream; our expectations about our ability to maintain our status as a real estate investment trust (a “REIT”); our expectations regarding filing an amendment to this Form 10-K to include Windstream’s audited financial statements as of and for the year ended December 31, 2022; our expectations regarding the effect of the COVID-19 pandemic on our results of operations and financial condition, including the potential need to perform an interim goodwill analysis and report an impairment charge related thereto; our expectations regarding the effect of tax-related legislation on our tax position; our expectations regarding the future growth and demand of the telecommunication industry, future financing plans, business strategies, growth prospects, operating and financial performance, and our future liquidity needs and access to capital; expectations regarding future deployment of fiber strand miles and small cell networks and recognition of revenue related thereto; expectations regarding levels of capital expenditures; expectations regarding the deductibility of goodwill for tax purposes; expectations regarding reclassification of accumulated other comprehensive income (loss) related to derivatives to interest expense; expectations regarding the amortization of intangible assets; and expectations regarding the payment of dividends.
Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:
•the future prospects of our largest customer, Windstream, following its emergence from bankruptcy;
•adverse impacts of the COVID-19 pandemic, inflation and higher interest rates on our employees, our business, the business of our customers and other business partners and the global financial markets;
•the ability and willingness of our customers to meet and/or perform their obligations under any contractual arrangements entered into with us, including master lease arrangements;
•the ability and willingness of our customers to renew their leases with us upon their expiration, our ability to reach agreement on the price of such renewal or ability to obtain a satisfactory renewal rent from an independent appraisal, and the ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we replace an existing tenant;
•the availability of and our ability to identify suitable acquisition opportunities and our ability to acquire and lease the respective properties on favorable terms or operate and integrate the acquired businesses;
•our ability to generate sufficient cash flows to service our outstanding indebtedness and fund our capital funding commitments;
•our ability to access debt and equity capital markets;
•the impact on our business or the business of our customers as a result of credit rating downgrades, and fluctuating interest rates;
•our ability to retain our key management personnel;
•our ability to maintain our status as a REIT;
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•changes in the U.S. tax law and other federal, state or local laws, whether or not specific to REITs;
•covenants in our debt agreements that may limit our operational flexibility;
•the possibility that we may experience equipment failures, natural disasters, cyber-attacks or terrorist attacks for which our insurance may not provide adequate coverage;
•the risk that we fail to fully realize the potential benefits of or have difficulty in integrating the companies we acquire;
•other risks inherent in the communications industry and in the ownership of communications distribution systems, including potential liability relating to environmental matters and illiquidity of real estate investments; and
•additional factors discussed in Part I, Item 1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K, as well as those described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (the “SEC”).
Forward-looking statements speak only as of the date of this Annual Report on Form 10-K. Except in the normal course of our public disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.
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PART I
Item 1. Business.
Overview
Uniti Group Inc. (the “Company”, “Uniti”, “we”, “us” or “our”) is an independent, internally managed real estate investment trust (“REIT”) engaged in the acquisition, construction and leasing of mission critical infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic, copper and coaxial broadband networks and data centers.
As of December 31, 2022, Uniti and its subsidiaries own approximately 136,000 fiber network route miles, representing approximately 8.0 million fiber strand miles, approximately 230,000 route miles of copper cable lines, central office land and buildings across 44 states and beneficial rights to permits, pole agreements and easements. Refer to Part I, Item 2 “Properties” of this Annual Report on Form 10-K for a more detailed breakdown of our telecommunications properties.
For the year ended December 31, 2022, we had revenues of $1.1 billion, net loss attributable to common shareholders of $9.4 million, Funds From Operations (“FFO”) of $202.9 million and Adjusted Funds From Operations (“AFFO”) of $455.1 million. Both FFO and AFFO are non-GAAP financial measures, which we use to analyze our results. Refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K for additional information regarding these non-GAAP financial measures. We manage our operations in two reportable segments, Leasing and Fiber (which we refer to as Uniti Leasing and Uniti Fiber, respectively), which are described in more detail in Note 15 to our consolidated financial statements contained in Part II, Item 8 “Financial Statements and Supplementary Data” in addition to our corporate operations.
Refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Significant Business Developments,” of this Annual Report on Form 10-K for information regarding significant developments in our business in 2022.
Industry
The current communications infrastructure industry is marked by the growing demand for and use of bandwidth-intensive devices and applications, such as smart devices, real-time and online streaming video, cloud-based applications, social media and mobile broadband. This growth in consumption requires the support of robust communications infrastructure, of which fiber networks and communications towers are critical components. Substantial investments have been made in recent years in fiber networks, lit services and colocation facilities to keep pace with the increased bandwidth use of both enterprise and consumer-end users. As companies attempt to keep pace with this rapidly evolving business sector, communications infrastructure continues to increase in priority and economic importance. We believe this considerable demand creates significant opportunities for us as an operator and as a funding source for operators seeking to capitalize on these trends through build outs and acquisitions of infrastructure assets.
The wireless communications industry is a prime example of the growing importance of the bandwidth infrastructure industry. As wireless traffic and mobile data consumption continue to grow worldwide, participants in the wireless communications industry are increasing their network capacity through the development of new wireless cell sites and the addition of bandwidth capacity. Consumers are demanding network quality and coverage, and as a result, wireless carriers are making significant capital investments to improve quality, expand their coverage and remain relevant in a highly competitive industry. We expect this continued growth in capital expenditures to generate high demands for bandwidth infrastructure services.
Strategy
Our primary goal is to create long-term stockholder value by (i) generating reliable and growing cash flows, (ii) diversifying our tenant and asset base, (iii) paying a dividend and (iv) maintaining our financial strength and liquidity. To
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achieve this goal, we employ a business strategy that leverages our first mover advantages in the sector and our strong access to the capital markets. The key components of our business strategy are:
Acquire Additional Infrastructure Assets Through Sale Leaseback Transactions
We actively seek to acquire communications infrastructure assets from communication service providers and lease these assets back to the communication service providers on a long-term basis. We believe this type of transaction benefits the communication service providers with incremental liquidity which can be used to reduce indebtedness or for other investments, while they continue to focus on their existing business. We will employ a disciplined, opportunistic acquisition strategy and seek to price transactions appropriately based on, among other things, growth opportunities, the mix of assets acquired, length and terms of the lease, and credit worthiness of the tenant.
This strategy is also designed to expand our mix of tenants and other real property and will reduce our revenue concentration with Windstream Holdings, Inc. (“Windstream Holdings” together with Windstream Holdings II, LLC, its successor in interest, and subsidiaries, “Windstream”), our anchor tenant. We expect that this objective will be achieved over time as part of our overall strategy to acquire new distribution systems and other real property within the communications infrastructure industry to further diversify our overall portfolio.
Capitalize on the Market Demand for Increased Bandwidth Infrastructure and Performance
Bandwidth intensive devices and applications are rapidly fueling worldwide consumption of bandwidth, which in turn fuels a continuously growing demand for stable and secure bandwidth options. Communications service providers and other enterprises whose services and businesses require substantial amounts of bandwidth are increasingly looking to infrastructure providers to support their bandwidth needs and to expand the reach, performance and security of their networks. We believe Uniti Fiber is well positioned to capitalize on this ongoing demand for bandwidth infrastructure solutions.
Fund Capital Extensions to Existing and New Tenants for Improvements of Infrastructure Assets
We believe the communications infrastructure industry in the United States is currently going through an upgrade cycle driven by consumers’ general desire for greater bandwidth and wireless services. These upgrades require significant capital expenditures, and we believe Uniti provides a non-competitive funding source for communication service providers to help accelerate expansion of their networks.
We intend to support our tenant operators and other communication service providers by providing capital to them for a variety of purposes, including capacity augmentation projects, tower construction and network expansions. We expect to structure these investments as lease arrangements that produce attractive returns for Uniti. For example, under the leases with our anchor tenant, Windstream, we have agreed to fund up to $1.75 billion in value accretive upgrades to the network we lease to Windstream in exchange for an 8% return and future rental rate increases. For more information on this program with Windstream, refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K.
Facilitate M&A Transactions in the Communication Service Sector as a Capital Partner
We believe Uniti can provide cost efficient funds to potential acquirers in the communication service sector, and thereby facilitate M&A transactions as a capital partner, including by partnering with operators through use of “OpCo-PropCo” structures, pursuant to which we acquire the underlying network and other assets and the operator acquires the operations.
The highly fragmented nature of the communication service sector is expected to result in more consolidation, which we believe will provide us ample opportunity to pursue these types of transactions.
Maintain Balance Sheet Strength and Liquidity
We seek to maintain a capital structure that provides the resources and financial flexibility to position us to capitalize on strategic growth opportunities. Our access to, and cost of, external capital is dependent on various factors, including general market conditions, credit ratings on our securities, interest rates and expectations of our future business performance. We intend to maintain a strong balance sheet through disciplined use of leverage, aiming to lower our relative cost of capital over time, and continuing to have access to multiple sources of capital and liquidity. As of December 31,
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2022, we had $43.8 million of unrestricted cash and cash equivalents. As of December 31, 2022, with the exception of our Revolving Credit Facility, all of our debt was fixed-rate debt.
Competition
We compete for investments in the communications industry with telecommunications companies, investment companies, private equity funds, hedge fund investors, sovereign funds and other REITs who focus primarily on specific segments of the communications infrastructure industry. The communications infrastructure industry is characterized by a high degree of competition among a large number of participants, including many local, regional and global corporations. Some of our competitors are significantly larger and have greater financial resources and lower costs of capital than we have. In addition, revenues from our network properties are dependent, to an extent, on the ability of our operating partners, like Windstream, to compete with other communication service providers.
However, we believe we are positioned to identify and successfully capitalize on acquisition opportunities that meet our investment objectives and that we have significant competitive advantages that support our leadership position in owning, funding the construction of and leasing communications infrastructure, including:
First-Mover Advantage; Uniquely Positioned to Capitalize on Expansion Opportunities
We are the first REIT primarily focused on the acquisition and construction of mission critical infrastructure in the communications industry. We believe this provides us with a significant first-mover competitive advantage to capitalize on the large and fragmented communications infrastructure industry. Additionally, we believe our position, scale and national reach will help us achieve operational efficiencies and support future growth opportunities.
Large Scale Anchor Tenant
Windstream, as our anchor tenant, provides us with a base of rent revenues as an initial platform for us to grow and diversify our portfolio and tenant base. For the year ended December 31, 2022, Windstream represented 66.5% of our revenue.
Windstream provides advanced network communications and technology solutions for businesses across the United States. Windstream also offers broadband, entertainment and security solutions to consumers and small businesses primarily in rural areas. Windstream continues to operate the telecommunications network assets, including fiber and copper networks and other real estate (the “Distribution Systems”) which were contributed to us in our spin-off from Windstream in 2015 (the “Spin-Off”), hold the associated regulatory licenses and own and operate other assets, including distribution systems in select states not included in the Spin-Off.
Windstream has a diverse customer base, encompassing enterprise and small business customers, carriers and consumers. We believe the assets we lease to Windstream under the Windstream Leases (as defined below) are critical for Windstream to successfully run its business and operations following its emergence from bankruptcy.
Strong Relationships with Communication Service Providers
Members of our management team have developed an extensive network of relationships with qualified local, regional and national communication service providers across the United States. This extensive network has been built by our management team through decades of operating experience, involvement in industry trade organizations and the development of banking relationships and investor relations within the communications infrastructure industry. We believe these strong relationships will allow us to effectively source investment opportunities from communication service providers other than Windstream. We intend to work collaboratively with our operating partners in providing expansion capital at attractive rates to help them achieve their growth and business objectives. We will seek to partner with communication service providers who possess local market knowledge, demonstrate hands-on management and have proven track records.
Experienced and Committed Management Team
Our senior management team is comprised of veteran leaders with strong backgrounds in their respective disciplines. Our senior management team has extensive experience managing telecommunications operations, consummating mergers and acquisitions and accessing both debt and equity capital markets to fund growth and maintain a flexible capital structure.
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Our Business
Our primary lines of business are Uniti Leasing and Uniti Fiber, which are described in further detail below.
Uniti Leasing
Uniti Leasing is engaged in acquiring and constructing mission-critical communications assets, such as fiber, data centers, next-generation consumer broadband, coaxial and upgradeable copper, and leasing them back to anchor customers on either an exclusive or shared-tenant basis. Presently, a substantial portion of Uniti Leasing’s revenue is rental revenues from leasing the Distribution Systems to Windstream as described below in the section titled “Significant Customers.” We believe our attractive cost of capital and advantageous REIT structure will enable Uniti Leasing to provide creative and tax-efficient solutions to additional customers, including (i) sale leaseback transactions, whereby Uniti Leasing acquires existing infrastructure assets from communications service providers and leases them back on a long-term basis; (ii) capital investment financing, whereby Uniti Leasing offers communications service providers a cost-efficient method of raising funds for discrete capital investments to upgrade or expand their network; and (iii) mergers and acquisitions financing, whereby Uniti Leasing facilitates mergers and acquisition transactions as a capital partner. Results for Uniti Leasing are reported in our consolidated financial statements in our Leasing business segment.
Uniti Fiber
Uniti Fiber is a leading provider of infrastructure solutions, including cell site backhaul and small cell for wireless operators and ethernet, wavelengths and dark fiber for telecommunications carriers and enterprises. With Uniti Fiber, our goal is to capitalize on the rising demand by carriers and enterprises for dark fiber, establish ourselves as a proven small-cell systems provider and leverage wholesale enterprise opportunities as well as opportunities through the School and Libraries Program (commonly referred to as "E-Rate") administered by the Universal Service Administrative Company (also known as USAC). We believe fiber is the mission-critical focal point in the modern communications infrastructure industry and that Uniti Fiber will accelerate our growth and diversification strategy and expand our relationships with high quality national and international wireless carriers.
At December 31, 2022, Uniti Fiber’s revenues under contract were over $1.1 billion, with a network consisting of approximately 2.9 million strand miles of fiber and approximately 28,137 customer connections. Results for Uniti Fiber are reported in our consolidated financial statements in our Fiber Infrastructure business segment.
The Company
Uniti Group Inc. was incorporated in the state of Maryland on September 4, 2014.
Uniti operates as a REIT for U.S. federal income tax purposes. As a REIT, the Company is generally not subject to U.S. federal income taxes on income generated by its REIT operations. We have elected to treat the subsidiaries through which we operate our fiber business, Uniti Fiber, certain aspects of our leasing business, Uniti Leasing, certain aspects of our former towers business, and our former small consumer competitive local exchange carrier business (the "Consumer CLEC Business" or “Talk America”), as taxable REIT subsidiaries (“TRSs”). TRSs enable us to engage in activities that result in income that does not constitute qualifying income for a REIT. Our TRSs are subject to U.S. federal, state and local corporate income taxes.
The Company operates through a customary up-REIT structure, pursuant to which we hold substantially all of our assets through a partnership, Uniti Group LP, a Delaware limited partnership (the “Operating Partnership”), that we control as general partner. This structure is intended to facilitate future acquisition opportunities by providing the Company with the ability to use common units of the Operating Partnership as a tax-efficient acquisition currency. As of December 31, 2022, we are the sole general partner of the Operating Partnership and own approximately 99.96% of the partnership interests in the Operating Partnership. In addition, we have undertaken a series of transactions to permit us to hold certain of our assets indirectly through subsidiaries that are taxed as REITs, which may also facilitate future acquisition opportunities.
Human Capital Resources
On December 31, 2022, we employed 784 people, of whom 460 work directly developing and maintaining network operations, 110 in sales and sales support, 68 in shared services, 78 accounting and finance related positions and 68 in operations support roles. None of our employees are subject to a collective bargaining agreement.
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Our employees are our most important resources and their success ultimately creates our own. We fuel their success by offering career growth, recognition and appreciation programs, fulfilling work relationships, empowerment, mentoring, and training and development opportunities. We demonstrate the value we place in our employees financial, physical and emotional health by providing our employees with competitive salaries, health benefits, investment opportunities, vacation options and a generous paid volunteer program, among other benefits.
For the last four years Uniti has been certified as a Great Place to Work®. Our management team strives to embody and promote our company values of united, necessary, innovative, tenacious, and integrity. As a certified Great Place to Work®, 91% of our employees say they are treated fairly and are made to feel welcome. 80% of them agree that Uniti is a great place to work. We believe our energetic and collaborative work environment is a contributing factor to our limited employee turnover and high levels of engagement.
Within our organization, we believe in unity and know that it can only be generated through connection, collaboration and respect. We are committed to fostering these ideals by hiring, developing and supporting a diverse and inclusive workplace that encourages, supports and celebrates the diverse voices of our team members. Two women sit on our board of directors and women represent approximately 22% of leadership positions across our company. A key component to our commitment includes our Diversity and Inclusion Groups (“DIGs”) which support employees and allies in various experiences including diverse backgrounds, lifestyle, characteristics, and more. Uniti currently has five active DIGs that allow for enrichment, connection and growth for our employees. Each DIG is sponsored and supported by senior leaders across the organization.
We value our strong ethical foundation and have instituted policies and procedures designed to preserve and prioritize corporate integrity. To actively promote honest, ethical and respectful conduct, we engage in a top-down approach by requiring our directors and executives to set high standards of integrity, responsibility and transparency. We insist all employees adhere to a code of conduct that sets standards for appropriate behavior and includes information on preventing, identifying, reporting and stopping any type of discrimination or unethical behavior.
To support the mental health needs of our employees we added an employer-paid virtual mental health benefit in addition to our already available Employee Assistance Program ("EAP"). Our EAP offers free, confidential assessments and short-term counseling to employees. Together, with our additional virtual mental health benefit, employees have the opportunity to seek in person or virtual assistance with personal and/or work-related problems. In 2021, Uniti launched Remote Work Academy which allows eligible employees primarily located within offices to enroll in a six-month virtual learning academy teaching them successful and effective business practices necessary to work remotely. Upon graduation of Remote Work Academy, employees are formally transitioned to a remote work opportunity giving them the flexibility to work from home in lieu of reporting to an office location.
Uniti will continue to seek opportunities to support the overall health and well-being of our employees as we continue to realize significant value for our stockholders, customers and communities.
Significant Customers
For the years ended December 31, 2022, 2021 and 2020, 66.5%, 66.4% and 65.8% of our revenues, respectively, were derived from leasing our Distribution Systems to Windstream.
On April 24, 2015, we were separated and spun-off from Windstream pursuant to which Windstream contributed the Distribution Systems and the Consumer CLEC Business to Uniti and Uniti issued common stock and indebtedness and paid cash obtained from borrowings under Uniti’s senior credit facilities to Windstream. In connection with the Spin-Off, we entered into a long-term exclusive triple-net lease (the “Master Lease”) with Windstream, pursuant to which a substantial portion of our real property is leased to Windstream and from which a substantial portion of our leasing revenues are currently derived. In connection with Windstream’s emergence from bankruptcy, Uniti and Windstream bifurcated the Master Lease and entered into two structurally similar master leases (collectively, the “Windstream Leases”), which amended and restated the Master Lease in its entirety. The Windstream Leases consist of (a) a master lease (the "ILEC MLA") that governs Uniti owned assets used for Windstream’s incumbent local exchange carrier (“ILEC”) operations and (b) a master lease (the "CLEC MLA") that governs Uniti owned assets used for Windstream’s CLEC operations.
Prior to its emergence from bankruptcy on September 21, 2020, Windstream was a publicly traded company subject to the periodic filing requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Windstream’s historic filings through their quarter ended June 30, 2020 can be found at www.sec.gov. On September 22, 2020,
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Windstream filed a Form 15 to terminate all filing obligations under Sections 12(g) and 15(d) under the Exchange Act. Windstream’s filings are not incorporated by reference in this Annual Report on Form 10-K.
We monitor the credit quality of Windstream through numerous methods, including by (i) reviewing credit ratings of Windstream by nationally recognized credit agencies, (ii) reviewing the financial statements of Windstream that are required to be delivered to us pursuant to the Windstream Leases, (iii) monitoring new reports regarding Windstream and its business, (iv) conducting research to ascertain industry trends potentially affecting Windstream, (v) monitoring Windstream’s compliance with the terms of the Windstream Leases and (vi) monitoring the timeliness of its payments under the Windstream Leases.
As of the date of this Annual Report on Form 10-K, Windstream is current on all lease payments. We note that in August 2020, Moody’s Investors Service assigned a B3 corporate family rating with a stable outlook to Windstream in connection with its post-emergence exit financing. At the same time, S&P Global Ratings assigned Windstream a B- issuer rating with a stable outlook. Both ratings remain current as of the date of this filing. In addition, in order to assist us in our continuing assessment of Windstream’s creditworthiness, we periodically receive certain confidential financial information and metrics from Windstream. Refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K for additional information regarding this assessment.
Government Regulation, Licensing and Enforcement
U.S. Telecommunications Regulatory Overview
Our subsidiaries and our tenants operate in a regulated market. As operators of telecommunications facilities and services, both we and the current and future tenants of our telecommunications assets are typically subject to extensive and complex federal, state and local telecommunications laws and regulations. The Federal Communications Commission (“FCC”) regulates the provision of interstate and international telecommunications services, and state public utility commissions (“PUCs”) regulate intrastate telecommunications services. Federal and state telecommunications laws and regulations are wide-ranging, and violations of them can subject us and our tenants to civil, criminal and administrative sanctions. We expect that the telecommunications industry, in general, will continue to face increased regulation. Changes in laws and regulations and violations of federal or state laws or regulations by us or our tenants could have a significant direct or indirect effect on our operations and financial condition, as detailed below and set forth under “Risk Factors—Risks Related to Our Business.”
Our operations require that certain of our subsidiaries across all segments hold licenses or other forms of authorization from the FCC and state PUCs in those states where we operate, and in some jurisdictions our subsidiaries must file tariffs or other price lists describing their rates, terms and conditions of the services they provide. The FCC and PUCs can modify or terminate a service provider’s license or other authority to provide telecommunications services for failure to comply with applicable laws and regulations. The FCC and PUCs may also investigate our subsidiaries’ operations and may impose fines or other penalties for violations of the same. In addition, our subsidiaries are required to submit periodic reports to the FCC and PUCs documenting their revenues and other data. Some of this information is used as the basis for the imposition of various regulatory fees and other assessments. In order to engage in certain transactions in some jurisdictions, including changes of control, the encumbrance of certain assets, the issuance of securities, the incurrence of indebtedness, the guarantee of indebtedness of other entities, including subsidiaries of ours, and the transfer of assets, we may be required to provide notice and/or obtain prior approval from certain governmental agencies. Failure to obtain required approvals could subject us to fines or other penalties.
Our subsidiaries are subject to a number of federal, state, and local regulations that govern the way we can conduct our business. Such regulations may impose requirements and costs for our entities to operate and utilize local rights of way. They may also impose other operating costs on our businesses, including restrictions on pricing flexibility for certain products, minimum service quality standards, service reporting, intercarrier compensation, contributions to universal service, and other obligations. Further, the relaxation of regulatory requirements on our competitors, such as those granting us access to incumbent local exchange carrier facilities and/or services or the prices that such carriers may charge for such services or access to their facilities, may also have a detrimental effect on the businesses of our subsidiaries and/or tenants.
We have sought to structure the operations for our core real estate business in a manner to minimize the likelihood that we may be required to become regulated as a public utility or common carrier by the FCC or PUCs, but a number of our business operations are nonetheless subject to federal, state, and local regulation, and we cannot guarantee that our core real estate business will not become further subject to federal, state, and local regulation in the future.
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With respect to the broadband internet services that we provide, traditionally, the FCC has recognized that broadband internet access services are “information services” subject to limited regulation. In 2015, the FCC issued a “network neutrality” decision that declared broadband internet access services to be subject to certain “telecommunications services” regulation under Title II of the Communications Act of 1934. These regulations would have limited the ways that broadband internet access service providers could structure business arrangements and manage their networks and spurred additional restrictions, including rate regulation, which could adversely affect broadband investment and innovation. In 2017, the FCC voted to return broadband internet access service to its prior classification as “information services.” As a result of these decisions, state legislators and governors have introduced, and in some cases passed, state laws and executive orders requiring different levels of adherence to “network neutrality” principles for broadband internet access service providers active in the applicable states. As a result of these laws and regulations, it is unclear at this time how broadband internet services will be regulated in the future, and the potential impact those regulations may have on our broadband internet service business. In addition, while they have not sought to specifically regulate the manner in which broadband internet service providers manage network traffic, the FCC has nonetheless continued to adopt other forms of regulation over such services, such as broadband labelling requirements, which may affect our operations and subject us to sanctions if we fail to comply with them. We cannot anticipate what additional requirements may be imposed on our broadband internet access business by federal, state or local authorities in the future.
Uniti Fiber
Our subsidiaries that compose Uniti Fiber own and operate significant fiber and other communications facilities throughout various regions of the United States. The provision of such services is often subject to FCC and PUC licensure in many jurisdictions, and the companies are typically licensed as CLECs and/or interexchange carriers in those states where they operate. The companies also hold various FCC wireless licenses in order to provide microwave backhaul and other wireless services. Because of the nature of the licenses that these companies hold, and the nature of the services that they provide, they are subject to various federal and state regulatory requirements, including, but not limited to, revenue and other reporting requirements and tariffing requirements. The companies must also maintain their wireless licenses with the FCC, which requires construction and notification reporting and other regulatory requirements. New fiber network construction is also subject to certain state and local governmental permitting and licensing requirements. Delays in the local and state permitting process can delay the construction of new facilities. Failure to abide by permit requirements can subject the company to fines and other penalties.
In some cases, our subsidiaries that compose Uniti Fiber utilize services or facilities of incumbent local exchange carriers through arrangements established under the Telecommunications Act of 1996 and FCC regulations. The FCC has recently issued orders allowing ILECs to stop offering such elements and/or to increase the rates that they may charge competitive providers for access to such elements. The loss of these elements, or significant price increases associated with our use of such elements, may increase our costs to maintain and construct new network facilities to replace those we may no longer access, or have other negative effects on our business such as a loss of ability to continue to provide services to certain customers.
A number of our subsidiaries that compose Uniti Fiber provide services to customers within the FCC’s E-Rate and Rural Healthcare (“RHC”) programs. E-Rate and RHC are a federally funded programs that provide discounts to assist eligible schools, libraries, and healthcare providers to fund the acquisition and operation of certain communications services and technology. These programs are administered by the Universal Service Administrative Company under the direction of the FCC. The E-Rate and RHC programs are subject to regulatory requirements that change often, and require strict-adherence to program requirements and deadlines. Failure to abide by program and regulatory requirements can result in loss of funding, claw back of prior funding, and fines or other sanctions. The E-Rate, RHC and other programs are funded by the universal service fund ("USF") program The USF program design, including the manner in which USF contributions are made by service providers, is currently subject to federal court challenges. We cannot predict future developments or changes to the regulatory environment with respect to the USF, E-Rate or RHC programs, or the impact such developments or changes would have on our business.
Regulatory Changes
Future revenues, costs, and capital investment in the communication businesses of our tenants, Uniti Fiber, and other related entities could be adversely affected by material changes to, or decisions regarding applicability of, government requirements, including, but not limited to, changes in rules governing inter-carrier compensation, interconnection access to network facilities, state and federal USF support, rules governing the prices that can be charged for business data services, infrastructure location and siting rules, access to unbundled network elements, and other requirements. Federal and state
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communications laws and regulations may be amended in the future, and other new laws and regulations may affect our business. In addition, certain laws and regulations applicable to us and our competitors may be, and have been, challenged in the courts and could be vacated or modified at any time. We cannot predict future developments or changes to the regulatory environment or the impact such developments or changes would have on our business.
In addition, regulations could create significant compliance costs for us. Delays in obtaining FCC and PUC certifications and regulatory approvals could cause us to incur substantial legal and administrative expenses, and conditions imposed in connection with such approvals could adversely affect the rates that we are able to charge our customers. Both our subsidiaries and our tenants may also be affected by legislation and/or regulation imposing new or additional obligations related to, for example, law enforcement assistance, cyber-security protection, intellectual property rights protections, environmental protections, consumer privacy, tax, or other areas. We cannot predict how any such future changes may impact our business, or the business of our tenants.
Environmental Matters
A wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect telecommunications operations and facilities. These laws and regulations, and their enforcement, involve complex and varied requirements, and many such laws and regulations impose strict liability for violations. Some of these federal, state and local laws may directly impact us. Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal property damages and the owner’s liability therefore could exceed or impair the value of the property and/or the assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral, which, in turn, could reduce revenues.
Insurance
We maintain, or will require in our leases (including the Windstream Leases) that our tenants maintain, applicable lines of insurance on our properties and their operations. Under the Windstream Leases, Windstream has the right to self-insure or use a captive provider with respect to its insurance obligations. We believe that the amount and scope of insurance coverage provided by our policies and the policies maintained by our tenants are customary for similarly situated companies in the telecommunications industry. However, our tenants may elect not to, or be able to, maintain the required insurance coverages, and the failure by any of them to do so could have a material adverse effect on us. We may not continue to require the same levels of insurance coverage under our leases, including the Windstream Leases, and such insurance may not be available at a reasonable cost in the future or fully cover all losses on our properties upon the occurrence of a catastrophic event. Moreover, we cannot guarantee the future financial viability of the insurers.
Available Information
Our principal executive offices are located at 2101 Riverfront Drive, Suite A, Little Rock, AR 72202 and our telephone number is (501) 850-0820. We maintain a website at www.uniti.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available on our website, free of charge, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and Exchange Commission. Our Exchange Act filings can also be found at www.sec.gov.
Current copies of our Code of Business Conduct and Ethics & Whistleblower Policy, Corporate Governance Guidelines, and the charters for our Audit, Compensation and Governance Committees are posted in the “Corporate Governance” section of the About Us page of our website at www.uniti.com.
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Item 1A. Risk Factors.
Risks Related to Our Business
We are dependent on Windstream to make payments to us under the Windstream Leases, and an event that materially and adversely affects Windstream’s business, financial position or results of operations could materially and adversely affect our business, financial position or results of operations.
Windstream is the lessee of the Distribution Systems pursuant to the Windstream Leases and, therefore, is presently the source of a substantial portion of our revenues. There can be no assurance that Windstream will have sufficient assets, income and access to financing to enable it to satisfy its payment and other obligations under the Windstream Leases. In recent years, Windstream has experienced annual declines in its total revenue, sales and cash flow and has undergone a restructuring under Chapter 11 of the U.S. Bankruptcy Code.
The inability or unwillingness of Windstream to meet its rent obligations under the Windstream Leases could materially adversely affect our business, financial position or results of operations, including our ability to pay dividends to our stockholders as required to maintain our status as a REIT. The inability of Windstream to satisfy its other obligations under the Windstream Leases, such as the payment of insurance, taxes and utilities, could materially and adversely affect the condition of the Distribution Systems as well as the business, financial position and results of operations of Windstream. In addition, Windstream will be dependent on distributions from its subsidiaries in order to satisfy the payment obligations under the Windstream Leases, as such, if its subsidiaries were to experience a material and adverse effect on their business, financial position or results of operations, our business, financial position or results of operations could also be materially and adversely affected.
Failure by Windstream to comply with the terms of the Windstream Leases or to comply with the regulations to which the Distribution Systems are subject could require us to find another lessee for such Distribution Systems, or a portion thereof, and there could be a decrease or cessation of rental payments by Windstream.
There is no assurance that we would be able to lease the Distribution Systems to another lessee on substantially equivalent or better terms than the Windstream Leases, or at all, successfully reposition the Distribution Systems for other uses or sell the Distribution Systems on terms that are favorable to us. It may be more difficult to find a replacement tenant for a telecommunications property than it would be to find a replacement tenant for a general commercial property due to the specialized nature of the business. Even if we are able to find a suitable replacement tenant for the Distribution Systems, transfers of operations of communication distribution systems are subject to regulatory approvals not required for transfers of other types of commercial operations, which may affect our ability to successfully transition the Distribution Systems.
We may be unable to renew the Windstream Leases on commercially attractive terms or at all.
The initial term of the Windstream Leases expires on April 30, 2030. There can be no assurance that Windstream will renew the Windstream Leases upon their expiration.
If Windstream elects to renew the Windstream Leases, we and Windstream will need to reach a mutual agreement on the rent for the renewal term. The Windstream Leases require that the renewal rent be “Fair Market Rent,” and if we and Windstream are unable to agree on that amount, the renewal Fair Market Rent will be determined by an independent appraisal process. If the current rent payable by Windstream exceeds the Fair Market Rent at the time of renewal, then the renewal term rent will be lower than the current rent payable by Windstream. We are confident that any renewal will be at a rate reflecting fair value as required by the terms of the Windstream Leases and should be at an amount that will at least approximate current rent amounts, but we can provide no assurance as to the outcome of any negotiation or appraisal process. Any significant decrease in the renewal rent of the Windstream Leases could have a material adverse effect on our results of operations, financial condition and future prospects.
Our level of indebtedness could materially and adversely affect our financial position, including reducing funds available for other business purposes and reducing our operational flexibility.
As of December 31, 2022, we had outstanding long term indebtedness of approximately $5.26 billion consisting of senior notes and a revolving credit facility provided by a syndicate of banks and other financial institutions, which, as of December 31, 2022, provided for an aggregate committed amount of borrowings up to approximately $500.0 million. Subject to the restrictions set forth in our debt agreements, our board of directors may establish and change our leverage
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policy at any time without stockholder approval. Any significant additional indebtedness could require a substantial portion of our cash flow to make interest and principal payments due on our indebtedness. Greater demands on our cash resources may reduce funds available to us to pay dividends, make capital expenditures and acquisitions, or carry out other aspects of our business strategy. Increased indebtedness can also limit our ability to adjust rapidly to changing market conditions, make us more vulnerable to general adverse economic and industry conditions and create competitive disadvantages for us compared to other companies with relatively lower debt levels. Increased future debt service obligations may limit our operational flexibility, including our ability to acquire assets, finance or refinance our assets or sell assets as needed, and our ability to pay dividends.
We anticipate that we will have sufficient access to liquidity to fund our cash needs; if we are unable to do so, we would need to reduce our spending and it could have an adverse effect on us.
We anticipate continuing to invest in our network infrastructure across our Uniti Leasing and Uniti Fiber portfolios. We anticipate declaring dividends for the 2023 tax year to comply with our REIT distribution requirements. We anticipate that we will partially finance these needs, together with operating expenses (including our debt service obligations) from our cash on hand and cash flows provided by operating activities. We also expect the need to raise capital to fund obligations to
Windstream, including (i) $490.1 million of settlement payments payable over time (of which $269.6 million remains to be
paid as of December 31, 2022) and (ii) an aggregate of up to $1.75 billion for certain growth capital improvements (of
which $1.2 billion remains to be paid as of December 31, 2022) in long-term value accretive fiber and related assets made by Windstream (or other applicable tenant) to certain ILEC and CLEC properties (the “Growth Capital Improvements”)
subject to the Windstream Leases (although such investments will lead to higher rent payments). However, we may need to access the capital markets to generate additional funds in an amount sufficient to fund our business operations, announced investment activities, capital expenditures, debt service and distributions to our shareholders. We are closely monitoring the equity and debt markets and will seek to access them promptly when we determine market conditions are appropriate. The amount, nature and timing of any capital markets transactions will depend on: our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions. These expectations are forward-looking and subject to a number of uncertainties and assumptions. If our expectations about our liquidity prove to be incorrect or we are unable to access the capital markets as we anticipate, we would be subject to a shortfall in liquidity in the future which could lead to a reduction in our capital expenditures and/or dividends and, in an extreme case, our ability to pay our debt service obligations. If this shortfall occurs rapidly and with little or no notice, it could limit our ability to address the shortfall on a timely basis.
We intend to pursue acquisitions of additional properties and seek other strategic opportunities, which may result in the use of a significant amount of management resources or significant costs, and we may not fully realize the potential benefits of such transactions.
We intend to pursue acquisitions of additional properties and seek acquisitions and other strategic opportunities. Accordingly, we currently are, and expect in the future to be, engaged in evaluating potential transactions and other strategic alternatives. Although there is uncertainty that any of these discussions will result in definitive agreements or the completion of any transaction, we may devote a significant amount of our management resources to such a transaction, which could negatively impact our operations. We may incur significant costs in connection with seeking acquisitions or other strategic opportunities regardless of whether the transaction is completed. In the event that we consummate an acquisition or strategic alternative in the future, there is no assurance that we would fully realize the potential benefits of such a transaction. Integration may be difficult and unpredictable, and acquisition-related integration costs, including certain non-recurring charges, could materially and adversely affect our results of operations. Moreover, integrating assets and businesses may significantly burden management and internal resources, including the potential loss or unavailability of key personnel. If we fail to successfully integrate the assets and businesses we acquire, we may not fully realize the potential benefits we expect, and our operating results could be adversely affected.
Reports of a potential sale of the business may interfere with our business and harm our results of operations.
Media outlets have recently reported, and may report in the future, that certain unaffiliated third parties are interested in acquiring us. There can be no assurance that any such transaction will occur. We generally do not confirm or deny rumors, and we also do not generally announce negotiations or discussions until definitive documentation has been executed. Such rumors and any related actions taken by third parties could adversely affect our business, as responding to such reports and activity can be costly and time-consuming, disruptive to our operations and divert the attention of management and our employees. Moreover, such reports and activities may create perceived uncertainties among current and potential customers, employees and other constituencies as to our future direction, which could result in the loss of business
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opportunities and make it more difficult to attract and retain qualified personnel. In addition, any perception of a possible transaction may cause significant fluctuations in our stock price that do not necessarily reflect the underlying fundamentals and prospects of our business.
We are dependent on the communications industry and may be susceptible to the risks associated with it, which could materially adversely affect our business, financial position or results of operations.
As the owner, lessor and provider of communications services and distribution systems serving the communications industry, we are impacted by the risks associated with the communications industry. Therefore, our success is to some degree dependent on the communications industry, which could be adversely affected by economic conditions in general, changes in consumer trends and preferences, changes in communications technology designed to enhance the efficiency of communications distribution systems (including lit fiber networks and wireless equipment), and other factors over which we and our tenants have no control. As we are subject to risks inherent in substantial investments in a single industry, a decrease in the communications business or development and implementation of any such new technologies would likely have an adverse effect on our revenues.
Our business is subject to government regulations and changes in current or future laws, regulations or rules could restrict our ability to operate our business in the manner currently contemplated.
Our business, and that of our tenants, is subject to federal, state and local regulation. In certain jurisdictions these regulations could be applied or enforced retroactively. Local zoning authorities and community organizations are often opposed to construction in their communities and these regulations can delay, prevent or increase the cost of new distribution system construction and modifications, thereby limiting our ability to respond to customer demands and requirements. Existing regulatory policies may materially and adversely affect the associated timing or cost of such projects and additional regulations may be adopted which increase delays or result in additional costs to us, or that prevent such projects in certain locations. These factors could materially and adversely affect our business, results of operations or financial condition. For more information regarding the regulations we are subject to, please see the section entitled “Business – Government Regulation, Licensing and Enforcement.”
In addition, in response to the COVID-19 pandemic, federal, state, and local governments adopted certain policies and initiatives including travel restrictions, stay at home policies, temporary business closures, social distancing and vaccination requirements. While many of these measures have been loosened, the COVID-19 pandemic resulted in, and future outbreak of highly infectious or contagious diseases could result in, reinstating these measures or implementing new or additional measures. While we were able to navigate workplace restrictions and limitations in connection with COVID-19 with minimal disruptions to our business operations, we may be required to further modify our business practices in response to further government policies and initiatives or other negative impacts in response to COVID-19 or other highly infectious or contagious diseases.
Any further impairment of our goodwill would negatively impact our financial condition.
Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations. Impairment may result from significant changes in the manner of use of the acquired assets, negative industry or economic trends and/or any changes in the key assumptions regarding our fair value. The extent to which the fair value of net assets acquired in business combinations is ultimately impacted will depend on numerous evolving factors that are presently uncertain and which we may not be able to predict. Although we assess potential impairment of our goodwill on an annual basis, negative industry or economic trends and/or any changes in key assumptions regarding our fair value may cause us to perform an interim analysis of our goodwill and cause us to report an impairment charge in the future, which could have a significant adverse impact on our reported earnings. At December 31, 2022, we had $361.4 million of goodwill on our consolidated balance sheet after recognizing a $240.5 million goodwill impairment charge for the Fiber Infrastructure reporting unit during the year ended December 31, 2022. For a discussion of our goodwill impairment testing, see Note 3 to our consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” and “Critical Accounting Estimates-Evaluation of Goodwill Impairment” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.
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We or our tenants may experience uninsured or underinsured losses, which could result in a significant loss of the capital we have invested in a property, decrease anticipated future revenues or cause us to incur unanticipated expenses.
The Windstream Leases require, and we expect that additional lease agreements that we enter into will require, that the tenant maintain comprehensive insurance and hazard insurance or self-insure its insurance obligations. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods that may be uninsurable or not economically insurable. Insurance coverage may not be sufficient to pay the full current market value or current replacement cost of a loss. Inflation, changes in ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore the economic position with respect to such property.
In addition, even if damage to our properties is covered by insurance, a disruption of business caused by a casualty event may result in loss of revenue for our tenants or us. Any business interruption insurance may not fully compensate them or us for such loss of revenue. If one of our tenants experiences such a loss, it may be unable to satisfy its payment obligations to us under its lease with us.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
We rely on information technology networks and systems, including the internet, to process, transmit and store electronic information and to manage or support a variety of our business processes, including financial transactions and maintenance of records. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing confidential information. Although we have taken steps to protect the security of the data maintained in our information systems, it is possible that our security measures will not be able to prevent the systems’ improper functioning, or the improper disclosure of information in the event of cyber-attacks. Physical or electronic break-ins, computer viruses, attacks by hackers and similar security breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could materially and adversely affect us.
Additionally, many of our employees may be working remotely from their homes, which could have the effect of exacerbating any of the foregoing risks. While we have taken steps to ensure the security of our data and to prevent security breaches, many of these measures are being deployed for the first time on a widespread and sustained basis, and there is no guarantee the data security and privacy safeguards we have put in place will be completely effective or that we will not encounter some of the common risks associated with employees accessing Company data and systems remotely. As a result, we may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by security breaches.
Any failure of Uniti Fiber’s physical infrastructure or services could lead to significant costs and disruptions.
Uniti Fiber’s business depends on providing customers with highly reliable service. The services provided are subject to failure resulting from numerous factors, including human error, power loss, improper maintenance, physical or electronic security breaches, fire, earthquake, hurricane, flood and other natural disasters, water damage, the effect of war, terrorism and any related conflicts or similar events worldwide, and sabotage and vandalism. Problems within Uniti Fiber’s networks or facilities, whether within our control or the control of third-party providers, could result in service interruptions or equipment damage. We may not be able to efficiently upgrade or change Uniti Fiber’s networks or facilities to meet new demands without incurring significant costs that we may not be able to pass on to customers. Given the service guarantees that may be included in Uniti Fiber’s agreements with customers, such disruptions could result in customer credits; however, we cannot assume that customers will accept these credits as compensation in the future, and we may face additional liability or loss of customers.
Unforeseen events could adversely affect our operations, business, and reputation
We could be negatively impacted by unforeseen events, such as extreme weather events, natural disasters (including as a result of any potential effects of climate change), acts of vandalism or terrorism, or outbreak of highly infectious or contagious diseases. For example, the COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets, and another pandemic or other
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unforeseen event in the future could do the same. Also, there is increasing concern that global climate change is occurring and could result in increased frequency of certain types of natural disasters and extreme weather events. We cannot predict with certainty the rate at which climate change is occurring or the potential direct or indirect impacts of climate change to our business. Any such unforeseen events could, among other things, damage or delay deployment of our communication infrastructure, interrupt or delay service to our tenants or could result in legal claims or penalties, disruption in operations, damage to our reputation, negative market perception, or costly response measures, which could adversely affect our business.
Although our businesses are considered essential, an unforeseen event, such as the COVID-19 pandemic or a future pandemic, could have material and adverse effects on our ability to successfully operate and on our financial condition, results of operations and cash flows due to, among other factors: significant disruptions or delays in our operations or network performance; increases in operating costs, inventory shortages and/or a decrease in productivity; delays in permitting activities due to the shutdown of local permitting authorities; a deterioration in our ability to operate in affected areas or delays in the supply of products or services; the impact on our contracts with customers and suppliers, including potential disputes over force majeure events; adverse impact on the timing of installs in our enterprise and wholesale customer segments at Uniti Fiber; a general reduction in business and economic activity; difficulty accessing debt and equity capital on attractive terms, or at all; our access to capital may be restricted; and the potential negative impact on the health and well-being of our personnel. We have implemented policies and procedures designed to mitigate the risk of adverse impacts of unforeseen events on our operations, but we may incur additional costs to ensure continuity of business operations caused by these events, which could adversely affect our financial condition and results of operations. However, the extent of such impacts will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of an unforeseen event and actions taken to contain it or its impact, among others.
Risks Related to the Status of Uniti as a REIT
If we do not qualify as a REIT, or fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which could reduce the amount of cash available for distribution to our stockholders and to service debt.
We operate as a REIT for U.S. federal income tax purposes, as does one of our principal operating subsidiaries. Our qualification as a REIT will depend on our satisfaction of certain highly technical and complex asset, income, organizational, distribution, stockholder ownership and other requirements, including at the level of our subsidiary REIT, on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination and for which we may not obtain independent appraisals.
If we or our subsidiary REIT were to fail to qualify as a REIT in any taxable year, unless certain relief provisions apply, we would be subject to U.S. federal income tax on all of our taxable income at regular corporate rates and dividends paid to our stockholders would not be deductible by us in computing our taxable income. As a result, we would no longer be required to pay dividends in order to qualify to be taxed as a REIT, and we could decide to reduce the amount of dividends we pay to our stockholders. Any resulting corporate liability could be substantial and could reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock and to service debt. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
Legislative or other actions affecting REITs could have a negative effect on us.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury (“Treasury”). Changes to the tax laws affecting REITs or TRSs, which may have retroactive application, could adversely affect our stockholders or us. We cannot predict how changes in the tax laws might affect our stockholders or us. Accordingly, we cannot provide assurance that new legislation, Treasury regulations, administrative interpretations or court decisions will not significantly affect our ability to remain qualified as a
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REIT, the federal income tax consequences of such qualification, the determination of the amount of REIT taxable income or the amount of tax paid by our TRSs.
We could fail to qualify as a REIT if income we receive from lease transactions, such as income from Windstream pursuant to the Windstream Leases, is not treated as qualifying income.
Under applicable provisions of the Code, we will not be treated as a REIT unless we satisfy various requirements, including requirements relating to the sources of our gross income. Rents received or accrued by us from Windstream or other lessees will not be treated as qualifying rent for purposes of these requirements if the relevant lease is not respected as a “true lease” for U.S. federal income tax purposes and is instead treated as a service contract, joint venture or some other type of arrangement. If any of our leases, including the Windstream Leases, are not respected as a true lease for U.S. federal income tax purposes, we may fail to qualify as a REIT.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must qualify as a REIT and distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, for the U.S. federal corporate income tax not to apply to earnings that we distribute (assuming that certain other requirements are also satisfied). To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified for REITs under U.S. federal income tax laws. The same rules apply to our REIT subsidiary. We currently intend to make distributions to our stockholders, and to cause our REIT subsidiary to make distributions, to comply with the REIT requirements of the Code.
Our FFO is currently generated largely by rents paid under the Windstream Leases. From time to time, we may generate taxable income greater than our cash flow as a result of differences in timing between the recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. If we do not have other funds available in these situations, we could be required to borrow funds on unfavorable terms, sell assets at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions in order to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock and decrease cash available to service debt.
A deterioration in Windstream’s financial condition could adversely affect our ability to continue to qualify as a REIT.
In addition to satisfying the distribution requirement described above in the immediately preceding risk factor, we and our subsidiary REIT must each satisfy a number of other requirements in order to qualify as a REIT. A deterioration in Windstream’s financial condition could adversely affect our ability to satisfy several of these requirements and thus our ability to continue to qualify as a REIT.
For example, in order to qualify as a REIT for any year, at the end of each calendar quarter, at least 75% of the value of our assets must consist of cash, cash items, government securities and “real estate assets” (as defined in the Code), and no more than 20% of the value of our total assets can be represented by securities (other than qualified real estate assets) of one or more TRSs. If we fail to comply with either of these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification. These same rules apply to our REIT subsidiary. Our ability to satisfy these requirements depends in substantial part on the value of the assets that are the subject of the Windstream Leases with Windstream, and any diminution in the value of such assets, including as a result of any diminution in the implied value of the Windstream Leases as a result of changes in the financial condition or creditworthiness of Windstream or Windstream’s inability or unwillingness to meet its rent and other obligations under the Windstream Leases, could adversely affect our ability to satisfy these requirements at the end of any calendar quarter, and there can be no assurance that we would be able to timely correct any such failure or otherwise qualify for any statutory relief provision. See “—Risks Related to Our Business—We are dependent on Windstream Holdings to make payments to us under the Windstream Leases, and an event that materially and adversely affects Windstream’s business, financial position or results of operations could materially and adversely affect our business, financial position or results of operations.” In addition, under applicable provisions of the Code, we
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will not be treated as a REIT for any year unless we satisfy various requirements, including requirements relating to the sources of our gross income in such year. These same rules apply to our REIT subsidiary. Our ability to satisfy these gross income tests depends in substantial part on our receipt of rents paid under the Windstream Leases. Windstream’s inability or unwillingness to meet its rent and other obligations under the Windstream Leases, or any suspension, delay or other reduction in the amount of rent that we receive under the Windstream Leases could adversely affect our ability to qualify as a REIT.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income and state or local income, property and transfer taxes. For example, we hold some of our assets and conduct certain of our activities through a TRS that is subject to U.S. federal, state and local corporate-level income taxes as a regular C corporation. In addition, we may incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm’s-length basis. Any of these taxes could decrease cash available for distribution to our stockholders and servicing our debt.
Complying with the REIT requirements may cause us to forego otherwise attractive acquisition opportunities.
To qualify as a REIT for U.S. federal income tax purposes, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and “real estate assets” (as defined in the Code). The remainder of our investments (other than government securities, qualified real estate assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, no more than 20% of the value of our total assets can be represented by securities (other than qualified real estate assets) of one or more TRSs, and no more than 25% of the value of our total assets can be represented by nonqualified publicly offered REIT debt instruments (as defined in the Code). If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result of such asset limitations, we may be required to forego otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders and servicing our debt.
Risks Related to Our Common Stock
We cannot guarantee our ability to pay dividends in the future, and we could elect to pay dividends substantially in the form of additional shares of our common stock.
To qualify as a REIT, our annual dividend must not be less than 90% of our REIT taxable income on an annual basis, determined without regard to the dividends paid deduction and excluding any net capital gains. Our ability to pay dividends may be adversely affected by a number of factors, including the risk factors herein. Dividends will be authorized by our board of directors and declared by us based upon a number of factors, including actual results of operations, restrictions under Maryland law or applicable debt covenants, our financial condition, our taxable income, the annual distribution requirements under the REIT provisions of the Code, our operating expenses and other factors our directors deem relevant. We cannot ensure that we will achieve investment results that will allow us to make a specified level of cash dividends or year-to-year increases in cash dividends in the future. Accordingly, because we are required to make distributions in certain amounts to our shareholders in order to maintain our REIT status and avoid incurring entity-level income and excise tax, we may elect to pay one or more dividends to our shareholders substantially in the form of additional shares of common stock. If we do so, the common stock that we distribute would be taxable dividend income to our shareholders, in whole or in part, based on the fair market value of our common stock at the time the dividend is paid.
Furthermore, while we are required to pay dividends in order to maintain our REIT status (as described above under “Risks Related to the Status of Uniti as a REIT—REIT distribution requirements could adversely affect our ability to execute our business plan”), we may elect not to maintain our REIT status, in which case we would no longer be required to pay such dividends. Moreover, even if we do maintain our REIT status, after completing various procedural steps, we may elect to comply with the applicable distribution requirements by distributing, under certain circumstances, shares of our common stock in lieu of cash, which may result in holders of our common stock incurring tax liability without the receipt of a corresponding amount of cash. If we elect not to maintain our REIT status or to satisfy any required distributions in shares
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of common stock in lieu of cash, such action could negatively affect our business and financial condition as well as the market price of our common stock. No assurance can be given that we will pay any dividends on shares of our common stock in the future.
The market price and trading volume of our common stock may fluctuate widely.
We cannot predict the prices at which our common stock may trade. The market price of our common stock has fluctuated significantly since February 15, 2019 and may continue to fluctuate significantly, depending upon many factors, some of which may be beyond our control.
Our charter restricts the ownership and transfer of our outstanding stock, which may have the effect of delaying, deferring or preventing a transaction or change of control of our company.
In order for us to qualify as a REIT, not more than 50% in value of our outstanding shares of stock may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year after the first year for which we elect to be taxed and qualify as a REIT. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year (other than the first taxable year for which we elect to be taxed and qualify as a REIT). Our charter, with certain exceptions, authorizes our board of directors to take such actions as are necessary or advisable to preserve our qualification as a REIT. Our charter also provides that, unless exempted by the board of directors, no person may own more than 9.8% in value or in number, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate of the outstanding shares of all classes and series of our stock. The constructive ownership rules are complex and may cause shares of stock owned directly or constructively by a group of related individuals or entities to be constructively owned by one individual or entity. These ownership limits could delay or prevent a transaction or a change in control of us that might involve a premium price for shares of our stock or otherwise be in the best interests of our stockholders.
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
Uniti and its subsidiaries own or lease approximately 136,000 fiber network route miles, representing approximately 8.0 million fiber strand miles, approximately 230,000 route miles of copper cable lines, wireless communication towers, central office land and buildings across 44 states and beneficial rights to permits, pole agreements and easements.
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Leasing Segment
Uniti Leasing’s network properties include its fiber route miles and copper route miles. Below is a geographic distribution summary as of December 31, 2022:
| Location | Fiber Route Miles | Copper Route Miles | Total Route Miles | ||||||||||||||
| TX | 13,300 | 39,000 | 52,300 | ||||||||||||||
| GA | 12,700 | 44,900 | 57,600 | ||||||||||||||
| KY | 12,500 | 32,200 | 44,700 | ||||||||||||||
| IA | 9,200 | 31,500 | 40,700 | ||||||||||||||
| NC | 5,800 | 18,000 | 23,800 | ||||||||||||||
| OH | 5,800 | 10,400 | 16,200 | ||||||||||||||
| AR | 4,500 | 13,400 | 17,900 | ||||||||||||||
| IL | 3,500 | — | 3,500 | ||||||||||||||
| FL | 3,100 | 8,300 | 11,400 | ||||||||||||||
| OK | 2,300 | 12,000 | 14,300 | ||||||||||||||
| IN | 2,200 | — | 2,200 | ||||||||||||||
| MI | 2,100 | — | 2,100 | ||||||||||||||
| WI | 2,000 | — | 2,000 | ||||||||||||||
| CA | 1,800 | — | 1,800 | ||||||||||||||
| MO | 1,700 | 10,800 | 12,500 | ||||||||||||||
| NM | 1,600 | 5,100 | 6,700 | ||||||||||||||
| NY | 1,400 | — | 1,400 | ||||||||||||||
| PA | 1,300 | — | 1,300 | ||||||||||||||
| TN | 1,300 | — | 1,300 | ||||||||||||||
| AL | 1,200 | 2,400 | 3,600 | ||||||||||||||
| VA | 1,100 | — | 1,100 | ||||||||||||||
| LA | 1,000 | — | 1,000 | ||||||||||||||
| CO | 1,000 | 0 | 1,000 | ||||||||||||||
Other(1) | 6,500 | 1,500 | 8,000 | ||||||||||||||
| Total | 98,900 | 229,500 | 328,400 | ||||||||||||||
(1)Includes 21 states.
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Fiber Segment
Uniti Fiber’s network properties include its fiber route miles and wireless communications towers. Below is a geographic distribution summary of approximate fiber route miles and wireless communications towers as of December 31, 2022:
| Location | Fiber Route Miles | ||||
| FL | 9,200 | ||||
| LA | 6,500 | ||||
| GA | 6,100 | ||||
| AL | 5,200 | ||||
| MS | 3,100 | ||||
| VA | 1,600 | ||||
| NY | 1,500 | ||||
| TX | 1,300 | ||||
Other(1) | 2,100 | ||||
| Total | 36,600 | ||||
(1)Includes 13 states.
| Location | Towers | ||||
| LA | 32 | ||||
| NM | 19 | ||||
| AR | 11 | ||||
| TX | 18 | ||||
| NE | 10 | ||||
Other(1) | 20 | ||||
| Total | 110 | ||||
(1)Includes 10 states.
Item 3. Legal Proceedings.
A description of legal proceedings can be found in Note 16 - Commitments and Contingencies to our consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K and is incorporated by reference into this Item 3.
Item 4. Mine Safety Disclosures.
None
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “UNIT.”
Holders
As of February 17, 2023, the closing price of our common stock was $5.94 per share as reported on the NASDAQ Global Select Market. As of February 17, 2023, we had 237,252,934 outstanding shares of common stock, and there were approximately 16,778 registered holders of record of Uniti’s common stock. A substantially greater number of holders of Uniti common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions.
Dividends (Distributions)
Distributions with respect to our common stock are characterized for federal income tax purposes as taxable ordinary dividends, capital gains dividends, non-dividend distributions or a combination thereof. It has been our policy to declare dividends to common shareholders so as to comply with the provisions of the Internal Revenue Code governing REITs.
Any dividends must be declared by our Board of Directors, which will take into account various factors including our current and anticipated operating results, our financial position, REIT requirements, conditions prevailing in the market, restrictions in our debt documents and additional factors they deem appropriate. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends or to change the amount paid as dividends.
As a result, we may be required to record a provision in our Consolidated Financial Statements for U.S. federal income taxes related to the activities of the REIT and its pass-through subsidiaries for any undistributed income. We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
Stock Performance
The following graph shows a comparison from December 31, 2017 through December 31, 2022 on the NASDAQ Global Select Market of the cumulative total return for our common stock, the Standard & Poor's 400 Stock Index (S&P 400 Index), and the MSCI US REIT Index. The graph assumes that $100 was invested at the market open on December 31,
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2017 and that all dividends were reinvested in the common stock of Uniti, the S&P 400 Index and the MSCI US REIT Index. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
Cumulative Total Stockholder Returns
Based on Investment of $100.00 Beginning on December 31, 2017
| 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | |||||||||||||||
| Uniti Group Inc. | $ | 100.00 | $ | 99.99 | $ | 55.05 | $ | 84.42 | $ | 106.08 | $ | 44.80 | ||||||||
| S&P 400 Index | 100.00 | 88.92 | 112.21 | 127.54 | 159.12 | 138.34 | ||||||||||||||
| MSCI US REIT Index | 100.00 | 95.49 | 120.21 | 111.11 | 158.96 | 120.00 | ||||||||||||||
Issuer Purchases of Equity Securities
The table below provides information regarding shares withheld from Uniti employees to satisfy minimum statutory tax withholding obligations arising from the vesting of restricted stock granted under the Uniti Group Inc. 2015 Equity
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Incentive Plan. The shares of common stock withheld to satisfy tax withholding obligations may be deemed purchases of such shares required to be disclosed pursuant to this Item 5.
| Period | Total Number of Shares Purchased | Average Price Paid per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| October 1, 2022 to October 31, 2022 | 58,366 | $ | 6.95 | — | — | |||||||||||||||||||||
| November 1, 2022 to November 30, 2022 | — | — | — | — | ||||||||||||||||||||||
| December 1, 2022 to December 31, 2022 | 12,235 | 5.94 | — | — | ||||||||||||||||||||||
| Total | 70,601 | $ | 6.77 | — | — | |||||||||||||||||||||
(1)The average price paid per share is the weighted-average of the fair market prices at which we calculated the number of shares withheld to cover tax withholdings for the employees.
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management’s discussion and analysis of financial condition and results of operations describes the principal factors affecting the results of our operations, financial condition, and changes in financial condition, as well as our critical accounting estimates.
This section generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on February 25, 2022, as amended by Amendment No. 1 thereto filed on Form 10-K/A with the SEC on March 22, 2022.
Overview
Company Description
Uniti is an independent, internally managed REIT engaged in the acquisition and construction of mission critical infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic, copper and coaxial broadband networks and data centers.
Uniti operates as a REIT for U.S. federal income tax purposes. As a REIT, the Company is generally not subject to U.S. federal income taxes on income generated by its REIT operations, which includes income derived from the Windstream Leases. We have elected to treat the subsidiaries through which we operate our fiber business, Uniti Fiber, certain aspects of our leasing business, Uniti Leasing, certain aspects of our former towers business, and our former Consumer CLEC Business, as TRSs. TRSs enable us to engage in activities that result in income that does not constitute qualifying income for a REIT. Our TRSs are subject to U.S. federal, state and local corporate income taxes.
The Company operates through a customary up-REIT structure, pursuant to which we hold substantially all of our assets through the Operating Partnership that we control as general partner. This structure is intended to facilitate future acquisition opportunities by providing the Company with the ability to use common units of the Operating Partnership as a tax-efficient acquisition currency. As of December 31, 2022, we are the sole general partner of the Operating Partnership and own approximately 99.96% of the partnership interests in the Operating Partnership. In addition, we have undertaken a series of transactions to permit us to hold certain assets indirectly through subsidiaries that are taxed as REITs, which may also facilitate future acquisition opportunities.
We aim to grow and diversify our portfolio and tenant base by pursuing a range of transaction structures with communication service providers, including (i) sale-leaseback transactions, whereby we acquire existing infrastructure assets from third parties, including communication service providers, and lease them back on a long-term triple-net basis;
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(ii) leasing of dark fiber and selling of lit services on our existing fiber network assets that we either constructed or acquired; (iii) whole company acquisitions, which may include the use of one or more TRSs that are permitted under the tax laws to acquire and operate non-REIT businesses and assets subject to certain limitations; (iv) capital investment financing, whereby we offer communication service providers a cost efficient method of raising funds for discrete capital investments to upgrade or expand their network; and (v) mergers and acquisitions financing, whereby we facilitate mergers and acquisition transactions as a capital partner, including through operating company-property company (“OpCo-PropCo”) structures.
We manage our operations as the two reportable business segments, in addition to our corporate operations, which include:
Leasing Segment: Represents the results from our leasing business, Uniti Leasing, which is engaged in the acquisition and construction of mission-critical communications assets and leasing them to anchor customers on either an exclusive or shared-tenant basis, in addition to the leasing of dark fiber on our existing fiber network assets that we either constructed or acquired. While the Leasing segment represents our REIT operations, certain aspects of the Leasing segment are also operated through taxable REIT subsidiaries.
Fiber Infrastructure Segment: Represents the operations of our fiber business, Uniti Fiber, which is a leading provider of infrastructure solutions, including cell site backhaul and dark fiber, to the telecommunications industry.
Corporate Operations: Represents our corporate office and shared service functions. Certain costs and expenses, primarily related to headcount, information technology systems, insurance, professional fees and similar charges, that are directly attributable to operations of our business segments are allocated to the respective segments.
We evaluate the performance of each segment based on Adjusted EBITDA, which is a segment performance measure we define as net income determined in accordance with GAAP, before interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense and the impact, which may be recurring in nature, of transaction and integration related costs, costs associated with Windstream’s bankruptcy, costs associated with litigation claims made against us, costs associated with the implementation of our enterprise resource planning system, goodwill impairment charges, executive severance costs, costs related to the settlement with Windstream, amortization of non-cash rights-of-use assets, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, including early tender and redemption premiums and costs associated with the termination of related hedging activities, gains or losses on dispositions, changes in the fair value of contingent consideration and financial instruments, and other similar or infrequent items (although we may not have had such charges in the periods presented). Adjusted EBITDA includes adjustments to reflect the Company’s share of Adjusted EBITDA from unconsolidated entities. For more information on Adjusted EBITDA, see “Non-GAAP Financial Measures.” Detailed information about our segments can be found in Note 15 to our consolidated financial statements contained in Part II, Item 8 “Financial Statements and Supplementary Data.”
Significant Business Developments
Secured Notes Offering. On February 14, 2023, the Operating Partnership, Uniti Fiber Holdings Inc., Uniti Group Finance
2019 Inc. and CSL Capital, LLC issued $2.6 billion aggregate principal amount of 10.50% senior secured notes due 2028 (the “Secured Notes due February 2028”) and deposited amounts with the trustee sufficient to fund the redemption in full of the 2025 Secured Notes (as defined herein). Consequently, our obligations with respect to the indenture governing the 2025 Secured Notes have been satisfied and discharged. We used the remaining net proceeds from the offering of the Secured Notes due February 2028 to repay outstanding borrowings under our Revolving Credit Facility (as defined below). See Note 23 to our Consolidated Financial Statements in Part II, Item 8 "Financial Statements and Supplementary Data" for additional information.
Convertible Notes. The Company issued $300 million aggregate principal amount of 7.50% Convertible Senior Notes due 2027 on December 12, 2022 and, pursuant to an over-allotment option, $6.5 million aggregate principal amount of 7.50% Convertible Senior Notes due 2027 on December 23, 2022 (collectively, the “Convertible 2027 Notes”). The Convertible 2027 Notes are guaranteed by each of the Company’s subsidiaries that is an issuer, obligor or guarantor under the Company’s existing senior notes (except initially those subsidiaries that require regulatory approval prior to guaranteeing the Convertible 2027 Notes). The Convertible 2027 Notes bear interest at a fixed rate of 7.50% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2023. The Convertible 2027 Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election at an initial conversion rate of 137.1742 shares of the Company’s common stock per $1,000 principal amount (equal to an
26
initial conversion price of approximately $7.29 per share) subject to adjustment. The Convertible 2027 Notes will mature on December 1, 2027, unless earlier converted, redeemed or repurchased.
The net proceeds from the sale of the Convertible 2027 Notes were approximately $298.1 million, after deducting discounts and commissions to the initial purchasers and other estimated fees and expenses. The Company contributed approximately $198.1 million of the net proceeds of the offering to Uniti Fiber Holdings Inc., a wholly owned subsidiary of the Company (“Uniti Fiber Holdings”), to fund the repurchase of, and to pay accrued and unpaid interest with respect to, approximately $207.1 million aggregate principal amount of 4.00% exchangeable senior notes due 2024 (the “Exchangeable Notes”) issued by Uniti Fiber Holdings. The Company used $21.1 million of the net proceeds of the offering to pay the cost of certain capped call transactions in connection with the Convertible 2027 Notes offering, as described in Note 12 to our consolidated financial statements contained in Part II, Item 8 "Financial Statements and Supplementary Data". The Company intends to use the remaining net proceeds from the offering for general corporate purposes, which may include the repurchase or repayment of other outstanding debt, including, but not limited to, additional open market repurchases, redemptions or tender offers of the Exchangeable Notes.
Sale of Harmoni Towers Interest. On June 21, 2022, the Company completed the sale of its investment in Harmoni Towers LP (“Harmoni”) to Palistar Communications Infrastructure GP LLC for total cash consideration of $32.5 million. As a result of the transaction, during the second quarter of 2022 we recorded a pre-tax gain of $7.9 million within other (income) expense, net within our Consolidated Statements of Income (Loss).
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Comparison of the years ended December 31, 2022 and 2021
The following tables sets forth our results of operations expressed as dollars and as a percentage of total revenues for the periods indicated:
| (Thousands) | Year Ended December 31, 2022 | % of Revenues | Year Ended December 31, 2021 | % of Revenues | ||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Leasing | $ | 827,457 | 73.3% | $ | 801,497 | 72.8% | ||||||||||||||||||||
| Fiber Infrastructure | 301,390 | 26.7% | 299,025 | 27.2% | ||||||||||||||||||||||
| Total revenues | 1,128,847 | 100.0% | 1,100,522 | 100.0% | ||||||||||||||||||||||
| Costs and Expenses: | ||||||||||||||||||||||||||
| Interest expense, net | 376,832 | 33.4% | 446,296 | 40.6% | ||||||||||||||||||||||
| Depreciation and amortization | 292,788 | 25.9% | 290,942 | 26.4% | ||||||||||||||||||||||
| General and administrative expense | 100,992 | 8.9% | 101,176 | 9.2% | ||||||||||||||||||||||
| Operating expense (exclusive of depreciation and amortization) | 143,131 | 12.7% | 146,869 | 13.3% | ||||||||||||||||||||||
| Goodwill impairment | 240,500 | 21.3% | — | 0.0% | ||||||||||||||||||||||
| Transaction related and other costs | 10,340 | 0.9% | 7,544 | 0.7% | ||||||||||||||||||||||
| Gain on sale of real estate | (433) | 0.0% | (442) | 0.0% | ||||||||||||||||||||||
| Gain on sale of operations | (176) | 0.0% | (28,143) | (2.6%) | ||||||||||||||||||||||
| Other (income) expense, net | (7,269) | (0.6%) | 18,553 | 1.7% | ||||||||||||||||||||||
| Total costs and expenses | 1,156,705 | 102.5% | 982,795 | 89.3% | ||||||||||||||||||||||
| (Loss) income before income taxes and equity in earnings from unconsolidated entities | (27,858) | (2.4%) | 117,727 | 10.7% | ||||||||||||||||||||||
| Income tax benefit | (17,365) | (1.5%) | (4,916) | (0.4%) | ||||||||||||||||||||||
| Equity in earnings from unconsolidated entities | (2,371) | (0.2%) | (2,102) | (0.2%) | ||||||||||||||||||||||
| Net (loss) income | (8,122) | (0.7%) | 124,745 | 11.3% | ||||||||||||||||||||||
| Net income attributable to noncontrolling interests | 153 | 0.0% | 1,085 | 0.1% | ||||||||||||||||||||||
| Net (loss) income attributable to shareholders | (8,275) | (0.7%) | 123,660 | 11.2% | ||||||||||||||||||||||
| Participating securities' share in earnings | (1,135) | (0.1%) | (1,077) | (0.1%) | ||||||||||||||||||||||
| Dividends declared on convertible preferred stock | (20) | 0.0% | (10) | 0.0% | ||||||||||||||||||||||
| Net (loss) income attributable to common shareholders | $ | (9,430) | (0.8%) | $ | 122,573 | 11.1% | ||||||||||||||||||||
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The following table sets forth revenues, Adjusted EBITDA and net (loss) income of our reportable segments for the years ended December 31, 2022 and 2021
| Year Ended December 31, 2022 | ||||||||||||||||||||||||||
| (Thousands) | Leasing | Fiber Infrastructure | Corporate | Total of Reportable Segments | ||||||||||||||||||||||
| Revenues | $ | 827,457 | $ | 301,390 | $ | — | $ | 1,128,847 | ||||||||||||||||||
| Adjusted EBITDA | $ | 806,027 | $ | 125,361 | $ | (25,492) | $ | 905,896 | ||||||||||||||||||
| Less: | ||||||||||||||||||||||||||
| Interest expense, net | 376,832 | |||||||||||||||||||||||||
| Depreciation and amortization | 172,007 | 120,666 | 115 | 292,788 | ||||||||||||||||||||||
| Other, net | (4,790) | |||||||||||||||||||||||||
| Transaction related and other costs | 10,340 | |||||||||||||||||||||||||
| Gain on sale of operations | (176) | |||||||||||||||||||||||||
| Gain on sale of real estate | (433) | |||||||||||||||||||||||||
| Goodwill impairment | 240,500 | |||||||||||||||||||||||||
| Stock-based compensation | 12,751 | |||||||||||||||||||||||||
| Income tax benefit | (17,365) | |||||||||||||||||||||||||
| Adjustments for equity in earnings from unconsolidated entities | 3,571 | |||||||||||||||||||||||||
| Net loss | $ | (8,122) | ||||||||||||||||||||||||
| Year Ended December 31, 2021 | ||||||||||||||||||||||||||
| (Thousands) | Leasing | Fiber Infrastructure | Corporate | Total of Reportable Segments | ||||||||||||||||||||||
| Revenues | $ | 801,497 | $ | 299,025 | $ | — | $ | 1,100,522 | ||||||||||||||||||
| Adjusted EBITDA | $ | 784,061 | $ | 118,452 | $ | (24,232) | $ | 878,281 | ||||||||||||||||||
| Less: | ||||||||||||||||||||||||||
| Interest expense, net | 446,296 | |||||||||||||||||||||||||
| Depreciation and amortization | 174,622 | 116,065 | 255 | 290,942 | ||||||||||||||||||||||
| Other, net | 24,917 | |||||||||||||||||||||||||
| Transaction related and other costs | 7,544 | |||||||||||||||||||||||||
| Gain on sale of operations | (28,143) | |||||||||||||||||||||||||
| Gain on sale of real estate | (442) | |||||||||||||||||||||||||
| Stock-based compensation | 13,847 | |||||||||||||||||||||||||
| Income tax benefit | (4,916) | |||||||||||||||||||||||||
| Adjustments for equity in earnings from unconsolidated entities | 3,491 | |||||||||||||||||||||||||
| Net Income | $ | 124,745 | ||||||||||||||||||||||||
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| Operating Metrics | |||||||||||||||||
| As of December 31, | |||||||||||||||||
| 2022 | 2021 | % Increase / (Decrease) | |||||||||||||||
| Operating metrics: | |||||||||||||||||
| Leasing: | |||||||||||||||||
| Fiber strand miles | 5,175,000 | 4,900,000 | 5.6% | ||||||||||||||
| Copper route miles | 230,000 | 230,000 | 0.0% | ||||||||||||||
| Fiber Infrastructure: | |||||||||||||||||
| Fiber strand miles | 2,860,000 | 2,680,000 | 6.7% | ||||||||||||||
| Customer connections | 28,137 | 26,300 | 7.0% | ||||||||||||||
Revenues
Leasing – Leasing revenues are primarily attributable to rental revenue from leasing our Distribution Systems to Windstream pursuant to the Windstream Leases. Under the Windstream Leases, Windstream is responsible for the costs related to operating the Distribution Systems, including property taxes, insurance, and maintenance and repair costs. As a result, we do not record an obligation related to the payment of property taxes, as Windstream makes direct payments to the taxing authorities. The initial term of the Windstream Leases expires on April 30, 2030. Annual rent under the Windstream Leases is $668.9 million, and is subject to annual escalation at a rate of 0.5%. The rent for the first year of each renewal term under the Windstream Leases will be an amount agreed to by us and Windstream. While the agreements require that the renewal rent be "Fair Market Rent," if we are unable to agree, the renewal Fair Market Rent will be determined by an independent appraisal process. Commencing with the second year of each renewal term, the renewal rent will increase at an escalation rate of 0.5%. For a description of the Windstream Leases, see Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations in “Liquidity and Capital Resources—Windstream Leases.”
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| (Thousands) | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||||||||||||
| Leasing revenues: | ||||||||||||||||||||||||||
| Windstream Leases: | ||||||||||||||||||||||||||
| Cash revenue | ||||||||||||||||||||||||||
| Cash rent | $ | 668,890 | 80.8 | % | $ | 665,562 | 83.0 | % | ||||||||||||||||||
| GCI revenue | 13,981 | 1.7 | % | 1,192 | 0.1 | % | ||||||||||||||||||||
| Total cash revenue | 682,871 | 82.5 | % | 666,754 | 83.1 | % | ||||||||||||||||||||
| Non-cash revenue | ||||||||||||||||||||||||||
| TCI revenue | 43,199 | 5.2 | % | 38,962 | 4.9 | % | ||||||||||||||||||||
| GCI revenue | 14,615 | 1.8 | % | 11,263 | 1.4 | % | ||||||||||||||||||||
| Other straight-line revenue | 10,091 | 1.2 | % | 13,478 | 1.7 | % | ||||||||||||||||||||
| Total non-cash revenue | 67,905 | 8.2 | % | 63,703 | 8.0 | % | ||||||||||||||||||||
| Total Windstream revenue | 750,776 | 90.7 | % | 730,457 | 91.1 | % | ||||||||||||||||||||
| Other services | 76,681 | 9.3 | % | 71,040 | 8.9 | % | ||||||||||||||||||||
| Total Leasing revenues | $ | 827,457 | 100.0 | % | $ | 801,497 | 100.0% | |||||||||||||||||||
The increase in tenant funded capital improvements ("TCIs") revenue is attributable to continued investment by Windstream, where Windstream invested $119.7 million of TCIs during the year ended December 31, 2022, offset by the Growth Capital Improvement reimbursements of capital improvements completed in 2021, as allowed under the Settlement, that were previously classified as TCIs of $30.9 million. The total amount invested in TCIs by Windstream
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since the inception of the Windstream Leases (including the Master Lease) was $1.1 billion as of December 31, 2022 and $984.7 million as of December 31, 2021.
The increase in GCI revenue is attributable to continued reimbursement by Uniti, where Uniti reimbursed $238.0 million of Growth Capital Improvements during the year ended December 31, 2022. Subsequent to December 31, 2022, Windstream requested and we reimbursed $19.5 million of qualifying Growth Capital Improvements. As of the date of this Annual Report on Form 10-K, we have reimbursed a total of $563.6 million of Growth Capital Improvements.
For the year ended December 31, 2022, we recognized $76.7 million of revenues from other services including non-Windstream triple-net leasing and dark fiber indefeasible rights of use (“IRU”) arrangements, compared to $71.0 million for the year ended December 31, 2021. The increase is primarily driven by revenues from new customer arrangements.
Because a substantial portion of our revenue and cash flows are derived from lease payments by Windstream pursuant to the Windstream Leases, there could be a material adverse impact on our consolidated results of operations, liquidity, financial condition and/or ability to maintain our status as a REIT and service debt if Windstream were to become unable to generate sufficient cash to make payments to us.
Under the terms of the Windstream Leases, Windstream is required to provide us audited financial statements as of and for the year ended December 31, 2022 (the “2022 Financial Statements”) no later than 90-days after its fiscal year-end. After receipt of the 2022 Financial Statements, Uniti expects to file a Form 10-K/A to include the 2022 Financial Statements in our annual report. As of the date of this Annual Report on Form 10-K, Windstream is current on all lease payments required under the Windstream Leases.
Fiber Infrastructure – Revenue components for the Fiber Infrastructure segment for the years ended December 31, 2022 and 2021 consisted of the following:
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| (Thousands) | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||||||||||||
| Fiber Infrastructure revenues: | ||||||||||||||||||||||||||
| Lit backhaul services | $ | 78,977 | 26.2% | $ | 86,915 | 29.0% | ||||||||||||||||||||
| Enterprise and wholesale | 85,820 | 28.5% | 86,390 | 28.9% | ||||||||||||||||||||||
| E-Rate and government | 64,219 | 21.3% | 74,396 | 24.9% | ||||||||||||||||||||||
| Dark fiber and small cells | 69,547 | 23.1% | 48,052 | 16.1% | ||||||||||||||||||||||
| Other services | 2,827 | 0.9% | 3,272 | 1.1% | ||||||||||||||||||||||
| Total Fiber Infrastructure revenues | $ | 301,390 | 100.0% | $ | 299,025 | 100.0% | ||||||||||||||||||||
For the years ended December 31, 2022 and 2021, we recognized $301.4 million and $299.0 million of revenue, respectively, in our Fiber Infrastructure segment. The change is primarily due to an increase in dark fiber and small cells revenues of $18.9 million related to one-time early termination revenues and an increase in enterprise and wholesale revenues of $8.1 million related to increased internet services and customer connections, partially offset by decreases of $8.5 million within enterprise and wholesale revenues driven by decreased equipment and installation sales, $7.9 million within lit backhaul services revenues due to the sale of our Uniti Fiber Northeast operations on May 28, 2021, and $8.8 million within E-Rate and government revenues related to decreased non-recurring construction projects.
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Interest Expense, net
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands) | 2022 | 2021 | Increase / (Decrease) | |||||||||||||||||
| Interest expense, net: | ||||||||||||||||||||
| Cash: | ||||||||||||||||||||
| Senior secured notes | $ | 204,263 | $ | 207,615 | $ | (3,352) | ||||||||||||||
| Senior unsecured notes | 128,749 | 138,931 | (10,182) | |||||||||||||||||
| Senior secured revolving credit facility - variable rate | 13,868 | 9,467 | 4,401 | |||||||||||||||||
| Tender premium payment | — | 24,694 | (24,694) | |||||||||||||||||
| Interest rate swap termination | 9,243 | 11,317 | (2,074) | |||||||||||||||||
| Other | 2,013 | 2,437 | (424) | |||||||||||||||||
| Total cash interest | 358,136 | 394,461 | (36,325) | |||||||||||||||||
| Non-cash: | ||||||||||||||||||||
| Amortization of deferred financing costs and debt discount | 18,147 | 18,122 | 25 | |||||||||||||||||
| Accretion of settlement payable | 11,714 | 16,901 | (5,187) | |||||||||||||||||
| Gain on prepayment of settlement payable | — | (5,432) | 5,432 | |||||||||||||||||
| Pre-tax (gain) loss on extinguishment of debt | (10,754) | 24,587 | (35,341) | |||||||||||||||||
| Capitalized interest | (411) | (2,343) | 1,932 | |||||||||||||||||
| Total non-cash interest | 18,696 | 51,835 | (33,139) | |||||||||||||||||
| Total interest expense, net | 376,832 | 446,296 | (69,464) | |||||||||||||||||
Interest expense for the year ended December 31, 2022 decreased $69.5 million compared to the year ended December 31, 2021. The decrease in cash interest expense is primarily due to the financing transactions involving the 2029 Notes, 2028 Secured Notes, and 2030 Notes (as defined below) occurring during the year ended December 31, 2021, in which $24.7 million of tender premium payments were paid in the year ended December 31, 2021 and led to $13.6 million of cash interest expense savings in the year ended December 31, 2022. Non-cash interest expense decreased primarily due to the $24.6 million loss on extinguishment of debt related to financing transactions involving the 2029 Notes, 2028 Secured Notes, and 2030 Notes during the year ended December 31, 2021 and the $10.8 million pre-tax gain on the extinguishment of $207.1 million aggregate principal of the Exchangeable Notes during the year ended December 31, 2022.
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Depreciation and Amortization Expense
We incur depreciation and amortization expense related to our property, plant and equipment, corporate assets and intangible assets. Depreciation and amortization expense for our reportable segments for the years ended December 31, 2022 and 2021 consisted of the following:
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands) | 2022 | 2021 | Increase / (Decrease) | |||||||||||||||||
| Depreciation and amortization expense by segment: | ||||||||||||||||||||
| Depreciation expense | ||||||||||||||||||||
| Leasing | $ | 165,090 | $ | 167,705 | $ | (2,615) | ||||||||||||||
| Fiber Infrastructure | 97,800 | 93,193 | 4,607 | |||||||||||||||||
| Corporate | 115 | 255 | (140) | |||||||||||||||||
| Total depreciation expense | 263,005 | 261,153 | 1,852 | |||||||||||||||||
| Amortization expense | ||||||||||||||||||||
| Leasing | 6,917 | 6,917 | — | |||||||||||||||||
| Fiber Infrastructure | 22,866 | 22,872 | (6) | |||||||||||||||||
| Total amortization expense | 29,783 | 29,789 | (6) | |||||||||||||||||
| Total depreciation and amortization expense | $ | 292,788 | $ | 290,942 | $ | 1,846 | ||||||||||||||
Leasing – Leasing depreciation expense decreased $2.6 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The decrease is primarily attributable to an increase in fully depreciated Windstream Distribution Systems assets of $3.6 million, partially offset by a $1.0 million increase in depreciation related to asset additions since December 31, 2021.
Fiber Infrastructure – Fiber Infrastructure depreciation and amortization expense increased $4.6 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase in depreciation expense is primarily attributable to asset additions since December 31, 2021.
General and Administrative Expense
General and administrative expenses include compensation costs, including stock-based compensation awards, professional and legal services, corporate office costs and other costs associated with the administrative activities of our segments.
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| (Thousands) | Amount | % of Consolidated Revenues | Amount | % of Consolidated Revenues | ||||||||||||||||||||||
| General and administrative expense by segment: | ||||||||||||||||||||||||||
| Leasing | $ | 12,792 | 1.1% | $ | 10,127 | 0.9% | ||||||||||||||||||||
| Fiber Infrastructure | 54,695 | 4.8% | 55,074 | 5.0% | ||||||||||||||||||||||
| Corporate | 33,505 | 3.0% | 35,975 | 3.3% | ||||||||||||||||||||||
| Total general and administrative expenses | $ | 100,992 | 8.9% | $ | 101,176 | 9.2% | ||||||||||||||||||||
Leasing – Leasing general and administrative expense increased $2.7 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase is primarily attributable to increased personnel expenses of $2.4 million due to growth in the number of our employees.
Fiber Infrastructure – Fiber Infrastructure general and administrative expense decreased $0.4 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The decrease is primarily attributable to decreased personnel expense of $0.3 million and facility expense of $0.2 million.
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Corporate – Corporate general and administrative expense decreased $2.5 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The decrease is primarily attributable to decreased personnel expense of $3.1 million, insurance expense of $1.5 million, and professional fees of $0.3 million, partially offset by increased legal fees of $1.5 million, computer software expense of $0.5 million, and facility expense of $0.3 million.
Operating Expense
Operating expense for the year ended December 31, 2022, totaled $143.1 million compared to $146.9 million for the year ended December 31, 2021 and consisted of the following:
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| (Thousands) | Amount | % of Consolidated Revenues | Amount | % of Consolidated Revenues | ||||||||||||||||||||||
| Operating expense by segment: | ||||||||||||||||||||||||||
| Leasing | $ | 19,232 | 1.7% | $ | 16,556 | 1.5% | ||||||||||||||||||||
| Fiber Infrastructure | 123,899 | 11.0% | 130,313 | 11.8% | ||||||||||||||||||||||
| Total operating expenses | $ | 143,131 | 12.7% | $ | 146,869 | 13.3% | ||||||||||||||||||||
Leasing – For the year ended December 31, 2022, Leasing operating expense totaled $19.2 million as compared to $16.6 million for the year ended December 31, 2021. The $2.7 million increase is primarily driven by a $1.8 million increase in leased asset cost and a $0.8 million increase in splicing expenses resulting from customer growth.
Fiber Infrastructure – For the year ended December 31, 2022, Fiber Infrastructure operating expenses totaled $123.9 million as compared to $130.3 million for the year ended December 31, 2021. The $6.4 million decrease in operating expense is primarily attributable to decreases in non-recurring equipment and installation expenses of $5.7 million as a result of decreases in attributable sales.
Goodwill Impairment
During the third quarter of 2022, the Company identified a Triggering Event (as defined below) and, therefore, performed a qualitative and quantitative goodwill impairment test with a valuation date of September 30, 2022. The Triggering Event was a result of macroeconomic and financial market factors, specifically increased interest rates impacting our discount rate. As a result, we concluded that the fair value of the Fiber Infrastructure reporting unit, estimated using a combination of the income approach and market approach, was less than its carrying amount. Accordingly, we recorded a $216.0 million goodwill impairment charge in the Fiber Infrastructure reporting unit. During the fourth quarter of 2022, we performed an additional quantitative and qualitative impairment test, and concluded that as a result of the continuing macroeconomic and financial market factors, specifically increased interest rates impacting our discount rate, the fair value of the Fiber Infrastructure reporting unit was less than its carrying amount. As a result, we recorded a $24.5 million goodwill impairment charge in the Fiber Infrastructure reporting unit. Goodwill impairment charges totaled $240.5 million for the year ended December 31, 2022.
Transaction Related and Other Costs
Transaction related costs include incremental acquisition pursuit, transaction and integration costs, including unsuccessful acquisition pursuit costs. Pursuit and transaction costs include professional services (legal, accounting, advisory, regulatory, etc.) and costs associated with the implementation of our enterprise resource planning system. For the year ended December 31, 2022, we incurred $10.3 million of transaction related and other costs, compared to $7.5 million of such costs during the year ended December 31, 2021.
Gain on Sale of Operations
For the year ended December 31, 2021, we recognized a gain of $28.1 million related to the May 28, 2021 completion of the Everstream OpCo-PropCo Transaction. See Note 6 to our Consolidated Financial Statements in Part II, Item 8 "Financial Statements and Supplementary Data".
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Other Expense (Income), net
We recognized $7.3 million of other income for the year ended December 31, 2022, primarily attributable to a $7.9 million pre-tax gain on the sale of our investment in Harmoni. Other expense for the year ended December 31, 2021 totaled $18.6 million, which included $17.6 million of expenses related to the issuance of the 2028 Secured Notes and 2030 Notes.
Income Tax Benefit
The income tax benefit recorded for the years ended December 31, 2022 and 2021 relates to the following:
| Year Ended December 31, | ||||||||||||||
| (Thousands) | 2022 | 2021 | ||||||||||||
| Income tax benefit | ||||||||||||||
| Pre-tax loss (Fiber Infrastructure) | $ | (29,031) | $ | (6,657) | ||||||||||
| Gain on sale of operations | 6,711 | — | ||||||||||||
| Other undistributed REIT taxable income | 3,329 | — | ||||||||||||
| REIT state and local taxes | 1,558 | — | ||||||||||||
| Return to accrual adjustments | 11 | — | ||||||||||||
| Other | 57 | 1,741 | ||||||||||||
| Total income tax benefit | $ | (17,365) | $ | (4,916) | ||||||||||
Non-GAAP Financial Measures
We refer to EBITDA, Adjusted EBITDA, Funds From Operations (“FFO”) (as defined by the National Association of Real Estate Investment Trusts (“NAREIT”)) and Adjusted Funds From Operations (“AFFO”) in our analysis of our results of operations, which are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). While we believe that net income, as defined by GAAP, is the most appropriate earnings measure, we also believe that EBITDA, Adjusted EBITDA, FFO and AFFO are important non-GAAP supplemental measures of operating performance for a REIT.
We define “EBITDA” as net income, as defined by GAAP, before interest expense, provision for income taxes and depreciation and amortization. We define “Adjusted EBITDA” as EBITDA before stock-based compensation expense and the impact, which may be recurring in nature, of transaction and integration related costs, costs associated with Windstream’s bankruptcy, costs associated with litigation claims made against us, and costs associated with the implementation of our enterprise resource planning system, (collectively, “Transaction Related and Other Costs”), costs related to the settlement with Windstream, goodwill impairment charges, executive severance costs, amortization of non-cash rights-of-use assets, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, including early tender and redemption premiums and costs associated with the termination of related hedging activities, gains or losses on dispositions, changes in the fair value of contingent consideration and financial instruments, and other similar or infrequent items (although we may not have had such charges in the periods presented). Adjusted EBITDA includes adjustments to reflect the Company’s share of Adjusted EBITDA from unconsolidated entities. We believe EBITDA and Adjusted EBITDA are important supplemental measures to net income because they provide additional information to evaluate our operating performance on an unleveraged basis. In addition, Adjusted EBITDA is calculated similar to defined terms in our material debt agreements used to determine compliance with specific financial covenants. Since EBITDA and Adjusted EBITDA are not measures calculated in accordance with GAAP, they should not be considered as alternatives to net income determined in accordance with GAAP.
Because the historical cost accounting convention used for real estate assets requires the recognition of depreciation expense except on land, such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that uses historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. FFO is defined by NAREIT as net income attributable to common shareholders computed in accordance with GAAP, excluding gains or losses from real estate
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dispositions, plus real estate depreciation and amortization and impairment charges, and includes adjustments to reflect the Company’s share of FFO from unconsolidated entities. We compute FFO in accordance with NAREIT’s definition.
The Company defines AFFO, as FFO excluding (i) Transaction Related and Other Costs; (ii) costs related to the litigation settlement with Windstream, accretion on our settlement obligation, and gains on the prepayment of our settlement obligation as these items are not reflective of ongoing operating performance; (iii) goodwill impairment charges; (iv) certain non-cash revenues and expenses such as stock-based compensation expense, amortization of debt and equity discounts, amortization of deferred financing costs, depreciation and amortization of non-real estate assets, amortization of non-cash rights-of-use assets, straight line revenues, non-cash income taxes, and the amortization of other non-cash revenues to the extent that cash has not been received, such as revenue associated with the amortization of TCIs; and (v) the impact, which may be recurring in nature, of the write-off of unamortized deferred financing fees, additional costs incurred as a result of the early repayment of debt, including early tender and redemption premiums and costs associated with the termination of related hedging activities, executive severance costs, taxes associated with tax basis cancellation of debt, gains or losses on dispositions, changes in the fair value of contingent consideration and financial instruments and similar or infrequent items less maintenance capital expenditures. AFFO includes adjustments to reflect the Company’s share of AFFO from unconsolidated entities. We believe that the use of FFO and AFFO, and their respective per share amounts, combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and analysts, and makes comparisons of operating results among such companies more meaningful. We consider FFO and AFFO to be useful measures for reviewing comparative operating performance. In particular, we believe AFFO, by excluding certain revenue and expense items, can help investors compare our operating performance between periods and to other REITs on a consistent basis without having to account for differences caused by unanticipated items and events, such as transaction and integration related costs. The Company uses FFO and AFFO, and their respective per share amounts, only as performance measures, and FFO and AFFO do not purport to be indicative of cash available to fund our future cash requirements. While FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income as defined by GAAP and should not be considered an alternative to those measures in evaluating our liquidity or operating performance.
Further, our computations of EBITDA, Adjusted EBITDA, FFO and AFFO may not be comparable to that reported by other REITs or companies that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define EBITDA, Adjusted EBITDA and AFFO differently than we do.
The reconciliation of our net (loss) income to EBITDA and Adjusted EBITDA and of our net (loss) income attributable to common shareholders to FFO and AFFO for the years ended December 31, 2022 and 2021 is as follows:
| Year Ended December 31, | ||||||||||||||
| (Thousands) | 2022 | 2021 | ||||||||||||
| Net (loss) income | $ | (8,122) | $ | 124,745 | ||||||||||
| Depreciation and amortization | 292,788 | 290,942 | ||||||||||||
| Interest expense, net | 376,832 | 446,296 | ||||||||||||
| Income tax benefit | (17,365) | (4,916) | ||||||||||||
| EBITDA | $ | 644,133 | $ | 857,067 | ||||||||||
| Stock based compensation | 12,751 | 13,847 | ||||||||||||
| Transaction related and other costs | 10,340 | 7,544 | ||||||||||||
| Gain on sale of operations | (176) | (28,143) | ||||||||||||
| Gain on sale of real estate | (433) | (442) | ||||||||||||
| Goodwill impairment | 240,500 | — | ||||||||||||
| Other, net | (4,790) | 24,917 | ||||||||||||
| Adjustments for equity in earnings from unconsolidated entities | 3,571 | 3,491 | ||||||||||||
| Adjusted EBITDA | $ | 905,896 | $ | 878,281 | ||||||||||
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| Year Ended December 31, | ||||||||||||||
| (Thousands) | 2022 | 2021 | ||||||||||||
| Net (loss) income attributable to common shareholders | $ | (9,430) | $ | 122,573 | ||||||||||
| Real estate depreciation and amortization | 211,892 | 211,472 | ||||||||||||
| Gain on sale of real estate assets | (433) | (442) | ||||||||||||
| Participating securities share in earnings | 1,135 | 1,077 | ||||||||||||
| Participating securities share in FFO | (2,345) | (2,188) | ||||||||||||
| Real estate depreciation and amortization from unconsolidated entities | 2,366 | 2,465 | ||||||||||||
| Adjustments for noncontrolling interests | (260) | (2,154) | ||||||||||||
| FFO attributable to common shareholders | $ | 202,925 | $ | 332,803 | ||||||||||
| Transaction related and other costs | 10,340 | 7,544 | ||||||||||||
| Change in fair value of contingent consideration | — | 21 | ||||||||||||
| Amortization of deferred financing costs and debt discount | 18,147 | 18,122 | ||||||||||||
| (Gain) loss on extinguishment of debt | (10,754) | 24,587 | ||||||||||||
| Costs related to the early repayment of debt | — | 49,414 | ||||||||||||
| Stock based compensation | 12,751 | 13,847 | ||||||||||||
| Gain on sale of unconsolidated entity, net of tax | (1,212) | — | ||||||||||||
| Gain on sale of operations | (176) | (28,143) | ||||||||||||
| Non-real estate depreciation and amortization | 80,896 | 79,470 | ||||||||||||
| Goodwill impairment | 240,500 | — | ||||||||||||
| Straight-line revenues and amortization of below-market lease intangibles | (40,925) | (41,239) | ||||||||||||
| Maintenance capital expenditures | (10,000) | (8,342) | ||||||||||||
| Other, net | (48,435) | (17,694) | ||||||||||||
| Adjustments for equity in earnings from unconsolidated entities | 1,207 | 1,026 | ||||||||||||
| Adjustments for noncontrolling interests | (146) | (1,090) | ||||||||||||
| AFFO attributable to common shareholders | $ | 455,118 | $ | 430,326 | ||||||||||
Critical Accounting Estimates
We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. We have identified the following critical accounting estimates, as they are the most important to our financial statement presentation and require difficult, subjective and complex judgments.
We believe the current assumptions and other considerations used to estimate amounts reflected in our financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our financial statements, the resulting changes could have a material adverse effect on our results of operations and, in certain situations, could have a material adverse effect on our financial condition.
Income Taxes
We elected on our initial U.S. federal income tax return to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, we must distribute at least 90% of our annual REIT taxable income to shareholders, and meet certain organizational and operational requirements, including asset holding requirements. As a REIT, we will generally not be subject to U.S. federal income tax on income that we distribute as dividends to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates, and we could not deduct dividends paid to our shareholders in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to shareholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from reelecting to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
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We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
We have elected to treat the subsidiaries through which we operate Uniti Fiber and certain subsidiaries of Uniti Leasing, and operated Talk America as TRSs. TRSs enable us to engage in activities that result in income that does not constitute qualifying income for a REIT. Our TRSs are subject to U.S. federal, state and local corporate income taxes.
Deferred tax assets and liabilities are recognized under the asset and liability method for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax balances are adjusted to reflect tax rates based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period of the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
We recognize the benefit of tax positions that are "more likely than not" to be sustained upon examination based on their technical merit. The benefit of a tax position is measured at the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. If applicable, we will report tax-related penalties and interest expense as a component of income tax expense.
The Company may be subject to state corporate level tax in a certain limited number of states on any built-in gain recognized from a sale of assets occurring within a ten-year recognition period after the Spin-Off. The five-year recognition period applicable for federal corporate level tax on any built-in gain recognized from a sale of assets occurring within five years after the Spin-Off expired in 2020.
Revenue Recognition
Leasing revenues are primarily derived from providing access to or usage of leased networks and facilities. Leasing revenues are recognized on a straight-line basis over the initial lease term. Revenues derived from other telecommunications services, including broadband, long distance and enhanced service revenues are recognized monthly as services are provided. Sales of customer premise equipment are recognized when products are delivered to and accepted by customers.
Service revenues are primarily derived from providing broadband transport and backhaul communications services and are recognized using the following five step model: (i) identify the contract with a customer, (ii) identify the performance obligation in the contract, (iii) determine the transaction price, (iv) allocate the transaction price, and (v) recognize revenue when the related performance obligation is satisfied. Services provided to the Company’s customers are pursuant to contractual fee‑based arrangements, which generally provide for recurring fees charged for the use of designated portions of the Company’s network and typically range for a period of three to ten years. The Company’s revenue arrangements often include upfront fees charged to the customer for the cost of establishing the necessary components of the Company’s network prior to the commencement of use by the customer. Fees charged to customers for the recurring use of the Company’s network are recognized during the related periods of service. Upfront fees that are billed in advance of providing services are deferred until such time the customer accepts the Company’s network and then are recognized as service revenues ratably over a period in which substantive services required under the revenue arrangement are expected to be performed, which is the initial term of the arrangement.
Impairment of Property, Plant and Equipment
We continually monitor events and changes in circumstances that could indicate that the carrying amount of our property, plant and equipment may not be recoverable or realized. When indicators of potential impairment suggest that the carrying value may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of those assets through its undiscounted future cash flows and the eventual disposition of the asset. If, based on this analysis, we do not believe that we will be able to recover the carrying value of our property, plant and equipment, we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the related assets. During the years ended December 31, 2022 and 2021, no impairment losses were recognized.
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Business Combinations and Asset Acquisitions
We apply the acquisition method of accounting for acquisitions meeting the definition of a business combination or asset acquisition, where assets acquired and liabilities assumed are recorded at fair value at the date of each acquisition, and the results of operations are included with those of the Company from the dates of the respective acquisitions. The fair value of the acquired assets and liabilities are estimated using the income, market and/or cost approach. The income approach utilizes the present value of estimated future cash flows that a business or asset can be expected to generate, while under the market approach, the fair value of an asset or business reflects the price at which comparable assets are purchased under similar circumstances. Inherent in our preparation of cash flow projections are significant assumptions and estimates derived from a review of operating results, business plans, expected growth rates, capital expenditure plans, cost of capital and tax rates. We also make certain forecasts about future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management. Small changes in these assumptions or estimates could materially affect the cash flow projections, and therefore could affect the estimated fair value. Impact these assumptions or estimates include customer retention, execution of our business plans, which impact growth, cost escalation impacting margin, the level of capital expenditures required to sustain our growth and market factors, including stock price fluctuations and increased rates, impacting our cost of capital.
For acquisitions meeting the definition of a business combination, any excess of the purchase price paid by the Company over the amounts recognized for assets acquired and liabilities assumed is recorded as goodwill. Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), also requires acquirers to, among other things, estimate the acquisition date fair value of any contingent consideration and recognize any subsequent changes in the fair value of contingent consideration in earnings. When provisional amounts are initially recorded, the Company continues to evaluate acquisitions for a period not to exceed one year after the applicable acquisition date of each transaction to determine whether any additional adjustments are needed to the allocation of the purchase price paid for the assets acquired and liabilities assumed.
For acquisitions meeting the definition of an asset acquisition, the fair value of the consideration transferred, including transaction costs, is allocated to the assets acquired and liabilities assumed based on their relative fair values. There are significant judgments and estimates used in determining the fair values of the assets acquired and liabilities assumed, which include assumptions with respect to items such as replacement cost, land value, assemblage factor, discount rate, lease-up period, implied rents per strand mile, and useful life. No goodwill is recognized in an asset acquisition.
Goodwill
As of December 31, 2022 and 2021, all of our goodwill is included in our Fiber Infrastructure segment. Goodwill is recognized for the excess of purchase price over the fair value of net assets of businesses acquired. Goodwill is reviewed for impairment at least annually. Our annual impairment test is performed with a valuation date of October 1. In accordance with ASC 350-20, Intangibles-Goodwill and Other ("ASC 350-20"), we evaluate goodwill for impairment between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount (a “Triggering Event”). On the occurrence of a Triggering Event, an entity has the option to first assess qualitative factors to determine whether a quantitative impairment test is necessary. If it is more likely than not that goodwill is impaired, the fair value of the reporting unit must be compared with its carrying value. Unless circumstances otherwise dictate, the annual impairment test is performed in the fourth quarter. Application of the goodwill impairment test requires significant judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, and the assignment of goodwill to reporting units. During the third quarter of 2022, the Company identified a Triggering Event and, therefore, performed a qualitative and quantitative goodwill impairment test with a valuation date of September 30, 2022. The Triggering Event was a result of macroeconomic and financial market factors, specifically increased interest rates impacting our discount rate. As a result, we concluded that the fair value of the Fiber Infrastructure reporting unit, estimated using a combination of the income approach and market approach, was less than its carrying amount. Accordingly, we recorded a $216.0 million goodwill impairment charge in the Fiber Infrastructure reporting unit. During the fourth quarter of 2022, we performed an additional quantitative and qualitative impairment test, and concluded that as a result of the continuing macroeconomic and financial market factors, specifically increased interest rates impacting our discount rate, the fair value of the Fiber Infrastructure reporting unit was less than its carrying amount. As a result, we recorded a $24.5 million goodwill impairment charge in the Fiber Infrastructure reporting unit.
During the year ended December 31, 2021, no impairment losses were recognized. During the year ended December 31, 2020, we performed our annual goodwill impairment analysis during the fourth quarter of 2020 and concluded that, as a
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result of increased capital expenditure investments in dark fiber and small cell projects and less than anticipated cash flow growth, the fair value of the Fiber Infrastructure reporting unit, estimated using a combination of the income approach and market approach, was less that its carrying amount. Accordingly, we recorded a $71.0 million goodwill impairment in the Fiber Infrastructure reporting unit.
We estimate the fair value of our Fiber reporting unit using a combination of an income approach based on the present value of estimated future cash flows and a market approach based on market data of comparable businesses and acquisition multiples paid in recent transactions. We evaluate the appropriateness of each valuation methodology in determining the weighting applied to each methodology in the determination of the concluded fair value. If the carrying amount of a reporting unit's net assets is less than its fair value, no impairment exists. If the carrying amount of the reporting unit is greater than the fair value of the reporting unit, an impairment loss must be recognized for the excess and recorded in the Consolidated Statements of Income (Loss) not to exceed the carrying amount of goodwill.
Inherent in our preparation of cash flow projections are significant assumptions and estimates derived from a review of our operating results and business plans, which includes expected revenue and expense growth rates, capital expenditure plans and cost of capital. In determining these assumptions, we consider our ability to execute on our plans, future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods. Small changes in these assumptions or estimates could materially affect our cash flow projections, and therefore could affect the likelihood and amount of potential impairment in future periods. Potential events that could negatively impact these assumptions or estimates may include customer losses or poor execution of our business plans, which impact revenue growth, cost escalation impacting margin, the level of capital expenditures required to sustain our growth and market factors, including stock price fluctuations and increased rates, impacting our cost of capital. For example, if we were to experience a significant delay in our permitting process in the construction of our fiber networks, the timing of effected cash flows could impact long term growth rates and negatively impact the income approach, leading to potential impairment. As a result, should our expectations of average projected revenue growth percentage, average projected EBITDA margin percentage and/or average projected capital expenditures as a percentage of revenue change, we may experience future impairment to goodwill (while other assumptions remain constant). Furthermore, a deterioration in market factors such as stock prices or increased interest rates and/or declines in acquisition multiples utilized in the market approach could affect the likelihood and amount of potential impairment.
Liquidity and Capital Resources
Our principal liquidity needs are to fund operating expenses, meet debt service obligations, fund investment activities, including capital expenditures, and make dividend distributions. Furthermore, following consummation of our settlement agreement with Windstream, including entry into the Windstream Leases, we are obligated (i) to make $490.1 million of cash payments to Windstream in equal installments over 20 consecutive quarters beginning in October 2020 and (ii) to reimburse Windstream for up to an aggregate of $1.75 billion for Growth Capital Improvements in long-term value accretive fiber and related assets made by Windstream through 2029. To date, we have paid $215.4 million of the $490.1 million due to Windstream under the settlement agreement, including $92.9 million that we pre-paid on October 14, 2021, $78 million of which was funded from a portion of the proceeds of the 2030 Notes. Uniti’s reimbursement commitment for Growth Capital Improvements does not require Uniti to reimburse Windstream for maintenance or repair expenditures (except for costs incurred for fiber replacements to the CLEC MLA leased property, up to $70 million during the term), and each such reimbursement is subject to underwriting standards. Uniti’s total annual reimbursement commitments for the Growth Capital Improvements under both Windstream Leases (and under separate equipment loan facilities) were limited to $125 million in 2020, $225 million in 2021 and 2022 and are limited to $225 million per year in 2023 and 2024; $175 million per year in 2025 and 2026; and $125 million per year in 2027 through 2029. As of December 31, 2022, we have reimbursed a total of $544.2 million in Growth Capital Improvements.
Our primary sources of liquidity and capital resources are cash on hand, cash provided by operating activities (primarily from the Windstream Leases), available borrowings under our credit agreement by and among the Operating Partnership, CSL Capital, LLC and Uniti Group Finance 2019 Inc., the guarantors and lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “Credit Agreement”), and proceeds from the issuance of debt and equity securities.
As of December 31, 2022, we had cash and cash equivalents of $43.8 million and approximately $312.0 million of borrowing availability under our Revolving Credit Facility under the Credit Agreement. Subsequent to December 31, 2022,
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other than $19.5 million of Growth Capital Improvements, there have been no material outlays of funds outside of our scheduled interest and dividend payments. Subsequent to December 31, 2022, the Operating Partnership, Uniti Fiber
Holdings Inc., Uniti Group Finance 2019 Inc. and CSL Capital, LLC issued $2.6 billion aggregate principal amount of the
Secured Notes due February 2028 and deposited amounts with the trustee sufficient to fund the redemption in full of the 2025 Secured Notes.
Consequently, our obligations with respect to the indenture governing the 2025 Secured Notes have been satisfied and
discharged. We used the remaining net proceeds from the sale of the Secured Notes due February 2028 to repay outstanding borrowings under our Revolving Credit Facility. See Note 23 to our Consolidated Financial Statements in Part II, Item 8 "Financial Statements and Supplementary Data" for additional information.
Availability under our Revolving Credit Facility is subject to various conditions, including a maximum secured leverage ratio of 5.0:1. In addition, if we incur debt under our Revolving Credit Facility or otherwise such that our total leverage ratio exceeds 6.5:1, our Revolving Credit Facility would impose restrictions on our ability to pay dividends. There were no such restrictions as of December 31, 2022.
| Year Ended December 31, | ||||||||||||||
| (Thousands) | 2022 | 2021 | ||||||||||||
| Cash flow from operating activities: | ||||||||||||||
| Net cash provided by operating activities | $ | 460,115 | $ | 499,157 | ||||||||||
Cash provided by operating activities is primarily attributable to our leasing activities, which includes the leasing of mission-critical communications assets to anchor customers on either an exclusive or shared-tenant basis, in addition to the leasing of dark fiber network assets to the telecommunications industry. Cash used in operating activities includes compensation and related costs, interest payments, and other changes in working capital. Net cash provided by operating activities was $460.1 million and $499.2 million for the years ended December 31, 2022 and 2021, respectively. The decrease in net cash provided by operating activities during the year ended December 31, 2022 is primarily attributable to the timing of the upfront IRU payments received in connection with the sale of the Uniti Fiber Northeast operations on May 28, 2021.
| Year Ended December 31, | ||||||||||||||
| (Thousands) | 2022 | 2021 | ||||||||||||
| Cash flow from investing activities: | ||||||||||||||
| Proceeds from sale of unconsolidated entity | $ | 32,527 | $ | — | ||||||||||
| Proceeds from sale of operations | 541 | 62,113 | ||||||||||||
| Proceeds from sale of other equipment | 1,815 | 1,487 | ||||||||||||
| Proceeds from sale of real estate, net of cash | 665 | 1,034 | ||||||||||||
| Other capital expenditures | (427,567) | (385,855) | ||||||||||||
| Net cash used in investing activities | $ | (392,019) | $ | (321,221) | ||||||||||
Cash used in investing activities was $392.0 million for the year ended December 31, 2022 and is primarily driven by capital expenditures of $427.6 million, which includes $238.0 million of Growth Capital Improvements, partially offset by proceeds received from the sale of the Harmoni investment of $32.5 million. Cash used in investing activities for the year ended December 31, 2021 was $321.2 million and is primarily driven by capital expenditures of $385.9 million, which includes $221.5 million of Growth Capital Improvements, partially offset by proceeds from the sale of the Uniti Fiber Northeast operations to Everstream of $62.1 million.
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| Year Ended December 31, | |||||||||||||||||
| (Thousands) | 2022 | 2021 | |||||||||||||||
| Cash flow from financing activities: | |||||||||||||||||
| Repayment of debt | $ | (194,043) | $ | (2,260,000) | |||||||||||||
| Proceeds from issuance of Notes | 306,500 | 2,380,000 | |||||||||||||||
| Dividends paid | (142,950) | (141,371) | |||||||||||||||
| Payments of settlement payable | — | (190,924) | |||||||||||||||
| Payments of contingent consideration | — | (2,979) | |||||||||||||||
| Payment for exchange of noncontrolling interest | (4,620) | — | |||||||||||||||
| Borrowings under revolving credit facility | 180,000 | 310,000 | |||||||||||||||
| Payments under revolving credit facility | (192,000) | (220,000) | |||||||||||||||
| Payments for capped call option | (21,149) | — | |||||||||||||||
| Payment for settlement of common stock warrant | (522) | — | |||||||||||||||
| Termination of bond hedge option | 1,190 | — | |||||||||||||||
| Finance lease payments | (1,193) | (2,019) | |||||||||||||||
| Payments for financing costs | (9,852) | (27,660) | |||||||||||||||
| Costs related to early repayment of debt | — | (36,486) | |||||||||||||||
| Distributions paid to noncontrolling interest | (233) | (1,700) | |||||||||||||||
| Employee stock purchase plan | 589 | 672 | |||||||||||||||
| Payments related to tax withholding for stock-based compensation | (4,913) | (4,100) | |||||||||||||||
| Net cash used in financing activities | $ | (83,196) | $ | (196,567) | |||||||||||||
Cash used in financing activities was $83.2 million for the year ended December 31, 2022, which was primarily driven by the repayment of the Exchangeable Notes ($194.0 million), dividend payments ($143.0 million), payments under the Revolving Credit Facility ($192.0 million), and payments for the capped call option related to the Secured Notes due February 2028 ($21.1 million), partially offset by proceeds received from the issuance of the 2028 Secured Notes due February 2028 ($306.5 million), and borrowings under the Revolving Credit Facility ($180.0 million). Cash used in financing activities was $196.6 million for the year ended December 31, 2021, which was primarily driven by the repayment of the 2023 Notes, 2023 Secured Notes and 2024 Notes ($2.3 billion), dividend payments ($141.4 million), payments for financing costs ($27.7 million), payment of settlement obligation ($190.9 million), 2023 Notes tender premium payment ($17.6 million), 2024 Notes early redemption payment ($10.6 million), 2023 Secured Notes early redemption payment ($8.3 million), partially offset by proceeds from the issuance of the 2030 Notes, 2029 Notes, and 2028 Secured Notes ($2.4 billion) and net borrowings under the Revolving Credit Facility ($90.0 million).
Windstream Leases
The initial term of the Windstream Leases expires on April 30, 2030. The aggregate initial annual rent under the Windstream Leases is $663.0 million. The Windstream Leases contain cross-guarantees and cross-default provisions, which will remain effective as long as Windstream or an affiliate is the tenant under both of the Windstream Leases and unless and until the landlords under the ILEC MLA are different from the landlords under the CLEC MLA. The Windstream Leases permit Uniti to transfer its rights and obligations and otherwise monetize or encumber the Windstream Leases, together or separately, so long as Uniti does not transfer interests in either Windstream Lease to a Windstream competitor.
Pursuant to the Windstream Leases, Windstream (or any successor tenant under a Windstream Lease) has the right to cause Uniti to reimburse up to an aggregate $1.75 billion of Growth Capital Improvements. Uniti’s reimbursement commitment for Growth Capital Improvements does not require Uniti to reimburse Windstream for maintenance or repair expenditures (except for costs incurred for fiber replacements to the CLEC MLA leased property, up to $70 million during the term), and each such reimbursement is subject to underwriting standards. Uniti’s total annual reimbursement commitments for the Growth Capital Improvements under both Windstream Leases (and under separate equipment loan facilities) were limited to $125 million in 2020, $225 million in 2021 and 2022, and are limited to $225 million per year in 2023 and 2024; $175 million per year in 2025 and 2026; and $125 million per year in 2027 through 2029. If the cost incurred by Windstream (or the successor tenant under a Windstream Lease) for Growth Capital Improvements in any calendar year exceeds the annual
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limit for such calendar year, Windstream (or such tenant, as the case may be) may submit such excess costs for reimbursement in any subsequent year and such excess costs shall be funded from the annual commitment amounts in such subsequent period. In addition, to the extent that reimbursements for Growth Capital Improvements funded in any calendar year during the term is less than the annual limit for such calendar year, the unfunded amount in any calendar year will carry-over and may be added to the annual limits for subsequent calendar years, subject to an annual limit of $250 million in any calendar year, except that, during calendar year 2022, Uniti’s combined total obligation to fund Growth Capital Improvements may exceed $250 million to the extent of any unfunded excess amounts from calendar year 2021.
Starting on the first anniversary of each installment of reimbursement for a Growth Capital Improvement, the rent payable by Windstream under the applicable Windstream Lease will increase by an amount equal to 8.0% (the “Rent Rate”) of such installment of reimbursement. The Rent Rate will thereafter increase to 100.5% of the prior Rent Rate on each anniversary of each reimbursement. In the event that the tenant’s interest in either Windstream Lease is transferred by Windstream under the terms thereof (unless transferred to the same transferee), or if Uniti transfers its interests as landlord under either Windstream Lease (unless to the same transferee), the reimbursement rights and obligations will be allocated between the ILEC MLA and the CLEC MLA by Windstream, provided that the maximum that may be allocated to the CLEC MLA following such transfer is $20 million per year. If Uniti fails to reimburse any Growth Capital Improvement reimbursement payment or equipment loan funding request as and when it is required to do so under the terms of the Windstream Leases, and such failure continues for thirty (30) days, then such unreimbursed amounts may be applied as an offset against the rent owed by Windstream under the Windstream Leases (and such amounts will thereafter be treated as if Uniti had reimbursed them).
Uniti and Windstream have entered into separate ILEC and CLEC Equipment Loan and Security Agreements (collectively “Equipment Loan Agreement”) in which Uniti will provide up to $125 million (limited to $25 million in any calendar year) of the $1.75 billion of Growth Capital Improvements commitments discussed above in the form of loans for Windstream to purchase equipment related to network upgrades or to be used in connection with the Windstream Leases. Interest on these loans will accrue at 8% from the date of the borrowing. All equipment financed through the Equipment Loan Agreement is the sole property of Windstream; however, Uniti will receive a first-lien security interest in the equipment purchased with the loans. If the cost incurred by Windstream (or the successor tenant under a Windstream Lease) for Growth Capital Improvements in any calendar year exceeds the annual limit for such calendar year, Windstream (or such tenant, as the case may be) may submit such excess costs for reimbursement in any subsequent year and such excess costs shall be funded from the annual commitment amounts in such subsequent period. No such loans have been made as of December 31, 2022.
At-the-Market Common Stock Offering Program
We have an effective shelf registration statement on file with the SEC (the “Registration Statement”) to offer and sell various securities from time to time. Under the registration statement, we have established an at-the-market common stock offering program (the "ATM Program") to sell shares of common stock having an aggregate offering price of up to $250 million. During the year ended December 31, 2022, we did not make any sales under the refreshed ATM Program. This program is intended to provide additional financial flexibility and an alternative mechanism to access the capital markets at an efficient cost as and when we need financing, including for acquisitions.
UPREIT Operating Partnership Units
During 2017, the Company completed its reorganization (the “up-REIT Reorganization”) to operate through a customary “up-REIT” structure. Under this structure, the Operating Partnership now holds substantially all of the Company’s assets and is the direct or indirect parent company of, among others, CSL Capital, LLC, Uniti Group Finance 2019 Inc. and Uniti Fiber Holdings.
Our UPREIT structure enables us to acquire properties by issuing to sellers, as a form of consideration, limited partnership interests in our operating partnership, (commonly called “OP Units”). The limited partner equity interests in the Operating Partnership are exchangeable on a one-for-one basis for shares of our common stock or, at our election, cash of equivalent value. We believe that this structure will facilitate our ability to acquire individual properties and portfolios of properties by enabling us to structure transactions which will defer taxes payable by a seller while preserving our available cash for other purposes, including the possible payment of dividends. We issued limited partnership interests as part of the acquisition consideration for the 2017 acquisitions of Hunt Telecommunications, LLC and Southern Light, LLC.
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Senior Notes
At December 31, 2022, the Operating Partnership and certain of its subsidiaries had outstanding $570 million aggregate principal amount of 4.750% Senior Secured Notes due April 15, 2028 (the “2028 Secured Notes”), $2.25 billion aggregate principal amount of 7.875% Senior Secured Notes due February 15, 2025 (the “2025 Secured Notes”), $1.1 billion aggregate principal amount of 6.50% Senior Notes due February 15, 2029 (the “2029 Notes”), and $700 million aggregate principal amount of 6.00% Senior Unsecured Notes due January 15, 2030 (the “2030 Notes”).
On February 2, 2021, the Operating Partnership, Uniti Group Finance 2019 Inc. and CSL Capital, LLC (hereinafter, the “Borrowers”) issued $1.1 billion aggregate principal amount of the 2029 Notes and used the net proceeds to fund the tender offer and subsequent redemption of all outstanding 2023 Notes.
On April 20, 2021, the Borrowers issued $570 million aggregate principal amount of the 2028 Secured Notes and used the net proceeds from the offering to fund the redemption in full of the $550 million aggregate principal amount of the 2023 Secured Notes on May 6, 2021.
On October 13, 2021, the Operating Partnership, Uniti Fiber Holdings, Uniti Group Finance 2019 Inc. and CSL Capital, LLC issued $700 million aggregate principal amount of 6.00% Senior Notes due 2030 and used the proceeds to fund the redemption in full of the 2024 Notes on December 15, 2021.
In connection with the up-REIT Reorganization, the Operating Partnership replaced the Company and assumed its obligations as an obligor under the Facilities. The Company is a guarantor to all series of senior notes, including the Exchangeable Notes, and under the Credit Agreement. Separate financial statements of the Operating Partnership have not been included since the Operating Partnership is not a registrant.
Convertible Notes
The Company issued $300 million aggregate principal amount of 7.50% Convertible Senior Notes due 2027 on December 12, 2022 and, pursuant to an over-allotment option, $6.5 million aggregate principal amount of 7.50% Convertible Senior Notes due 2027 on December 23, 2022 (collectively, the “Convertible 2027 Notes”). The Convertible 2027 Notes are guaranteed by each of the Company’s subsidiaries that is an issuer, obligor or guarantor under the Company’s existing senior notes (except initially those subsidiaries that require regulatory approval prior to guaranteeing the Convertible 2027 Notes). The Convertible 2027 Notes bear interest at a fixed rate of 7.50% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2023. The Convertible 2027 Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election at an initial conversion rate of 137.1742 shares of the Company’s common stock per $1,000 principal amount (equal to an initial conversion price of approximately $7.29 per share) subject to adjustment. The Convertible 2027 Notes will mature on December 1, 2027, unless earlier converted, redeemed or repurchased.
The net proceeds from the sale of the Convertible 2027 Notes were approximately $298.1 million, after deducting discounts and commissions to the initial purchasers and other estimated fees and expenses. The Company contributed approximately $198.1 million of the net proceeds of the offering to Uniti Fiber Holdings Inc., a subsidiary of the Company (“Uniti Fiber Holdings”), to fund the repurchase of, and to pay accrued and unpaid interest with respect to, approximately $207.1 million aggregate principal amount of the Exchangeable Notes issued by Uniti Fiber Holdings. The Company used $21.1 million of the net proceeds of the offering to pay the cost of certain capped call transactions in connection with the Convertible 2027 Notes offering, as described in Note 12 to our consolidated financial statements contained in Part II, Item 8 "Financial Statements and Supplementary Data". The Company intends to use the remaining net proceeds from the offering for general corporate purposes, which may include the repurchase or repayment of other outstanding debt, including, but not limited to, additional open market repurchases, redemptions or tender offers of the Exchangeable Notes.
Exchangeable Notes
On June 28, 2019, Uniti Fiber Holdings Inc. issued $345.0 million aggregate principal amount of the Exchangeable Notes. The Exchangeable Notes bear interest at a fixed rate of 4.00% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2019. The Exchangeable Notes are exchangeable into cash, shares of the Company’s common stock, or a combination thereof, at Uniti Fiber Holding Inc.’s election.
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Credit Agreement
The Borrowers are party to the Credit Agreement, which as of December 31, 2022, provided for a $500 million revolving credit facility that matures on December 10, 2024 (the “Revolving Credit Facility”), which provide us with the ability to obtain revolving loans as well as swingline loans and letters of credit from time to time. All obligations under the Credit Agreement are guaranteed by (i) the Company and (ii) certain of the Operating Partnership’s subsidiaries (the “Subsidiary Guarantors”) and are secured by substantially all of the assets of the Borrowers and the Subsidiary Guarantors.
The Borrowers are subject to customary covenants under the Credit Agreement, including an obligation to maintain a consolidated secured leverage ratio, as defined in the Credit Agreement, not to exceed 5.00 to 1.00. We are permitted, subject to customary conditions, to incur other indebtedness, so long as, on a pro forma basis after giving effect to any such indebtedness, our consolidated total leverage ratio, as defined in the Credit Agreement, does not exceed 6.50 to 1.00 and, if such debt is secured, our consolidated secured leverage ratio, as defined in the Credit Agreement, does not exceed 4.00 to 1.00. In addition, the Credit Agreement contains customary events of default, including a cross default provision whereby the failure of the Borrowers or certain of their subsidiaries to make payments under other debt obligations, or the occurrence of certain events affecting those other borrowing arrangements, could trigger an obligation to repay any amounts outstanding under the Credit Agreement. In particular, a repayment obligation could be triggered if (i) the Borrowers or certain of their subsidiaries fail to make a payment when due of any principal or interest on any other indebtedness aggregating $75.0 million or more, or (ii) an event occurs that causes, or would permit the holders of any other indebtedness aggregating $75.0 million or more to cause, such indebtedness to become due prior to its stated maturity. As of December 31, 2022, the Borrowers were in compliance with all of the covenants under the Credit Agreement.
Borrowings under the Revolving Credit Facility bear interest at a rate equal to either a base rate plus an applicable margin ranging from 2.75% to 3.50% or a Eurodollar rate plus an applicable margin ranging from 3.75% to 4.50%, in each case, calculated in a customary manner and determined based on our consolidated secured leverage ratio. We are required to pay a quarterly commitment fee under the Revolving Credit Facility equal to 0.50% of the average amount of unused commitments during the applicable quarter (subject to a step-down to 0.40% per annum of the average amount of unused commitments during the applicable quarter upon achievement of a consolidated secured leverage ratio not to exceed a certain level), as well as quarterly letter of credit fees equal to the product of (A) the applicable margin with respect to Eurodollar borrowings and (B) the average amount available to be drawn under outstanding letters of credit during such quarter.
Interest Rate Swaps
We were party to interest rate swap agreements that we entered into to mitigate interest rate risk associated with our now repaid variable rate term loan facility under the Credit Agreement. These interest rate swaps were designated as cash flow hedges, had a notional value of $2.0 billion and matured on October 24, 2022. The weighted average fixed rate paid was 2.105%, and the variable rate received resets monthly to the one-month LIBOR subject to a minimum rate of 1.0%.
As result of the repayment of the term loan facility in February of 2020, the Company entered into receive-fixed interest rate swaps (the “Replacement Swaps”) to offset its existing pay-fixed interest rate swaps (the “Existing Swaps”) that were designated as cash flow hedges of interest payments initially associated with the term loan facility. On February 10, 2020, the Company discontinued hedge accounting on its Existing Swaps as the hedge accounting requirements were no longer met. Amounts in accumulated other comprehensive (loss) income associated with the Existing Swaps as of the date of dedesignation, will be reclassified to interest expense as the hedged interest payments impact earnings. The net effect of these offsetting interest rate swaps resulted in a monthly cash outflows of approximately $1.1 million through October 2022.
Outlook
We anticipate continuing to invest in our network infrastructure across our Uniti Leasing and Uniti Fiber portfolios. We anticipate declaring dividends for the 2023 tax year to comply with our REIT distribution requirements. We anticipate that we will partially finance these needs, as well as operating expenses (including our debt service obligations), from our cash on hand and cash flows provided by operating activities. In December 2020, we amended the Credit Agreement to increase the commitments under our Revolving Credit Facility that mature on December 10, 2024 from $418 million to $500 million and extended the maturity date to December 10, 2024. We refinanced and extended the maturity of our 2023 Notes through the issuance of our 2029 Notes. We expect to access the capital markets to fund Growth Capital Improvements
45
over the term of the Windstream Leases, business operations, announced investment activities, capital expenditures, debt service and distributions to our shareholders. We are closely monitoring the equity and debt markets and will seek to access them again promptly when we determine market conditions are appropriate. Our debt covenants currently do not permit us to incur material additional debt.
The amount, nature and timing of any capital markets transactions will depend on: our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions. These expectations are forward-looking and subject to a number of uncertainties and assumptions. If our expectations about our liquidity prove to be incorrect or we are unable to access the capital markets as we anticipate, we would be subject to a shortfall in liquidity in the future which could lead to a reduction in our capital expenditures and/or dividends and, in an extreme case, our ability to pay our debt service obligations. If this shortfall occurs rapidly and with little or no notice, it could limit our ability to address the shortfall on a timely basis.
In addition to exploring potential capital markets transactions, the Company regularly evaluates market conditions, its liquidity profile, and various financing alternatives for opportunities to enhance its capital structure. If opportunities are favorable, the Company may refinance or repurchase existing debt. However, there can be no assurances that any debt refinancing would be on similar or more favorable terms than our existing arrangements. This would include the risk that interest rates could increase and/or there may be changes to our existing covenants.
Contractual Obligations
We enter into various contractual arrangements as a part of our normal operations. Many of these contractual obligations are discussed in the notes (“Notes”) to our consolidated financial statements contained in Part II, Item 8 “Financial Statements and Supplementary Data”. As of December 31, 2022, material obligations discussed in the Notes included principal and interest payments on our long-term debt discussed above and in Note 12, operating and finance leases discussed in Note 5, and reimbursement commitments for growth capital improvements and cash payments related to the settlement agreement discussed in Note 3.
In addition, we have material purchase commitments related to network deployment for success-based projects for which we have a signed customer contract before we commit resources to expand our network. As of December 31, 2022, purchase commitments totaled $28.5 million due in 2023 and $5.0 million due in 2024. Projections of future cash flows are subject to substantial uncertainty as discussed throughout Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and particularly in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K. Debt agreements may be renewed or refinanced if we determine it is advantageous to do so.
Dividends
We have elected to be taxed as a REIT for U.S. federal income tax purposes. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. In order to maintain our REIT status, we intend to make dividend payments of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our board of directors. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service obligations. If our cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities.
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The following table below sets out details regarding our cash dividends on our common stock:
| Period | Payment Date | Cash Dividend Per Share | Record Date | |||||||||||||||||
| October 1, 2021 - December 31, 2021 | January 3, 2022 | $ | 0.15 | December 17, 2021 | ||||||||||||||||
| January 1, 2022 - March 31, 2022 | April 15, 2022 | $ | 0.15 | April 1, 2022 | ||||||||||||||||
| April 1, 2022 - June 30, 2022 | July 1, 2022 | $ | 0.15 | June 17, 2022 | ||||||||||||||||
| July 1, 2022 - September 30, 2022 | September 23, 2022 | $ | 0.15 | September 9, 2022 | ||||||||||||||||
| October 1, 2022 - December 31, 2022 | December 30, 2022 | $ | 0.15 | December 16, 2022 | ||||||||||||||||
Any dividends must be declared by our Board of Directors, which will take into account various factors including our current and anticipated operating results, our financial position, REIT requirements, conditions prevailing in the market, restrictions in our debt documents and additional factors they deem appropriate. Dividend payments are not guaranteed, and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends or to change the amount paid as dividends. In light of the ongoing COVID-19 pandemic, we may take further measures to conserve cash, which may include a suspension, delay or reduction in our dividend.
Capital Expenditures
| Twelve Months Ended December 31, 2022 | ||||||||||||||||||||||||||||||||
| (Thousands) | Success Based | Maintenance | Integration | Non-Network | Total | |||||||||||||||||||||||||||
| Capital expenditures: | ||||||||||||||||||||||||||||||||
| Leasing | $ | 24,959 | $ | 324 | $ | — | $ | — | $ | 25,283 | ||||||||||||||||||||||
| Growth capital improvements | 237,986 | — | — | — | 237,986 | |||||||||||||||||||||||||||
| Fiber Infrastructure | 151,818 | 10,000 | 1,511 | 633 | 163,962 | |||||||||||||||||||||||||||
| Corporate | — | — | — | 336 | 336 | |||||||||||||||||||||||||||
| Total capital expenditures | $ | 414,763 | $ | 10,324 | $ | 1,511 | $ | 969 | $ | 427,567 | ||||||||||||||||||||||
We categorize our capital expenditures as either (i) success-based, (ii) maintenance, (iii) integration or (iv) corporate and non-network. We define success-based capital expenditures as those related to installing existing or anticipated contractual customer service orders. Maintenance capital expenditures are those necessary to keep existing network elements fully operational. Integration capital expenditures are those made specifically with respect to recent acquisitions that are essential to integrating acquired companies in our business. We anticipate continuing to invest in our network infrastructure across our Uniti Leasing and Uniti Fiber businesses and expect that cash on hand and cash flows provided by operating activities will be sufficient to support these investments. We have the right, but not the obligation (except for Growth Capital Improvements under the terms of the Windstream Leases), to reimburse growth capital expenditures in certain of our lease arrangements where we are the lessor.
Uniti’s total annual reimbursement commitments to Windstream for the Growth Capital Improvements is discussed above in this Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations in “Liquidity and Capital Resources—Windstream Leases.” Growth Capital Improvements are treated as success-based capital improvements based on the rents paid with respect to such amounts.
If circumstances warrant, we may need to take measures to conserve cash, which may include a suspension, delay or reduction in success-based capital expenditures. We continually assess our capital expenditure plans in light of developments the impact COVID-19 has on our business and that of our tenants and customers.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
In fiscal year 2022, our primary market risk exposure was interest rate risk with respect to our variable rate indebtedness under our Revolving Credit Facility, which had an aggregate principal amount of $188.0 million as of December 31, 2022.
47
A hypothetical 10% change in interest rates effective at December 31, 2022, would have had a $1.4 million impact on Uniti’s results of operations for the year ended December 31, 2022.
An increase in interest rates could make the financing of any acquisition by us more costly. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness.
48
Item 8. Financial Statements and Supplementary Data.
Uniti Group Inc.
Consolidated Financial Statements
Index to Financial Statements
| Page | |||||
| Uniti Group Inc. | |||||
49
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Uniti Group Inc.:
Uniti Group Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Uniti Group Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedules I to III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company has elected to change its method of accounting for certain financial instruments with characteristics of liabilities and equity as of January 1, 2021 due to the adoption of Accounting Standards Update No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in an Entity’s Own Equity (Subtopic 815-40).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Fair Value of the Fiber Infrastructure Reporting Unit
As discussed in Notes 3 and 11 to the consolidated financial statements, the Company’s consolidated goodwill balance was $361.4M as of December 31, 2022, all of which is associated with the Fiber Infrastructure segment. The Company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances occur that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company estimated the fair value of the Fiber Infrastructure reporting unit using a combination of an income approach based on the present value of estimated future cash flows and a market approach based on market data of comparable businesses and acquisition multiples paid in recent market transactions. The Company recorded impairment of goodwill for the Fiber Infrastructure reporting unit of $240.5 million during the year ended December 31, 2022 to reduce the carrying value of the reporting unit to its estimated fair value.
We identified the evaluation of the fair value of the Fiber Infrastructure reporting unit as a critical audit matter. We performed a sensitivity analysis to determine the significant assumptions used to estimate the fair value of the reporting unit. Specifically, forecasted revenue, profit margin, and capital expenditures were challenging to test as they represent subjective estimates of future operations. The discount rate, long-term growth rate, terminal capitalization rate, and acquisition multiple were also challenging to test as they represent subjective judgments about the investment market for infrastructure operations and assets. Minor changes to these assumptions, either individually or in aggregate, could have a significant effect on the Company’s assessment of the fair value of the reporting unit. Additionally, the audit effort associated with the evaluation of the fair value of the reporting unit required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s reporting unit fair value determination. This included controls related to forecasted revenue, profit margin, and capital expenditures as well as the discount rate, long-term growth rate, terminal capitalization rate, and acquisition multiple. We evaluated the forecasted revenue and profit margins by comparing them to peer company analyst reports. We also obtained an understanding of the Company’s intent to carry out particular courses of action by inspecting their written plans and other relevant documentation, and assessed how the Company incorporated those planned actions into forecasted revenue, profit margins and capital expenditures. We compared the Company’s historical revenue, profit margin and capital expenditure forecasts to actual results to assess the Company’s ability to accurately forecast. We evaluated the Company’s forecasted revenue, profit margin, and capital expenditures by comparing them to historical results. We also evaluated whether the information used in the determination of the fair value of the reporting unit was consistent with other information used internally, presented to the Board of Directors, and used to develop other externally presented financial information. In addition, we involved a valuation professional with specialized skills and knowledge, who assisted in evaluating the Company’s discount rate, long-term growth rate, terminal capitalization rate and acquisition multiples by comparing them to market data for comparable entities and transactions.
/s/ KPMG LLP
We have served as the Company’s auditor since 2020
February 28, 2023
51
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Uniti Group Inc.:
Uniti Group Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Uniti Group Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedules I to III (collectively, the consolidated financial statements), and our report dated February 28, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
52
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Dallas, Texas
February 28, 2023
February 28, 2023
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Uniti Group Inc.
Consolidated Balance Sheets
| (Thousands, except par value) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Assets: | ||||||||||||||
| Property, plant and equipment, net | $ | $ | ||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Accounts receivable, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Straight-line revenue receivable | ||||||||||||||
| Operating lease right-of-use assets, net | ||||||||||||||
| Other assets, net | ||||||||||||||
| Investments in unconsolidated entities | ||||||||||||||
| Deferred income tax assets, net | ||||||||||||||
| Total Assets | $ | $ | ||||||||||||
| Liabilities and Shareholders' Deficit: | ||||||||||||||
| Liabilities: | ||||||||||||||
| Accounts payable, accrued expenses and other liabilities, net | $ | $ | ||||||||||||
| Settlement payable (Note 3) | ||||||||||||||
| Intangible liabilities, net | ||||||||||||||
| Accrued interest payable | ||||||||||||||
| Deferred revenue | ||||||||||||||
| Derivative liability, net | ||||||||||||||
| Dividends payable | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Finance lease obligations | ||||||||||||||
| Notes and other debt, net | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Note 16) | ||||||||||||||
| Shareholders' Deficit: | ||||||||||||||
Preferred stock, $ | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated other comprehensive loss | ( | |||||||||||||
| Distributions in excess of accumulated earnings | ( | ( | ||||||||||||
| Total Uniti shareholders' deficit | ( | ( | ||||||||||||
| Noncontrolling interests: | ||||||||||||||
| Operating partnership units | ||||||||||||||
Cumulative non-voting convertible preferred stock, $ | ||||||||||||||
| Total shareholders' deficit | ( | ( | ||||||||||||
| Total Liabilities and Shareholders' Deficit | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Uniti Group Inc.
Consolidated Statements of Income (Loss)
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands, except per share data) | 2022 | 2021 | 2020 | |||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Leasing | $ | $ | $ | |||||||||||||||||
| Fiber Infrastructure | ||||||||||||||||||||
| Tower | ||||||||||||||||||||
| Consumer CLEC | ||||||||||||||||||||
| Total revenues | ||||||||||||||||||||
| Costs and Expenses: | ||||||||||||||||||||
| Interest expense, net | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| General and administrative expense | ||||||||||||||||||||
| Operating expense (exclusive of depreciation, accretion and amortization) | ||||||||||||||||||||
| Settlement expense (Note 3) | ||||||||||||||||||||
| Goodwill impairment (Note 3) | ||||||||||||||||||||
| Transaction related and other costs | ||||||||||||||||||||
| Gain on sale of real estate | ( | ( | ( | |||||||||||||||||
| Gain on sale of operations | ( | ( | ||||||||||||||||||
| Other expense (income), net | ( | |||||||||||||||||||
| Total costs and expenses | ||||||||||||||||||||
| (Loss) income before income taxes and equity in earnings from unconsolidated entities | ( | ( | ||||||||||||||||||
| Income tax (benefit) expense | ( | ( | ( | |||||||||||||||||
| Equity in earnings from unconsolidated entities | ( | ( | ( | |||||||||||||||||
| Net (loss) income | ( | ( | ||||||||||||||||||
| Net income (loss) attributable to noncontrolling interests | ( | |||||||||||||||||||
| Net (loss) income attributable to shareholders | ( | ( | ||||||||||||||||||
| Participating securities' share in earnings | ( | ( | ( | |||||||||||||||||
| Dividends declared on convertible preferred stock | ( | ( | ( | |||||||||||||||||
| Net (loss) income attributable to common shareholders | $ | ( | $ | $ | ( | |||||||||||||||
| Earnings (loss) per common share (Note 14): | ||||||||||||||||||||
| Basic | $ | ( | $ | $ | ( | |||||||||||||||
| Diluted | $ | ( | $ | $ | ( | |||||||||||||||
| Weighted-average number of common shares outstanding | ||||||||||||||||||||
| Basic | ||||||||||||||||||||
| Diluted | ||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Uniti Group Inc.
Consolidated Statements of Comprehensive Income (Loss)
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ( | |||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||
| Unrealized loss on derivative contracts | ( | |||||||||||||||||||
| Interest rate swap termination | ||||||||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||||||
| Comprehensive income (loss) | ( | |||||||||||||||||||
| Comprehensive income (loss) attributable to noncontrolling interest | ( | |||||||||||||||||||
| Comprehensive income (loss) attributable to shareholders | $ | $ | $ | ( | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Uniti Group Inc.
Consolidated Statements of Shareholders’ Deficit
| Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss) Income | Distributions in Excess of Accumulated Earnings | Noncontrolling Interest - OP Units | Noncontrolling Interest - Non- voting Preferred Shares | Total Shareholders' Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Thousands, except share data) | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 Activity: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends declared ($ | — | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of non-voting convertible preferred stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payments related to tax withholding for stock-based compensation | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock - employee stock purchase plan | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement Common Stock (Note 20) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 Activity: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends declared ($ | — | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of noncontrolling interest | — | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payments related to tax withholding for stock-based compensation | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock - employee stock purchase plan | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
57
| Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss) Income | Distributions in Excess of Accumulated Earnings | Noncontrolling Interest - OP Units | Noncontrolling Interest - Non- voting Preferred Shares | Total Shareholders' Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Thousands, except share data) | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 Activity: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends declared ($ | — | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of non-voting convertible preferred stock | — | — | — | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of noncontrolling interest | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payments related to tax withholding for stock-based compensation | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock - employee stock purchase plan | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payments to settle capped call option | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payment for settlement of common stock warrant | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Termination of bond hedge option | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | — | $ | — | $ | $ | $ | $ | ( | $ | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Uniti Group Inc.
Consolidated Statements of Cash Flows
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Cash flow from operating activities | ||||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ( | |||||||||||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Amortization of deferred financing costs and debt discount | ||||||||||||||||||||
| (Gain) Loss on debt extinguishment | ( | |||||||||||||||||||
| Interest rate swap termination | ||||||||||||||||||||
| Deferred income taxes | ( | ( | ( | |||||||||||||||||
| Equity in earnings of unconsolidated entities | ( | ( | ( | |||||||||||||||||
| Distributions of cumulative earnings from unconsolidated entities | ||||||||||||||||||||
| Cash paid for interest rate swap settlement | ( | ( | ( | |||||||||||||||||
| Straight-line rental revenues | ( | ( | ( | |||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Change in fair value of contingent consideration | ||||||||||||||||||||
| Gain on sale of operations | ( | ( | ||||||||||||||||||
| Gain on sale of unconsolidated entity | ( | |||||||||||||||||||
| Goodwill impairment (Note 3) | ||||||||||||||||||||
| Gain on prepayment of settlement payable (Note 3) | ( | |||||||||||||||||||
| Loss (gain) on asset disposals | ( | |||||||||||||||||||
| Gain on sale of real estate | ( | ( | ( | |||||||||||||||||
| Accretion of settlement payable | ||||||||||||||||||||
| Other | ( | ( | ||||||||||||||||||
| Changes in assets and liabilities, net of acquisitions: | ||||||||||||||||||||
| Accounts receivable | ( | |||||||||||||||||||
| Other assets | ( | |||||||||||||||||||
| Accounts payable, accrued expenses and other liabilities | ( | |||||||||||||||||||
| Settlement payable (Note 3) | ||||||||||||||||||||
| Net cash provided by operating activities | ||||||||||||||||||||
| Cash flow from investing activities | ||||||||||||||||||||
| Proceeds from sale of other equipment | ||||||||||||||||||||
| Proceeds from sale of operations (Note 6) | ||||||||||||||||||||
| Proceeds from sale of real estate, net of cash | ||||||||||||||||||||
| Proceeds from sale of unconsolidated entity | ||||||||||||||||||||
| Capital expenditures | ( | ( | ( | |||||||||||||||||
| Asset acquisitions (Note 6) | ( | |||||||||||||||||||
| Net cash (used in) provided by investing activities | ( | ( | ||||||||||||||||||
| Cash flow from financing activities | ||||||||||||||||||||
| Repayment of debt | ( | ( | ( | |||||||||||||||||
| Proceeds from issuance of Notes | ||||||||||||||||||||
| Dividends paid | ( | ( | ( | |||||||||||||||||
| Payments of settlement payable | ( | |||||||||||||||||||
| Payments of contingent consideration | ( | ( | ||||||||||||||||||
| Borrowings under revolving credit facility | ||||||||||||||||||||
| Payments under revolving credit facility | ( | ( | ( | |||||||||||||||||
| Finance lease payments | ( | ( | ( | |||||||||||||||||
| Payments for financing costs | ( | ( | ( | |||||||||||||||||
| Payments for capped call option | ( | |||||||||||||||||||
| Payment for settlement of common stock warrant | ( | |||||||||||||||||||
| Termination of bond hedge option | ||||||||||||||||||||
| Settlement Common Stock issuance (Note 20) | ||||||||||||||||||||
| Costs related to early repayment of debt | ( | |||||||||||||||||||
| Distributions paid to noncontrolling interest | ( | ( | ( | |||||||||||||||||
| Payment for exchange of noncontrolling interest | ( | |||||||||||||||||||
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| Employee stock purchase plan | ||||||||||||||||||||
| Payments related to tax withholding for stock-based compensation | ( | ( | ( | |||||||||||||||||
| Net cash used in financing activities | ( | ( | ( | |||||||||||||||||
| Effect of exchange rates on cash and cash equivalents | ||||||||||||||||||||
| Net decrease in cash and cash equivalents | ( | ( | ( | |||||||||||||||||
| Cash and cash equivalents at beginning of period | ||||||||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | $ | |||||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||||||||
| Property and equipment acquired but not yet paid | $ | $ | $ | |||||||||||||||||
| Tenant capital improvements | $ | $ | $ | |||||||||||||||||
| Receipt of equity method investment value in exchange for assets | $ | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Uniti Group Inc.
Notes to the Consolidated Financial Statements
Note 1. Organization and Description of Business
Uniti Group Inc. (the “Company,” “Uniti,” “we,” “us,” or “our”) was incorporated in the state of Maryland on September 4, 2014. We are an independent internally managed real estate investment trust (“REIT”) engaged in the acquisition, construction and leasing of mission critical infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic, copper and coaxial broadband networks and data centers. We manage our operations focused on our two primary lines of business: Uniti Fiber and Uniti Leasing.
The Company operates through a customary “up-REIT” structure, pursuant to which we hold substantially all of our assets through a partnership, Uniti Group LP, a Delaware limited partnership (the “Operating Partnership”) that we control as general partner. The up-REIT structure is intended to facilitate future acquisition opportunities by providing the Company with the ability to use common units of the Operating Partnership as a tax-efficient acquisition currency. As of December 31, 2022, we are the sole general partner of the Operating Partnership and own approximately 99.96 % of the partnership interests in the Operating Partnership.
Note 2. Basis of Presentation and Consolidation
The accompanying Consolidated Financial Statements include all accounts of the Company and, its wholly-owned and/or controlled subsidiaries, including the Operating Partnership. Under the Accounting Standards Codification 810, Consolidation (“ASC 810”), the Operating Partnership is considered a variable interest entity and is consolidated in the Consolidated Financial Statements of Uniti Group Inc. because the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated.
ASC 810 provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIEs. Generally, the consideration of whether an entity is a VIE applies when either: (1) the equity investors (if any) lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and substantially all of the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is defined as the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance; and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.
Note 3. Summary of Significant Accounting Policies
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involved in bringing the assets comprising a network to an operational state at the Company’s weighted average interest rate during the respective accounting period.
The Company also enters into leasing arrangements providing for the long‑term use of constructed fiber that is then integrated into the Company’s network infrastructure. For each lease that qualifies as a finance lease, the present value of the lease payments, which may include both periodic lease payments over the term of the lease as well as upfront payments to the lessor, is capitalized at the inception of the lease and included in property and equipment. As of December 31, 2022 and 2021, the accumulated amortization of our finance lease assets was $22.2 million and $18.4 million, respectively.
On April 24, 2015, we were separated and spun-off (the “Spin-Off”) from Windstream Holdings, Inc. (“Windstream Holdings” and together with Windstream Holdings II, LLC, its successor in interest, and its subsidiaries, “Windstream”) pursuant to which Windstream contributed certain telecommunications network assets, including fiber and copper networks and other real estate (the “Distribution Systems”) to Uniti. Certain property, plant and equipment acquired as part of our Spin-Off is depreciated using a group composite depreciation method. Under this method, when property is retired, the original cost, net of salvage value, is charged against accumulated depreciation and no immediate gain or loss is recognized on the disposition of the property. For all other property, which includes amortization of finance lease assets, depreciation is computed using the straight-line method over the estimated useful life of the respective property. When the property is retired or otherwise disposed of, the related cost and accumulated depreciation are written-off, with the corresponding gain or loss reflected in operating results. Construction in progress includes direct materials and labor related to fixed assets during the construction period. Depreciation begins once the construction period has ceased and the related asset is placed into service, and the asset will be depreciated over its useful life.
Costs of maintenance and repairs to property, plant and equipment subject to triple-net leasing arrangements are the responsibility of our tenant. Costs of maintenance and repairs to property, plant and equipment not subject to triple-net leasing arrangements are expensed as incurred.
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million, and $1.3 million of accretion expense related to asset retirement obligations, respectively, included in depreciation and amortization expense in our Consolidated Statements of Income (Loss).
Exchangeable Notes and Related Transactions—On June 28, 2019, Uniti Fiber Holdings Inc., a subsidiary of the Company, issued $345 million aggregate principal amount of 4.00 % Exchangeable Senior Notes due June 15, 2024 (the “Exchangeable Notes”). The Exchangeable Notes bear interest at a fixed rate of 4.00 % per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2019. The Exchangeable Notes are exchangeable into cash, shares of the Company’s common stock, or a combination thereof, at Uniti Fiber Holdings Inc.’s election. In accordance with ASC 470-20, Debt – Debt with Conversion and Other Options, because the conversion feature in the Exchangeable Notes is not bifurcated pursuant to ASC 815, Derivatives and Hedging, and because the conversion can be settled in cash, shares, or a combination thereof, the Exchangeable Notes were separated into a liability component and an equity component in a manner that reflects Uniti Fiber Holdings Inc.’s non-convertible debt borrowing rate. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. See Note 12. The Company adopted ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) on January 1, 2021. ASU 2020-06 (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (“EPS”) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.The adoption of ASU 2020-06 resulted in the re-combination of the liability and equity components of these notes into a single liability instrument.
In connection with the offering of the Exchangeable Notes, Uniti Fiber Holdings Inc. entered into exchangeable note hedge transactions with respect to the Company’s common stock (the “Note Hedge Transactions”) with certain of the initial purchasers or their respective affiliates (collectively, the “2019 Counterparties”). In addition, the Company entered into warrant transactions to sell to the 2019 Counterparties warrants (the “Warrants”) to acquire, subject to anti-dilution adjustments, up to approximately 27.8 million shares of the Company’s common stock in the aggregate at an exercise price of $16.42 per share. The warrant transactions may have a dilutive effect with respect to the Company’s common stock to the extent the market price per share of the Company’s common stock exceeds the strike price of the Warrants. While the Note Hedge Transactions and the Warrants each meet the definition of a derivative in ASC 815-10-15-83, they each meet the equity scope exception specified in ASC 815-10-15-74(a); as such, the Warrants and the Note Hedge Transactions are not accounted for as derivatives that must be remeasured each reporting period and instead, are recorded in stockholders’ deficit. See Note 10.
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Settlement Expense—On July 25, 2019, in connection with Windstream’s bankruptcy, Windstream Holdings and Windstream Services, LLC (“Windstream Services”) filed a complaint with the Bankruptcy Court in an adversary proceeding against Uniti and certain of its affiliates, alleging, among other things, that the Master Lease (as defined in Note 5) should be recharacterized as a financing arrangement, that certain rent payments and TCIs made by Windstream under the Master Lease constitute constructive fraudulent transfers, that the Master Lease is a lease of personal property and that Uniti breached certain of its obligations under the Master Lease. On March 2, 2020, Uniti and Windstream jointly announced that they agreed to the Settlement (as defined below) to resolve any and all claims and causes of action that have been or may be asserted against Uniti by Windstream, including all litigation brought by Windstream and certain of its creditors in the context of Windstream’s bankruptcy, and on May 12, 2020, the Bankruptcy Court entered an order approving Windstream’s assumption of the Master Lease as part of the Settlement. As a result, during the second quarter of 2020, we estimated that $650.0 million of the consideration paid to Windstream should be classified as settlement of litigation, and therefore, recorded a $650.0 million charge. The charge represented our estimated fair value of the litigation settlement component of the Settlement.
On May 26, 2020, UMB Bank, National Association and U.S. Bank National Association ("U.S. Bank"), in their respective capacities as indenture trustees of Windstream’s bonds, filed a notice of appeal in the United States District Court for the Southern District of New York from the bankruptcy court’s May 12, 2020 order approving the settlement. On July 20, 2020, UMB Bank, National Association withdrew from the appeal. On June 22, 2021, the district court dismissed the appeal of the bankruptcy court’s order approving the settlement as equitably moot. On July 26, 2021, U.S. Bank filed a notice of appeal in the United States Court of Appeals for the Second Circuit from the district court’s order. On November 8, 2022, U.S. Bank petitioned the Second Circuit for a rehearing or, in the alternative, a rehearing en banc of the October 25 summary opinion affirming the district court's dismissal of U.S. Bank's appeal. On December 16, 2022, the Second Circuit denied the petition for a rehearing or a rehearing en banc.
On September 21, 2020, Windstream emerged from bankruptcy following its voluntary petition for relief under Chapter 11 of the Bankruptcy Code. In connection with Windstream’s emergence from bankruptcy, Uniti entered into several agreements and consummated the transactions, each as described herein, to implement its settlement (the “Settlement”) with Windstream pursuant to the settlement agreement dated as of May 12, 2020 between Uniti and Windstream. Pursuant to the Settlement, Uniti and Windstream agreed to mutual releases with respect to any and all liability related to any claims and causes of action between them, including those brought by Windstream and certain of its creditors relating to Windstream’s Chapter 11 proceedings and the Master Lease. On January 8, 2021, Windstream filed in the bankruptcy court a stipulation and order dismissing the adversary proceeding against Uniti with prejudice subject to the terms set forth in the settlement agreement. The stipulation and order was entered by the bankruptcy court on January 25, 2021.
In accordance with the Settlement, we have a number of obligations including the following:
i.we are obligated to make $490.1 million of cash payments to Windstream in equal installments over 20 consecutive quarters beginning in October 2020, and we may prepay any installments due on or after the first anniversary of the settlement agreement (discounted at a 9 % rate). As of December 31, 2022, the Company has made payments totaling $215.4 million;
ii.we are obligated to reimburse Windstream for Growth Capital Improvements as described in Note 5;
iii.we closed the Stock Purchase Agreement with certain first lien creditors of Windstream (see Note 20); and
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Revenue Recognition— The following is a description of principal activities, separated by reportable segments (see Note 15), from which the Company generates its revenues. We exclude from the transaction price any amounts collected from customers for sales taxes and therefore, they are not included in revenue.
Leasing
Leasing revenue represents the results from our leasing segment, Uniti Leasing, which is engaged in the acquisition and construction of mission-critical communications assets and leasing them to anchor customers on either an exclusive or shared-tenant basis. See discussion in “Leases” in this Note 3 and Note 5.
The Windstream Leases (as defined in Note 5) are long-term exclusive triple-net leases, whereby Windstream is responsible for the costs related to operating the Distribution Systems, including property taxes, insurance and maintenance and repair costs. As a result, we do not record an obligation related to the payment of property taxes or insurance, as Windstream makes direct payments to the taxing authorities and insurance carriers, respectively.
Fiber Infrastructure
The Fiber Infrastructure segment represents the operations of our fiber business, Uniti Fiber, which provides:
i.Consumer, enterprise, wholesale, and backhaul lit fiber revenue is recognized over the life of the contracts in a pattern that reflects the satisfaction of Uniti’s stand-ready obligation to provide lit fiber services. The transaction price is equal to the monthly-recurring charge multiplied by the contract term, plus any non-recurring or variable charges. For each contract, the customer is invoiced monthly.
ii.E-Rate contracts involve providing lit fiber services to schools and libraries, and revenue is recognized over the life of the contract in a pattern that reflects the satisfaction of Uniti’s stand-ready obligation to provide lit fiber services. The transaction price is equal to the monthly-recurring charge multiplied by the contract term, plus any non-recurring or variable charges. For each contract, the customer is invoiced monthly.
iii.Small cell contracts provide improved network connection to areas that may not require or accommodate a tower. Small cell arrangements typically contain five streams of revenue: site development, radio frequency (“RF”) design, dark fiber lease, construction services, and maintenance services. Site development, RF design and construction are each separate services and are considered distinct performance obligations. Dark fiber and associated maintenance services constitute a lease, and as such, revenue is recognized under the leasing guidance.
iv.Construction revenue is generated from contracts to provide various construction services such as equipment installation or the laying of fiber. Construction revenue is recognized over time as construction activities occur as we are either enhancing a customer’s owned asset or constructing an asset with no alternative use to us and we would be entitled to our costs plus a reasonable profit margin if the contract was terminated early by the customer. We are utilizing our costs incurred as the measure of progress of satisfying our performance obligation.
v.Dark fiber arrangements represent operating leases and revenue is recognized under the leasing guidance. When (i) a customer makes an advance payment or (ii) a customer is contractually obligated to pay any amounts in advance, which is not deemed a separate performance obligation, deferred leasing revenue is recorded. This leasing revenue is recognized ratably over the expected term of the contract, unless the pattern of service suggests otherwise.
vi.The Company generates revenues from other services, such as consultation services and equipment sales. Revenue from the sale of customer premise equipment and modems that are not provided as an essential part of the telecommunications services, including broadband, long distance, and enhanced services is recognized when products are delivered to and accepted by
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the customer. Revenue from customer premise equipment and modems provided as an essential part of the telecommunications services, including broadband, long distance, and enhanced services are recognized over time in a pattern that reflects the satisfaction of the service performance obligation.
Towers
The Towers segment represents the operations of our former towers business, Uniti Towers, through which we acquired and constructed tower and tower-related real estate, which we then leased to our customers in the United States and Latin America. Revenue from our towers business qualifies as lease revenues under ASC 842 and is outside the scope of ASC 606. The Company completed a series of transactions to largely divest of its towers business and on April 2, 2019, May 23, 2019 and June 1, 2020, the Company completed the sales of its Latin American business, substantially all of its U.S. ground lease business, and its U.S. tower business, respectively.
Consumer CLEC
The Consumer CLEC segment represents the operations of our former small consumer competitive local exchange carrier business (the "Consumer CLEC Business" or "Talk America", which provided local telephone, high-speed internet and long-distance services to customers in the eastern and central United States. Customers were billed monthly for services rendered based on actual usage or contracted amounts. The transaction price is equal to the monthly-recurring charge multiplied by the initial contract term (typically 12 months), plus any non-recurring or variable charges. As of the end of the second quarter of 2020, we substantially completed a wind down of our Consumer CLEC Business.
Commissions – Under Topic 606 and Topic 340, Other Assets and Deferred Costs, we capitalize commission fees as costs of obtaining a contract when those commissions are incremental and expected to be recovered from the revenue contract and we amortize those capitalized costs consistent with the pattern of transfer of the product or service to which the capitalized costs relate. The amortization of these costs are included in general and administrative expense on the Consolidated Statements of Income (Loss).
Leases—We classify leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is comprised of amortization on the right-of-use (“ROU”) asset and interest expense recognized based on an effective interest method (a finance lease) or as a single lease cost recognized on a straight-line basis over the term of the lease (an operating lease). We recognize an ROU asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.
We determine if an arrangement is a lease at contract inception. A lease exists when a contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration.
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We enter into lease contracts including ground, towers, equipment, office, colocation and fiber lease arrangements, in which we are the lessee, and service contracts that may include embedded leases. Operating leases where we are the lessor are included in Leasing, Fiber Infrastructure and Tower revenues on our Consolidated Statements of Income (Loss).
From time to time we may enter into direct financing lease arrangements as a lessee that include (i) a lessee obligation to purchase the leased equipment at the end of the lease term, (ii) a bargain purchase option, (iii) a lease term having a duration that is for the major part of the remaining economic life of the leased equipment or (iv) provides for minimum lease payments with a present value amounting to substantially all of the fair value of the leased asset at the date of lease inception.
ROU assets and lease liabilities related to operating leases where we are the lessee are separately stated on our Consolidated Balance Sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments.
ROU assets and lease liabilities related to finance leases where we are the lessee are included in property, plant and equipment, net and finance lease obligations, respectively, on our Consolidated Balance Sheets. The lease liabilities are initially measured in the same manner as operating leases and are subsequently measured at amortized cost using the effective interest method. ROU assets for finance leases are amortized on a straight-line basis over the remaining lease term.
Key estimates and judgments include how we determined (i) the discount rate we use to discount the unpaid lease payments to present value, (ii) lease term and (iii) lease payments.
i.ASC 842 requires a lessor to discount its unpaid lease payments using the interest rate implicit in the lease and a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As we generally do not know the implicit rate for our leases where we are the lessee, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.
ii.The lease term for all of our leases includes the noncancellable period of the lease plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.
iii.Lease payments included in the measurement of the lease asset or liability comprise the following: (i) fixed payments (including in-substance fixed payments), (ii) variable payments that depend on index or rate based on the index or rate at lease commencement, and (iii) the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.
For operating leases where we are the lessor, we continue recognizing the underlying asset and depreciating it over its estimated useful life. Lease income is recognized on a straight-line basis over the lease term. Leasing revenue is not recognized when collection of all contractual rents over the term of the agreement is not probable. When collection is not probable, we limit the lease revenue to the lesser of the revenue recognized on a straight-line basis or cash basis.
Where we are the lessee, the ROU asset is initially measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received.
For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
For finance leases, the ROU asset is subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term unless the lease transfers ownership of the
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underlying asset to us, or we are reasonably certain to exercise an option to purchase the underlying asset. In those cases, the ROU asset is amortized over the useful life of the underlying asset. Amortization of the ROU asset is recognized and presented separately from interest expense on the lease liability.
Variable lease payments associated with our leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are presented within Leasing, Fiber Infrastructure and Tower revenues and general and administrative expense and operating expense in our Consolidated Statements of Income (Loss) in the same line item as revenue arising from fixed lease payments (operating leases where we are the lessor) and expense arising from fixed lease payments (operating leases where we are the lessee) or amortization of the ROU asset (finance leases), respectively.
We monitor for events or changes in circumstances that require a reassessment of a lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in general and administrative and operating expense in our Consolidated Statements of Income (Loss).
We have lease agreements which include lease and nonlease components. For leases where we are a lessee, we have elected to combine lease and nonlease components for all lease contracts. For leases where we are the lessor, we combine the lease and non-lease components when the components qualify to be combined and we account for the combined arrangement based on whether the lease or non-lease component is predominant. Maintenance services are the primary nonlease components and the combined components typically are treated as leases for revenue recognition purposes.
We have elected not to recognize ROU assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. We recognize the lease payments associated with our short-term leases as an expense on a straight-line basis over the lease term.
We have elected to exclude sales taxes from lease payments in arrangements where we are a lessor.
Income Taxes—We elected on our initial U.S. federal income tax return to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, we must distribute at least 90% of our annual REIT taxable income, determined without regard to the dividends paid deduction and excluding any capital gains, to shareholders, and meet certain organizational and operational requirements, including asset holding requirements. As a REIT, we will generally not be subject to U.S. federal income tax on income that we distribute as dividends to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates, and we could not deduct dividends paid to our shareholders in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to shareholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from reelecting to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
We may be required to record a provision in our Consolidated Financial Statements for U.S. federal income taxes related to the activities of the REIT and its passthrough subsidiaries for any undistributed income. We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
We have elected to treat the subsidiaries through which we operate Uniti Fiber and certain subsidiaries of Uniti Leasing, and operated Talk America as taxable REIT subsidiaries (“TRSs”). TRSs enable us to engage in activities that result in income that does not constitute qualifying income for a REIT. Our TRSs are subject to U.S. federal, state and local corporate income taxes.
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Deferred tax assets and liabilities are recognized under the asset and liability method for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax balances are adjusted to reflect tax rates based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period of the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
We recognize the benefit of tax positions that are "more likely than not" to be sustained upon examination based on their technical merit. The benefit of a tax position is measured at the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. If applicable, we will report tax-related penalties and interest expense as a component of income tax expense. We currently have unrecognized tax benefits of $1.7 million recorded in deferred income taxes on our Consolidated Balance Sheet.
The Company may be subject to state corporate level tax in a certain limited number of states on any built-in gain recognized from a sale of assets occurring within a ten-year recognition period after the Spin-Off. The five-year recognition period applicable for federal corporate level tax on any built-in gain recognized from a sale of assets occurring within five years after the Spin-Off expired in 2020.
Business Combinations and Asset Acquisitions—In accordance with ASC 805, Business Combinations, we apply the acquisition method of accounting for acquisitions meeting the definition of a business combination or asset acquisition, where assets acquired and liabilities assumed are recorded at fair value at the date of each acquisition, and the results of operations are included with those of the Company from the dates of the respective acquisitions. The fair value of the acquired assets and liabilities are estimated using the income, market and/or cost approach. The income approach utilizes the present value of estimated future cash flows that a business or asset can be expected to generate, while under the market approach, the fair value of an asset or business reflects the price at which comparable assets are purchased under similar circumstances. Inherent in our preparation of cash flow projections are significant assumptions and estimates derived from a review of operating results, business plans, expected growth rates, capital expenditure plans, cost of capital and tax rates. We also make certain forecasts about future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management. Small changes in these assumptions or estimates could materially affect the cash flow projections, and therefore could affect the estimated fair value. Impacts of these assumptions or estimates include customer retention, execution of our business plans, which impact growth, cost escalation impacting margin, the level of capital expenditures required to sustain our growth and market factors, including interest rate and stock price fluctuations, impacting our cost of capital.
For acquisitions meeting the definition of a business combination, any excess of the purchase price paid by the Company over the amounts recognized for assets acquired and liabilities assumed is recorded as goodwill. ASC 805 also requires acquirers to, among other things, estimate the acquisition date fair value of any contingent consideration and recognize any subsequent changes in the fair value of contingent consideration in earnings. When provisional amounts are initially recorded, the Company continues to evaluate acquisitions for a period not to exceed one year after the applicable acquisition date of each transaction to determine whether any additional adjustments are needed to the allocation of the purchase price paid for the assets acquired and liabilities assumed.
For acquisitions meeting the definition of an asset acquisition, the fair value of the consideration transferred, including transaction costs, is allocated to the assets acquired and liabilities assumed based on their relative fair values. There are significant judgments and estimates used in determining the fair values of the assets acquired and liabilities assumed, which include assumptions with respect to items such as replacement cost, land value, assemblage factor, discount rate, lease-up period, implied rents per strand mile, and useful life. No goodwill is recognized in an asset acquisition.
Noncontrolling Interest—The limited partner equity interests in our operating partnership are exchangeable on a one-for-one basis for shares of our common stock or, at our election, cash of equivalent value. All of the limited partner equity interests in our operating partnership not held by the Company are reflected as noncontrolling interests. In the Consolidated Statements of Income (Loss), we allocate net income (loss) attributable to noncontrolling interests to arrive at net (loss) income attributable to shareholders based on their proportionate share.
For transactions that result in changes to the Company's ownership interest in our operating partnership, the carrying amount of noncontrolling interests is adjusted to reflect such changes. The difference between the fair value of the
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Goodwill—As of December 31, 2022, and 2021, all of our goodwill is included in our Fiber Infrastructure segment. Goodwill is recognized for the excess of purchase price over the fair value of net assets of businesses acquired. Goodwill is reviewed for impairment at least annually. Our annual impairment test is performed with a valuation date of October 1. In accordance with ASC 350-20, Intangibles-Goodwill and Other ("ASC 350-20"), we evaluate goodwill for impairment between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount (a “Triggering Event”). On the occurrence of a Triggering Event, an entity has the option to first assess qualitative factors to determine whether a quantitative impairment test is necessary. If it is more likely than not that goodwill is impaired, the fair value of the reporting unit must be compared with its carrying value. Unless circumstances otherwise dictate, the annual impairment test is performed in the fourth quarter. Application of the goodwill impairment test requires significant judgment, including: the identification of reporting units; assignment of assets and liabilities to reporting units; assignment of goodwill to reporting units; and the estimation of the fair value of a reporting unit. During the third quarter of 2022, the Company identified a triggering event under ASC 350-20 and, therefore, performed a qualitative and quantitative goodwill impairment test with a valuation date of September 30, 2022. The triggering event was a result of macroeconomic and financial market factors, specifically increased interest rates impacting our discount rate. As a result, we concluded that the fair value of the Fiber Infrastructure reporting unit, estimated using a combination of the income approach and market approach, was less than its carrying amount. Accordingly, we recorded a $216.0 million goodwill impairment charge in the Fiber Infrastructure reporting unit. During the fourth quarter of 2022, we performed an additional quantitative and qualitative impairment test, and concluded that as a result of the continuing macroeconomic and financial market factors, specifically increased interest rates impacting our discount rate, the fair value of the Fiber Infrastructure reporting unit was less than its carrying amount. As a result, we recorded a $24.5 million goodwill impairment charge in the Fiber Infrastructure reporting unit.
During the year ended December 31, 2021, no impairment losses were recognized. During the year ended December 31, 2020, we performed our annual goodwill impairment analysis during the fourth quarter of 2020 and concluded that, as a result of increased capital expenditure investments in dark fiber and small cell projects and less than anticipated cash flow growth, the fair value of the Fiber Infrastructure reporting unit, estimated using a combination of the income approach and market approach, was less that its carrying amount. Accordingly, we recorded a $71 million goodwill impairment in the Fiber Infrastructure reporting unit.
We estimate the fair value of our reporting units (which are our segments) using a combination of an income approach based on the present value of estimated future cash flows and a market approach based on market data of comparable businesses and acquisition multiples paid in recent transactions. We evaluate the appropriateness of each valuation methodology in determining the weighting applied to each methodology in the determination of the concluded fair value. If the carrying amount of a reporting unit's net assets is less than its fair value, no impairment exists. If the carrying amount of the reporting unit is greater than the fair value of the reporting unit, an impairment loss must be recognized for the excess and recorded in the Consolidated Statements of Income (Loss) not to exceed the carrying amount of goodwill.
Inherent in our preparation of cash flow projections are significant assumptions and estimates derived from a review of our operating results and business plans, which includes expected revenue and expense growth rates, capital expenditure plans and cost of capital. In determining these assumptions, we consider our ability to execute on our plans, future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods. Small changes in these assumptions or estimates could materially affect our cash flow projections, and therefore could affect the likelihood and amount of potential impairment in future periods. Potential events that could negatively impact these assumptions or estimates may include customer losses or poor execution of our business plans, which impact revenue growth, cost escalation impacting margin, the level of capital expenditures required to sustain our growth and market factors, including stock price fluctuations and increased rates, impacting our cost of capital. For example, if we were to experience a significant delay in our permitting process in the construction of our fiber networks, the timing of effected cash flows could impact long term growth rates and negatively impact the income approach, leading to potential impairment. As a result, should our
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Earnings per Share—Outstanding restricted stock awards that contain rights to non-forfeitable dividends are deemed to be participating securities, requiring the application of the two-class method of computing basic and dilutive earnings per share.
Basic earnings per share includes only the weighted average number of common shares outstanding during the period. Dilutive earnings per share includes the weighted average number of common shares and the dilutive effect of restricted stock, performance-based awards outstanding during the period, the Convertible 2027 Notes and the Exchangeable Notes, when such awards are dilutive. See Note 14.
Concentration of Credit Risks—Revenue under the Windstream Leases provided 66.5 % of our revenue for the year ended December 31, 2022, 66.4 % of our revenue for the year ended December 31, 2021, and 65.8 % of our revenue for the year ended December 31, 2020. Because a substantial portion of our revenue and cash flows are derived from lease payments by Windstream pursuant to the Windstream Leases, there could be a material adverse impact on our consolidated results of operations, liquidity, financial condition and/or ability to pay dividends and service debt if Windstream were to default under the Windstream Leases or otherwise experiences operating or liquidity difficulties and becomes unable to generate sufficient cash to make payments to us.
Prior to its emergence from bankruptcy on September 21, 2020, Windstream was a publicly traded company subject to the periodic filing requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Windstream historic filings through their quarter ended June 30, 2020 can be found at www.sec.gov. On September 22, 2020, Windstream filed a Form 15 to terminate all filing obligations under Sections 12(g) and 15(d) under the Exchange Act. Windstream’s filings are not incorporated by reference in this Annual Report on Form 10-K.
We monitor the credit quality of Windstream through numerous methods, including by (i) reviewing credit ratings of Windstream by nationally recognized credit agencies, (ii) reviewing the financial statements of Windstream that are required to be delivered to us pursuant to the Windstream Leases, (iii) monitoring new reports regarding Windstream and its business, (iv) conducting research to ascertain industry trends potentially affecting Windstream, (v) monitoring Windstream’s compliance with the terms of the Windstream Leases and (vi) monitoring the timeliness of its payments under the Windstream Leases.
As of the date of this Annual Report on Form 10-K, Windstream is current on all lease payments. We note that in August 2020, Moody’s Investor Service assigned a B3 corporate family rating with a stable outlook to Windstream in connection with its post-emergence exit financing. At the same time, S&P Global Ratings assigned Windstream a B- issuer rating with a stable outlook. These ratings were both upgrades from Windstream’s pre-bankruptcy ratings. Both ratings remain current as of the date of this filing. In order to assist us in our continuing assessment of Windstream’s creditworthiness, we periodically receive certain confidential financial information and metrics from Windstream.
Reclassifications—Certain prior year asset and liability categories and related amounts have been reclassified to conform with current year presentation. Operating lease right of use assets, net and operating lease liabilities are now presented separately on our Consolidated Balance Sheets.
Recently Adopted Accounting Pronouncements
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The Company adopted ASU 2021-04 effective January 1, 2022, and there was no impact on our consolidated financial statements.
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Note 4. Revenues
Disaggregation of Revenue
The following table presents our revenues disaggregated by revenue stream.
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Revenue disaggregated by revenue stream | ||||||||||||||||||||
| Revenue from contracts with customers | ||||||||||||||||||||
| Fiber Infrastructure | ||||||||||||||||||||
| Lit backhaul | $ | $ | $ | |||||||||||||||||
| Enterprise and wholesale | ||||||||||||||||||||
| E-Rate and government | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Fiber Infrastructure | $ | $ | $ | |||||||||||||||||
| Leasing | ||||||||||||||||||||
| Consumer CLEC | ||||||||||||||||||||
| Total revenue from contracts with customers | ||||||||||||||||||||
| Revenue accounted for under leasing guidance | ||||||||||||||||||||
| Leasing | ||||||||||||||||||||
| Fiber Infrastructure | ||||||||||||||||||||
| Towers | ||||||||||||||||||||
| Total revenue accounted for under leasing guidance | ||||||||||||||||||||
| Total revenue | $ | $ | $ | |||||||||||||||||
At December 31, 2022 and 2021, lease receivables were $26.2 million and $19.4 million, respectively, and receivables from contracts with customers were $16.1 million and $14.7 million, respectively.
Contract Assets (Unbilled Revenue) and Liabilities (Deferred Revenue)
Contract assets primarily consist of unbilled construction revenue where we are utilizing our costs incurred as the measure of progress of satisfying our performance obligation. Contract assets are reported within accounts receivables, net on our Consolidated Balance Sheets. When the contract price is invoiced, the related unbilled receivable is reclassified to trade accounts receivable, where the balance will be settled upon the collection of the invoiced amount. Contract liabilities are generally comprised of upfront fees charged to the customer for the cost of establishing the necessary components of the Company’s network prior to the commencement of use by the customer. Fees charged to customers for the recurring use of the Company’s network are recognized during the related periods of service. Upfront fees that are billed in advance of providing services are deferred until such time the customer accepts the Company’s network and then are recognized as service revenues ratably over a period in which substantive services required under the revenue arrangement are expected to be performed, which is the initial term of the arrangement. During the years ended December 31, 2022, 2021, and 2020, we recognized revenues of $6.4 million, $13.2 million, and $5.4 million, respectively that was included in the December 31, 2021, December 31, 2020, and December 31, 2019 contract liabilities balance, respectively.
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The following table provides information about contract assets and contract liabilities accounted for under Topic 606.
| (Thousands) | Contract Assets | Contract Liabilities | ||||||||||||
| Balance at December 31, 2021 | $ | $ | ||||||||||||
| Balance at December 31, 2022 | $ | $ | ||||||||||||
Transaction Price Allocated to Remaining Performance Obligations
Performance obligations within contracts to stand ready to provide services are typically satisfied over time or as those services are provided. Contract liabilities primarily relate to deferred revenue from upfront customer payments. The deferred revenue is recognized, and the liability reduced, over the contract term as the Company completes the performance obligation. As of December 31, 2022, our future revenues (i.e. transaction price related to remaining performance obligations) under contract accounted for under ASC 606 totaled $563.4 million, of which $463.8 million is related to contracts that are currently being invoiced and have an average remaining contract term of 2.3 years, while $99.7 million represents our backlog for sales bookings which have yet to be installed and have an average remaining contract term of 5.7 years. We do not disclose the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less.
Note 5. Leases
Lessor Accounting
We lease communications towers, ground, colocation, other communication equipment and dark fiber to tenants under operating leases. Our leases have initial lease terms ranging from less than one year to 35 years, most of which include options to extend or renew the leases for less than one year to 20 years (based on the satisfaction of certain conditions as defined in the lease agreements), and some of which may include options to terminate the leases within to six months . Certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include fixed payments plus, for some of our leases, variable payments.
The components of lease income for the years ended December 31, 2022 and 2021 are as follows:
| (Thousands) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | ||||||||||||
| $ | $ | |||||||||||||
Lease payments to be received under non-cancellable operating leases where we are the lessor for the remainder of the lease terms as of December 31, 2022 are as follows:
| (Thousands) | December 31, 2022 (1) | |||||||
| 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total lease receivables | $ | |||||||
(1) Total future minimum lease payments to be received include $ | ||||||||
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The underlying assets under operating leases where we are the lessor as of December 31, 2022 and 2021 are summarized as follows:
| (Thousands) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Land | $ | $ | ||||||||||||
| Building and improvements | ||||||||||||||
| Poles | ||||||||||||||
| Fiber | ||||||||||||||
| Equipment | ||||||||||||||
| Copper | ||||||||||||||
| Conduit | ||||||||||||||
| Tower assets | ||||||||||||||
| Finance lease assets | ||||||||||||||
| Other assets | ||||||||||||||
| Less: accumulated depreciation | ( | ( | ||||||||||||
| Underlying assets under operating leases, net | $ | $ | ||||||||||||
Depreciation expense for the underlying assets under operating leases where we are the lessor for the years ended December 31, 2022 and 2021 is summarized as follows:
| (Thousands) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | ||||||||||||
| Depreciation expense for underlying assets under operating leases | $ | $ | ||||||||||||
Lessee Accounting
We have commitments under operating leases for communications towers, ground, colocation, other communication equipment, dark fiber lease arrangements and buildings. We also have finance leases for automobiles and dark fiber lease arrangements. Our leases have initial lease terms ranging from less than one year to 30 years, most of which include options to extend or renew the leases for less than one year 20 years, and some of which may include options to terminate the leases within to six months . Certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include fixed payments plus, for some of our leases, variable payments.
As of December 31, 2022, we have short term lease commitments amounting to approximately $2.9 million, for colocation and dark fiber arrangements.
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The components of lease cost are presented within general and administrative expense and operating expense, while sublease income is presented within revenues in our Consolidated Statements of Income (Loss) for the years ended December 31, 2022 and 2021 are as follows:
| (Thousands) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | ||||||||||||
| Finance lease cost | ||||||||||||||
| Amortization of ROU assets | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||
| Total finance lease cost | ||||||||||||||
| Operating lease cost | ||||||||||||||
| Short-term lease cost | ||||||||||||||
| Variable lease cost | ||||||||||||||
| Less sublease income | ( | ( | ||||||||||||
| Total lease cost | $ | $ | ||||||||||||
Amounts reported in the Consolidated Balance Sheets for leases where we are the lessee as of December 31, 2022 and 2021 were as follows:
| (Thousands) | Location on Consolidated Balance Sheets | December 31, 2022 | December 31, 2021 | |||||||||||||||||
| Operating leases | ||||||||||||||||||||
| ROU asset, net | $ | $ | ||||||||||||||||||
| ROU liability | ||||||||||||||||||||
| Finance leases | ||||||||||||||||||||
| ROU asset, gross | $ | $ | ||||||||||||||||||
| ROU liability | ||||||||||||||||||||
| Weighted-average remaining lease term | ||||||||||||||||||||
| Operating leases | ||||||||||||||||||||
| Finance leases | ||||||||||||||||||||
| Weighted-average discount rate | ||||||||||||||||||||
| Operating leases | % | % | ||||||||||||||||||
| Finance leases | % | % | ||||||||||||||||||
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Other information related to leases as of December 31, 2022 and 2021 are as follows:
| (Thousands) | Year Ended December 31, 2022 | Year Ended December 31, 2021 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
| Operating cash flows for finance leases | $ | $ | ||||||||||||
| Operating cash flows for operating leases | ||||||||||||||
| Financing cash flows for finance leases | ||||||||||||||
| Non-cash items: | ||||||||||||||
| New operating leases and remeasurements, net | $ | $ | ||||||||||||
| New finance leases | ||||||||||||||
Future lease payments under non-cancellable leases as of December 31, 2022 are as follows:
| (Thousands) | Operating Leases | Finance Leases | ||||||||||||
| 2023 | $ | $ | ||||||||||||
| 2024 | ||||||||||||||
| 2025 | ||||||||||||||
| 2026 | ||||||||||||||
| 2027 | ||||||||||||||
| Thereafter | ||||||||||||||
| Total undiscounted lease payments | $ | $ | ||||||||||||
| Less: imputed interest | ( | ( | ||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||
Future sublease rentals as of December 31, 2022 are as follows:
| (Thousands) | Sublease Rentals | |||||||
| 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
Windstream Leases
Pursuant to the Spin-Off, Uniti entered into a long-term exclusive triple-net lease (the “Master Lease”) with Windstream, pursuant to which a substantial portion of our real property is leased to Windstream and from which a substantial portion of our leasing revenues are currently derived. In connection with Windstream’s emergence from bankruptcy, Uniti and Windstream bifurcated the Master Lease and entered into two structurally similar master leases that each expire on April 30, 2030 (collectively, the “Windstream Leases”), which Windstream Leases amended and restated the Master Lease in its entirety. The Windstream Leases consist of two leases: (a) a master lease (the “ILEC MLA”) that governs Uniti owned assets used for Windstream’s incumbent local exchange carrier (“ILEC”) operations and (b) a master lease (the “CLEC MLA”) that governs Uniti owned assets used for Windstream’s competitive local exchange carrier (“CLEC”) operations. The aggregate initial annual rent under the Windstream Leases is $663.0 million. The tenants under the ILEC MLA are Windstream Holdings II, LLC (“Windstream Holdings II,” successor in interest to Windstream Holdings, Inc.), Windstream Services II, LLC (“Windstream Services II,” successor in interest to Windstream Services LLC), and certain
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subsidiaries and/or newly formed affiliated entities operating the ILECs, and the landlords under the ILEC MLA are the Uniti entities that own the applicable ILEC assets. Similarly, the tenants under the CLEC MLA are Windstream Holdings II, Windstream Services II, and certain subsidiaries and/or newly formed affiliated entities operating CLECs, and the landlords under the CLEC MLA are the Uniti entities that own the CLEC assets. The Windstream Leases contain cross-guarantees and cross-default provisions, which will remain effective as long as Windstream or an affiliate is the tenant under both of the Windstream Leases and unless and until the landlords under the ILEC MLA are different from the landlords under the CLEC MLA. The Windstream Leases permit Uniti to transfer its rights and obligations and otherwise monetize or encumber the Windstream Leases, together or separately, so long as Uniti does not transfer interests in either Windstream Lease to a Windstream competitor.
In addition, the Windstream Leases impose certain financial restrictions on Windstream if Windstream fails to maintain certain financial covenants. Windstream covenants not to incur certain indebtedness (other than certain refinancing in a principal amount that does not exceed the sum of the principal amount of the indebtedness refinanced, the accrued and unpaid interest on such indebtedness refinanced and any other amounts owing thereon and any customary costs incurred in connection with such refinancing or drawings under its third party syndicated revolving credit facility, in an amount not to exceed $750 million) if its total leverage ratio, pro forma for the incurrence of such indebtedness, would exceed 3.00 :1:00. Further, Windstream covenants not to incur certain additional indebtedness, pay dividends, repurchase stock or prepay unsecured debt, or enter into a transaction with an entity controlled by a member of the board without Uniti’s consent if Windstream’s total leverage ratio exceeds 3.50 :1.00. Notwithstanding the foregoing, the financial covenants described herein shall not apply at any time in which Windstream maintains a corporate family rating of not less than “B2” by Moody’s and either “B” by Standard & Poor’s or “B” by Fitch Ratings.
Pursuant to the Windstream Leases, Windstream (or any successor tenant under a Windstream Lease) has the right to cause Uniti to reimburse up to an aggregate $1.75 billion for certain growth capital improvements in long-term value accretive fiber and related assets made by Windstream (or the applicable tenant under the Windstream Lease) to certain ILEC and CLEC properties (the “Growth Capital Improvements”). Uniti’s reimbursement commitment for Growth Capital Improvements does not require Uniti to reimburse Windstream for maintenance or repair expenditures (except for costs incurred for fiber replacements to the CLEC MLA leased property, up to $70 million during the term), and each such reimbursement is subject to underwriting standards. Uniti’s total annual reimbursement commitments for the Growth Capital Improvements under both Windstream Leases (and under separate equipment loan facilities) were limited to $125 million in 2020, $225 million in 2021 and 2022 and are limited to $225 million per year in 2023 and 2024; $175 125
If the cost incurred by Windstream (or the successor tenant under a Windstream Lease) for Growth Capital Improvements in any calendar year exceeds the annual limit for such calendar year, Windstream (or such tenant, as the case may be) may submit such excess costs for reimbursement in any subsequent year and such excess costs shall be funded from the annual commitment amounts in such subsequent period. In addition, to the extent that reimbursements for Growth Capital Improvements funded in any calendar year during the term is less than the annual limit for such calendar year, the unfunded amount in any calendar year will carry-over and may be added to the annual limits for subsequent calendar years, subject to an annual limit of $250 million in any calendar year, except that, during calendar year 2021, Uniti’s combined total obligation to fund Growth Capital Improvements may exceed $250 million to the extent of any unfunded excess amounts from calendar year 2020. Starting on the first anniversary of each installment of reimbursement for a Growth Capital Improvement, the rent payable by Windstream under the applicable Windstream Lease will increase by an amount equal to 8.0 % (the “Rent Rate”) of such installment of reimbursement. The Rent Rate will thereafter increase to 100.5 % of the prior Rent Rate on each anniversary of each reimbursement. In the event that the tenant’s interest in either Windstream Lease is transferred by Windstream under the terms thereof (unless transferred to the same transferee), or if Uniti transfers its interests as landlord under either Windstream Lease (unless to the same transferee), the reimbursement rights and obligations will be allocated between the ILEC MLA and the CLEC MLA by Windstream, provided that the maximum that may be allocated to the CLEC MLA following such transfer is $20 million per year. If Uniti fails to reimburse any Growth Capital Improvement payment or equipment loan funding request as and when it is required to do so under the terms of the Windstream Leases, and such failure continues for thirty (30) days, then such unreimbursed amounts may be applied as an offset against the rent owed by Windstream under the Windstream Leases (and such amounts will thereafter be treated as if Uniti had reimbursed them).
Uniti and Windstream have entered into separate ILEC and CLEC Equipment Loan and Security Agreements (collectively “Equipment Loan Agreement”) in which Uniti will provide up to $125 million (limited to $25 million in any calendar year) of the $1.75 billion of Growth Capital Improvement commitments discussed above in the form of loans for Windstream to purchase equipment related to network upgrades or to be used in connection with the Windstream Leases. Interest on these
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loans will accrue at 8 % from the date of the borrowing. All equipment financed through the Equipment Loan Agreement is the sole property of Windstream; however, Uniti will receive a first-lien security interest in the equipment purchased with the loans. No such loans have been made to Windstream as of December 31, 2022.
The Windstream Leases provide that TCIs, defined as maintenance, repair, overbuild, upgrade or replacement to the Distribution Systems, including without limitation, the replacement of copper distribution systems with fiber distribution systems, automatically become property of Uniti upon their construction by Windstream. We receive non-monetary consideration related to TCIs as they automatically become our property, and we recognize the cost basis of TCIs that are capital in nature as real estate investments and deferred revenue. We depreciate the real estate investments over their estimated useful lives and amortize the deferred revenue as additional leasing revenues over the same depreciable life of the TCI assets. TCIs exclude Growth Capital Improvements as an when reimbursed by Uniti.
Note 6. Business Combinations, Asset Acquisitions and Dispositions
2021 Transactions
Everstream OpCo-PropCo Transaction
On May 28, 2021, the Company completed its previously announced strategic transaction with Everstream Solutions LLC (“Everstream”). As part of the transaction, Uniti entered into two 20 -year dark fiber indefeasible rights of use (“IRU”) lease agreements with Everstream on Uniti owned fiber. Concurrently, Uniti sold its Uniti Fiber Northeast operations and certain dark fiber IRU contracts acquired as part of the Windstream settlement to Everstream. Total cash consideration, including upfront IRU payments, was approximately $135 million. In addition to the upfront proceeds, Uniti will receive fees of approximately $3 million annually from Everstream over the initial 20 -year term of the IRU lease agreements, subject to an annual escalator of 2 %. During the quarter ended June 30, 2021, we recorded a gain of $28.1 million related to this transaction, which is included in gain on sale of operations in our Consolidated Statements of Income (Loss).
| (Thousands) | ||||||||
| Assets and liabilities sold: | ||||||||
| Assets: | ||||||||
| Property, plant and equipment, net | $ | |||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Right of use assets, net | ||||||||
| Total assets | $ | |||||||
| Liabilities: | ||||||||
| Lease liabilities | $ | |||||||
| Intangible liabilities, net | ||||||||
| Finance lease obligations | ||||||||
| Total liabilities | $ | |||||||
| Cash consideration | $ | |||||||
| Less: total assets and liabilities sold, net | ( | |||||||
| Gain on sale of operations | $ | |||||||
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2020 Transactions
Windstream Settlement Agreement
On September 18, 2020, and in furtherance of the settlement agreement (see Note 16), Uniti and Windstream closed an asset purchase agreement, as amended by a letter agreement (collectively, the “Asset Purchase Agreement”), pursuant to which (a) Uniti paid to Windstream approximately $284.6 million and (b) Windstream (i) granted to Uniti exclusive rights to use 1.8 million fiber strand miles leased by Windstream under the CLEC MLA, which fiber strands are either unutilized or utilized under certain dark fiber indefeasible rights of use (“IRUs”) that were simultaneously transferred to Uniti, (ii) conveyed to Uniti fiber assets (and underlying rights) consisting of 0.4 million fiber strand miles (covering 4,000 route miles) owned by Windstream, and (iii) transferred and assigned to subsidiaries of Uniti dark fiber IRUs relating to (x) the fiber strand miles granted to Uniti under the CLEC MLA (and described in clause (i)) and (y) the fiber assets (and underlying rights) for the 0.4 million fiber strand miles conveyed to Uniti (and described in clause (ii)), which IRUs generated $28.9 million of annual EBITDA in the aggregate as of the closing of the Asset Purchase Agreement. In addition, upon the transfer of the Windstream owned fiber assets (described in clause (ii) above), Uniti granted to Windstream a 20-year IRU for certain strands included in the transferred fiber assets.
The Company concluded that the Asset Purchase Agreement, and the obligation for Uniti to make cash payments to Windstream in accordance with the terms of the settlement agreement (see Note 16), should be combined for the accounting purpose of ASC 842. As such, total consideration provided to Windstream under the Settlement has been allocated as follows:
| (Thousands) | ||||||||
| Consideration: | ||||||||
| Asset Purchase Agreement | $ | |||||||
| Fair value of settlement obligation | ||||||||
| Total consideration | $ | |||||||
| Fair values of the assets acquired and liabilities assumed as of the acquisition date: | ||||||||
| Property, plant and equipment | $ | |||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Intangible liabilities, net | ( | |||||||
| Total assets acquired, net | ||||||||
| Settlement expense | ||||||||
| Total | $ | |||||||
Of the $69.8 million of intangible assets acquired, $59.3 million is related to contracts (8 -year weighted-average life) and $10.5 million is related to underlying rights agreements (30 -year life). The Company determined the useful life of the contract intangible assets using the weighted-average remaining term and the rights of way intangible asset by aligning the useful life of the intangible assets with that of the underlying fiber assets acquired. The intangible liabilities represent below market leases, where we are the lessor, and has a weighted-average useful life of 19 years, which aligns with the terms of the agreements. Acquired right of use assets of $27.6 million are recorded within other assets on our Consolidated Balance Sheets.
Sale of Midwest Fiber Network
On July 1, 2020, the Company completed the sale of the entity that controlled the Company’s Midwest fiber network assets (the “Propco”) to Macquarie Infrastructure Partners (“MIP”), selling net assets having a book value of $186.5 million for total cash consideration of $167.6 million. The Company retained a 20 % investment interest in the Propco, having a fair value of $41.9 million, through a newly-formed limited liability company with MIP. During the third quarter of 2020, we recorded a gain of $23.0 million related to this transaction.
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Sale of U.S. Tower Portfolio
On June 1, 2020, the Company completed the sale of its U.S. tower business to Melody, selling net assets having a book value of $190.0 million for total cash consideration of $225.8 million. The Company retained a 10 % investment interest in the tower business, having a fair value of $26.0 million, through a newly-formed limited partnership with Melody, and will receive incremental earn-out payments, estimated to be $1.6 million, which is included in other assets on the Consolidated Balance Sheet as of December 31, 2022. During the second quarter of 2020, we recorded a gain of $63.4 million related to this transaction.
Note 7. Investment in Unconsolidated Entities
Fiber Holdings
Fiber Holdings was primarily established to develop fiber networks as real estate property for long-term investment. On July 1, 2020, the Company completed the sale of an ownership stake in the Propco. Fiber Holdings has a 47.5 % ownership in the Propco that is under a long-term, triple net lease with our joint venture partner. Our ownership interest in Fiber Holdings represents approximately a 20 % economic interest in the Propco. The Company’s current investment and maximum exposure to loss as a result of its involvement with Fiber Holdings, as equity method unconsolidated entity, was approximately $38.7 million as of December 31, 2022. The Company has not provided financial support to Fiber Holdings.
Harmoni
Note 8. Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements, establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring assets and liabilities at fair values. This hierarchy establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the assessment date;
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3 – Unobservable inputs for the asset or liability.
Our financial instruments consist of cash and cash equivalents, accounts and other receivables, derivative instruments, contingent consideration, our outstanding notes and other debt, settlement payable, contingent consideration and accounts, interest and dividends payable.
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The following table summarizes the fair value of our financial instruments at December 31, 2022 and 2021:
| (Thousands) | Total | Quoted Prices in Active Markets (Level 1) | Prices with Other Observable Inputs (Level 2) | Prices with Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| At December 31, 2022 | ||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
Senior secured notes - | $ | $ | — | $ | $ | — | ||||||||||||||||||||
Senior secured notes - | — | — | ||||||||||||||||||||||||
Senior unsecured notes - | — | — | ||||||||||||||||||||||||
Senior unsecured notes - | — | — | ||||||||||||||||||||||||
Convertible senior notes - | — | — | ||||||||||||||||||||||||
Exchangeable senior unsecured notes - | — | — | ||||||||||||||||||||||||
Senior secured revolving credit facility, variable rate, due December 10, 2024 | — | — | ||||||||||||||||||||||||
| Settlement payable | — | — | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| (Thousands) | Total | Quoted Prices in Active Markets (Level 1) | Prices with Other Observable Inputs (Level 2) | Prices with Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| At December 31, 2021 | ||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
Senior secured notes - | $ | $ | — | $ | $ | — | ||||||||||||||||||||
Senior secured notes - | — | — | ||||||||||||||||||||||||
Senior unsecured notes - | — | — | ||||||||||||||||||||||||
Senior unsecured notes - | — | — | ||||||||||||||||||||||||
Exchangeable senior unsecured notes - | — | — | ||||||||||||||||||||||||
Senior secured revolving credit facility, variable rate, due December 10, 2024 | — | — | ||||||||||||||||||||||||
| Settlement payable | — | — | ||||||||||||||||||||||||
| Derivative liability, net | — | — | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
The carrying value of cash and cash equivalents, accounts and other receivables, and accounts, interest and dividends payable approximate fair values due to the short-term nature of these financial instruments.
The total principal balance of our Notes and other debt was $5.26 billion at December 31, 2022, with a fair value of $4.52 billion. The estimated fair value of the Notes and other debt was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within the fair value hierarchy. Derivative instruments are carried at fair value. See Note 10. The fair value of our interest rate swap is determined based on the present value of expected future cash flows using observable, quoted LIBOR swap rates for the full term of the swap and also incorporate credit valuation adjustments to appropriately reflect both Uniti 's own non-
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performance risk and non-performance risk of the respective counterparties. The Company has determined that the majority of the inputs used to value its derivative instruments fall within Level 2 of the fair value hierarchy; however, the associated credit valuation adjustments utilized Level 3 inputs, such as estimates of credit spreads, to evaluate the likelihood of default by the Company and its counterparties. As of December 31, 2022, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall value of the derivatives. As such, the Company classifies its derivative instruments valuation in Level 2 of the fair value hierarchy.
Given the limited trade activity of the Exchangeable Notes, the fair value of the Exchangeable Notes (see Note 12) is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy. Specifically, we estimated the fair value of the Exchangeable Notes based on readily available external pricing information, quoted market prices, and current market rates for similar convertible debt instruments.
Uniti is required to make $490.1 million of cash payments to Windstream in equal installments over 20 consecutive quarters beginning October 2020 (the “Settlement Payable”) (see Note 3). The Settlement Payable was recorded at fair value, using the present value of future cash flows. The future cash flows are discounted using discount rate input based on observable market data. Accordingly, we classify inputs used as Level 2 in the fair value hierarchy. The remaining Settlement Payable is $251.1 million and is reported as settlement payable on our Consolidated Balance Sheet at December 31, 2022. There have been no changes in the valuation methodologies used since the initial recording.
We acquired Tower Cloud, Inc. (“Tower Cloud”) on August 31, 2016. As part of the Tower Cloud acquisition, we were obligated to pay contingent consideration upon achievement of certain defined operational and financial milestones from the date of acquisition through December 31, 2021. During the three months ended March 31, 2021, the Company paid $3.0 million for the achievement of the final remaining milestone in accordance with the Tower Cloud merger agreement.
Changes in the fair value of contingent consideration were recorded in our Consolidated Statements of Income (Loss) in the period in which the change occurred. The final measurement of the contingent consideration was recorded during the three months ended March 31, 2021, resulting in an increase in the fair value of less than $0.1 million. For the year ended December 31, 2020, there was a $7.2 million increase in the fair value of the contingent consideration that was recorded in Other (income) expense on the Consolidated Statements of Income (Loss).
Note 9. Property, Plant and Equipment
The carrying value of property, plant and equipment is as follows:
| (Thousands) | Depreciable Lives(1) | December 31, 2022 | December 31, 2021 | |||||||||||||||||
| Land | Indefinite | $ | $ | |||||||||||||||||
| Building and improvements | ||||||||||||||||||||
| Poles | ||||||||||||||||||||
| Fiber | ||||||||||||||||||||
| Equipment | ||||||||||||||||||||
| Copper | ||||||||||||||||||||
| Conduit | ||||||||||||||||||||
| Tower assets | ||||||||||||||||||||
| Finance lease assets | See Note 3 | |||||||||||||||||||
| Construction in progress | See Note 3 | |||||||||||||||||||
| Other assets | ||||||||||||||||||||
| Corporate assets | ||||||||||||||||||||
| Less accumulated depreciation | ( | ( | ||||||||||||||||||
| Property, plant and equipment, net | $ | $ | ||||||||||||||||||
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Finance lease assets above predominantly represent fiber leases, where we have the exclusive, unrestricted, and indefeasible right to use one, a pair, or more strands of fiber of a fiber cable.
Note 10. Derivative Instruments and Hedging Activities
The Company uses derivative instruments to mitigate the effects of interest rate volatility inherent in our variable rate debt, which could unfavorably impact our future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes.
On April 27, 2015, we entered into fixed for floating interest rate swap agreements to mitigate the interest rate risk inherent in our variable rate senior secured term loan facility. These interest rate swaps were designated as cash flow hedges and had a notional value of $2.0 billion. As result of the repayment of the Company’s senior secured term loan facility in February of 2020 (see Note 12), the Company entered into receive-fixed interest rate swaps to offset its existing pay-fixed interest rate swaps, which matured on October 24, 2022. As a result, the Company discontinued hedge accounting as the hedge accounting requirements were no longer met. Amounts in accumulated other comprehensive (loss) income as of the date of de-designation, were reclassified to interest expense as the hedged transactions impact earnings. Prospectively, changes in fair value of all interest rate swaps will be recorded directly to earnings.
The Company has elected to offset derivative positions that are subject to master netting arrangements with the same counterparty in our Consolidated Balance Sheets. The following table presents the gross amounts of our derivative instruments subject to master netting arrangements with the same counterparty as of December 31, 2021:
| Offsetting of Derivative Assets and Liabilities (Thousands) | Gross Amounts of Recognized Assets or Liabilities | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts of Assets or Liabilities presented in the Consolidated Balance Sheets | |||||||||||||||||
| At December 31, 2021 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Interest rate swaps | $ | $ | ( | $ | ||||||||||||||||
| Total | $ | $ | ( | $ | ||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Interest rate swaps | $ | $ | ( | $ | ||||||||||||||||
| Total | $ | $ | ( | $ | ||||||||||||||||
The following table summarizes the fair value and the presentation in our Consolidated Balance Sheet:
| (Thousands) | Location on Consolidated Balance Sheet | December 31, 2022 | December 31, 2021 | |||||||||||||||||
| Interest rate swaps | Derivative liability, net | $ | $ | |||||||||||||||||
As of December 31, 2022, all of the interest rate swaps matured and have no impact on the Consolidated Balance Sheets. The amount reclassified out of other comprehensive income into interest expense on our Consolidated Statements of Income (Loss) for the year ended December 31, 2022 was $9.2 million.
As of December 31, 2021, all of the interest rate swaps were valued in net unrealized loss positions and recognized as a liability balance within the derivative liability, net on the Consolidated Balance Sheets. As hedge accounting is no longer applied beginning in February 2020, the unrealized loss amounts are now being recorded directly to earnings. For the year
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ended December 31, 2020, the amount recorded in other comprehensive income related to the derivative instruments was a $7.7 million unrealized loss. The amount reclassified out of other comprehensive income into interest expense on our Consolidated Statements of Income (Loss) for the years ended December 31, 2021 and 2020 was $11.3 million and $10.8 million, respectively.
Exchangeable Notes Hedge Transactions
On June 25, 2019, concurrently with the pricing of the Exchangeable Notes (see Note 12), and on June 27, 2019, concurrently with the exercise by the initial purchasers of their option to purchase additional Exchangeable Notes, Uniti Fiber Holdings Inc., the issuer of the Exchangeable Notes, entered into the Note Hedge Transactions with certain of the 2019 Counterparties. The Note Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Notes, the same number of shares of the Company’s common stock that initially underlie the Exchangeable Notes in the aggregate and are exercisable upon exchange of the Exchangeable Notes. The Note Hedge Transactions have an initial strike price that corresponds to the initial exchange price of the Exchangeable Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Notes. The Note Hedge Transactions will expire upon the maturity of the Exchangeable Notes, if not earlier exercised. The Note Hedge Transactions are intended to reduce potential dilution to the Company’s common stock upon any exchange of the Exchangeable Notes and/or offset any cash payments Uniti Fiber Holdings Inc. is required to make in excess of the principal amount of exchanged Exchangeable Notes, as the case may be, in the event that the market value per share of the Company’s common stock, as measured under the Note Hedge Transactions, at the time of exercise is greater than the strike price of the Note Hedge Transactions.
The Note Hedge Transactions are separate transactions, entered into by Uniti Fiber Holdings Inc. with the 2019 Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Note Hedge Transactions. Uniti Fiber Holdings Inc. used approximately $70.0 million of the net proceeds from the offering of the Exchangeable Notes to pay the cost of the Note Hedge Transactions. The Note Hedge Transactions meet certain accounting criteria under GAAP and are recorded in additional paid-in capital on our Consolidated Balance Sheets, and are not accounted for as derivatives that are remeasured each reporting period.
Warrant Transactions
On June 25, 2019, concurrently with the pricing of the Exchangeable Notes, and on June 27, 2019 concurrently with the exercise by the initial purchasers of their option to purchase additional Exchangeable Notes, the Company entered into warrant transactions to sell to the 2019 Counterparties Warrants to acquire, subject to anti-dilution adjustments, up to approximately 27.8 million shares of the Company’s common stock in the aggregate at an exercise price of approximately $16.42 per share. The maximum number of shares of the Company’s common stock that could be issued pursuant to the Warrants is approximately 55.5 million. The Company offered and sold the Warrants in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). If the market value per share of the Company’s common stock, as measured under the Warrants, at the time of exercise exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on the Company’s common stock unless, subject to the terms of the Warrants, the Company elects to cash settle the Warrants. The Warrants will expire over a period beginning in September 2024.
The Warrants are separate transactions, entered into by the Company with the 2019 Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Warrants. The Company received approximately $50.8 million from the offering and sale of the Warrants. The Warrants meet certain accounting criteria under GAAP and are recorded in additional paid-in capital on our Consolidated Balance Sheets are not accounted for as derivatives that are remeasured each reporting period.
Capped Call Transactions
On December 7, 2022, in connection with the pricing of the Convertible 2027 Notes (see Note 12), the Company entered into privately negotiated capped call transactions (the “Capped Calls”) with certain financial institutions at a cost of $21.1 million. The Capped Calls cover the same number of shares of the Company’s common stock that initially underlie the Convertible 2027 Notes in the aggregate. By entering into the Capped Calls, the Company expects to reduce the potential dilution to its common stock (or, in the event a conversion of the Convertible 2027 Notes is settled in cash, to reduce its cash payment obligation) in the event that at the time of conversion of the Convertible 2027 Notes its common stock price exceeds the conversion price of the Convertible 2027 Notes. The cap price of the Capped Calls will initially be $10.63 per
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share of common stock, which represents a premium of 75 % over the last reported sale price of the Company’s common stock of $6.075 per share on December 7, 2022 and is subject to customary anti-dilution adjustments substantially similar to those applicable to the Convertible 2027 Notes. The Company used approximately $21.1 million of the net proceeds from the offering of the Convertible 2027 Notes to pay for the cost of the Capped Calls. The Capped Calls meet the criteria for classification in equity, are not remeasured each reporting period and are included as a reduction to additional paid-in-capital within stockholders’ equity.
Additionally on December 7, 2022, in connection with the Company’s repurchase of the Exchangeable Notes, the Company entered into partial unwind agreements (the “Unwind Agreements”) with the 2019 Counterparties to unwind (see Note 12) a portion of the Note Hedge Transactions and the Warrant described above (collectively, the “Unwind Transactions”). In connection with the Unwind Transactions, the Company received cash as a termination payment for of the portion of the Note Hedge Transactions that were unwound, and the Company delivered cash as a termination payment in respect of the portion of the Warrants that were unwound. The amount of cash that was received, which was approximately $1.2 million, and the amount of cash that was delivered to the 2019 Counterparties, which was approximately $0.5 million, were based generally on the termination values of the unwound portions of such instruments.
Note 11. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill occurring during the year ended December 31, 2022 and 2021, are as follows:
| (Thousands) | Fiber Infrastructure | Total | ||||||||||||
| Goodwill at December 31, 2020 | $ | $ | ||||||||||||
| Accumulated impairment charges as of December 31, 2020 | ( | ( | ||||||||||||
| Balance at December 31, 2020 | ||||||||||||||
| Balance at December 31, 2021 | ||||||||||||||
| Goodwill impairment (Note 3) | ( | ( | ||||||||||||
| Balance at December 31, 2022 | $ | $ | ||||||||||||
| Goodwill at December 31, 2022 | $ | $ | ||||||||||||
| Accumulated impairment charges as of December 31, 2022 | $ | ( | $ | ( | ||||||||||
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The carrying value of our other intangible assets is as follows:
| (Thousands) | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||
| Cost | Accumulated Amortization | Cost | Accumulated Amortization | |||||||||||||||||||||||
| Finite life intangible assets: | ||||||||||||||||||||||||||
| Customer lists | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Contracts | ( | ( | ||||||||||||||||||||||||
| Underlying rights | ( | ( | ||||||||||||||||||||||||
| Total intangible assets | $ | $ | ||||||||||||||||||||||||
| Less: accumulated amortization | ( | ( | ||||||||||||||||||||||||
| Total intangible assets, net | $ | $ | ||||||||||||||||||||||||
| Finite life intangible liabilities: | ||||||||||||||||||||||||||
| Acquired below-market leases | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Total intangible liabilities | ||||||||||||||||||||||||||
| Less: accumulated amortization | ( | ( | ||||||||||||||||||||||||
| Total intangible liabilities, net | $ | $ | ||||||||||||||||||||||||
As of December 31, 2022, the remaining weighted average amortization period of the Company’s intangible assets was 14.2 years.
Amortization expense for the years ended December 31, 2022, 2021 and 2020 was $29.8 million, $29.8 million and $28.2 million, respectively. Amortization expense is estimated to be $29.8 million in 2023, $29.7 million in 2024, $29.7 million in 2025, $29.7 million in 2026 and $29.7 million in 2027.
Note 12. Notes and Other Debt
All debt, including the senior secured credit facility and notes described below, are obligations of the Operating Partnership and certain of its subsidiaries as discussed below. The Company is, however, a guarantor of such debt.
Notes and other debt is as follows:
| (Thousands) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Principal amount | $ | $ | ||||||||||||
| Less unamortized discount, premium and debt issuance costs | ( | ( | ||||||||||||
| Notes and other debt less unamortized discount and debt issuance costs | $ | $ | ||||||||||||
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Notes and other debt at December 31, 2022 and 2021 consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| (Thousands) | Principal | Unamortized Discount, Premium and Debt Issuance Costs | Principal | Unamortized Discount, Premium and Debt Issuance Costs | ||||||||||||||||||||||
Senior secured notes - (discount is based on imputed interest rate of | ( | ( | ||||||||||||||||||||||||
Senior secured notes - (discount is based on imputed interest rate of | ( | ( | ||||||||||||||||||||||||
Exchangeable senior unsecured notes - (discount is based on imputed interest rate of | ( | ( | ||||||||||||||||||||||||
Convertible senior notes - (discount is based on imputed interest rate of | ( | |||||||||||||||||||||||||
Senior unsecured notes - (discount is based on imputed interest rate of | ( | ( | ||||||||||||||||||||||||
Senior unsecured notes - (discount is based on imputed interest rate of | ( | ( | ||||||||||||||||||||||||
Senior secured revolving credit facility, variable rate, due December 10, 2024 | ( | ( | ||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
At December 31, 2022, notes and other debt included the following: (i) $188.0 million under the Revolving Credit Facility (as defined below) pursuant to the credit agreement by and among the Operating Partnership, Uniti Group Finance 2019 Inc. and CSL Capital, LLC (hereinafter, the “Borrowers”), the guarantors and lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “Credit Agreement”); (ii) $2.25 billion aggregate principal amount of 7.875 % Senior Secured Notes due 2025 (the “2025 Secured Notes”); (iii) $570.0 million aggregate principal amount of 4.75 % Senior Secured Notes due April 15, 2028 (the “2028 Secured Notes”); (iv) $1.11 billion aggregate principal amount of 6.50 % Senior Unsecured Notes due February 15, 2029 (the “2029 Notes”); (v) $137.9 million aggregate principal amount of the Exchangeable Notes; (vi) $700.0 million aggregate principal amount of 6.00 % Senior Secured Notes due January 15, 2030 (the “2030 Notes” and collectively with the 2025 Secured Notes, 2028 Secured Notes, 2029 Notes, the Exchangeable Notes, and the 2030 Notes, the “Notes”); and (vii) $306.5 million aggregate principal amount of 7.50 % Convertible Senior Notes due 2027 (the "Convertible 2027 Notes").
Credit Agreement
The Borrowers are party to the Credit Agreement, which provides for a $500 million revolving credit facility that will mature on December 10, 2024 (the “Revolving Credit Facility”) and provides us with the ability to obtain revolving loans as well as swing line loans and letters of credit from time to time. All obligations under the Credit Agreement are guaranteed by (i) the Company and (ii) certain of the Operating Partnership’s subsidiaries (the “Subsidiary Guarantors”) and are secured by substantially all of the assets of the Borrowers and the Subsidiary Guarantors.
The Borrowers are subject to customary covenants under the Credit Agreement, including an obligation to maintain a consolidated secured leverage ratio, as defined in the Credit Agreement, not to exceed 5.00 to 1.00. We are permitted, subject to customary conditions, to incur other indebtedness, so long as, on a pro forma basis after giving effect to any such indebtedness, our consolidated total leverage ratio, as defined in the Credit Agreement, does not exceed 6.50 to 1.00 and, if such debt is secured, our consolidated secured leverage ratio, as defined in the Credit Agreement, does not exceed 4.00 to 1.00. In addition, the Credit Agreement contains customary events of default, including a cross default provision whereby the failure of the Borrowers or certain of their subsidiaries to make payments under other debt obligations, or the occurrence of certain events affecting those other borrowing arrangements, could trigger an obligation to repay any amounts outstanding under the Credit Agreement. In particular, a repayment obligation could be triggered if (i) the Borrowers or certain of their subsidiaries fail to make a payment when due of any principal or interest on any other
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indebtedness aggregating $75.0 million or more, or (ii) an event occurs that causes, or would permit the holders of any other indebtedness aggregating $75.0 million or more to cause, such indebtedness to become due prior to its stated maturity. As of December 31, 2022, the Borrowers were in compliance with all of the covenants under the Credit Agreement.
A termination of either Windstream Lease would result in an “event of default” under the Credit Agreement if a replacement lease is not entered into within ninety (90 ) calendar days and we do not maintain pro forma compliance with a consolidated secured leverage ratio, as defined in the Credit Agreement, of 5.00 to 1.00.
Borrowings under the Revolving Credit Facility bear interest at a rate equal to either a base rate plus an applicable margin ranging from 2.75 % to 3.50 % or a Eurodollar rate plus an applicable margin ranging from 3.75 % to 4.50 %, in each case, calculated in a customary manner and determined based on our consolidated secured leverage ratio. We are required to pay a quarterly commitment fee under the Revolving Credit Facility equal to 0.50 % of the average amount of unused commitments during the applicable quarter (subject to a step-down to 0.40 % per annum of the average amount of unused commitments during the applicable quarter upon achievement of a consolidated secured leverage ratio not to exceed a certain level), as well as quarterly letter of credit fees equal to the product of (A) the applicable margin with respect to Eurodollar borrowings and (B) the average amount available to be drawn under outstanding letters of credit during such quarter.
The Notes
Secured Notes
The Operating Partnership, CSL Capital, LLC, Uniti Group Finance 2019 Inc. and Uniti Fiber Holdings Inc. (collectively, the “Issuers”), have outstanding $2.25 billion aggregate principal amount of the 2025 Secured Notes, which were issued on February 10, 2020. The 2025 Secured Notes mature on February 15, 2025 and bear interest at a rate of 7.875 % per year. Interest on the 2025 Secured Notes is payable on February 15 and August 15 of each year. On February 14, 2023, the Issuers issued $2.6 billion aggregate principal amount of the 10.50 % Senior Secured Notes due 2028 (the “Secured Notes due February 2028”). The Issuers used the net proceeds from the offering to fund the redemption in full of the Issuers’ outstanding 2025 Secured Notes, to repay outstanding borrowings under the Revolving Credit Facility and to pay any related premiums, fees and expenses in connection with the foregoing. The Issuers deposited funds with the trustee sufficient to fund the redemption in full of the 2025 Secured Notes and satisfied and discharged their obligations with respect to the 2025 Secured Notes. See Note 23.
On April 20, 2021, the Borrowers issued $570.0 million aggregate principal amount of the 2028 Secured Notes (together with the 2025 Secured Notes, the “Secured Notes”) and used the net proceeds from the offering to fund the redemption in full of the $550.0 million aggregate principal amount of 6.00 % Senior Secured Notes due April 15, 2023 (the “2023 Secured Notes”) on May 6, 2021. During the three months ended June 30, 2021, we recognized a $4.3 million loss on the extinguishment of the 2023 Secured Notes within interest expense, net on the Consolidated Statements of Income (Loss), which included $1.3 million of non-cash interest expense for the write off of the unamortized discount and deferred financing costs and $3.0 million of cash interest expense for the redemption premium. The 2028 Secured Notes mature on April 15, 2028 and bear interest at a rate of 4.750 % per year. Interest on the 2028 Secured Notes is payable on April 15 and October 15 of each year.
The Secured Notes and the related guarantees are secured by liens on substantially all of the assets of the issuers and guarantors thereto, which assets also ratably secure obligations under the senior secured credit facilities, in each case, subject to certain exceptions and permitted liens. The collateral does not include real property (below a specified threshold of value), but includes certain fixtures and other equipment as well as cash that we receive pursuant to the Windstream Leases.
The indentures governing the Secured Notes contain customary high yield covenants limiting the ability of the Operating Partnership and its restricted subsidiaries to: incur or guarantee additional indebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments or other restricted payments; sell assets; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of their assets; and create restrictions on the ability to pay dividends or other amounts to the Borrowers or Issuers, as applicable. These covenants are subject to a number of limitations, qualifications and exceptions. The indentures governing the Secured Notes also contain customary events of default. As of December 31, 2022, the Company was in compliance with all of the covenants under the indentures governing the Secured Notes.
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Senior Unsecured Notes
On February 2, 2021, the Borrowers issued $1.11 billion aggregate principal of the 2029 Notes and used the net proceeds to fund the tender offer and subsequent redemption of all outstanding 8.25 % Senior Unsecured Notes due October 15, 2023 (the “2023 Notes”). During the year ended December 31, 2021, we recognized a $39.1 million loss on the tendered 2023 Notes within interest expense, net on the Consolidated Statements of Income (Loss), which included $21.5 million of non-cash interest expense for the write off of the unamortized discount and deferred financing costs and $17.6 million of cash interest expense for the tender premium. The 2029 Notes mature on February 15, 2029 and bear interest at a rate of 6.50 % per year. Interest on the 2029 Notes is payable on February 15 and August 15 of each year.
On October 13, 2021, the Issuers issued $700.0 million aggregate principal amount of the 2030 Senior (together with the 2029 Notes, the “Senior Unsecured Notes”) and used the net proceeds to fund redemption in full of the $600.0 million 7.125 % Senior Unsecured Notes due December 15, 2024 (the “2024 Notes”) on December 15, 2021. During the year ended December 31, 2021, we recognized a $5.9 million loss on the extinguishment of the 2024 Notes within interest expense, net on the Consolidated Statements of Income (Loss), which included $1.8 million of non-cash interest expense for the write off of the unamortized discount and deferred financing costs and $4.1 million of cash interest expense for the redemption premium. The Company used the remaining proceeds of $78.0 million to prepay a portion of the settlement obligations under the settlement agreement with Windstream. See Note 3. The 2030 Notes mature on January 15, 2030 and bear interest at a rate of 6.000 % per year. Interest on the 2030 Notes is payable on January 15 and July 15 of each year, beginning on July 15, 2022.
The indentures governing the Senior Unsecured Notes contain customary high yield covenants limiting the ability of the Operating Partnership and its restricted subsidiaries to: incur or guarantee additional indebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments or other restricted payments; sell assets; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of their assets; and create restrictions on the ability to pay dividends or other amounts to the Issuers or Borrowers, as applicable. These covenants are subject to a number of important and significant limitations, qualifications and exceptions. The indentures governing the Senior Unsecured Notes also contain customary events of default. As of December 31, 2022, the Company was in compliance with all of the covenants under the indentures governing the Senior Unsecured Notes.
The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company and by each of the Operating Partnership’s existing and future domestic restricted subsidiaries (other than the Borrowers or Issuers, as applicable) that guarantees indebtedness under the Company’s senior secured credit facilities. The guarantees are subject to release under specified circumstances, including certain circumstances in which such guarantees may be automatically released without the consent of the holders of the Notes.
The Exchangeable Notes
On June 28, 2019, Uniti Fiber Holdings Inc., a subsidiary of the Company, issued $345 million aggregate principal amount of the Exchangeable Notes. The Exchangeable Notes are senior unsecured notes and are guaranteed by the Company and each of the Company’s subsidiaries (other than Uniti Fiber Holdings Inc.) that is an issuer, obligor or guarantor under the Company’s Notes. The Exchangeable Notes bear interest at a fixed rate of 4.00 % per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2019. The Exchangeable Notes are exchangeable into cash, shares of the Company’s common stock, or a combination thereof, at Uniti Fiber Holdings Inc.’s election, subject to limitations under the Company's Credit Agreement. The Exchangeable Notes will mature on June 15, 2024, unless earlier exchanged, redeemed or repurchased.
Uniti Fiber Holdings Inc. issued the Exchangeable Notes pursuant to an indenture, dated as of June 28, 2019, among Uniti Fiber Holdings Inc., the Company, the other guarantors party thereto and Deutsche Bank Trust Company Americas, as trustee. Prior to the close of business on the business day immediately preceding March 15, 2024, the Exchangeable Notes are exchangeable only upon satisfaction of certain conditions and during certain periods described in the Indenture, and thereafter, the Exchangeable Notes are exchangeable at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The Exchangeable Notes are exchangeable on the terms set forth in the Indenture into cash, shares of the Company’s common stock, or a combination thereof, at Uniti Fiber Holdings Inc.’s election, subject to limitations under the Company's Credit Agreement. The exchange rate is initially 80.4602 shares of the Company’s common stock per $1,000 principal amount of Exchangeable Notes (equivalent to an initial exchange price of approximately $12.43 per share of the Company’s common stock). The exchange rate is subject to adjustment in some
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circumstances as described in the Indenture. In addition, following certain corporate events that occur prior to the maturity date or Uniti Fiber Holdings Inc.’s delivery of a notice of redemption, Uniti Fiber Holdings Inc. will increase, in certain circumstances, the exchange rate for a holder who elects to exchange its Exchangeable Notes in connection with such corporate event or notice of redemption, as the case may be.
If Uniti Fiber Holdings Inc. or the Company undergoes a fundamental change (as defined in the Indenture), subject to certain conditions, holders may require Uniti Fiber Holdings Inc. to repurchase for cash all or part of their Exchangeable Notes at a repurchase price equal to 100 % of the principal amount of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date.
Uniti Fiber Holdings Inc. may redeem all or a portion of the Exchangeable Notes, at any time, at a cash redemption price equal to 100 % of the principal amount of the Exchangeable Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, if the Company’s board of directors determines such redemption is necessary to preserve the Company's status as a real estate investment trust for U.S. federal income tax purposes. Uniti Fiber Holdings Inc. may not otherwise redeem the Exchangeable Notes prior to June 20, 2022. On or after June 20, 2022 and prior to the 42nd scheduled trading day immediately preceding the maturity date, if the last reported sale price per share of the Company’s common stock has been at least 130 % of the exchange price for the Exchangeable Notes for certain specified periods, Uniti Fiber Holdings Inc. may redeem all or a portion of the Exchangeable Notes at a cash redemption price equal to 100 % of the principal amount of the Exchangeable Notes to be redeemed plus accrued and unpaid interest to, but not including, the redemption date.
Under GAAP, certain convertible debt instruments that may be settled in cash upon conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Exchangeable Notes, the Company separated the Exchangeable Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.
The carrying amount of the equity component, which was initially recognized as a debt discount, represented the difference between the proceeds from the issuance of the Exchangeable Notes and the fair value of the liability component of the Exchangeable Notes. The excess of the principal amount of the liability component over its carrying amount was amortized to interest expense using an effective interest rate of 11.1 % over the term of the Exchangeable Notes. The equity component was not remeasured.
Debt issuance costs related to the Exchangeable Notes were comprised of commissions payable to the initial purchasers of $10.4 million and third-party costs of approximately $1.4 million.
In accounting for the debt issuance costs related to the issuance of the Exchangeable Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component were recorded as a contra-liability and are presented net against the Exchangeable Notes balance on our Consolidated Balance Sheets. These costs are amortized to interest expense using the effective interest method over the term of the Exchangeable Notes. Debt issuance costs of $2.9 million attributable to the equity components were offset against the equity component in stockholders’ equity, which netted to $80.8 million.
As a result of early adopting ASU 2020-06, the Company made certain adjustments to its accounting for the outstanding exchangeable senior unsecured notes. The adoption of ASU 2020-06 resulted in the re-combination of the liability and equity components of these notes into a single liability instrument. The carrying value as of December 31, 2020, totaled approximately $275.4 million and as a result of the adoption increased by $61.1 million to $336.5 million as of January 1, 2021. Because of this adoption, the effective interest rate on the exchangeable senior unsecured notes went from 11.1 % to 4.8 %. Additional paid-in-capital was reduced by $59.9 million and deferred tax liabilities were reduced by $15.8 million. Approximately $14.6 million of cumulative effect of adoption was recognized to the opening balance of distributions in excess of accumulated earnings as of January 1, 2021. See Note 3.
On December 12, 2022, in connection with the issuance of the Convertible 2027 Notes (as discussed below), approximately $207.1 million aggregate principal amount was repurchased for $194.0 million. As a result, we recognized a gain on extinguishment of $10.8 million, which is comprised of a $13.1 million gain on the repurchase of the Exchangeable Notes and a $2.3 million write off of the related unamortized deferred financing costs, within interest expense, net on the Consolidated Statements of Income (Loss).
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Convertible 2027 Notes
Uniti Group Inc., issued $300 million aggregate principal amount of the Convertible 2027 Notes on December 12, 2022 and, pursuant to an over-allotment option, $6.5 million aggregate principal amount of the Convertible 2027 Notes on December 23, 2022. The Convertible 2027 Notes are guaranteed by each of the Company’s subsidiaries that is an issuer, obligor or guarantor under the Company’s existing senior notes (except initially those subsidiaries that require regulatory approval prior to guaranteeing the Convertible 2027 Notes). The Convertible 2027 Notes bear interest at a fixed rate of 7.50 % per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2023. The Convertible 2027 Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election at an initial conversion rate of 137.1742 shares of the Company’s common stock per $1,000 principal amount (equal to an initial conversion price of approximately $7.29 per share) subject to adjustment. The Convertible 2027 Notes will mature on December 1, 2027, unless earlier converted, redeemed or repurchased.
The net proceeds from the sale of the Convertible 2027 Notes were approximately $298.1 million, after deducting discounts and commissions to the initial purchasers and other estimated fees and expenses. The Company contributed approximately $198.1 million of the net proceeds of the offering to Uniti Fiber Holdings Inc., a wholly owned subsidiary of the Company (“Uniti Fiber Holdings”), to fund the repurchase of, and to pay accrued and unpaid interest with respect to, approximately $207.1 million aggregate principal amount of the Exchangeable Notes issued by Uniti Fiber Holdings. The Company used $21.1 million of the net proceeds of the offering to pay the cost of certain capped call transactions in connection with the Convertible 2027 Notes offering, as described in Note 10. The Company intends to use the remaining net proceeds from the offering for general corporate purposes, which may include the repurchase or repayment of other outstanding debt, including, but not limited to, additional open market repurchases, redemptions or tender offers of the Exchangeable Notes.
Deferred Financing Cost
Deferred financing costs were incurred in connection with the issuance of the Notes and the Facilities. These costs are amortized using the effective interest method over the term of the related indebtedness, and are included in interest expense in our Consolidated Statements of Income (Loss). For the year ended December 31, 2022, 2021 and 2020, we recognized $17.5 million, $16.5 million and $15.3 million of non-cash interest expense, respectively, related to the amortization of deferred financing costs.
Aggregate annual maturities of our long-term obligations at December 31, 2022 are as follows:
| (Thousands) | ||||||||
| 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
Note 13. Stock-Based Compensation
The Company’s Board of Directors adopted the Uniti Group Inc. 2015 Equity Incentive Plan (the “Equity Plan”), which is administered by the Compensation Committee of the Board of Directors. Awards issuable under the Equity Plan include incentive stock options, “non-qualified” stock options, stock appreciation rights, performance units and performance shares, restricted shares, and restricted stock units.
Restricted Awards
During the year ended December 31, 2022, the Company granted 925,059 shares of restricted stock to employees, which had a fair value of $8.8 million as of the date of grant. We calculate the grant date fair value of non-vested shares of restricted stock awards using the closing sale prices on the trading day on the grant date. The restricted stock awards are amortized on a straight-line basis to expense over the vesting period, which is generally three years . As of December 31,
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2022, there were 1,935,548 shares available for future issuance under the Equity Plan. The following table sets forth the number of unvested restricted stock awards and the weighted-average fair value of these awards at the date of grant:
| Restricted Awards | Weighted Average Fair Value at Grant Date | Aggregate Intrinsic Value(1)($000s) | ||||||||||||||||||
| Unvested balance December 31, 2021 | $ | |||||||||||||||||||
| Granted | $ | |||||||||||||||||||
| Forfeited | ( | $ | ||||||||||||||||||
| Vested | ( | $ | ||||||||||||||||||
| Unvested balance, December 31, 2022 | $ | $ | ||||||||||||||||||
| (1) | The aggregate intrinsic value is calculated using the market value of our common stock as of December 30, 2022. The market value as of December 30, 2022 was $ | ||||
During the year ended December 31, 2021, there were 691,241 shares of restricted stock granted with a weighted-average fair value of $11.82 per share. During the year ended December 31, 2020, there were 996,037 shares of restricted stock granted with a weighted-average fair value of $10.39 per share.
The total fair value of shares vested for the years ended December 31, 2022, 2021 and 2020 was $9.1 million, $9.9 million and $8.6 million, respectively.
As of December 31, 2022, total unrecognized compensation expense on restricted awards was approximately $8.7 million, and the expense is expected to be recognized over a weighted average vesting period of 0.9 years.
Performance Awards
The Company grants long-term incentives to members of management in the form of performance-based restricted stock units (“PSUs”) under the Equity Plan. The number of PSUs earned is based on the Company’s achievement of specified performance goals, over a specified performance period, and may range from 0 % to 200 % of the target shares. The PSUs have a service condition that will expire at the end of the three-year performance period provided that the holder continues to be employed by the Company at the end of the performance period. Holders of PSUs are entitled to dividend equivalents, which will be accrued and paid in cash upon the vesting of a PSU. Dividend equivalents are forfeited to the extent that the underlying PSU is forfeited.
On February 23, 2022, we issued 425,010 PSUs equal to 100 % of the target amount, with an aggregate fair value of $6.1 million on the grant date. The PSUs, in addition to a service condition, are subject to the Company’s performance versus the total return of the MSCI US REIT Index and a triple-net lease peer group, as defined by the Compensation Committee. Upon evaluating the results of the market conditions, the final number of shares is determined, and such shares vest based on satisfaction of the service condition. The PSUs are amortized on a straight-line basis over the vesting period. During the year ended December 31, 2022, no PSUs were forfeited due to termination of service. The following table sets forth the number of unvested PSUs and the weighted-average fair value of these awards at the date of grant:
| Performance Awards | Weighted Average Fair Value at Grant Date | Aggregate Intrinsic Value(1)($000s) | ||||||||||||||||||
| Unvested balance December 31, 2021 | $ | |||||||||||||||||||
| Granted | $ | |||||||||||||||||||
| Forfeited | $ | |||||||||||||||||||
| Vested | ( | $ | ||||||||||||||||||
| Unvested balance, December 31, 2022 | $ | $ | ||||||||||||||||||
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| (1) | The aggregate intrinsic value is calculated using the market value of our common stock as of December 30, 2022. The market value as of December 30, 2022 was $ | ||||
During the year ended December 31, 2021, there were 216,085 PSUs granted with a weighted-average fair value of $16.27 per share. During the year ended December 31, 2020, there were 322,209 PSUs granted with a weighted-average fair value of $15.45 per share.
As of December 31, 2022, total unrecognized compensation expense related to PSUs was approximately $6.6 million, and the weighted-average vesting period was 1.4 years. The fair value of each PSU award is estimated at the date of grant using a Monte Carlo simulation. The simulation requires assumptions for expected volatility, risk-free return, and dividend yield. Our assumptions include a 0 % dividend yield, which is the mathematical equivalent to reinvesting the dividends over the three-year performance period as is consistent with the terms of the PSUs. The following table summarizes the assumptions used to value the PSUs granted during the years ended December 31, 2022, 2021 and 2020:
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Expected term (years) | ||||||||||||||||||||
| Expected volatility | % | % | % | |||||||||||||||||
| Expected annual dividend | % | % | % | |||||||||||||||||
| Risk free rate | % | % | % | |||||||||||||||||
Employee Stock Purchase Plan
On May 17, 2018, our stockholders approved and adopted the Uniti Group Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP authorizes us to issue up to 2,000,000 shares of our common stock to any of our employees so long as the employee is employed on the first day of the applicable offering period. Under the ESPP, there are two six-month plan periods during each calendar year, one beginning January 1 and ending on June 30, and one beginning on July 1 and ending on December 31. Under the terms of the ESPP, employees can choose each plan period to have up to 15 % of their annual base earnings, limited to $25,000 withheld to purchase our common stock. The purchase price of the stock is 85 % of the lower of its beginning-of-period or end-of-period market price. Under the ESPP the Company issued 69,854 , 74,950 and 96,788 shares during the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, there were 1,675,121 shares available for future issuance under the ESPP. The following table summarizes the assumptions used to value the purchase rights granted under the ESPP during the years ended December 31, 2022, 2021 and 2020:
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Expected term (years) | ||||||||||||||||||||
| Expected volatility | % | % | % | |||||||||||||||||
| Expected annual dividend | % | % | % | |||||||||||||||||
| Risk free rate | % | % | % | |||||||||||||||||
For the years ended December 31, 2022, 2021 and 2020, we recognized $12.8 million, $13.8 million and $13.7 million, respectively, of compensation expense related to restricted stock awards, performance-based awards and the ESPP, which is recorded in general and administrative expense on our Consolidated Statements of Income (Loss).
Note 14. Earnings Per Share
Our restricted stock awards are considered participating securities as they receive non-forfeitable rights to dividends at the same rate as common stock. As participating securities, we included these instruments in the computation of earnings per share under the two-class method described in FASB ASC 260, Earnings per Share.
We also have outstanding PSUs that contain forfeitable rights to receive dividends. Therefore, the awards are considered non-participating restrictive shares and not dilutive under the two-class method until performance conditions are met.
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During the year ended December 31, 2022, approximately 604,000 PSUs were excluded from the computation of diluted net loss per share because the performance conditions had not been met. During the year ended December 31, 2020, approximately 707,000 PSUs were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.
The dilutive effect of the Exchangeable Notes and the Convertible 2027 Notes (see Note 12) are calculated by using the “if-converted” method. This assumes an add-back of interest, net of income taxes, to net income attributable to shareholders as if the securities were converted at the beginning of the reporting period (or at time of issuance, if later) and the resulting common shares included in the number of weighted average shares. The dilutive effect of the Warrants (see Note 10) is calculated using the treasury-stock method. During the years ended December 31, 2022, 2021 and 2020, the Warrants were excluded from diluted shares outstanding because the exercise price exceeded the average market price of our common stock for the reporting period.
The following sets forth the computation of basic and diluted earnings per share under the two-class method:
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands, except per share data) | 2022 | 2021 | 2020 | |||||||||||||||||
| Basic earnings per share: | ||||||||||||||||||||
| Numerator: | ||||||||||||||||||||
| Net (loss) income attributable to shareholders | $ | ( | $ | $ | ( | |||||||||||||||
| Less: Income allocated to participating securities | ( | ( | ( | |||||||||||||||||
| Dividends declared on convertible preferred stock | ( | ( | ( | |||||||||||||||||
| Net (loss) income attributable to common shares | $ | ( | $ | $ | ( | |||||||||||||||
| Denominator: | ||||||||||||||||||||
| Basic weighted-average common shares outstanding | ||||||||||||||||||||
| Basic (loss) earnings per common share | $ | ( | $ | $ | ( | |||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands, except per share data) | 2022 | 2021 | 2020 | |||||||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||
| Numerator: | ||||||||||||||||||||
| Net (loss) income attributable to shareholders | $ | ( | $ | $ | ( | |||||||||||||||
| Less: Income allocated to participating securities | ( | ( | ( | |||||||||||||||||
| Dividends declared on convertible preferred stock | ( | ( | ( | |||||||||||||||||
| Impact on if-converted dilutive securities | ||||||||||||||||||||
| Net (loss) income attributable to common shares | $ | ( | $ | $ | ( | |||||||||||||||
| Denominator: | ||||||||||||||||||||
| Basic weighted-average common shares outstanding | ||||||||||||||||||||
| Impact on if-converted dilutive securities | ||||||||||||||||||||
| Effect of dilutive non-participating securities | ||||||||||||||||||||
| Weighted-average shares for dilutive earnings per common share | ||||||||||||||||||||
| Dilutive (loss) earnings per common share | $ | ( | $ | $ | ( | |||||||||||||||
For the year ended December 31, 2022, 33,472,978 potential common shares related to the Convertible 2027 Notes and the Exchangeable Notes were excluded from the computation of earnings per share, as their effect would have been anti-dilutive. For the year ended December 31, 2020, 29,777,226 potential common shares related to the Exchangeable Notes were excluded from the computation of earnings per share, as their effect would have been anti-dilutive.
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Note 15. Segment Information
Our management, including our chief executive officer, who is our chief operating decision maker, managed our operations as two
Leasing: Represents the operations of our leasing business, Uniti Leasing, which is engaged in the acquisition and construction of mission-critical communications assets and leasing them to anchor customers on either an exclusive or shared-tenant basis, in addition to the leasing of dark fiber on our existing dark fiber network assets that we either constructed or acquired. While the Leasing segment represents our REIT operations, certain aspects of the Leasing segment are also operated through taxable REIT subsidiaries.
Fiber Infrastructure: Represents the operations of our fiber business, Uniti Fiber, which is a leading provider of infrastructure solutions, including cell site backhaul and dark fiber, to the telecommunications industry.
Corporate: Represents our corporate office and shared service functions. Certain costs and expenses, primarily related to headcount, insurance, professional fees and similar charges, that are directly attributable to operations of our business segments are allocated to the respective segments.
Towers: Historically represented the operations of our former towers business, Uniti Towers, through which we acquired and constructed tower and tower-related real estate, which we then leased to our customers in the United States and Latin America. Revenue from our towers business qualified as a lease under ASC 842 and was outside the scope of ASC 606. The Company completed a series of transactions to largely divest of its towers business and on April 2, 2019, May 23, 2019 and June 1,2020, the Company completed the sales of its Latin American business, substantially all of its U.S. ground lease business, and its U.S. tower business, respectively.
Consumer CLEC: Historically represented the operations of Talk America through which we operated the Consumer CLEC Business, which prior to Uniti’s separation and spin-off from Windstream was reported as an integrated operation within Windstream. Talk America provided local telephone, high-speed internet and long-distance services to customers in the eastern and central United States. As of the end of the second quarter of 2020, we substantially completed a wind down of our Consumer CLEC Business.
Management evaluates the performance of each segment using Adjusted EBITDA, which is a segment performance measure we define as net income determined in accordance with GAAP, before interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense and the impact, which may be recurring in nature, of transaction and integration related costs, costs associated with Windstream’s bankruptcy, costs associated with litigation claims made against us, costs associated with the implementation of our enterprise resource planning system, goodwill impairment charges, executive severance costs, costs related to the settlement with Windstream, amortization of non-cash rights-of-use assets, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, including early tender and redemption premiums and costs associated with the termination of related hedging activities, gains or losses on dispositions, changes in the fair value of contingent consideration and financial instruments, and other similar or infrequent items (although we may not have had such charges in the periods presented). Adjusted EBITDA includes adjustments to reflect the Company’s share of Adjusted EBITDA from unconsolidated entities. The Company believes that net income, as defined by GAAP, is the most appropriate earnings metric; however, we believe that Adjusted EBITDA serves as a useful supplement to net income because it allows investors, analysts and management to evaluate the performance of our segments in a manner that is comparable period over period. Adjusted EBITDA should not be considered as an alternative to net income as determined in accordance with GAAP.
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Selected financial data related to our segments is presented below for the years ended December 31, 2022, 2021 and 2020:
| Year Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| (Thousands) | Leasing | Fiber Infrastructure | Towers | Consumer CLEC | Corporate | Total of Reportable Segments | ||||||||||||||||||||||||||||||||
| Revenues | $ | $ | $ | — | $ | — | $ | — | $ | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | $ | $ | — | $ | — | $ | ( | $ | |||||||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||
| Interest expense, net | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | — | — | ||||||||||||||||||||||||||||||||||||
| Other, net | ( | |||||||||||||||||||||||||||||||||||||
| Transaction related and other costs | ||||||||||||||||||||||||||||||||||||||
| Gain on sale of operations | ( | |||||||||||||||||||||||||||||||||||||
| Gain on sale of real estate | ( | |||||||||||||||||||||||||||||||||||||
| Goodwill impairment | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||
| Income tax benefit | ( | |||||||||||||||||||||||||||||||||||||
| Adjustments for equity in earnings from unconsolidated entities | $ | |||||||||||||||||||||||||||||||||||||
| Net loss | ( | |||||||||||||||||||||||||||||||||||||
| Capital expenditures | $ | $ | $ | — | $ | — | $ | $ | ||||||||||||||||||||||||||||||
| Year Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| (Thousands) | Leasing | Fiber Infrastructure | Towers | Consumer CLEC | Corporate | Total of Reportable Segments | ||||||||||||||||||||||||||||||||
| Revenues | $ | $ | $ | — | $ | — | $ | — | $ | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | $ | $ | — | $ | — | $ | ( | $ | |||||||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||
| Interest expense, net | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | — | — | ||||||||||||||||||||||||||||||||||||
| Other, net | ||||||||||||||||||||||||||||||||||||||
| Transaction related and other costs | ||||||||||||||||||||||||||||||||||||||
| Gain on sale of operations | ( | |||||||||||||||||||||||||||||||||||||
| Gain on sale of real estate | ( | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||
| Income tax benefit | ( | |||||||||||||||||||||||||||||||||||||
| Adjustments for equity in earnings from unconsolidated entities | ||||||||||||||||||||||||||||||||||||||
| Net Income | $ | |||||||||||||||||||||||||||||||||||||
| Capital expenditures | $ | $ | $ | — | $ | — | $ | $ | ||||||||||||||||||||||||||||||
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| Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| (Thousands) | Leasing | Fiber Infrastructure | Towers | Consumer CLEC | Corporate | Total of Reportable Segments | ||||||||||||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | — | $ | |||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||
| Interest expense, net | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||||||||||||||
| Other, net | ||||||||||||||||||||||||||||||||||||||
| Settlement expense | ||||||||||||||||||||||||||||||||||||||
| Goodwill impairment | ||||||||||||||||||||||||||||||||||||||
| Transaction related and other costs | ||||||||||||||||||||||||||||||||||||||
| Gain on sale of real estate | ( | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||
| Income tax benefit | ( | |||||||||||||||||||||||||||||||||||||
| Adjustments for equity in earnings from unconsolidated entities | ||||||||||||||||||||||||||||||||||||||
| Net loss | $ | ( | ||||||||||||||||||||||||||||||||||||
Capital expenditures (1) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1)Segment capital expenditures represents capital expenditures and the Windstream Asset Purchase Agreement (see Note 6) as reported in the investing activities section of the Consolidated Statements of Cash Flows.
Total assets by business segment as of December 31, 2022 and December 31, 2021 are as follows:
| December 31, | ||||||||||||||
| (Thousands) | 2022 | 2021 | ||||||||||||
| Leasing | $ | $ | ||||||||||||
| Fiber Infrastructure | ||||||||||||||
| Corporate | ||||||||||||||
| Total of reportable segments | $ | $ | ||||||||||||
Note 16. Commitments and Contingencies
Litigation
In the ordinary course of our business, we are subject to claims and administrative proceedings, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of operations.
Beginning on October 25, 2019, several purported shareholders filed separate putative class actions in the U.S. District Court for the Eastern District of Arkansas against the Company and certain of our officers, alleging violations of the federal securities laws, based on claims that the defendants improperly failed to disclose the risk that the Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream. On March 12, 2020, the U.S. District Court for the Eastern District of Arkansas consolidated the shareholder actions and appointed lead plaintiffs and lead counsel in the consolidated cases under the caption In re Uniti Group Inc. Securities Litigation (the “Class Action”). On May 11, 2020, lead plaintiffs filed a consolidated amended complaint in the Class Action, which sought to represent investors who acquired the Company’s securities between April 20, 2015 and February 15, 2019. The Class Action asserted claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, alleging that the Company made materially false and misleading statements relating to the Spin-Off and the Master Lease and the risk that the Spin-Off
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violated certain debt covenants and/or the Master Lease could be recharacterized as a financing instead of a "true lease." On March 25, 2022, the parties reached an agreement to settle the Class Action, on behalf of a settlement class, for $38.9 million, to be funded entirely by the Company’s insurance carriers. On June 17, 2022, the parties signed a stipulation of settlement and plaintiffs moved for preliminary approval of the settlement. On November 7, 2022, the court granted final approval of the settlement. In accordance with ASC 450, we recorded $38.9 million of settlement expense within general and administrative expense within our Consolidated Statements of Income during the first quarter of 2022 and accounts payable, accrued expenses and other liabilities, net within our Consolidated Balance Sheets as of December 31, 2022. Additionally, we recorded the probable insurance recovery of $38.9 million as a reduction to general and administrative expense during the first quarter of 2022 within our Consolidated Statements of Income, and other assets within Consolidated Balance Sheets as of December 31, 2022.
On August 17, 2021, two purported shareholders filed a derivative action on behalf of Uniti in the Circuit Court for Baltimore City, Maryland, under the caption Mayer et al. v. Gunderman et al., 24-C-21-003488 (the “Mayer Derivative Action”). The Mayer Derivative Action names Kenneth Gunderman and Mark Wallace as defendants and the Company as a nominal defendant and asserts claims for breach of fiduciary duty and unjust enrichment. The allegations in the Mayer Derivative Action are similar to those in the Class Action. The complaint seeks unspecified damages, unspecified equitable relief, and related costs and fees. On December 23, 2021, the court entered a joint stipulation to stay the Mayer Derivative Action, including the time for the defendants to respond to the complaint, pending the outcome of the Class Action.
On February 11, 2022, a purported shareholder filed a derivative action on behalf of Uniti in the federal District Court for the District of Maryland under the caption Guzzo et al. v. Gunderman et al., 1:22-cv-00366-GLR (the "Guzzo Derivative Action"). The complaint names Kenneth Gunderman, Mark Wallace, Francis Frantz, David Solomon, Jennifer Banner, and Scott Bruce as defendants and the Company as a nominal defendant and asserts claims for contribution against Gunderman and Wallace if the Company is found to be liable for violations of the federal securities laws in the Class Action and claims against all the individual defendants for breaches of fiduciary duty, waste of corporate assets, and unjust enrichment. The allegations in the Guzzo Derivative Action are similar to those in the Mayer Derivative Action and the Class Action. The complaint seeks unspecified damages, equitable relief, and related costs and fees. On March 16, 2022, the court entered a joint stipulation to stay the Guzzo Derivative Action, including the time for the defendants to respond to the complaint, pending the outcome of the Class Action. On November 8, 2022, the parties in the Mayer Derivative Action and the
Guzzo Derivative Action signed a term sheet to settle the actions, which contemplate non-monetary settlement consideration. The parties are preparing a stipulation of settlement, after which they will seek court approval of the settlement.
We maintain insurance policies that would provide coverage to various degrees for potential liabilities arising from the legal proceedings described above.
Under the terms of the tax matters agreement entered into on April 24, 2015 by the Company, Windstream Services, LLC and Windstream (the “Tax Matters Agreement”), in connection with the Spin-Off, we are generally responsible for any taxes imposed on Windstream that arise from the failure of the Spin-Off and the debt exchanges to qualify as tax-free for U.S. federal income tax purposes, within the meaning of Section 355 and Section 368(a)(1)(D) of the Code, as applicable, to the extent such failure to qualify is attributable to certain actions, events or transactions relating to our stock, indebtedness, assets or business, or a breach of the relevant representations or any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in connection with the request for the private letter ruling or the representations provided in connection with the tax opinion. We believe that the probability of us incurring obligations under the Tax Matters Agreement are remote; and therefore, we have recorded no such liabilities in our Consolidated Balance Sheet as of December 31, 2022.
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Note 17. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income (loss) by component is as follows for the years ended December 31, 2022, 2021 and 2020:
| (Thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Cash flow hedge changes in fair value (loss) gain: | ||||||||||||||||||||
| Balance at beginning of period | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Other comprehensive loss before reclassifications | ( | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | ||||||||||||||||||||
| Net other comprehensive loss | ( | ( | ( | |||||||||||||||||
| Less: Other comprehensive loss attributable to noncontrolling interest | ( | |||||||||||||||||||
| Balance at end of period | ( | ( | ( | |||||||||||||||||
| Interest rate swap termination: | ||||||||||||||||||||
| Balance at beginning of period attributable to common shareholders | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | ||||||||||||||||||||
| Balance at end of period | ||||||||||||||||||||
| Less: Other comprehensive income attributable to noncontrolling interest | ||||||||||||||||||||
| Balance at end of period attributable to common shareholders | ||||||||||||||||||||
| Accumulated other comprehensive income (loss) at end of period | $ | $ | ( | $ | ( | |||||||||||||||
Note 18. Income Taxes
We elected on our initial U.S. federal income tax return to be treated as a REIT under the Code. To qualify as a REIT, we must distribute at least 90% of our annual REIT taxable income, determined without regard to the dividends paid deduction and excluding any capital gains, to shareholders, and meet certain organizational and operational requirements, including asset holding requirements. As a REIT, we will generally not be subject to U.S. federal income tax on income that we distribute as dividends to our shareholders. If we fail to qualify as a REIT in any taxable year unless certain relief provisions apply, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates, and we could not deduct dividends paid to our shareholders in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to shareholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from reelecting to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
We have elected to treat the subsidiaries through which we operate Uniti Fiber and certain subsidiaries of Uniti Leasing, and operated Talk America as TRSs. TRSs enable us to engage in activities that result in income that does not constitute qualifying income for a REIT. Our TRSs are subject to U.S. federal, state and local corporate income taxes.
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Income tax expense (benefit) for the years ended December 31, 2022, 2021 and 2020 as reported in the accompanying Consolidated Statements of Income (Loss) was comprised of the following:
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Current | ||||||||||||||||||||
| Federal | $ | $ | ( | $ | ( | |||||||||||||||
| State | ( | |||||||||||||||||||
| Foreign | ||||||||||||||||||||
| Total current expense | ( | |||||||||||||||||||
| Deferred | ||||||||||||||||||||
| Federal | ( | ( | ( | |||||||||||||||||
| State | ( | ( | ( | |||||||||||||||||
| Total deferred benefit | ( | ( | ( | |||||||||||||||||
| Total income tax benefit | $ | ( | $ | ( | $ | ( | ||||||||||||||
An income tax expense reconciliation between the U.S. statutory tax rate and the effective tax rate is as follows:
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Income (loss) from continuing operations, before tax | $ | ( | $ | $ | ( | |||||||||||||||
| Income tax expense (benefit) at U.S. statutory federal rate | ( | ( | ||||||||||||||||||
| Increases (decreases) resulting from: | ||||||||||||||||||||
| State taxes, net of federal benefit | ( | ( | ||||||||||||||||||
| Benefit of REIT status | ( | ( | ||||||||||||||||||
| Goodwill impairment | ||||||||||||||||||||
| Return to accrual | ( | ( | ||||||||||||||||||
| Permanent differences | ( | |||||||||||||||||||
| Foreign taxes | ||||||||||||||||||||
| Income tax benefit | $ | ( | $ | ( | $ | ( | ||||||||||||||
The effective tax rate on income from continuing operations differs from tax at the statutory rate primarily due to our status as a REIT, and goodwill impairment which is not deductible for tax purposes.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
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The components of the Company's deferred tax assets and liabilities are as follows:
| (Thousands) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Deferred tax assets: | ||||||||||||||
| Deferred revenue | $ | $ | ||||||||||||
| Stock-based compensation | ||||||||||||||
| Accrued expenses and other | ||||||||||||||
| Asset retirement obligation | ||||||||||||||
| Inventory reserve | ||||||||||||||
| Excess business interest expense | ||||||||||||||
| Lease asset liability | ||||||||||||||
| Settlement obligation | ||||||||||||||
| Debt discount and interest expense | ||||||||||||||
| Other | ||||||||||||||
| Net operating loss carryforwards | ||||||||||||||
| Deferred tax assets | $ | $ | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Property, plant and equipment | $ | ( | $ | ( | ||||||||||
| Customer list intangible | ( | ( | ||||||||||||
| Other intangible amortization | ( | ( | ||||||||||||
| Right of use asset | ( | ( | ||||||||||||
| Deferred or prepaid costs | ( | ( | ||||||||||||
| Other | ( | |||||||||||||
| Deferred tax liabilities | $ | ( | $ | ( | ||||||||||
| Deferred tax asset, net | $ | $ | ||||||||||||
As of December 31, 2022, the Company’s deferred tax assets were primarily the result of U.S. federal and state NOL carryforwards.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. Management has evaluated sources of future taxable income, including the Company’s significant deferred tax liabilities and available tax planning strategies, and determined that sufficient positive evidence exists as of December 31, 2022, to conclude that it is more likely than not that all of its deferred tax assets are realizable, and therefore, no valuation allowance has been recorded.
On August 31, 2016, we acquired 100 % of the outstanding equity of Tower Cloud, Inc., which had federal NOL carryforwards of approximately $81.2 million at the date of the acquisition. As a result of the change in ownership, the utilization of Tower Cloud, Inc. NOL carryforwards is subject to limitations imposed by the Code. Approximately $18.3 million of the Tower Cloud, Inc. NOL carryforward was utilized in 2017. The remaining Tower Cloud, Inc. NOL carryforwards will expire between 2030 and 2036.
We have total federal NOL carryforwards as of December 31, 2022 of approximately $165.2 million which will expire between 2030 and 2037, and approximately $395.6 million which will not expire but the utilization of which will be limited to 80% of taxable income annually under provisions enacted in the Tax Cut and Jobs Act.
With the exception of Tower Cloud, Inc. and Uniti Fiber Holdings Inc., our 2019 returns remain open to examination. As Tower Cloud, Inc. and Uniti Fiber Holdings Inc. have NOLs available to carry forward, the applicable tax years will generally remain open to examination several years after the applicable loss carryforwards have been utilized or expire.
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The Company or its subsidiaries file tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and certain foreign jurisdictions. A reconciliation of the Company’s beginning and ending liability for unrecognized tax benefits is as follows:
| (Thousands) | 2022 | 2021 | ||||||||||||
| Balance at January 1 | $ | $ | ||||||||||||
| Balance at December 31 | $ | $ | ||||||||||||
The Company’s entire liability for unrecognized tax benefit would affect the annual effective tax rate if recognized.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as additional tax expense. The Company recorded no interest expense and penalties for the period ending December 31, 2022. The Company’s balance of accrued interest and penalties related to unrecognized tax benefits as of December 31, 2022 was $1.3 million.
Note 19. Supplemental Cash Flow Information
Cash paid for interest expense, net of capitalized interest and income taxes, net of refunds for the years ended December 31, 2022, 2021 and 2020 is as follows:
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Cash payments for: | ||||||||||||||||||||
| Interest, net of capitalized interest | $ | $ | $ | |||||||||||||||||
| Income taxes, net of refunds | $ | $ | $ | |||||||||||||||||
Note 20. Capital Stock
The limited partner equity interests in our operating partnership (commonly called “OP Units”), are exchangeable on a one -for-one basis for shares of our common stock or, at our election, cash of equivalent value. During the year ended December 31, 2022, the Company exchanged 591,349 OP Units held by third parties, of which 244,683 OP Units were exchanged for an equal number of common shares of the Company and 346,667 OP Units were exchanged for cash consideration of $4.6 million, representing approximately 85 % of the OP Units held by third parties with a carrying value of $11.9 million as of the exchange dates.
On September 9, 2020, Uniti entered into stock purchase agreements with certain first lien creditors of Windstream to replace and codify the terms set forth in the previously-filed binding letters of intent, pursuant to which on September 18, 2020 Uniti sold an aggregate of 38,633,470 shares of Uniti common stock, par value $0.0001 per share (the “Settlement Common Stock”), at $6.33 per share, which represents the closing price of Uniti common stock on the date when an agreement in principle of the basic outline of the Settlement was first reached. Uniti transferred the proceeds from the sale of the Settlement Common Stock to Windstream as consideration relating to the Asset Purchase Agreement and settlement of the litigation with Windstream. The issuance and sale of the Settlement Common Stock was made in reliance upon the exemption from registration requirements pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. Certain recipients of the Settlement Common Stock are subject to a one -year lock up, and all recipients are subject to a customary standstill agreement. No recipient will receive any governance rights in connection with the issuance. The binding letters of intent and the Stock Purchase Agreements also provide for customary registration rights.
On June 22, 2020, we established an at-the-market common stock offering program (the “ATM Program”) to sell shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $250 million. This offering supersedes and replaces the $250 million program we commenced on September 2, 2016, which had approximately $117.1 million available for issuance under such program. We have not made any sales under the refreshed ATM Program. This program is intended to provide additional financial flexibility and an alternative mechanism to access the capital markets at an efficient cost as and when we need financing, including for acquisitions.
We are authorized to issue up to 500,000,000 50,000,000 shares of preferred stock, of which 235,829,485 and 0 shares, respectively, were outstanding at December 31, 2022. We had 264,170,515 shares of voting common stock available for issuance at December 31, 2022.
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Note 21. Dividends (Distributions)
Distributions with respect to our common stock is characterized for federal income tax purposes as taxable ordinary dividends, capital gains dividends, non-dividend distribution or a combination thereof. For the years ended December 31, 2022, 2021, and 2020, our common stock distribution per share was $0.75 , $0.45 and $0.60 , respectively, characterized as follows:
| Year Ended December 31, | |||||||||||||||||
2022 | 2021(1) | 2020(2) | |||||||||||||||
| Ordinary dividends | $ | $ | $ | ||||||||||||||
| Capital gain distribution | $ | $ | $ | ||||||||||||||
| Non-dividend distributions | $ | — | $ | — | $ | — | |||||||||||
| Total | $ | $ | $ | ||||||||||||||
| (1) | Pursuant to Internal Revenue Code Section 857(b)(9), if you were a stockholder of record as of December 17, 2021, your dividend payment of $ | ||||
| (2) | Pursuant to Internal Revenue Code Section 857(b)(9), if you were a stockholder of record as of December 15, 2020, your dividend payment of $ | ||||
Note 22. Employee Benefit Plan
We sponsor a defined contribution plan under section 401(k) of the Internal Revenue Code, which covers employees who are 21 years of age and over. Under this plan, we match voluntary employee contributions at a rate of 100 % for the first 3 % of an employee’s annual compensation and at a rate of 50 % for the next 2 % of an employee’s annual compensation. Employees vest in our contribution immediately. Our expense related to the plan recognized for the years ended December 31, 2022, 2021 and 2020 was $2.2 million, $2.1 million and $2.2 million, respectively.
We sponsor a deferred compensation plan. The plan is established and maintained by the Company primarily to permit certain management or highly compensated employees of the Company and its subsidiaries, within the meaning of Section 301(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to defer a percentage of their compensation. The plan is an unfunded deferred compensation plan intended to qualify for the exemptions provided in, and shall be administered in a manner consistent with Section 201, 301 and 401 of ERISA and Section 409A of the Internal Revenue Code of 1986, as amended.
Note 23. Subsequent Events
On February 14, 2023, the Issuers issued $2.6 billion aggregate principal amount of the 10.50 % Secured Notes due
February 2028. The Issuers used the net proceeds from the offering to fund the redemption in full of the Issuers’ outstanding 2025 Secured Notes, to repay outstanding borrowings under the Revolving Credit Facility and to pay any related premiums, fees and expenses in connection with the foregoing. On February 14, 2023, the Issuers deposited the full redemption price for the 2025 Secured Notes with the trustee and satisfied and discharged their respective obligations with respect to the indenture governing the 2025 Secured Notes at such time.
The Secured Notes due February 2028 were issued at an issue price of 100 % of their principal amount pursuant to an indenture, dated as of February 14, 2023 (the “Secured Notes due February 2028 Indenture”), among the Issuers, the guarantors named therein (collectively, the “Guarantors”) and Deutsche Bank Trust Company Americas, as trustee and as collateral agent. The Secured Notes due February 2028 mature on February 15, 2028 and bear interest at a rate of 10.50 % per year. Interest on the Secured Notes due February 2028 is payable on March 15 and September 15 of each year, beginning on September 15, 2023.
The Issuers may redeem the Secured Notes due February 2028, in whole or in part, at any time prior to September 15, 2025 at a redemption price equal to 100 % of the principal amount of the Secured Notes due February 2028 redeemed plus
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accrued and unpaid interest thereon, if any, to, but not including, the redemption date, plus an applicable “make whole” premium described in the Secured Notes due February 2028 Indenture.
Thereafter, the Issuers may redeem the Secured Notes due February 2028 in whole or in part, at the redemption prices set forth in the Secured Notes due February 2028 Indenture. In addition, prior to February 15, 2025, the Issuers may, on one or more occasions, redeem up to 10 % of the aggregate principal amount of the Secured Notes due February 2028 in any twelve month period at a redemption price equal to 103 % of the principal amount thereof plus accrued and unpaid interest thereon, if any, to, but not including, the applicable redemption date. Notwithstanding the foregoing, the Issuers may not use the proceeds of any offering of Additional Notes (as defined in the Secured Notes due February 2028 Indenture) with a price to investors equal to or in excess of 103 % to finance any such optional redemption. Further, at any time on or prior to September 15, 2025, up to 40 % of the aggregate principal amount of the Secured Notes due February 2028 may be redeemed with the net cash proceeds of certain equity offerings at a redemption price of 110.50 % of the principal amount plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date; provided that at least 60 % of aggregate principal amount of the originally issued Secured Notes due February 2028 remains outstanding. If certain changes of control of the Operating Partnership occur, holders of the Secured Notes due February 2028 will have the right to require the Issuers to offer to repurchase their Notes at 101 % of their principal amount plus accrued and unpaid interest, if any, to, but not including, the repurchase date.
The Secured Notes due February 2028 are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company and on a senior secured basis by each of the Operating Partnership’s existing and future domestic restricted subsidiaries (other than the Issuers) that guarantees indebtedness under the Company’s senior secured credit facilities and existing secured notes (the “Subsidiary Guarantors”). In addition, the Issuers will use commercially reasonable efforts to obtain necessary regulatory approval to allow certain non-guarantor subsidiaries of the Company to guarantee the Secured Notes due February 2028, including by making filings to obtain such approval within 60 days of the issuance of the Secured Notes due February 2028. The guarantees are subject to release under specified circumstances, including certain circumstances in which such guarantees may be automatically released without the consent of the holders of the Secured Notes due February 2028.
The Secured Notes due February 2028 and the related guarantees are the Issuers’ and the Subsidiary Guarantors’ senior secured obligations and rank equal in right of payment with all of the Issuers’ and the Subsidiary Guarantors’ existing and future unsubordinated obligations; effectively senior to all unsecured indebtedness of the Issuers and the Subsidiary Guarantors, including the Company’s existing senior unsecured notes, to the extent of the value of the collateral securing the Secured Notes due February 2028; effectively equal with all of the Issuers’ and the Subsidiary Guarantors’ existing and future indebtedness that is secured by first-priority liens on the collateral (including indebtedness under the Company’s senior secured credit facilities and existing secured notes); senior in right of payment to any of the Issuers’ and Subsidiary Guarantors’ subordinated indebtedness; and structurally subordinated to all existing and future liabilities (including trade payables) of the Company’s subsidiaries (other than the Issuers) that do not guarantee the Secured Notes due February 2028.
The Secured Notes due February 2028 Indenture contains customary high yield covenants limiting the ability of the Operating Partnership and its restricted subsidiaries to: incur or guarantee additional indebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments or other restricted payments; sell assets; transfer material intellectual property to unrestricted subsidiaries; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of their assets; and create restrictions on the ability of the Issuers and their restricted subsidiaries to pay dividends or other amounts to the Issuers. These covenants are subject to a number of important and significant limitations, qualifications and exceptions. The Indenture also contains customary events of default.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
104
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2022.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013).
Based on this evaluation under the framework in Internal Control - Integrated Framework (2013) issued by COSO, management concluded the Company’s internal control over financial reporting was effective as of December 31, 2022.
The Company’s independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. KPMG LLP’s report appears in Part II, Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act, during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
On February 22, 2023, the Company approved a new form severance agreement (the “New Severance Agreement”) for the Company's executive officers other than our Chief Executive Officer (each an "Executive" and together the "Executives"), including Daniel L. Heard, Executive Vice President – General Counsel and Secretary of the Company, Paul Bullington, Senior Vice President – Chief Financial Officer and Treasurer of the Company, and Mike Friloux, Executive Vice
105
President – Chief Technology Officer of the Company. Mr. Heard’s prior severance agreement expired according to its terms on December 31, 2022, this will be Mr. Bullington’s first severance agreement with the Company and the New Severance Agreement will replace Mr. Friloux's existing severance agreement.
The term of the New Severance Agreement will run from the date it is executed by the Company and an Executive until the earliest of (i) prior to a change in control, the date of termination determined in accordance with the New Severance Agreement or March 1, 2024, or (ii) after a change in control, the Company’s performance of its obligations under the New Severance Agreement if a payment trigger has occurred or the expiration of the period for a payment trigger to occur if such expiration occurs after March 1, 2024. To the extent not previously terminated, commencing on March 1, 2024 and on each subsequent anniversary thereof, the term of the New Severance Agreement will be automatically extended for a period of one additional year following the expiration of the applicable term unless the Company or an Executive elect not to extend the term by notifying the other party of such non-renewal in writing not later than 60 days prior to the end of the current term.
The New Severance Agreement provides that should an Executive’s employment be terminated by the Company for cause or by the Executive without good reason, the Company must pay to the Executive his or her base salary and any accrued vacation pay through the date of termination. Additionally, should the Executive’s employment be terminated due to his or her death or disability, the Company must pay to the Executive or his or her estate (i) his or her base salary and any accrued vacation pay through the date of termination; (ii) any incentive compensation earned by or awarded to the Executive for a completed performance period preceding the date of termination, to the extent not already paid; and (iii) an amount equal to the Executive’s annual base salary in effect on the date of termination.
The New Severance Agreement also provides that should an Executive’s employment be terminated by the Company without cause or by the Executive for good reason and such termination does not occur at the same time or within one year following a change in control of the Company, the Company must pay to the Executive, in lieu of any other post-termination benefits, the following:
•his or her base salary and any accrued vacation pay through the date of termination;
•any incentive compensation that has been earned by or awarded to the Executive for a completed performance period preceding the date of termination, to the extent not already paid;
•an amount equal to one and a half (1.5) times the sum of (x) his or her then current annual base salary and (y) the average of the bonus payments paid to the Executive during the three years (or shorter period, as applicable) preceding the year in which the date of termination occurs; and
•his or her health, vision and dental insurance benefits for twelve months.
Finally, should an Executive’s employment be terminated by the Company without cause or by the Executive with good reason and such termination occurs at the same time as or within one year following a change in control of the Company, the New Severance Agreement obligates the Company to pay or provide to the Executive the following:
•his or her base salary and any accrued vacation pay through the date of termination;
•any incentive compensation that has been earned by or awarded to the Executive for a completed performance period preceding the date of termination, to the extent not already paid;
•a pro-rated portion of the Executive’s then-current target incentive compensation, reduced by any amount paid for the fiscal year during which the date of termination occurs;
•an amount equal to two (2) times the sum of (x) his or her annual base salary in effect immediately prior to the change in control or payment trigger, whichever is higher and (y) the average of the bonus payments paid to the Executive during the three years (or shorter period, as applicable) preceding the year in which the date of termination occurs;
•the Executive’s health, vision and dental insurance benefits for twenty-four months; and
•certain outplacement services.
The Company will pay or provide the foregoing in the manner set forth in the New Severance Agreement.
In the event that certain payments or benefits under the New Severance Agreement would be subject to an excise tax under Section 4999 of the Internal Revenue Code, as amended, then such payments or benefits may be reduced in the manner set forth in the New Severance Agreement.
106
The Company is only obligated to pay or provide, or continue to pay or provide, benefits for termination by the Company not for cause prior to a change in control or certain benefits in the event of a payment trigger to the extent that an Executive executes a waiver and release in the form set forth in the New Severance Agreement and otherwise remains in compliance with certain covenants set forth therein. The New Severance Agreement includes one-year post-termination non-disclosure, non-compete and non-interference covenants.
The foregoing description of the New Severance Agreement is only a summary, does not purport to be complete and is qualified in its entirety by the complete text of the New Severance Agreement, a copy of which is attached as Exhibit 10.18 to this Annual Report on Form 10-K and incorporate herein by reference.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Except as set forth below, the information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2022, pursuant to Regulation 14A under the Exchange Act in connection with our 2023 annual meeting of stockholders.
We have a code of ethics as defined in Item 406 of Regulation S-K, which code applies to all of our directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. A copy of this code of ethics, titled “Code of Business Conduct and Ethics and Whistleblower Policy,” is available free of charge in the Corporate Governance section of the About Us page on our website at www.uniti.com. We intend to satisfy the disclosure requirements of Form 8-K regarding any amendment to, or a waiver from, any provision of our code of ethics by posting such amendment or waiver on our website.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2022, pursuant to Regulation 14A under the Exchange Act in connection with our 2023 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Except as set forth below, the information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2022, pursuant to Regulation 14A under the Exchange Act in connection with our 2023 annual meeting of stockholders.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table contains information about our equity compensation plan as of December 31, 2022:
EQUITY COMPENSATION PLAN INFORMATION | ||||||||||||||
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||||
| (a) | (b) | (c) | ||||||||||||
| Equity compensation plans approved by security holders | — | — | 3,610,669 | 1 | ||||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||||
| Total | — | — | 3,610,669 | |||||||||||
| 1 | Amount includes 1,935,548 shares available for issuance under the Uniti Group Inc. 2015 Equity Incentive Plan and 1,675,121 shares under the Uniti Group Inc. Employee Stock Purchase Plan. | ||||
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2022, pursuant to Regulation 14A under the Exchange Act in connection with our 2023 annual meeting of stockholders.
108
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2022, pursuant to Regulation 14A under the Exchange Act in connection with our 2023 annual meeting of stockholders.
109
PART IV
Item 15. Exhibits, Financial Statement Schedules.
Financial Statements
See Index to Consolidated Financial Statements in “Financial Statements and Supplementary Data.”
Financial Statement Schedules
Uniti Group Inc. Schedule I – Condensed Financial Information of the Registrant (Parent Company) Condensed Balance Sheets as of December 31, 2022 and 2021, and the related Condensed Statements of Comprehensive Income and Cash Flows for each of the three years in the period ended December 31, 2022, including the related notes, appearing on pages S-1, S-2, S-3, and S-4 of this report.
Uniti Group Inc. Schedule II – Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2022 appearing on page S-5 of this report.
Uniti Group Inc. Schedule III – Schedule of Real Estate Investments and Accumulated Depreciation as of December 31, 2022 appearing on page S-6 of this report.
Index to Exhibits
| Exhibit No. | Description | |||||||
| 2.1 | ||||||||
| 2.2* | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
110
111
| 10.5 | ||||||||
| 10.6 | ||||||||
| 10.7 | ||||||||
| 10.8 | ||||||||
| 10.9 | ||||||||
| 10.10 | ||||||||
| 10.11 | ||||||||
| 10.12 | ||||||||
| 10.13 | ||||||||
| 10.14 | ||||||||
| 10.15 | ||||||||
| 10.16 | ||||||||
112
| 10.17+ | ||||||||
| 10.18+* | ||||||||
| 10.19+ | ||||||||
| 10.20+ | ||||||||
| 10.21+ | ||||||||
| 10.22+* | ||||||||
| 10.23+ | ||||||||
| 10.24+ | ||||||||
| 10.25+ | ||||||||
| 10.26+ | ||||||||
| 10.27+ | ||||||||
| 21.1* | ||||||||
| 23.1* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1* | ||||||||
| 32.2* | ||||||||
| 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||
____________________
| * | Filed herewith | ||||
| + | Constitutes a management contract or compensation plan or arrangement. | ||||
113
ITEM 16. FORM 10-K SUMMARY
None.
114
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| UNITI GROUP INC. | ||||||||
Date: February 28, 2023 | By: | /s/ Kenneth A. Gunderman | ||||||
| Kenneth A. Gunderman | ||||||||
| President and Chief Executive Officer | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
| Name | Title | Date | ||||||||||||
| /s/ Kenneth A. Gunderman | President and Chief Executive Officer | February 28, 2023 | ||||||||||||
| Kenneth A. Gunderman | (Principal Executive Officer) | |||||||||||||
| /s/ Paul E. Bullington | Senior Vice President – Chief Financial Officer and Treasurer | February 28, 2023 | ||||||||||||
| Paul E. Bullington | (Principal Financial Officer) | |||||||||||||
| /s/ Travis T. Black | Vice President – Chief Accounting Officer | February 28, 2023 | ||||||||||||
| Travis T. Black | (Principal Accounting Officer) | |||||||||||||
| /s/ Francis X. Frantz | Chairman and Director | February 28, 2023 | ||||||||||||
| Francis X. Frantz | ||||||||||||||
| /s/ Jennifer S. Banner | Director | February 28, 2023 | ||||||||||||
| Jennifer S. Banner | ||||||||||||||
| /s/ Scott G. Bruce | Director | February 28, 2023 | ||||||||||||
| Scott G. Bruce | ||||||||||||||
| /s/ Carmen Perez-Carlton | Director | February 28, 2023 | ||||||||||||
| Carmen Perez-Carlton | ||||||||||||||
| /s/ David L. Solomon | Director | February 28, 2023 | ||||||||||||
| David L. Solomon | ||||||||||||||
115
Uniti Group Inc.
Schedule I – Condensed Financial Information of
The Registrant (Parent Company)
Condensed Balance Sheets
| (Thousands, except par value) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Other assets | ||||||||||||||
| Total Assets | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||
| Accrued other liabilities | $ | $ | ||||||||||||
| Dividends payable | ||||||||||||||
| Notes and other debt, net | ||||||||||||||
| Cash distributions and losses in excess of investments in consolidated subsidiaries | ||||||||||||||
| Total liabilities | ||||||||||||||
| Shareholders' Deficit: | ||||||||||||||
Preferred stock, $ | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated other comprehensive loss | ( | |||||||||||||
| Distributions in excess of accumulated earnings | ( | ( | ||||||||||||
| Total Uniti shareholders' deficit | ( | ( | ||||||||||||
| Total Liabilities, Convertible Preferred Stock, and Shareholders' Deficit | $ | $ | ||||||||||||
See notes to Consolidated Financial Statements of Uniti Group Inc. included in Financial Statements and Supplementary Data.
S-1
Uniti Group Inc.
Schedule I – Condensed Financial Information of
The Registrant (Parent Company)
Condensed Statements of Comprehensive Income
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Costs and Expenses: | ||||||||||||||||||||
| General and administrative expense | $ | ( | $ | ( | $ | |||||||||||||||
| Transaction related costs | ||||||||||||||||||||
| Total costs and expenses | ( | |||||||||||||||||||
| Operating (loss) income | ( | ( | ||||||||||||||||||
| Earnings (loss) from consolidated subsidiaries | ( | |||||||||||||||||||
| Income (Loss) before income taxes | ( | |||||||||||||||||||
| Income tax expense (benefit) | ( | |||||||||||||||||||
| Net (loss) income attributable to shareholders | ( | ( | ||||||||||||||||||
| Comprehensive income (loss) attributable to shareholders | $ | $ | $ | ( | ||||||||||||||||
See notes to Consolidated Financial Statements of Uniti Group Inc. included in Financial Statements and Supplementary Data.
S-2
Uniti Group Inc.
Schedule I – Condensed Financial Information of
The Registrant (Parent Company)
Condensed Statements of Cash Flows
| Year Ended December 31, | ||||||||||||||||||||
| (Thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Cash flow from operating activities | ||||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | ( | $ | $ | ||||||||||||||||
| Cash flow from investing activities | ||||||||||||||||||||
| Proceeds from sale of real estate, net of cash | ||||||||||||||||||||
| Net cash provided by investing activities | ||||||||||||||||||||
| Cash flow from financing activities | ||||||||||||||||||||
| Settlement Common Stock issuance | ||||||||||||||||||||
| Dividends paid | ( | ( | ( | |||||||||||||||||
| Proceeds from issuance of Notes | ||||||||||||||||||||
| Payments for financing costs | ( | |||||||||||||||||||
| Payment for settlement of common stock warrant | ( | |||||||||||||||||||
| Net share settlement | ( | ( | ( | |||||||||||||||||
| Termination of bond hedge option | ||||||||||||||||||||
| Payments for capped call option | ( | |||||||||||||||||||
| Intercompany transactions, net | ( | |||||||||||||||||||
| Employee stock purchase plan | ||||||||||||||||||||
| Net cash provided by (used in) financing activities | ( | ( | ||||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ( | ||||||||||||||||||
| Cash and cash equivalents at beginning of period | ||||||||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | $ | |||||||||||||||||
See notes to Consolidated Financial Statements of Uniti Group Inc. included in Financial Statements and Supplementary Data.
S-3
Uniti Group Inc.
Schedule I – Condensed Financial Information of
The Registrant (Parent Company)
Notes to Condensed Financial Statements
Note 1. Background and Basis of Presentation
Uniti Group Inc.’s ("Uniti" or "the Company") parent company financial information has been derived from its consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes of Uniti and its subsidiaries included in Item 8 "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
Note 2. Subsidiary Transactions
Investment in Subsidiaries
During 2017, the parent company completed its reorganization (the “up-REIT Reorganization”) to operate through a customary “up-REIT” structure, pursuant to which we hold substantially all of our assets through a partnership, Uniti Group LP, a Delaware limited partnership (the “Operating Partnership”), that we control as general partner, with the only significant difference between the financial position and results of operations of the Operating Partnership and its subsidiaries compared to the consolidated financial position and consolidated results of operations of Uniti is that the results for the Operating Partnership and its subsidiaries do not include Uniti’s Consumer CLEC segment, which consisted of Talk America Services, LLC. We substantially completed the wind down of the Consumer CLEC Business as of the end of the second quarter of 2020. The up-REIT structure is intended to facilitate future acquisition opportunities by providing the Company with the ability to use common units of the Operating Partnership as a tax-efficient acquisition currency. As of December 31, 2022, Uniti is the sole general partner of the Operating Partnership and own approximately 99.96 % of the partnership interests in the Operating Partnership.
Dividends
Cash dividends received from subsidiaries and recorded in Cash Flow from Operating Activities in the Condensed Statement of Cash Flows were $141.4 million, $139.9 million and $134.7 million for the year ended December 31, 2022, 2021 and 2020, respectively.
S-4
Uniti Group Inc.
Schedule II – Valuation and Qualifying Accounts
(dollars in thousands)
| Column A | Column B | Column C | Column D | Column E | ||||||||||||||||||||||||||||
| Additions | ||||||||||||||||||||||||||||||||
| Description | Balance at Beginning of Period | Charged to Cost and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | |||||||||||||||||||||||||||
| Allowance for Doubtful Accounts | ||||||||||||||||||||||||||||||||
| Year Ended December 31, 2022 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Year Ended December 31, 2021 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Year Ended December 31, 2020 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
S-5
Uniti Group Inc.
Schedule III – Real Estate Investments and Accumulated Depreciation
As of December 31, 2022
(dollars in thousands)
| Col. A | Col. B | Col. C | Col. D | Col. E | Col. F | Col. G | Col. H | Col. I | ||||||||||||||||||||||||||||||||||||||||||||||||
Cost capitalized subsequent to acquisition(1) (3) | Life on which Depreciation in Latest Income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Encumbrances | Initial cost to company(1) | Improvements | Carry Costs | Gross Amount Carried at Close of Period(5) | Accumulated Depreciation | Date of Construction(2) | Date Acquired(2) | Statements is Computed | |||||||||||||||||||||||||||||||||||||||||||||||
| Land | $ | — | (1) | (1) | (1) | $ | $ | — | (2) | (2) | Indefinite | |||||||||||||||||||||||||||||||||||||||||||||
| Building and improvements | — | (1) | (1) | (1) | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Poles | — | (1) | (1) | (1) | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiber | — | (1) | (1) | (1) | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Copper | — | (1) | (1) | (1) | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Conduit | — | (1) | (1) | (1) | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Towers | — | (1) | (1) | (1) | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Finance lease assets | — | (1) | (1) | (1) | (2) | (2) | See Note 3 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other assets | — | (1) | (1) | (1) | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction in progress | — | (1) | (1) | (1) | — | (2) | (2) | See Note 3 | ||||||||||||||||||||||||||||||||||||||||||||||||
(1)Given the voluminous nature and variety of our real estate investment assets, this schedule omits columns C and D from the schedule III presentation.
(2)Because additions and improvements to our real estate investment assets are ongoing, construction and acquisition dates are not applicable.
(3)For the year ended December 31, 2022, the amount of capitalized costs related to the Distribution Systems is as follows (millions):
Tenant capital improvements(4) | $ | ||||
Growth capital improvements(5) | $ | ||||
(4)Tenant capital improvements (“TCIs”) represent, maintenance, repair, overbuild, upgrade or replacements to the leased network, including, without limitation, the replacement of copper distribution systems with fiber distribution systems. We receive non-monetary consideration related to the TCIs as they automatically become our property, and we recognize the cost basis of TCIs that are capital in nature.
(5)Pursuant to the Windstream Leases, Windstream (or any successor tenant under a Windstream Lease) has the right to cause Uniti to reimburse up to an aggregate $1.75 billion for certain growth capital improvements in long-term value accretive fiber and related assets made by Windstream (or the applicable tenant under the Windstream Lease) to certain ILEC and CLEC properties (the “Growth Capital Improvements”).
(6)Aggregate cost for Federal income tax purposes related to our real estate investment assets is $7.4 billion.
S-6
Uniti Group Inc.
Schedule III – Real Estate Investments and Accumulated Depreciation
As of December 31, 2022
(dollars in thousands)
| 2022 | 2021 | ||||||||||
| Gross amount at beginning | $ | $ | |||||||||
| Additions during period: | |||||||||||
Tenant capital improvements(1) | |||||||||||
Growth capital improvements(1) | |||||||||||
| Acquisitions | |||||||||||
| Other | |||||||||||
| Total additions | |||||||||||
| Deductions during period: | |||||||||||
| Cost of real estate sold or disposed | |||||||||||
| Other | |||||||||||
| Total deductions | |||||||||||
| Balance at end | $ | $ | |||||||||
(1) During the year ended December 31, 2022, TCIs totaled $ | |||||||||||
| 2022 | 2021 | ||||||||||
| Gross amount of accumulated depreciation at beginning | $ | $ | |||||||||
| Additions during period: | |||||||||||
| Depreciation | |||||||||||
| Other | |||||||||||
| Total additions | |||||||||||
| Deductions during period: | |||||||||||
| Amount of accumulated depreciation for assets sold or disposed | |||||||||||
| Other | — | — | |||||||||
| Total deductions | |||||||||||
| Balance at end | $ | $ | |||||||||
S-7
Exhibit 2.2
Second Amended and Restated Agreement of Limited Partnership
of
UNITI GROUP LP
December 12, 2022
#96603748v1
TABLE OF CONTENTS
Page
Article 1 Defined Terms | |||||
Section 1.01. Definitions | |||||
Section 1.02. Other Definitional and Interpretative Provisions | |||||
Article 2 Partnership Formation, Continuation and Identification | |||||
Section 2.01. Formation and Continuation | |||||
Section 2.02. Name, Office and Registered Agent | |||||
Section 2.03. Partners | |||||
Section 2.04. Term and Dissolution | |||||
Section 2.05. Filing of Certificate and Perfection of Limited Partnership | |||||
Section 2.06. Certificates Describing Partnership Units | |||||
Article 3 Business of the Partnership | |||||
Article 4 Capital Contributions and Accounts | |||||
Section 4.01. Capital Contributions | |||||
Section 4.02. Additional Capital Contributions and Issuances of Additional Partnership Interests | |||||
Section 4.03. Additional Funding | |||||
Section 4.04. Capital Accounts | |||||
Section 4.05. Percentage Interests | |||||
Section 4.06. No Interest on Contributions | |||||
Section 4.07. Return of Capital Contributions | |||||
Section 4.08. No Third-Party Beneficiary | |||||
Article 5 Allocation of Net Profit and Net Loss; Distributions | |||||
Section 5.01. Allocation of Net Profit and Net Loss | |||||
Section 5.02. Distributions of Cash | |||||
Section 5.03. REIT Distribution Requirements | |||||
Section 5.04. No Right to Distributions in Kind | |||||
Section 5.05. Limitations on Return of Capital Contributions | |||||
Section 5.06. Distributions Upon Liquidation | |||||
Section 5.07. Substantial Economic Effect | |||||
Article 6 Rights, Obligations and Powers of the General Partner | |||||
Section 6.01. Management of the Partnership | |||||
Section 6.02. Delegation of Authority | |||||
Section 6.03. Indemnification of Indemnitees | |||||
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Section 6.04. Liability of the General Partner | |||||
Section 6.05. Compensation and Reimbursement of General Partner | |||||
Section 6.06. Outside Activities | |||||
Section 6.07. Employment or Retention of Affiliates | |||||
Section 6.08. Title to Partnership Assets | |||||
Section 6.09. Miscellaneous | |||||
Section 6.10. Reliance by Third Parties | |||||
Article 7 Changes in General Partner | |||||
Section 7.01. Transfer of the General Partner’s Partnership Interest | |||||
Section 7.02. Admission of a Substitute or Additional General Partner | |||||
Section 7.03. Effect of Bankruptcy, Withdrawal, Death or Dissolution of a General Partner | |||||
Section 7.04. Removal of a General Partner | |||||
Article 8 Rights and Obligations of the Limited Partners | |||||
Section 8.01. Management of the Partnership | |||||
Section 8.02. Power of Attorney | |||||
Section 8.03. Limitation on Liability of Limited Partners | |||||
Section 8.04. Ownership by Limited Partner of General Partner or Affiliate | |||||
Section 8.05. Exchange Right | |||||
Section 8.06. Duties and Conflicts | |||||
Section 8.07. Right of Offset | |||||
Section 8.08. Notice of Mergers | |||||
Section 8.09. Limited Partner Representations and Warranties | |||||
Article 9 Transfers of Limited Partnership Interests | |||||
Section 9.01. Purchase for Investment | |||||
Section 9.02. Restrictions on Transfer of Limited Partnership Interests | |||||
Section 9.03. Admission of Substitute Limited Partner | |||||
Section 9.04. Rights of Assignees of Limited Partnership Interests | |||||
Section 9.05. Termination of Status as Limited Partner | |||||
Section 9.06. Effect of Bankruptcy, Death, Incompetence or Termination of a Limited Partner | |||||
Section 9.07. Joint Ownership of Interests | |||||
Article 10 Books and Records; Accounting; Tax Matters | |||||
Section 10.01. Books and Records | |||||
Section 10.02. Custody of Partnership Funds; Bank Accounts | |||||
Section 10.03. Fiscal and Taxable Year | |||||
Section 10.04. Annual Tax Information and Report | |||||
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Section 10.05. Tax Matters Partner; Partnership Representative; Tax Elections; Special Basis Adjustments | |||||
Section 10.06. Reports to Limited Partners | |||||
Article 11 Amendment of Agreement; Meetings | |||||
Section 11.01. Amendment | |||||
Section 11.02. Meetings of Partners | |||||
Article 12 General Provisions | |||||
Section 12.01. Notices | |||||
Section 12.02. Survival of Rights | |||||
Section 12.03. Additional Documents | |||||
Section 12.04. Severability | |||||
Section 12.05. Entire Agreement | |||||
Section 12.06. Pronouns and Plurals | |||||
Section 12.07. Headings | |||||
Section 12.08. Counterparts | |||||
Section 12.09. Governing Law | |||||
Section 12.10. Arbitration | |||||
Section 12.11. Acknowledgement as to Exculpation and Indemnification | |||||
Exhibits
Exhibit A Partners, Assignees, and Partnership Units
Exhibit B Form of Notice of Exercise of Exchange Right
Exhibit C [Reserved]
Exhibit D Form of Partnership Perpetual Convertible Preferred Unit
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Second Amended and Restated Agreement of Limited Partnership
of
UNITI GROUP LP
of
UNITI GROUP LP
This Second Amended and Restated Agreement of Limited Partnership is entered into effective as of the 12th day of December, 2022 by Uniti Group Inc., a Maryland corporation (“Uniti”), with respect to Uniti Group LP, a limited partnership formed under the laws of the State of Delaware (the “Partnership”), pursuant to a Certificate of Limited Partnership filed with the Secretary of State of the State of Delaware on May 1, 2017 (the “Certificate”).
Recitals
WHEREAS, Uniti, the Partnership and certain other Persons are parties to the Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of July 3, 2017, as amended by the General Partner on April 18, 2022 (the “LPA”);
WHEREAS, pursuant to Section 4.02(a)(i) of the LPA, Uniti, as the General Partner, is authorized to cause the Partnership to issue additional Partnership Interests in the form of Partnership Units for any Partnership purpose, at any time or from time to time, to the Partners (including the General Partner) or to other Persons for such consideration and on such terms and conditions as shall be established by the General Partner in its sole and absolute discretion, all without the approval of any Limited Partners;
WHEREAS, subject to Delaware law, any additional Partnership Interests issued pursuant to Section 4.02(a)(i) of the LPA may be issued in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative participating, optional or other special rights, powers and duties, including rights, powers and duties senior to Limited Partnership Interests then outstanding, all as shall be determined by the General Partner in its sole and absolute discretion in a Partnership Unit Designation and an amendment to this Agreement;
WHEREAS, pursuant to Section 4.02(a)(iii) of the LPA, the Partnership may issue additional Partnership Interests to the General Partner where (x) the additional Partnership Interests are issued in connection with an issuance of interests in the General Partner, which interests have designations, preferences and other rights such that the economic interests are substantially similar to the designations, preferences, and other rights of the additional Partnership Interests issued to the General Partner, and (y) the General Partner makes a Capital Contribution to the Partnership in an amount equal to the aggregate net proceeds raised in connection with the interests in the General Partner;
WHEREAS, the General Partner intends to issue 7.50% convertible senior notes due 2027 on the date hereof; and
WHEREAS, the General Partner desires to amend and restate the LPA (x) pursuant to Section 4.01(a)(i) and (iii) to establish and issue a new class of Partnership Interests designated as Partnership Perpetual Convertible Preferred Units, the terms and rights of which are provided in Exhibit D hereto and (y) make certain other amendments permissible pursuant to Section 11.01.
NOW, THEREFORE, in consideration of the foregoing, of the mutual covenants between the parties to this Agreement, and of other good and valuable consideration, the
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receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto agree as follows:
Article 1
Defined Terms
Defined Terms
Section 1.01.Definitions. (a) The following defined terms used in this Agreement shall have the meanings specified below:
“Act” means the Revised Uniform Limited Partnership Act as enacted in the State of Delaware.
“Adjusted Capital Account” means, with respect to any Partner, such Partner’s Capital Account balance (a) reduced for any items described in Regulations section 1.704-1(b)(2)(ii)(d)(4), (5), and (6), and (b) increased for any amount such Partner is obligated to contribute or is treated as being obligated to contribute to the Partnership pursuant to Regulations section 1.704-1(b)(2)(ii)(c) (relating to Partner liabilities to the Partnership) and the penultimate sentence of Regulations sections 1.704-2(g)(1) and 1.704-2(i)(5) (relating to Partnership Minimum Gain or Partner Nonrecourse Debt Minimum Gain), as of the end of the Partnership’s taxable year, after taking into account thereunder any changes during such year in Partnership Minimum Gain or Partner Nonrecourse Debt Minimum Gain.
“Adjusted Capital Account Deficit” means with respect to any Partner as of the end of any taxable year, the amount by which the balance in such Partner’s Adjusted Capital Account is less than zero.
“Administrative Expenses” means (i) all administrative and operating costs and expenses incurred by the Partnership, including, but not limited to, costs for accounting, administrative, legal, technical, management and other services rendered to the Partnership, (ii) all administrative costs and expenses of the General Partner, including any salaries or other payments to directors, officers or employees of the General Partner, and any accounting and legal expenses of the General Partner, which expenses the Partners hereby agree are expenses of the Partnership and not the General Partner, and (iii) to the extent not included in clause (ii) above, REIT Expenses.
“Affiliate” or “Affiliated” means, with respect to any Person, any Person directly or indirectly controlling or controlled by or under common control with such Person. For the purposes of this definition, “control” when used with respect to any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have meanings correlative to the foregoing.
“Agreed Value” means the fair market value of a Partner’s non-cash Capital Contribution as of the date of contribution as agreed to by such Partner and the General Partner, reduced by liabilities either assumed by the Partnership or Partner upon such contribution or distribution or to which a property is subject if and when such property is contributed or distributed.
“Agreement” means this Second Amended and Restated Agreement of Limited Partnership.
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“Articles of Incorporation” means the Articles of Incorporation of the General Partner filed with the Maryland State Department of Assessments and Taxation.
“Assignee” means a Person to whom one or more Partnership Units have been transferred in a manner permitted under this Agreement, but who has not become a Substitute Limited Partner.
“Book Value” means, with respect to any of the Partnership’s property, unless otherwise determined by the General Partner, the Partnership’s adjusted basis for federal income tax purposes, adjusted from time to time to reflect the adjustments required or permitted by Regulations sections 1.704-1(b)(2)(iv)(d)-(g), (m) and (s); provided that the initial Book Value of any asset contributed (or deemed contributed) to the Partnership shall initially be equal to its then-current gross fair market value, as determined by the General Partner in its sole discretion.
“Capital Contribution” means the total amount of cash, cash equivalents, and the Agreed Value of any other assets, contributed or agreed to be contributed, as the context requires, to the Partnership by each Partner pursuant to the terms of the Agreement. Any reference to the Capital Contribution of a Partner shall include the Capital Contribution made by a predecessor holder of the Partnership Interest of such Partner.
“Cash Amount” means an amount of cash equal to the Value of the REIT Shares Amount on the date of receipt by the General Partner of an Exchange Notice.
“Change of Control” means any transaction or series of related transactions whereby any group (within the meaning of Rule 13d-5 under the Exchange Act, or any successor provision) of Persons by way of merger, consolidation or other business combination or purchase, acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision) of more than 50% of the total voting power of the voting stock of the General Partner; provided, however, that any transaction or series of related transactions in which the Persons that beneficially owned the shares of the voting stock of the General Partner (including through any direct or indirect parent of the General Partner) immediately prior to such transaction or transactions beneficially own, directly or indirectly, at least a majority of the total voting power of all outstanding voting stock of the surviving or transferee Person shall not be considered a Change of Control.
“Class Percentage Interest” means, as to a Partner holding a class or series of Partnership Interests at any time, its interest in such class or series as determined by dividing the Partnership Units of such class or series then owned by such Partner by the total number of Partnership Units of such class or series then outstanding as specified in Exhibit A attached hereto, as such Exhibit A may be amended from time to time.
“Code” means the Internal Revenue Code of 1986. Reference to any particular provision of the Code shall include a reference to any successor provision of the Code.
“Commission” means the U.S. Securities and Exchange Commission.
“Consent of the Limited Partners” means the written consent of a Majority-in-Interest of the Limited Partners (or other specified group of Limited Partners), which consent shall be obtained prior to the taking of any action for which it is required by this Agreement and may be given or withheld by a Majority-in-Interest of the Limited
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Partners (or such specified group of Limited Partners), unless otherwise expressly provided herein, in their sole and absolute discretion.
“Correspondence Ratio” means, except as provided elsewhere in this definition, 1.0; provided, that in the event that the General Partner (i) declares (and the applicable record date has passed or will have passed before a redeeming Partner receives cash or REIT Shares in respect of the Partnership Units being redeemed) or pays a dividend on its outstanding REIT Shares of the relevant class or series in REIT Shares of the relevant class or series or makes a distribution to all holders of its outstanding REIT Shares of the relevant class or series in REIT Shares of the relevant class or series, (ii) subdivides its outstanding REIT Shares of the relevant class or series, or (iii) combines its outstanding REIT Shares of the relevant class or series into a smaller number of REIT Shares of the relevant class or series (and, in each of cases (i) through (iii), the Partnership does not make a corresponding distribution, subdivision, or combination with respect to the Partnership Units), the Correspondence Ratio shall be adjusted by multiplying the Correspondence Ratio by a fraction, the numerator of which shall be the number of REIT Shares of the relevant class or series issued and outstanding on the record date for such dividend, distribution, subdivision or combination (assuming for such purpose that such dividend, distribution, subdivision or combination has occurred as at such time), and the denominator of which shall be the actual number of REIT Shares of the relevant class or series issued and outstanding on the record date for such dividend, distribution, subdivision or combination; provided, further, that in the event of any merger, consolidation or combination of the General Partner with or into another entity (the “Successor Entity”), the Correspondence Ratio shall be adjusted by multiplying the Correspondence Ratio (immediately before such adjustment) by the number of shares of the Successor Entity into which one REIT Share of the relevant class or series is converted pursuant to such merger, consolidation or combination, determined as of the date of such merger, consolidation or combination. Any adjustment to the Correspondence Ratio shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. A separate Correspondence Ratio shall be determined for each class of Partnership Units by taking into account only the REIT Shares having the same class designation as the applicable class of Partnership Units.
“Event of Bankruptcy” as to any Person means (i) the filing of a petition for relief as to such Person as debtor or bankrupt under the Bankruptcy Code of 1978 or similar provision of law of any jurisdiction (unless such petition is contested by such Person and has been dismissed within 90 days); (ii) the insolvency or bankruptcy of such Person as finally determined by a court proceeding; (iii) the filing by such Person of a petition or application to accomplish the same or for the appointment of a receiver or a trustee for such Person or a substantial part of his assets; or (iv) the commencement of any proceedings relating to such Person as a debtor under any other reorganization, arrangement, insolvency, adjustment of debt or liquidation law of any jurisdiction, whether now in existence or hereinafter in effect, either by such Person or by another; provided, that if such proceeding is commenced by another, such Person indicates his approval of such proceeding, consents thereto or acquiesces therein, or such proceeding is contested by such Person and has not been finally dismissed within 90 days.
“Exchange Notice” means a Notice of Exercise of Exchange Right, substantially in the form of Exhibit B hereto.
“Excluded Amount” means the amount of cash held by Talk America Services, LLC (other than cash received as a distribution from the Partnership).
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“General Partner” means Uniti until such time as Uniti withdraws as such, and any Person who becomes a substitute or additional General Partner as provided herein, and any successors thereto.
“General Partnership Interest” means a Partnership Interest held by the General Partner in its capacity as a general partner of the Partnership. A General Partnership Interest may be (but is not required to be) expressed as a number of Partnership Units.
“Indemnitee” means (i) any Person made (or threatened to be made) a party to or subject to a proceeding, claim or demand by reason of its status as the General Partner or a director, officer or employee of the General Partner or the Partnership and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion.
“Joint Venture” means any joint venture or partnership arrangement in which the Partnership is a co-venturer or general partner established to acquire or hold any assets or other investments.
“Limited Partner” means the Original Limited Partner, any Person named as a Limited Partner on Exhibit A attached hereto (including the General Partner in its capacity as a Limited Partner holding Partnership Units), and any Person who becomes a Substitute or Additional Limited Partner in such Person’s capacity as a Limited Partner in the Partnership.
“Limited Partnership Interest” means the ownership interest of a Limited Partner in the Partnership at any particular time, including the right of such Limited Partner to any and all benefits to which such Limited Partner may be entitled as provided in this Agreement and in the Act, together with the obligations of such Limited Partner to comply with all the provisions of this Agreement and of such Act. A Limited Partnership Interest may be (but is not required to be) expressed as a number of Partnership Units.
“Majority-in-Interest of the Limited Partners” shall mean Limited Partner(s) (or a specified group of Limited Partners) who hold in the aggregate more than fifty percent (50%) of the Percentage Interests then allocable to and held by the Limited Partners (or such specified group of Limited Partners), as a class (excluding any Partnership Units held by the General Partner or any controlled Affiliate of the General Partner).
“Partner” means any General Partner or Limited Partner.
“Partner Nonrecourse Debt Minimum Gain” has the meaning provided in Regulations Section 1.704-2(i). A Partner’s share of Partner Nonrecourse Debt Minimum Gain shall be determined in accordance with Regulations Section 1.704-2(i)(5).
“Partnership Common Unit” means a Partnership Unit of the class entitling the holders thereof to the rights of Partnership Common Units as provided in this Agreement.
“Partnership Interest” means an ownership interest in the Partnership held by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may (but is not required to be) expressed as a number of Partnership Units.
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“Partnership Minimum Gain” has the meaning provided in Regulations Section 1.704-2(b)(2). A Partner’s share of Partnership Minimum Gain shall be determined in accordance with Regulations Section 1.704-2(g)(1).
“Partnership Percentage Interest” means the percentage common equity ownership interest in the Partnership of each Partner, which, except as set forth in the following sentence, shall be determined by dividing the number of Partnership Common Units owned by a Partner by the aggregate number of Partnership Common Units owned by all Partners. If the Partnership issues classes or series of Partnership Interest other than Partnership Common Units, including the Partnership Perpetual Convertible Preferred Units, the interest in the Partnership among the classes or series of Partnership Interests shall be determined as set forth in the Partnership Unit Designation setting forth the rights and privileges of such additional classes or series of Partnership Interest, if any, as contemplated by Section 4.02(a), and a Partner’s Partnership Percentage Interest will mean, with respect to each class or series of Partnership Interests held by such Partner, the product of such Partner’s Class Percentage Interest multiplied by the interest in the Partnership of such class or series of Partnership Interest.
“Partnership Perpetual Convertible Preferred Unit” means a Partnership Unit of the class entitling the holders thereof to the rights of Partnership Perpetual Convertible Preferred Units as provided in this Agreement and Exhibit D hereto. For all purposes of this Agreement, Exhibit D shall be treated as a Partnership Unit Designation.
“Partnership Record Date” means the record date established by the General Partner for the distribution of cash pursuant to Section 5.02, which record date shall be the same as the record date established by the General Partner for a distribution to its stockholders.
“Partnership Unit” means a fractional, undivided share of the Partnership Interests of all Partners issued hereunder, including the Partnership Common Units and the Partnership Perpetual Convertible Preferred Units. The number and class of Partnership Units held by the General Partner, directly and through the Original Limited Partner, will, with respect to each such class and as of any relevant date, equal the product of the number of shares of the General Partner of such class issued and outstanding as of such relevant date, multiplied by the inverse of the applicable class’s Correspondence Ratio as of such relevant date.
“Percentage Interest” means the Class Percentage Interest or the Partnership Percentage Interest, as the context indicates.
“Person” means any individual, partnership, corporation, joint venture, limited liability company, trust or other entity.
“Regulations” means the applicable income tax regulations, including temporary or proposed regulations issued under the Code. Reference to any particular provision of the Regulations shall include any successor provision of the Regulations.
“REIT” means an entity qualifying as a real estate investment trust under Sections 856 through 860 of the Code.
“REIT Common Share” means a REIT Share classified as common stock in the Articles of Incorporation.
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“REIT Convertible Preferred Share” means a REIT Share classified as 3.00% Series A Convertible Preferred Stock established in the Articles Supplementary of the General Partner filed on April 28, 2016.
“REIT Expenses” means (i) costs and expenses relating to the formation and continuity of existence and operation of the General Partner and, other than Talk America, LLC, any Subsidiaries of the General Partner (which Subsidiaries shall, for purposes of this definition, be included within the definition of General Partner), including taxes, fees and assessments associated therewith, any and all costs, expenses or fees payable to any director, officer, or employee of the General Partner, (ii) costs and expenses relating to (A) any registration and public offering of securities by the General Partner, the net proceeds of which were used to make a contribution to the Partnership, and (B) all statements and reports incidental thereto, including, without limitation, underwriting discounts and selling commissions applicable to any such offering of securities, and any costs and expenses associated with any claims made by any holders of such securities or any underwriters or placement agents thereof, (iii) costs and expenses associated with any repurchase of any securities by the General Partner, (iv) costs and expenses associated with the preparation and filing of any periodic or other reports and communications by the General Partner under federal, state or local laws or regulations, including filings with the Commission, (v) costs and expenses associated with compliance by the General Partner with laws, rules and regulations promulgated by any regulatory body, including the Commission and any securities exchange, (vi) costs and expenses associated with any section 401(k) plan, incentive plan, bonus plan or other plan providing for compensation for the employees of the General Partner, (vii) costs and expenses incurred by the General Partner relating to any issuance or redemption of Partnership Interests or REIT Shares, (viii) all other operating or administrative costs of the General Partner incurred in the ordinary course of its business on behalf of or in connection with the Partnership, and (ix) any payments, costs or expenses arising out of or associated with either (A) liabilities (including contingent liabilities) incurred by the General Partner or (B) contracts entered into by the General Partner (and which have not been legally assumed by or novated to the Partnership), in each case prior to July 3, 2017.
“REIT Share” means a share of capital stock (or other comparable equity interest) in the General Partner (or Successor Entity, as the case may be), including, as of the date hereof, REIT Common Shares. REIT Shares may be issued in one or more classes or series in accordance with the terms of the Articles of Incorporation (or, if the General Partner is a Successor Entity, the organizational documents of the General Partner). The term “REIT Shares” shall, as the context requires, be deemed to refer to the class or series of REIT Shares that correspond to the class or series of Partnership Interests for which the reference to REIT Shares is made. When used with reference to Partnership Common Units, the term “REIT Shares” refers to REIT Common Shares or common shares (or other comparable equity interest) of the General Partner (if the General Partner is a Successor Entity).
“REIT Shares Amount” means a number of REIT Shares (of the class corresponding to the class of Partnership Units in question) equal to the product of the number of Partnership Units of such class offered for exchange by an Exchanging Partner, multiplied by the Correspondence Ratio for such class as adjusted to and including the Specified Exchange Date; provided that in the event the General Partner issues to all holders of REIT Shares (or a class of REIT Shares) rights, options, warrants or convertible or exchangeable securities entitling the stockholders to subscribe for or purchase REIT Shares, or any other securities or property (collectively, the “Rights”), and the Rights have not expired at the Specified Exchange Date, then the REIT Shares Amount shall also include the Rights issuable to a holder of the REIT Shares (or the
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applicable class of REIT Shares) on the record date fixed for purposes of determining the holders of REIT Shares (or the applicable class of REIT Shares) entitled to Rights.
“Securities Act” means the Securities Act of 1933.
“Service” means the Internal Revenue Service.
“Specified Exchange Date” means the first Business Day of the month first occurring after the expiration of 60 calendar days from the date of receipt by the General Partner of the Exchange Notice.
“Subsidiary” means, with respect to any Person, any corporation, joint venture, partnership, limited liability company or other entity that is more than 50% owned, directly or indirectly, by such Person; provided that such Person possesses, directly or indirectly, the power to direct, or cause the direction of, the management and polices of such entity, whether through ownership of voting securities or partnerships interests, by contract or otherwise.
“Value” means, with respect to any security, the average of the daily market price of such security for the ten consecutive trading days immediately preceding the date as of which such Value is to be determined. The market price for each such trading day shall be: (i) if the security is listed or admitted to trading on any securities exchange, the last sale price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices, regular way, on such day; (ii) if the security is not listed or admitted to trading on any securities exchange, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner; or (iii) if the security is not listed or admitted to trading on any securities exchange and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten days prior to the date in question) for which prices have been so reported; provided, that if there are no bid and asked prices reported during the ten days prior to the date in question, the value of the security shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event the security includes any additional rights, then the value of such rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate.
(a)Each of the following terms is defined in the Section set forth opposite such term:
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Term | Section | ||||
2015 Budget Act | Section 10.05(a) | ||||
AAA | Section 12.10 | ||||
Additional Funds | Section 4.03 | ||||
Additional Limited Partner | Section 4.01 | ||||
Additional Securities | Section 4.02(a)(iv) | ||||
Capital Account | Section 4.04 | ||||
Certificate | Preamble | ||||
Defaulting Limited Partner | Section 5.02(b) | ||||
Demand Notice | Section 12.10(a) | ||||
Exchange Right | Section 8.05(a) | ||||
Exchanging Partner | Section 8.05(a) | ||||
GAAP | Section 10.01(b) | ||||
General Partner Loan | Section 5.02(c) | ||||
Meeting Medium | Section 11.02(k) | ||||
Net Loss | Section 5.01(g) | ||||
Net Profit | Section 5.01(g) | ||||
New Allocations | Section 5.07 | ||||
Offer | Section 7.01(c)(i) | ||||
Partnership | Preamble | ||||
Partnership Loan | Section 5.02(b) | ||||
Partnership Representative | Section 10.05(b) | ||||
Partnership Unit Designation | Section 4.02(a)(i) | ||||
Performance Units | Section 4.02(a)(ii) | ||||
Regulatory Allocations | Section 5.01(e) | ||||
Requesting Party | Section 12.10(a) | ||||
Rights | Section 1.01(a) | ||||
Substitute Limited Partner | Section 9.03 | ||||
Successor Entity | Section 1.01(a) | ||||
Survivor | Section 7.01(d) | ||||
Tax Matters Partner | Section 10.05(a) | ||||
Tendered Units | Section 8.05(a) | ||||
Transaction | Section 7.01(c) | ||||
Transfer | Section 9.02(a) | ||||
Uniti | Preamble | ||||
Section 1.02.Other Definitional and Interpretative Provisions. The words “hereof”, “herein” and “hereunder” and words of like import used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The captions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof. References to Articles, Sections, Exhibits and Schedules are to Articles, Sections, Exhibits and Schedules of this Agreement unless otherwise specified. All Exhibits and Schedules annexed hereto or referred to herein are
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hereby incorporated in and made a part of this Agreement as if set forth in full herein. Any capitalized terms used in any Exhibit or Schedule but not otherwise defined therein, shall have the meaning as defined in this Agreement. Any singular term in this Agreement shall be deemed to include the plural, and any plural term the singular. Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation”, whether or not they are in fact followed by those words or words of like import. “Writing”, “written” and comparable terms refer to printing, typing and other means of reproducing words (including electronic media) in a visible form. The word “will” shall be construed to have the same meaning and effect as the word “shall.” The word “or” when used in this Agreement is not exclusive. Except as expressly stated herein, references to any statute, rule, regulation or law shall be deemed to refer to such statute, rule, regulation or law as amended or supplemented from time to time and to any rules, regulations and interpretations promulgated thereunder. References to any contract, filing, certificate or similar document are to that contract, filing, certificate or similar document as amended, modified or supplemented from time to time in accordance with the terms hereof and thereof. References to any Person include the successors and permitted assigns of that Person. Unless otherwise specified herein, all accounting terms used herein will be interpreted and all accounting determinations hereunder will be made in accordance with GAAP. References from or through any date mean, unless otherwise specified, from and including or through and including, respectively. The parties have participated jointly in the negotiation and drafting of this Agreement and each has been represented by counsel of its choosing and, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as jointly drafted by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.
Article 2
Partnership Formation, Continuation and Identification
Partnership Formation, Continuation and Identification
Section 1.01.Formation and Continuation. The Partnership is a limited partnership heretofore formed and continued pursuant to the provisions of the Act and upon the terms and subject to the conditions set forth in this Agreement. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes.
Section 1.02.Name, Office and Registered Agent. The name of the Partnership is “UNITI GROUP LP.” The principal place of business of the Partnership shall be 10802 Executive Center Drive, Benton Building, Suite 300, Little Rock, Arkansas 72211. The General Partner may at any time change the location of such principal place of business in its sole discretion and shall give notice to the Partners of any such change. The name and address of the Partnership’s registered agent is The Corporation Trust Company, 1209 Orange Street, in the City of Wilmington, County of New Castle, 19801 (unless replaced by the General Partner in its sole discretion). The sole duty of the registered agent as such is to forward to the Partnership any notice that is served on it as registered agent.
Section 1.03.Partners.
(a)The initial general partner of the Partnership is Uniti. Its principal place of business is the same as that of the Partnership.
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(b)The limited partners are those Persons identified as Limited Partners (including the General Partner) on Exhibit A hereto, as it may be amended from time to time.
Section 1.04.Term and Dissolution.
(a)The Partnership commenced business as a limited partnership upon the date of the Certificate. The Partnership shall have perpetual duration, except that the Partnership shall be dissolved earlier upon the first to occur of any of the following events:
(i)the occurrence of an Event of Bankruptcy as to a General Partner or the dissolution, termination, removal or withdrawal of a General Partner, unless in each case the business of the Partnership is continued pursuant to Section 7.03(b); however, none of the foregoing shall be deemed to have occurred (x) on account of merger or liquidation of the General Partner into one or more of its Subsidiaries or (y) if a General Partner is a partnership, the dissolution of the General Partner as a result of the dissolution, death, withdrawal, removal or Event of Bankruptcy of a partner in such partnership if the business of such General Partner is continued by the remaining partner or partners thereof, either alone or with additional partners;
(ii)the passage of 90 days after the sale or other disposition of all or substantially all of the assets of the Partnership (provided, that the Partnership shall continue, unless sooner dissolved under the provisions of this Agreement, until such time as all consideration in respect of such disposition has been received in full); or
(iii)the election by the General Partner that the Partnership should be dissolved; or
(iv)dissolution required by applicable law.
(b)Upon dissolution of the Partnership (unless the business of the Partnership is continued pursuant to Section 7.03(b)), the General Partner (or its trustee, receiver, successor or legal representative) shall amend or cancel the Certificate and liquidate the Partnership’s assets and apply and distribute the proceeds thereof in accordance with Section 5.06. Notwithstanding the foregoing, the liquidating General Partner may either (i) defer liquidation of, or withhold from distribution for a reasonable time, any assets of the Partnership (including those necessary to satisfy the Partnership’s debts and obligations), or (ii) distribute the assets to the Partners in kind.
Section 1.05.Filing of Certificate and Perfection of Limited Partnership. The General Partner shall execute, acknowledge, record and file, at the expense of the Partnership, the Certificate and any and all amendments thereto and all requisite fictitious name statements and notices in such places and jurisdictions as may be necessary under applicable law to enable the Partnership to conduct its business.
Section 1.06.Certificates Describing Partnership Units. At the request of a Limited Partner, the General Partner may, at its option and in its sole and absolute discretion, issue a certificate summarizing the terms of such Limited Partner’s interest in the Partnership, including the number and class of Partnership Units owned as of the date of such certificate. If issued, any such certificates (a) shall be in form and substance as
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approved by the General Partner, (b) shall not be negotiable and (c) shall bear a legend substantially similar to the following:
“This certificate is not negotiable. The Partnership Units represented by this certificate are governed by, and are transferable only in accordance with, the provisions of the Second Amended and Restated Agreement of Limited Partnership of Uniti Group LP, as amended from time to time.
The Partnership Units evidenced hereby have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state, and may not be sold, transferred, or otherwise disposed of in the absence of such registration, unless the transferor delivers to the Partnership an opinion of counsel, in form and substance satisfactory to the Partnership, to the effect that the proposed sale, transfer or other disposition may be effected without registration under the Securities Act and under applicable state securities or “Blue Sky” laws.”
Article 3
Business of the Partnership
Business of the Partnership
The purpose and nature of the business to be conducted by the Partnership is (a) to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act; provided, however, that such business shall be conducted in such a manner as to permit the General Partner at all times to qualify as a REIT, unless the General Partner otherwise ceases to qualify as a REIT, (b) to enter into any partnership, Joint Venture or other similar arrangement to engage in any of the foregoing or the ownership of interests in any entity engaged in any of the foregoing, and (c) to do anything necessary, desirable or incidental to the foregoing. In connection with the foregoing, and without limiting the General Partner’s right in its sole and absolute discretion to cease qualifying as a REIT, the Partners acknowledge that the General Partner’s current status and taxation as a REIT inure to the benefit of all the Partners and not solely to the General Partner. Notwithstanding the foregoing, the Limited Partners agree that the General Partner may terminate its status as a REIT under the Code at any time to the full extent permitted under its Articles of Incorporation. The General Partner also shall be empowered to do any and all acts and things necessary or prudent to ensure that the Partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Code.
Article 4
Capital Contributions and Accounts
Capital Contributions and Accounts
Section 1.01.Capital Contributions. The General Partner and the Original Limited Partner have each made Capital Contributions to the Partnership in exchange for an agreed number and class of Partnership Units. The Capital Contributions made by each Partner and the number and type of Partnership Units held by each Partner shall be maintained in the books and records of the Partnership. At such time as new limited partners are admitted into the Partnership (each, an “Additional Limited Partner” and, collectively, “Additional Limited Partners”), each Additional Limited Partner shall
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make Capital Contributions in exchange for an agreed number and class of Partnership Units as set forth opposite their names on Exhibit A, as it may be amended from time to time (including to reflect sales, exchanges or other Transfers, redemptions, issuances or similar events affecting ownership of Partnership Units). Exhibit A shall be deemed automatically amended upon, and the General Partner may, without the approval of any other Partner, attach an amended Exhibit A to this Agreement to reflect: (a) the issuance of Partnership Units issued to Additional Limited Partners or to any existing Limited Partner pursuant to Section 4.02, (b) the purchase or redemption of any Partnership Units pursuant to Section 6.09, (c) the redemption or purchase of Partnership Units by the Partnership or the General Partner in connection with the exercise by a Limited Partner of the Exchange Right and (d) Transfers of Partnership Units permitted by Article 9 (to either Substitute Limited Partners or Assignees).
Section 1.02.Additional Capital Contributions and Issuances of Additional Partnership Interests. Except as provided in this Section 4.02 or in Section 4.03, the Partners shall have no obligation or, except with the prior written consent of the General Partner, right (including any preemptive, preferential, participation or similar right) to make any additional Capital Contributions or loans to the Partnership. The General Partner may contribute additional capital to the Partnership, from time to time, and receive additional Partnership Units in respect thereof in the manner contemplated by this Section 4.02.
(a)Issuances of Additional Partnership Interests.
(i)General. The General Partner is hereby authorized to cause the Partnership to issue additional Partnership Interests in the form of Partnership Units for any Partnership purpose, at any time or from time to time, to the Partners (including the General Partner) or to other Persons for such consideration and on such terms and conditions as shall be established by the General Partner in its sole and absolute discretion, all without the approval of any Limited Partners. Without limiting the generality of the foregoing, the General Partner is expressly authorized to cause the Partnership to issue Partnership Units (A) upon the conversion, redemption or exchange of any debt, Partnership Units or other securities issued by the Partnership, (B) for less than fair market value, so long as the General Partner concludes in good faith that such issuance is in the best interests of the General Partner and the Partnership, and/or (C) in connection with any merger of any other Person into the Partnership or any Subsidiary of the Partnership. Subject to Delaware law, any additional Partnership Interests issued thereby may be issued in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative participating, optional or other special rights, powers and duties, including rights, powers and duties senior to Limited Partnership Interests then outstanding, all as shall be determined by the General Partner in its sole and absolute discretion (and without the approval of any Limited Partner), and set forth in a written document amending this Agreement (each, a “Partnership Unit Designation”). Without limiting the generality of the foregoing, the General Partner shall have authority to specify (1) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests; (2) the right of each such class or series of Partnership Interests to share in Partnership distributions; (3) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership; (4) the voting rights, if any, of each such class or series of Partnership Interests; and (5) the conversion, redemption, or exchange rights applicable to each such class or series of Partnership Interests. Upon the
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issuance of any additional Partnership Interest, the General Partner shall amend Exhibit A as appropriate to reflect such issuance.
(ii)Issuances of Performance Units. Without limiting the generality of the foregoing, the General Partner is hereby authorized to create one or more classes or series of additional Partnership Interests, in the form of Partnership Units, for issuance at any time or from time to time to directors, officers or employees of the General Partner or any Affiliate of the foregoing (such Partnership Units, “Performance Units”), and to admit such Persons as Additional Limited Partners, for such consideration and on such terms and conditions as shall be established by the General Partner, all without approval of any Limited Partner or any other Person. The General Partner shall determine, in its sole and absolute discretion without the approval of any Limited Partner or any other Person, and set forth in a Partnership Unit Designation, the designations, preferences, conversion or other rights, voting powers or rights, restrictions, limitations as to dividends or distributions, qualifications or terms or conditions of redemption of any class or series of Performance Units (including, without limitation, the vesting schedule and the extent to which the value or number of each such class or series of Performance Units is subject to adjustment based on the financial performance of the General Partner or the Partnership or any of their respective Subsidiaries). Upon the issuance of any class or series of Performance Units, the General Partner shall amend the Partnership Agreement, including Exhibit A and Article 5, and the books and records of the Partnership as appropriate to reflect such issuance and the terms of such Performance Units.
(iii)Issuances of Additional Partnership Interests to the General Partner. Notwithstanding the preceding Section 4.02(a)(i), no additional Partnership Interests shall be issued to the General Partner or the Original Limited Partner unless:
(A)(1) the additional Partnership Interests are issued in connection with an issuance of REIT Shares or other interests in the General Partner, which shares or interests have designations, preferences and other rights such that the economic interests are substantially similar to the designations, preferences and other rights of the additional Partnership Interests issued to the General Partner by the Partnership in accordance with this Section 4.02 (without limiting the generality of the foregoing, for example, the Partnership shall issue Partnership Interests consisting of Partnership Common Units to the General Partner in connection with the General Partner’s issuance of REIT Common Shares and shall issue Partnership Interests consisting of a class of Partnership Units with such designations, preferences, relative participating, optional or other special rights, powers and duties, rights as to allocations of items of Partnership income, gain, loss, deduction and credit, rights to share in Partnership distributions, and rights upon dissolution and liquidation as correspond to the General Partner’s issuance of a new class of REIT Shares), and (2) the General Partner, on its own or with the Original Limited Partner, shall make a Capital Contribution to the Partnership in an amount equal to the aggregate net proceeds (if any) raised in connection with the issuance of such REIT Shares or other interests in the General Partner;
(B)the additional Partnership Interests are issued upon the conversion, redemption, repurchase or exchange of debt securities,
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Partnership Units or other securities issued by the Partnership in accordance with the terms thereof;
(C)the additional Partnership Interests are issued in exchange for property or other assets owned by the General Partner or Original Limited Partner with a fair market value, as determined by the General Partner, in good faith, equal to the value of the Partnership Interests (taking into account the acquisition costs incurred in connection with acquiring such property of other assets); or
(D)the additional Partnership Interests are Partnership Common Units and are issued to all Partners in proportion to their respective Class Percentage Interests with respect to the Partnership Common Units.
(iv)Issuance of Additional Securities. The General Partner shall not issue any additional REIT Shares (other than REIT Shares issued in connection with an exchange made pursuant to Section 8.05 or upon the conversion, redemption or repurchase of REIT Convertible Preferred Shares by the holders thereof in accordance with the terms thereof) or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase REIT Shares (collectively, “Additional Securities”) other than to all holders of REIT Shares, unless (1) the General Partner shall cause the Partnership to issue to the General Partner (or to the General Partner and the Original Limited Partner, as the General Partner may designate) Partnership Interests or rights, options, warrants or convertible or exchangeable securities of the Partnership having designations, preferences and other rights such that the economic interests are substantially similar to those of the Additional Securities, and (2) the General Partner (or the General Partner and the Original Limited Partner) contributes the net proceeds (if any) from the issuance of such Additional Securities and from any exercise of rights contained in such Additional Securities, directly (or through the Original Limited Partner), to the Partnership (without limiting the generality of the foregoing, for example, the Partnership shall issue Partnership Interests consisting of Partnership Common Units to the General Partner in connection with the General Partner’s issuance of REIT Common Shares and a class of Partnership Units with such designations, preferences, relative participating, optional or other special rights, powers and duties, rights as to allocations of items of Partnership income, gain, loss, deduction and credit, rights to share in Partnership distributions, and rights upon dissolution and liquidation as correspond to the General Partner’s issuance of a new class of REIT Shares). Without limiting the generality of the foregoing, the General Partner is expressly authorized to issue Additional Securities for less than fair market value, and to cause the Partnership to issue to the General Partner (or to the General Partner and the Original Limited Partner) corresponding Partnership Interests, so long as (1) the General Partner concludes in good faith that such issuance is in the best interests of the General Partner and the Partnership, including without limitation, the issuance of REIT Shares and corresponding Partnership Units pursuant to an employee share purchase plan providing for employee purchases of REIT Shares at a discount from fair market value or employee stock options that have an exercise price that is less than the fair market value of the REIT Shares, either at the time of issuance or at the time of exercise, or any other issuance of REIT Shares in connection with an equity plan, and (2) the General Partner contributes directly (or through the Original Limited Partner) all proceeds from such issuance to the Partnership. For example, in the event the General Partner issues REIT
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Shares of any class for a cash purchase price and contributes all of the net proceeds of such issuance to the Partnership, the General Partner shall be issued a number of additional Partnership Units having the same class designation as the issued REIT Shares equal to the product of (x) the number of such REIT Shares of that class issued by the General Partner, the net proceeds of which were so contributed, multiplied by (y) the inverse of the applicable class’s Correspondence Ratio in effect on the date of such contribution. Notwithstanding the foregoing, (1) the limitations of this Section 4.02(a)(iv) shall not apply to any issuance pursuant to an equity plan of Additional Securities that are convertible into, exercisable for or exchangeable into REIT Shares, but shall in each of the foregoing cases apply to the issuance of REIT Shares in connection with the conversion, exercise or exchange of such Additional Securities and (2) the limitations of this Section 4.02(a)(iv) shall not apply to an issuance of any REIT Share that is unvested at the time of issuance and in respect of which no election is validly made under Section 83(b) of the Code, but shall apply upon the vesting of any such REIT Share.
(b)Certain Deemed Contributions of Proceeds of Issuance of REIT Shares. Subject to the permitted use of cash specified in Section 8.05(d), in connection with any and all issuances of REIT Shares, the General Partner shall make directly (or through the Original Limited Partner) Capital Contributions to the Partnership of the net proceeds from such issuances; provided, that (i) if the proceeds actually received and contributed by the General Partner are less than the gross proceeds of such issuance as a result of any underwriter’s discount or other fees or expenses paid or incurred in connection with such issuance, then the General Partner (or the General Partner together with the Original Limited Partner, as applicable) shall be deemed to have made Capital Contributions to the Partnership in the aggregate amount of the gross proceeds of such issuance and the Partnership shall be deemed simultaneously to have paid such offering expenses in accordance with Section 6.05 and in connection with the required issuance of additional Partnership Units for such Capital Contributions pursuant to Section 4.02(a), and any such expenses shall be allocable solely to the class of Partnership Units issued to the General Partner (or the Original Limited Partner) at such time and (ii) if the proceeds actually received and contributed by the General Partner are less than the Value of a REIT Share as a result of the exercise price or other purchase price of a REIT Share pursuant to an employee share purchase plan, employee stock option or other equity plan being less than such Value of a REIT Share, then the General Partner (or the General Partner together with the Original Limited Partner, as applicable) shall be deemed to have made Capital Contributions to the Partnership in the aggregate amount of the Value of the REIT Shares issued.
Section 1.03.Additional Funding. If the General Partner determines that it is in the best interests of the Partnership to provide for additional Partnership funds (“Additional Funds”) for any Partnership purpose, the General Partner may (a) cause the Partnership to obtain such funds from outside borrowings upon such terms as the General Partner deems appropriate (which may be convertible, redeemable or exchangeable for Partnership Units and/or REIT Shares), or (b) elect to have the General Partner or any of its Affiliates provide such Additional Funds to the Partnership through loans or otherwise.
Section 1.04.Capital Accounts. A separate capital account (a “Capital Account”) shall be established and maintained for each Partner in accordance with Regulations Section 1.704-1(b)(2)(iv). If (a) a new or existing Partner acquires an additional Partnership Interest in exchange for more than a de minimis Capital Contribution, (b) the Partnership distributes to a Partner more than a de minimis amount
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of Partnership property as consideration for the redemption of a Partnership Interest, (c) a Partnership Perpetual Convertible Preferred Unit is converted into a Partnership Common Unit or (d) the Partnership is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), the General Partner shall adjust the Book Values of the property of the Partnership to their respective fair market values (as determined by the General Partner, in its sole and absolute discretion, and taking into account Section 7701(g) of the Code) in accordance with Regulations Section 1.704-l(b)(2)(iv)(f) or (s), as applicable. When the Partnership’s property is revalued by the General Partner, the Capital Accounts of the Partners shall be adjusted in accordance with Regulations Sections 1.704-1(b)(2)(iv)(f), (g), (h) and (s).
Section 1.05.Percentage Interests. If the number of outstanding Partnership Units increases or decreases during a taxable year, each Partner’s Class Percentage Interest and Partnership Percentage Interest shall be adjusted by the General Partner effective as of the date of each such increase or decrease. If the Partners’ Percentage Interests are adjusted pursuant to this Section 4.05, the Net Profit and Net Loss for the taxable year in which the adjustment occurs shall be divided between the part of the year ending on the effective date of such increase or decrease and the part of the year beginning on the following day and, as so divided, shall be allocated to the Partners based on their Percentage Interests before adjustment, and their adjusted Percentage Interests, respectively, either (a) as if the taxable year had ended on the date of the adjustment or (b) based on the number of days in each part. The General Partner, in its sole and absolute discretion, shall determine which method shall be used to allocate Net Profit and Net Loss for the taxable year in which an adjustment occurs, as may be required or permitted under Section 706 of the Code.
Section 1.06.No Interest on Contributions. No Partner shall be entitled to interest on its Capital Contribution.
Section 1.07.Return of Capital Contributions. No Partner shall be entitled to withdraw any part of its Capital Contribution or its Capital Account or to receive any distribution from the Partnership, except as specifically provided in this Agreement. Except as otherwise provided herein, there shall be no obligation to return to any Partner or withdrawn Partner any part of such Partner’s Capital Contribution for so long as the Partnership continues in existence.
Section 1.08.No Third-Party Beneficiary. No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it being understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assigns. None of the rights or obligations of the Partners herein set forth to make Capital Contributions or loans to the Partnership shall be deemed an asset of the Partnership for any purpose by any creditor or other third party, nor may such rights or obligations be sold, transferred or assigned by the Partnership or pledged or encumbered by the Partnership to secure any debt or other obligation of the Partnership or of any of the Partners. In addition, it is the intent of the parties hereto that no distribution to any Limited Partner shall be deemed a return of money or other property in violation of the Act. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Limited Partner is obligated to return such money or property, such obligation shall be the obligation of such Limited Partner and not of the General Partner. Without limiting the generality of the foregoing, a deficit Capital Account of a Partner shall not be deemed to be a liability of such Partner nor an asset or property of the Partnership.
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Article 5
Allocation of Net Profit and Net Loss; Distributions
Allocation of Net Profit and Net Loss; Distributions
Section 1.01.Allocation of Net Profit and Net Loss.
(a)General. Except as otherwise provided in this Agreement, Net Profit and Net Loss or, to the extent required, items of gross income, gain, deduction or loss that would otherwise be included therein, for any taxable year or other period shall be allocated among the Partners in a manner such that the Capital Account of each Partner, immediately following such allocation, is, as nearly as possible, equal (proportionately) to the difference of: (i) the distributions that would have been made to such Partner had the Partnership been dissolved, its affairs wound up and its assets sold for cash equal to their Book Values, all Partnership liabilities had been satisfied (limited in the case of each nonrecourse liability to the Book Value of the assets securing such liability) and the net assets of the Partnership, plus the Excluded Amount, were distributed to the Partners immediately thereafter, first, in accordance with the liquidation preferences of any Partnership Units that are entitled to preference on liquidation, in accordance with the rights of such class(es) or series of Partnership Units (and, within such class(es) or series, pro rata in proportion to the respective Class Percentage Interests on such date) and, thereafter, in accordance with Section 5.02, minus (ii) such Partner’s share of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain and the amount, if any and without duplication, that the Partner would be obligated to contribute to the Partnership, calculated immediately prior to such hypothetical sale of assets; provided, that for each taxable year or other period in which the General Partner holds a direct interest in Talk America Services, LLC, the amount described in the preceding clause (i) in respect of the General Partner shall be reduced by the Excluded Amount. For the avoidance of doubt, Net Loss allocated to a Partner shall not exceed the amount that could be so allocated without causing such Partner to have an Adjusted Capital Account Deficit after giving effect to such allocation. Any Net Loss in excess of such amount shall be allocated to the General Partner. An allocation of Net Profit or Net Loss to a Partner shall be treated as an allocation to such Partner of the same share of each item of income, gain, loss and deduction that is taken into account in computing such Net Profit or Net Loss, as the case may be.
(b)Partner Nonrecourse Debt Minimum Gain Chargeback. Items of loss or deduction attributable to partner nonrecourse debt (as defined in Regulations Section 1.704-2(b)(4)) shall be allocated in the manner required by Regulations Section 1.704-2(i). If there is a net decrease during a taxable year in Partner Nonrecourse Debt Minimum Gain, items of income and gain for such taxable year (and, if necessary, for subsequent taxable years) shall be allocated to the Partners in the amounts and of such character as determined according to Regulations Section 1.704-2(i)(4). This Section 5.01(b) is intended to be a minimum gain chargeback provision that complies with the requirements of Regulations Section 1.704-2(i)(4) and shall be interpreted in a manner consistent therewith.
(c)Minimum Gain Chargeback. Nonrecourse deductions (as determined according to Regulations Section 1.704-2(b)(1)) for any taxable year shall be allocated to the Partners ratably based upon the manner in which Net Profit (determined without regard to such non-recourse deductions) is allocated among the Partners for such taxable year. Except as otherwise provided in Section 5.01(b), if there is a net decrease in the Partnership Minimum Gain during any taxable year, each Partner shall be allocated items of income and gain for such taxable year (and, if necessary, for subsequent taxable years) in the amounts and of such character as determined according to Regulations Section 1.704-2(f).
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This Section 5.01(c) is intended to be a minimum gain chargeback provision that complies with the requirements of Regulations Section 1.704-2(f), and shall be interpreted in a manner consistent therewith.
(d)Qualified Income Offset. If any Partner that unexpectedly receives an adjustment, allocation or distribution described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6) has an Adjusted Capital Account Deficit as of the end of any taxable year, computed after the application of Section 5.01 but before the application of this Section 5.01(d), then items of Partnership income and gain for such taxable year shall be allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of the Partner as soon as possible (and, if two or more Partners have such deficits, in proportion to their deficits). This Section 5.01(d) is intended to be a qualified income offset provision as described in Regulations Section 1.704-l(b)(2)(ii)(d) and shall be interpreted in a manner consistent therewith.
(e)Allocation of Certain Items; Regulatory Allocations. Items of income, gain, loss or deduction described in Section 5.01(g)(v) shall be allocated in a manner consistent with the manner that the adjustments to the Capital Accounts are required to be made pursuant to Regulations Section 1.704-1(b)(2)(iv)(m). The allocations set forth in the preceding sentence and in (b)-(d) of this Section 5.01 (the “Regulatory Allocations”) are intended to comply with certain requirements of Sections 1.704-l(b) and 1.704-2 of the Regulations. The Regulatory Allocations may not be consistent with the manner in which the Partners intend to allocate Net Profit and Net Loss of the Partnership or make the Partnership’s distributions. Accordingly, notwithstanding the other provisions of this Section 5.01, but subject to the Regulatory Allocations, income, gain, deduction, and loss shall be reallocated among the Partners so as to eliminate the effect of the Regulatory Allocations and thereby cause the respective Capital Accounts of the Partners to be in the amounts (or as close thereto as possible) they would have been if Net Profit and Net Loss (and such other items of income, gain, deduction and loss) had been allocated without reference to the Regulatory Allocations. In general, the Partners anticipate that this will be accomplished by specially allocating such other items of income, gain, loss or deduction among the Partners so that the net amount of the Regulatory Allocations and such special allocations to each such Partner is zero.
(f)Allocations Between Transferor and Transferee. If a Partner transfers any part or all of its Partnership Interest, the distributive shares of the various items constituting Net Profit or Net Loss allocable among the Partners during the taxable year of the Partnership in which such transfer occurs shall be allocated between the transferor Partner and the transferee Partner either (i) as if the Partnership’s taxable year had ended on the date of the transfer, or (ii) based on the number of days of such taxable year that each was a Partner without regard to the results of Partnership activities in the respective portions of such fiscal year in which the transferor and the transferee were Partners. The General Partner, in its sole and absolute discretion, shall determine which method shall be used to allocate the distributive shares of the various items constituting Net Profit or Net Loss between the transferor and the transferee Partner, as may be required or permitted under Section 706 of the Code.
(g)Determination of Net Profit and Net Loss. The Partnership’s “Net Profit” or “Net Loss” for any taxable year means an amount equal to the Partnership’s income or loss for such taxable year, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately
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pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), but with the following adjustments:
(i)The computation of taxable income or loss shall include those items described in Section 705(a)(1)(B) of the Code or Section 705(a)(2)(B) of the Code and Regulations Section 1.704-1(b)(2)(iv)(i), without regard to the fact that such items are not includable in gross income or are not deductible for federal income tax purposes.
(ii)If the Book Value of any of the Partnership’s property is adjusted pursuant to Regulations Section 1.704-1(b)(2)(iv)(e) or (f), the amount of such adjustment shall be taken into account as gain or loss from the disposition of such property.
(iii)Items of income, gain, loss or deduction attributable to the disposition of the Partnership’s property having a Book Value that differs from its adjusted basis for tax purposes shall be computed by reference to the Book Value of such property.
(iv)Items of depreciation, amortization and other cost recovery deductions with respect to the Partnership’s property having a Book Value that differs from its adjusted basis for tax purposes shall be computed by reference to the property’s Book Value in accordance with Regulations Section 1.704-l(b)(2)(iv)(g).
(v)To the extent an adjustment to the adjusted tax basis of any of the Partnership’s assets pursuant to Sections 732(d), 734(b) or 743(b) of the Code is required, pursuant to Regulations Section 1.704-l(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis).
(vi)Notwithstanding any other provision of this Section 5.01(g), any items which are specially allocated pursuant Section 5.01(b), Section 5.01(c), Section 5.01(d) or Section 5.01(e) shall not be taken into account in computing Net Profit or Net Loss (but the amount of items of Partnership income, gain, loss or deduction available to be specially allocated pursuant to those Sections shall be determined by applying rules analogous to those set forth in this Section 5.01(g)).
(h)Tax Allocations.
(i)Allocations Generally. Items of income, gains, losses, and deductions of the Partnership will be allocated for federal, state and local income tax purposes among the Partners in accordance with the allocation of such items of income, gains, losses, and deductions among the Partners for computing their Capital Accounts pursuant to the preceding provisions of this Section 5.01; except that if any such allocation is not permitted by the Code or other applicable law, the Partnership’s items of income, gains, losses and deductions will be allocated among the Partners so as to reflect as nearly as possible the allocation set forth herein in computing their Capital Accounts.
(ii)Code Section 704(c) Allocations. Items of the Partnership’s taxable income, gain, loss and deduction with respect to any property contributed to the
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capital of the Partnership shall be allocated among the Partners in accordance with Section 704(c) of the Code so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its Book Value. In addition, if the Book Value of any asset of the Partnership is adjusted pursuant to the requirements of Regulations Section 1.704-1(b)(2)(iv)(e) or (f), then subsequent allocations of items of taxable income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Book Value in the same manner as under Section 704(c) of the Code. The General Partner shall determine all allocations pursuant to this Section 5.01(h)(ii) using a method that is reasonable, as determined in the General Partner’s sole discretion, under Regulations Section 1.704-3.
(iii)Allocation of Tax Credits, Tax Credit Recapture, Etc. Tax credits, tax credit recapture, and any items related thereto shall be allocated to the Partners according to their interests in such items as determined by the General Partner taking into account the principles of Regulations Section 1.704-1(b)(4)(ii).
(iv)Effect of Allocations. Allocations pursuant to this Section 5.01(h) are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Partner’s Capital Account, share of distributions or share of Net Profit, Net Loss, or items of income, gain, deduction and loss pursuant to any provision of this Agreement.
Section 1.02.Distributions of Cash.
(a)Subject to the other provisions of this Section 5.02 and to the terms of any Partnership Unit Designation, the General Partner shall cause the Partnership to distribute cash at such times and in such amounts as determined by the General Partner in its sole and absolute discretion, to the Partners who are Partners on the Partnership Record Date with respect to such distribution in the following manner:
(i)first, with respect to any Partnership Units that are entitled to any preference in distribution, in accordance with the rights of such class(es) or series of Partnership Units (and, within such class(es) or series, pro rata in proportion to the respective Class Percentage Interests on such Partnership Record Date); and
(ii)second, with respect to any Partnership Units that are not entitled to any preference in distribution, in accordance with the rights of such class or series of Partnership Units (and, within such class or series, pro rata in proportion to the respective Class Percentage Interests on such Partnership Record Date).
(b)Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that it determines to be necessary or appropriate to cause the Partnership to comply with any withholding requirements established under the Code or any other federal, state or local law including, without limitation, the requirements of Sections 1441, 1442, 1445, 1446 and 1471-1474 of the Code. To the extent that the Partnership is required to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to a Partner or its assignee (including by reason of Section 1446 of the Code), either (i) if the amount to be distributed to the Partner or assignee equals or exceeds the amount required to be withheld by the Partnership, the amount withheld shall be treated as a cash distribution under Section 5.02(a) to such Partner or assignee, or (ii) if the amount required to be withheld by the Partnership exceeds the amount to be distributed to the Partner or
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assignee, such excess shall be treated as a loan (a “Partnership Loan”) from the Partnership to the Partner or assignee on the day the Partnership pays over such excess to the relevant taxing authority. A Partnership Loan shall be payable on demand and may, at the discretion of the General Partner, be repaid through withholding by the Partnership with respect to subsequent distributions to the applicable Partner or assignee. In the event that a Limited Partner (a “Defaulting Limited Partner”) fails to pay any amount owed to the Partnership with respect to the Partnership Loan within 15 days after demand for payment thereof is made by the Partnership on the Limited Partner, the General Partner, in its sole and absolute discretion, may elect to make the payment to the Partnership on behalf of such Defaulting Limited Partner. In such event, on the date of payment, the General Partner shall be deemed to have extended a loan (a “General Partner Loan”) to the Defaulting Limited Partner in the amount of the payment made by the General Partner and shall succeed to all rights and remedies of the Partnership against the Defaulting Limited Partner as to that amount. Without limitation, the General Partner shall have the right to receive any distributions that otherwise would be made by the Partnership to the Defaulting Limited Partner until such time as the General Partner Loan has been paid in full, and any such distributions so received by the General Partner shall be treated as having been received by the Defaulting Limited Partner and immediately paid to the General Partner. Any amounts treated as a Partnership Loan or a General Partner Loan pursuant to this Section 5.02(b) shall bear interest at the lesser of (1) the base rate on corporate loans at large United States money center commercial banks, as published from time to time in The Wall Street Journal, or (2) the maximum lawful rate of interest on such obligation, such interest to accrue from the date the Partnership or the General Partner, as applicable, is deemed to extend the loan until such loan is repaid in full.
(c)If a Partner is entitled to receive a cash dividend as the holder of record of a REIT Share for which all or part of a Partnership Unit held by such Partner has been or will be exchanged, any corresponding distribution of cash with respect to such Partnership Unit shall be made to the General Partner.
Section 1.03.REIT Distribution Requirements. The General Partner shall use its reasonable efforts to cause the Partnership to distribute amounts sufficient to enable the General Partner to pay stockholder dividends that will allow the General Partner to (a) meet its distribution requirement for qualification as a REIT as set forth in Section 857 of the Code and (b) avoid any federal income or excise tax liability imposed by the Code.
Section 1.04.No Right to Distributions in Kind. No Partner shall be entitled to demand property other than cash in connection with any distributions by the Partnership.
Section 1.05.Limitations on Return of Capital Contributions. Notwithstanding any of the provisions of this Article 5, no Partner shall have the right to receive and the General Partner shall not have the right to make a distribution that includes a return of all or part of a Partner’s Capital Contributions, unless after giving effect to the return of a Capital Contribution, the sum of all Partnership liabilities, other than the liabilities to a Partner for the return of its Capital Contribution, does not exceed the fair market value of the Partnership’s assets.
Section 1.06.Distributions Upon Liquidation. Upon liquidation of the Partnership, after payment of, or adequate provision for, debts and obligations of the Partnership (in the General Partner’s good faith judgment), any remaining assets of the Partnership shall be distributed (i) first, in accordance with the liquidation preferences of any Partnership Units that are entitled to preference on liquidation, in accordance with the rights of such class(es) or series of Partnership Units (and, within such class(es) or series, pro rata in proportion to the respective Class Percentage Interests on such date) and (ii)
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thereafter, to all Partners with positive Capital Accounts in proportion to their respective positive Capital Account balances, determined after taking into account all allocations required to be made pursuant to Section 5.01 and all prior distributions made pursuant to this Article 5 (including distributions made pursuant to this Section 5.06). To the extent deemed advisable by the General Partner, appropriate arrangements (including the use of a liquidating trust) may be made to assure that adequate funds are available to pay any contingent debts or obligations.
Section 1.07.Substantial Economic Effect. It is the intent of the Partners that the allocations of Net Profit, Net Loss and other items of income, gain, loss and deduction under this Agreement have substantial economic effect (or be consistent with the Partners’ interests in the Partnership in the case of the allocation of losses attributable to nonrecourse debt) within the meaning of Section 704(b) of the Code as interpreted by the Regulations promulgated pursuant thereto. Article 5 and other relevant provisions of this Agreement shall be interpreted in a manner consistent with such intent. If, for any reason, the General Partner deems it necessary in order to comply with the Code, the General Partner may, and is hereby authorized and directed to, allocate income, gain, loss, deduction or credit (or items thereof) arising in any year differently than as provided in this Article 5 if, and to the extent, (i) that allocating income, gain, loss, deduction or credit (or item thereof) as provided in this Article 5 is not permitted by the Code and any Regulations promulgated thereunder, or (ii) such allocation would be inconsistent with a Partner’s interest in the Partnership taking into consideration all facts and circumstances. Any allocation made pursuant to this Section 5.07 shall be deemed to be a complete substitute for any allocation otherwise provided for in this Agreement, and no further amendment of this Agreement or approval by any Partner shall be required to effectuate such allocation. In making any such allocations (“New Allocations”) under this Section, the General Partner is authorized to act in reliance upon advice of counsel to the Partnership or the Partnership’s regular certified public accountants that, in their opinion, after examining the relevant provisions of the Code and any current or future proposed or final Regulations thereunder, the New Allocations are necessary in order to ensure that, in either the then-current year or in any preceding year, each Partner’s distributive share of income, gain, loss, deduction or credit (or items thereof) are determined and allocated in accordance with the Code and the Partner’s interests in the Partnership. New Allocations made by the General Partner in reliance upon the advice of counsel and accountants as described above shall be deemed to be made in the best interests of the Partnership and all of the Partners consistent with the duties of the General Partner hereunder and any such New Allocations shall not give rise to any claim or cause of action by any Partner against the Partnership or the General Partner.
Article 6
Rights, Obligations and Powers of the General Partner
Rights, Obligations and Powers of the General Partner
Section 1.01.Management of the Partnership.
(a)Except as otherwise expressly provided in this Agreement, the General Partner shall have full, complete and exclusive discretion to manage and control the business of the Partnership for the purposes herein stated, and shall make all decisions affecting the business and assets of the Partnership. Subject to the restrictions specifically contained in this Agreement, the powers and obligations, as the context requires, of the General Partner shall include, without limitation, the authority to take the following actions on behalf of the Partnership:
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(i)to acquire, purchase, own, operate, lease and dispose of any real property and any other property or assets including, but not limited to notes, mortgages, partnership or Joint Venture interests or securities;
(ii)to manage, control, invest, reinvest, acquire by purchase, lease or otherwise, sell, contract to purchase or sell, grant, obtain, or exercise options to purchase, options to sell or conversion rights, assign, transfer, convey, deliver, endorse, pledge, mortgage, abandon, improve, repair, maintain, lease and otherwise deal with any and all property of whatever kind and nature, and wheresoever situated;
(iii) to develop land, construct buildings and make other improvements on any and all of the properties owned, leased or otherwise acquired by the Partnership;
(iv)to authorize, issue, sell, redeem or otherwise repurchase any Partnership Interests or any securities (including secured and unsecured debt obligations of the Partnership, debt obligations of the Partnership convertible into any class or series of Partnership Interests, or options, rights, warrants or appreciation rights relating to any Partnership Interests) of the Partnership, subject to the limitations in Section 4.02;
(v)to borrow or lend money for the Partnership, issue or receive evidences of indebtedness in connection therewith, refinance, increase the amount of, modify, amend or change the terms of, or extend the time for the payment of, any such indebtedness, and secure such indebtedness by mortgage, deed of trust, pledge or other lien on the Partnership’s assets;
(vi)to pay, either directly or by reimbursement, for all operating costs and general administrative expenses of the Partnership to third parties or to the General Partner or its Affiliates as set forth in this Agreement;
(vii)to guarantee or become a co-maker of indebtedness of the General Partner or any Subsidiary thereof, refinance, increase the amount of, modify, amend or change the terms of, or extend the time for the payment of, any such guarantee or indebtedness, and secure such guarantee or indebtedness by mortgage, deed of trust, pledge or other lien on the Partnership’s assets;
(viii)to use assets of the Partnership (including, without limitation, cash on hand) for any purpose. including payment, either directly or by reimbursement, of all operating costs and general administrative expenses of the General Partner, the Original Limited Partner, the Partnership or any of their respective Subsidiaries, to third parties or to the General Partner or the Original Limited Partner;
(ix)to lease all or any portion of any of the Partnership’s assets, whether or not the terms of such leases extend beyond the termination date of the Partnership and whether or not any portion of the Partnership’s assets so leased are to be occupied by the lessee, or, in turn, subleased in whole or in part to others, for such consideration and on such terms as the General Partner may determine;
(x)to demand, sue for, receive and otherwise take steps to collect or recover all debts, rents, proceeds, interests, dividends, goods, chattels, income
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from property, damages and all other property, to which the Partnership may be entitled or which are or may become due the Partnership from any Person;
(xi)to prosecute, defend, arbitrate, or compromise any and all claims or liabilities in favor of or against the Partnership, on such terms and in such manner as the General Partner may reasonably determine, and similarly, to prosecute, settle or defend litigation with respect to the Partners, the Partnership, or the Partnership’s assets;
(xii)to file applications, communicate, and otherwise deal with any and all governmental agencies having jurisdiction over, or in any way affecting, the Partnership’s assets or any other aspect of the Partnership business;
(xiii)to make or revoke any election permitted or required of the Partnership by any taxing authority;
(xiv)to maintain such insurance coverage for public liability, fire and casualty, and any and all other insurance for the protection of the Partnership, for the conservation of Partnership assets, or for any other purpose convenient or beneficial to the Partnership, in such amounts and such types, as it shall determine from time to time;
(xv)to determine whether or not to apply any insurance proceeds for any asset to the restoration of such asset, to distribute the same, or to use such proceeds for other Partnership uses;
(xvi)to establish one or more divisions of the Partnership, to hire, dismiss and compensate employees of the Partnership or any division of the Partnership, and to retain legal counsel, accountants, consultants, real estate brokers, and such other persons, as the General Partner may deem necessary or appropriate in connection with the Partnership business and to pay such persons remuneration as the General Partner may deem reasonable and proper;
(xvii)to retain other services of any kind or nature in connection with Partnership business and to pay such remuneration as the General Partner may deem reasonable and proper for same;
(xviii)to negotiate and enter into agreements on behalf of the Partnership with respect to any of the rights, powers and authority conferred upon the General Partner;
(xix)to conduct any and all banking transactions on behalf of the Partnership, to adjust and settle checking, savings and other accounts in such institutions as the General Partner shall deem appropriate; to draw, sign, execute, accept, endorse, guaranty, deliver, receive and pay any checks, drafts, bills of exchange, acceptances, notes, obligations, undertakings and other instruments for or relating to the payment of money in, into or from any account in the Partnership’s name; to execute, procure, consent to and authorize extensions and renewals of the same; to make deposits and withdraw the same and to negotiate or discount commercial paper, acceptances, negotiable instruments, bills of exchange and dollar drafts;
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(xx)to maintain accurate accounting records and to file promptly all federal, state and local income tax returns on behalf of the Partnership;
(xxi)to distribute Partnership cash or other Partnership assets, subject to the provisions of Article 5;
(xxii)to take all reasonable measures necessary to insure compliance by the Partnership with applicable arrangements, and other contractual obligations and arrangements entered into by the Partnership from time to time;
(xxiii)to form or acquire an interest in, and contribute property to, any further limited or general partnerships, Joint Ventures, limited liability companies or other entities or relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, its Subsidiaries and any other Person in which it has an equity interest from time to time);
(xxiv)to establish Partnership reserves for working capital, capital expenditures, contingent liabilities, or any other valid purpose;
(xxv)the approval and/or implementation of any merger (including a triangular merger), consolidation or other combination between the Partnership and any other Person, whether with or without consent of any of the Limited Partners (it being agreed that the terms of Section 17-211(g) of the Act shall be applicable such that the General Partner shall have the right to effect any amendment to this Agreement or effect the adoption of a new partnership agreement in connection with any such merger, consolidation or other combination);
(xxvi)to do any and all acts and things necessary or prudent to ensure that the Partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Code;
(xxvii)to take any of the foregoing actions with respect to any Subsidiary, to the extent consistent with the governing documents of such Subsidiary; and
(xxviii)to take such other action, execute, acknowledge, swear to or deliver such other documents and instruments, and perform any and all other acts that the General Partner deems necessary or appropriate for the formation, continuation and conduct of the business and affairs of the Partnership (including, without limitation, all actions consistent with allowing the General Partner at all times to qualify as a REIT unless the General Partner voluntarily terminates its REIT status) and to possess and enjoy all of the rights and powers of a general partner as provided by the Act.
(b)Except as otherwise provided herein, to the extent the duties of the General Partner require expenditures of funds to be paid to third parties, the General Partner shall not have any obligations hereunder except to apply Partnership funds to the extent that Partnership funds are reasonably available to it for the performance of such duties, and nothing herein contained shall be deemed to require the General Partner, in its
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capacity as such, to expend its own funds for payment to third parties or to undertake any liability or obligation directly on its account for or on behalf of the Partnership.
(c)Each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned actions, agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement, the Act or any applicable law, rule or regulation, to the full extent permitted under the Act or other applicable law, rule or regulation. The execution, delivery or performance by the General Partner or the Partnership of any action or agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity.
(d)Notwithstanding the foregoing, the General Partner shall not have the authority to:
(i)take any action that would make it impossible to carry on the ordinary business of the Partnership, except as otherwise provided herein;
(ii)possess any Partnership property or assign rights in specific Partnership property for other than Partnership purposes, except as otherwise provided herein; or
(iii)admit any Person as a Partner, except as otherwise provided herein.
Nothing herein contained shall impose any obligation on any Person or firm doing business with the Partnership to inquire as to whether or not the General Partner has properly exercised its authority in executing any contract, lease, mortgage, deed or other instrument or document on behalf of the Partnership, and any such third Person shall be fully protected in relying upon such authority.
Section 1.02.Delegation of Authority. The General Partner may delegate any or all of its powers, rights and obligations hereunder, and may appoint, employ, contract or otherwise deal with any Person (including without limitation officers or other agents of the Partnership or the General Partner appointed by the General Partner) for the transaction of the business of the Partnership, which Person may perform any acts or services for the Partnership as the General Partner may approve.
Section 1.03.Indemnification of Indemnitees.
(a)To the fullest extent permitted by applicable law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, expenses (including reasonable legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative (collectively, “Actions”), that relate to the operations of the Partnership as set forth in this Agreement in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, as a result of acting on behalf of or performing services for the Partnership, unless (i) the Indemnitee did not act in good faith or committed fraud, (ii) in the case of a criminal proceeding, if the Indemnitee had reasonable cause to believe the act or omission was unlawful or (iii) for any transaction for which such Indemnitee actually received an improper personal benefit in money, property or services or otherwise, in violation or breach of any provision of this Agreement; provided that (x) no payments
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pursuant to this Agreement shall be made by the Partnership to indemnify to any Indemnitee with respect to any Action initiated or brought voluntarily by such Indemnitee (and not by way of defense) unless (I) approved or authorized by the General Partner or (II) incurred to establish or enforce such Indemnitee’s right to indemnification under this Agreement, and (y) the Partnership shall not be liable for any expenses incurred by an Indemnitee in connection with one or more Actions brought by the Partnership or involving such Indemnitee if such Indemnitee is found liable to the Partnership on any portion of any claim in any such Action. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 6.03(a). The termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, does not alone determine that the Indemnitee acted in a manner contrary to that specified in this Section 6.03(a). Any indemnification pursuant to this Section 6.03 shall be made only out of the assets of the Partnership.
(b)Subject to the proviso in the first sentence of Section 6.03(a), which shall apply to such payment or reimbursement in the same manner it applies to indemnification, the Partnership shall pay or reimburse reasonable legal expenses and other costs incurred by an Indemnitee in advance of final disposition of an Action if all of the following are satisfied: (i) the Action relates to acts or omissions with respect to the performance of duties for services on behalf of the Partnership, (ii) the Indemnitee provides the Partnership with written affirmation of the Indemnitee’s good faith belief that the Indemnitee has met the standard of conduct necessary for indemnification by the Partnership as authorized in this Section 6.03, (iii) the Action was initiated by a third party who is not a stockholder of the General Partner or a Limited Partner, or if by a stockholder of the General Partner or a Limited Partner acting in his or her capacity as such, a court of competent jurisdiction approves such advancement, and (iv) the Indemnitee provides the Partnership with a written agreement to repay the amount paid or reimbursed by the Partnership, together with the applicable legal rate of interest thereon, if it is ultimately determined that the Indemnitee did not comply with the requisite standard of conduct and is not entitled to indemnification.
(c)The indemnification provided by this Section 6.03 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity.
(d)The Partnership may purchase and maintain insurance or establish other arrangements, including without limitation trust arrangements and letters of credit on behalf of or to secure indemnification obligations owed to the Indemnitees and such other Persons as the General Partner shall determine against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership’s activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.
(e)For purposes of this Section 6.03, (i) the Partnership shall be deemed to have requested an Indemnitee to serve as a fiduciary of an employee benefit plan whenever the performance by the Indemnitee of its duties to the Partnership also imposes duties on the Indemnitee, or otherwise involves services by the Indemnitee to the plan or participants or beneficiaries of the plan; (ii) excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 6.03; and (iii) actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a
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purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership.
(f)In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.
(g)An Indemnitee shall not be denied indemnification in whole or in part under this Section 6.03 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.
(h)The provisions of this Section 6.03 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights in or be for the benefit of any other Persons.
(i)Neither the amendment nor repeal of this Section 6.03, nor the adoption or amendment of any other provision of this Agreement inconsistent with this Section 6.03, shall apply to or affect in any respect the applicability of this Section 6.03 with respect to any act or failure to act that occurred prior to such amendment, repeal or adoption.
(j)Notwithstanding the preceding, the indemnification provided under this Section 6.03 shall be limited to the extent it would provide greater indemnification than would be allowed under the Articles of Incorporation.
(k)The Partnership hereby agrees that, as between Uniti and the Partnership, the Partnership is the indemnitor of first resort (i.e., its obligations to an Indemnitee under this Agreement are primary and any obligation of Uniti or any other Person to provide advancement or indemnification for the same matters incurred by such Indemnitee are secondary).
Section 1.04.Liability of the General Partner.
(a)Generally.
(i)Notwithstanding anything to the contrary set forth in this Agreement, neither the General Partner nor any Person acting on its behalf (including its directors, officers and employees) shall be liable for damages (monetary or otherwise) to the Partnership or any Partners for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or any act or omission if the General Partner acted in good faith. The General Partner shall not be in breach of any duty that the General Partner may owe to the Limited Partners or the Partnership or any other Persons under this Agreement or of any duty stated or implied by law or equity; provided the General Partner acts in good faith.
(ii)Without limiting the foregoing, to the maximum extent that the Act and the general laws of the State of Delaware, in effect from time to time, permit limitation of the liability of general partners of a limited partnership, the General Partner and its officers, directors, employees, agents and stockholders shall not be liable to the Partnership or to any Partner for money damages except to the extent that (1) the General Partner or its officers, directors, employees, agents or stockholders actually received an improper benefit or profit in money, property or services, in which case the liability shall not exceed the amount of the benefit or
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profit in money, property or services actually received; or (2) a judgment or other final adjudication adverse to the General Partner or one or more of its officers, directors, employees, agents or stockholders is entered in a proceeding based on a finding in the proceeding that the action or failure to act of the General Partner or one or more of its officers, directors, employees, agents or stockholders was the result of common law fraud and was material to the cause of action adjudicated in the proceeding.
(iii)Neither the amendment nor repeal of this Section 6.04(a), nor the adoption or amendment of any other provision of this Agreement inconsistent with this Section 6.04(a), shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
(b)Without limiting the foregoing, the Limited Partners expressly acknowledge that (i) the General Partner is acting on behalf of the Partnership, itself and its stockholders collectively, (ii) the General Partner is under no obligation to consider the separate interests of the Limited Partners (including, without limitation, the tax consequences to Limited Partners or the tax consequences of some, but not all, of the Limited Partners) in deciding whether to cause the Partnership to take (or decline to take) any actions and (iii) the General Partner shall have no liability for any action or inaction that gives priority to the separate interests of the General Partner and its stockholders.
(c)Subject to its obligations and duties as General Partner set forth in Section 6.01, the General Partner may exercise any of the powers granted to it under this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its officers or agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by it in good faith.
(d)Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order to (i) protect the ability of the General Partner to continue to qualify as a REIT, (ii) prevent the General Partner from incurring any taxes under Section 857, Section 4981, or any other provision of the Code or (iii) for any General Partner Affiliate to continue to qualify as a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)), is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners.
(e)Any amendment, modification or repeal of this Section 6.04 or any provision shall be prospective only and shall not in any way affect the limitations on the General Partner’s liability to the Partnership and the Limited Partners under this Section 6.04 as in effect immediately prior to such amendment, modification or repeal with respect to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when claims relating to such matters may arise or be asserted.
(f)To the fullest extent permitted by applicable law, no Partner or any of its Affiliates or any of their respective officers, directors, employees, agents, members, associates or other representatives shall as a result of this Agreement or such status owe any fiduciary duty to the Partnership, any Affiliate of the Partnership, any other Partner or any Affiliate of any other Partner, and shall only have the duty to act in good faith as expressly set forth herein. The General Partner shall not be liable to the Partnership or to any other Partner for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict or modify the duties and
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liabilities of the General Partner under the Act or otherwise existing under applicable law, are agreed by the Partners to replace such other duties and liabilities of such General Partner.
(g)Whenever in this Agreement the General Partner is permitted or required to make a decision (i) in its “sole and absolute discretion,” “sole discretion” or “discretion” or under a grant of similar authority or latitude, the General Partner shall be entitled to consider only such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest or factors affecting the Partnership or the Partners or any of them, or (ii) in its “good faith” or under another expressed standard, the General Partner shall act under such express standard and shall not be subject to any other or different standards imposed by this Agreement or any other agreement contemplated herein or by relevant provisions of law or in equity or otherwise. If any question should arise with respect to the operation of the Partnership, which is not otherwise specifically provided for in this Agreement or the Act, or with respect to the interpretation of this Agreement, the General Partner is hereby authorized to make a final determination with respect to any such question and to interpret this Agreement in such a manner as it shall deem, in its sole discretion, to be fair and equitable, and its determination and interpretations so made shall be final and binding on all parties.
(h)The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties.
(i)The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters that the General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.
Section 1.05.Compensation and Reimbursement of General Partner.
(a)Except as provided in this Section 6.05 and elsewhere in this Agreement (including the provisions of Article 5 regarding distributions, payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership.
(b)The Partnership shall be responsible for and shall pay all expenses relating to the Partnership’s ownership of its assets and its operations. The General Partner and the Original Limited Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its sole and absolute discretion, for all Administrative Expenses. The Partners acknowledge that all such expenses of the General Partner and the Original Limited Partner are deemed to be for the benefit of the Partnership. Such reimbursement shall be in addition to any reimbursement made as a result of indemnification pursuant to Section 6.03 hereof. In the event that certain expenses are incurred for the benefit of the Partnership and other entities, such expenses will be allocated to the Partnership and such other entities in such a manner as the General Partner in its sole and absolute discretion deems fair and reasonable. All payments and reimbursements hereunder shall be characterized for federal income tax
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purposes as (i) expenses of the Partnership incurred on its behalf, and not as expenses of the General Partner or the Original Limited Partner, or (ii) payments in respect of liabilities assumed by the Partnership from the General Partner, as appropriate.
Section 1.06.Outside Activities. The General Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities substantially similar or identical to those of the Partnership. Neither the Partnership nor any of the Limited Partners shall have any rights by virtue of this Agreement in any such business ventures, interests or activities. None of the Limited Partners or any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby in any such business ventures, interests or activities, and the General Partner and its Affiliates shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures, interests and activities to the Partnership or any Limited Partner, even if such opportunity is of a character which, if presented to the Partnership or any Limited Partner, could be taken by such Person.
Section 1.07.Employment or Retention of Affiliates.
(a)Any Affiliate of the General Partner may be employed or retained by the Partnership and may otherwise deal with the Partnership (whether as an advisor, buyer, lessor, lessee, manager, property management agent, asset manager, furnisher of goods or services, broker, agent, lender or otherwise) and may receive from the Partnership any compensation, price, or other payment therefor which the General Partner determines to be fair and reasonable.
(b)The Partnership may lend or contribute to its Subsidiaries or other Persons in which it has an equity investment, and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person.
(c)The Partnership may transfer assets to Joint Ventures, limited liability companies, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions as the General Partner deems in good faith to be desirable.
(d)Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are on terms that the General Partner deems in good faith to be desirable.
(e)The General Partner in its sole and absolute discretion and without the approval of the Partners or any of them or any other Persons, may propose and adopt (on behalf of the Partnership) employee benefit plans funded by the Partnership for the benefit of employees of the General Partner, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the General Partner, the Partnership or any of the Partnership’s Subsidiaries.
Section 1.08.Title to Partnership Assets. Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof; provided, that title to
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any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership assets for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by such Person for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, that the General Partner shall use its best efforts to cause legal title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held.
Section 1.09.Miscellaneous. In the event the General Partner redeems or repurchases any REIT Shares, then the General Partner shall cause the Partnership to purchase from the General Partner or the Original Limited Partner a number of Partnership Units (of a class corresponding to the class of REIT Shares redeemed) determined by, and based upon, the application of the applicable Correspondence Ratio on the same terms upon which the General Partner redeemed such REIT Shares. Moreover, if the General Partner makes a cash tender offer or other offer to acquire REIT Shares, then the General Partner shall cause the Partnership to make a corresponding offer to the General Partner or the Original Limited Partner to acquire an equal number of Partnership Units (of a class corresponding to the class of REIT Shares solicited) held by the General Partner or the Original Limited Partner. In the event any REIT Shares are redeemed or repurchased by the General Partner pursuant to such offer, the Partnership shall redeem or repurchase an equivalent number of the General Partner’s or the Original Limited Partner’s Partnership Units (of a class corresponding to the class of REIT Shares redeemed) for an equivalent purchase price based on the application of the applicable Correspondence Ratio.
Section 1.10.Reliance by Third Parties. Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if it were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document, or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership, and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.
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Article 7
Changes in General Partner
Changes in General Partner
Section 1.01.Transfer of the General Partner’s Partnership Interest.
(a)Without the Consent of the Limited Partners, the General Partner shall not transfer all or any portion of its General Partnership Interest or withdraw as General Partner except as provided in or in connection with a transaction contemplated by Section 7.01(c), Section 7.01(d) or Section 7.01(e) or as otherwise expressly permitted by this Agreement. Any transaction contemplated by Sections 7.01(c), 7.01(d), 7.01(e) or as otherwise expressly contemplated by this Agreement may be consummated without the Consent of the Limited Partners or any other consent of the Partners.
(b)The General Partner agrees that Partnership Common Units held by it and constituting a 0.1% Partnership Percentage Interest are designated as Partnership Units representing a General Partnership Interest. Except as set forth in this Section 7.01(b), Partnership Units owned by the General Partner shall constitute Limited Partnership Interests, and the General Partner shall be deemed to hold such Partnership Units in its capacity as a Limited Partner.
(c)Except as otherwise provided in Section 7.01(d) or Section 7.01(e), the General Partner shall not engage in any merger, consolidation or other combination with or into another Person (other than in connection with a change in the General Partner’s state of incorporation or organizational form), which, in any such case, results in a Change of Control of the General Partner (a “Transaction”), unless:
(i)as a result of such Transaction, all holders of Partnership Common Units are granted the right to receive for each Partnership Common Unit an amount of cash, securities, or other property equal to the product of the Correspondence Ratio applicable to the Partnership Common Units and the amount of cash, securities or other property paid in the Transaction to a holder of one REIT Common Share in consideration of the transfer of one such REIT Common Share; provided, that if, in connection with the Transaction, a purchase, tender, or exchange offer (“Offer”) shall have been made to and accepted by the holders of the outstanding REIT Common Shares, each holder of Partnership Common Units shall be given the option to exchange its Partnership Common Units for the amount of cash, securities, or other property which a Limited Partner would have received had it (1) exercised its Exchange Right and (2) sold, tendered, or exchanged pursuant to the Offer the REIT Common Shares received upon exercise of the Exchange Right immediately prior to the expiration of the Offer; or
(ii)the General Partner is the surviving entity in the Transaction and either (1) the holders of REIT Common Shares do not receive cash, securities, or other property in the Transaction or (2) all holders of Partnership Common Units (other than the General Partner or any Subsidiary thereof) receive an amount of cash, securities, or other property (expressed as an amount per Partnership Common Unit) that is no less than the product of the applicable Correspondence Ratio and the amount of cash, securities, or other property (expressed as an amount per REIT Common Share) received in the Transaction by any holder of REIT Common Shares.
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(d)Notwithstanding Section 7.01(c), the General Partner may merge with or into or consolidate with another entity if immediately after such merger or consolidation (i) substantially all of the assets of the successor or surviving entity (the “Survivor”), other than Partnership Units held by the General Partner, are contributed, directly or indirectly, to the Partnership as a Capital Contribution in exchange for Partnership Units with a fair market value equal to the value of the assets so contributed as determined by the Survivor in good faith and (ii) the Survivor expressly agrees to assume all obligations of the General Partner, as appropriate, hereunder. Upon such contribution and assumption, the Survivor shall have the rights and duties as set forth in this Section 7.01(d). The Survivor shall in good faith determine a new method for the calculation of the Cash Amount, the REIT Shares Amount, the Correspondence Ratio and any applicable Settlement Amount for a Partnership Unit, in each case with respect to each class of Partnership Unit, after any such merger or consolidation so as to approximate the existing method for such calculation as closely as reasonably possible and shall amend this Agreement to implement such new method. Such method shall take into account, among other things, the kind and amount of securities, cash, and other property that was receivable upon such merger or consolidation by a holder of REIT Shares or options, warrants or other rights relating thereto, and which a holder of each applicable class of Partnership Units could have acquired had such Partnership Units been exchanged immediately prior to such merger or consolidation. Such amendment to this Agreement shall provide for adjustments to such method of calculation, which shall be as nearly equivalent as may be practicable to the adjustments provided for herein with respect to the applicable Correspondence Ratio. The Survivor also shall in good faith modify the definition of REIT Shares; amend or delete, as applicable, the definitions of REIT Common Shares and REIT Convertible Preferred Shares; add, as applicable definitions for any new classes of REIT Shares; make corresponding additions, deletions, or amendments with respect to Partnership Units; and make such amendments to Section 8.05 so as to approximate the existing rights and obligations set forth in Section 8.05 as closely as reasonably possible. The above provisions of this Section 7.01(d) shall similarly apply to successive mergers or consolidations permitted hereunder.
In respect of any transaction described in the preceding paragraph, the General Partner shall use its commercially reasonable efforts to structure such transaction to avoid the recognition of gain by the Limited Partners for U.S. federal income tax purposes by virtue of the occurrence of, or their participation in, such transaction; provided that the General Partner shall not be obligated to take any action that is inconsistent with the exercise of the fiduciary duties of the board of directors of the General Partner to the stockholders of the General Partner under applicable law.
(e)Notwithstanding the foregoing,
(i)the General Partner may transfer all or any portion of its General Partnership Interest to (1) one of its wholly-owned Subsidiaries or (2) the owner of all of the ownership interests in the General Partner, and following a transfer of all of its General Partnership Interest, may withdraw as General Partner;
(ii)the General Partner shall be permitted at any time, and from time to time, to merge or liquidate into one or more Subsidiaries of the General Partner without the Consent of the Limited Partners; and
(iii)the General Partner may engage in any transaction not required by law or by the rules of any national securities exchange on which the REIT Shares are listed to be submitted to the vote of the holders of the REIT Shares.
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Section 1.02.Admission of a Substitute or Additional General Partner. A Person shall be admitted as a substitute or additional General Partner of the Partnership only if the following terms and conditions are satisfied:
(a)the Person to be admitted as a substitute or additional General Partner shall have accepted and agreed to be bound by all the terms and provisions of this Agreement by executing a counterpart and such other documents or instruments as may be required or appropriate in order to effect the admission of such Person as a General Partner, a certificate evidencing the admission of such Person as a General Partner shall have been filed for recordation and all other actions required by Section 2.05 in connection with such admission shall have been performed;
(b)if the Person to be admitted as a substitute or additional General Partner is a corporation or a partnership, it shall have provided the Partnership with evidence satisfactory to counsel for the Partnership of such Person’s authority to become a General Partner and to be bound by the terms and provisions of this Agreement; and
(c)counsel for the Partnership shall have rendered an opinion (relying on such opinions from other counsel in the state or any other jurisdiction as may be necessary) that the admission of the Person to be admitted as a substitute or additional General Partner is in conformity with the Act, and that none of the actions taken in connection with the admission of such Person as a substitute or additional General Partner will cause (i) the Partnership to be classified other than as a partnership for federal income tax purposes, unless the Partnership is then treated as a disregarded entity (in which case such admission shall not cause the Partnership to be classified as other than a disregarded entity or a partnership for federal income tax purposes), or (ii) the loss of any Limited Partner’s limited liability.
Section 1.03.Effect of Bankruptcy, Withdrawal, Death or Dissolution of a General Partner.
(a)Upon the occurrence of an Event of Bankruptcy as to a General Partner (and its removal pursuant to Section 7.04(a)) or the dissolution, termination, removal or withdrawal of a General Partner (except that, if a General Partner is, on the date of such occurrence, a partnership, the Event of Bankruptcy or dissolution of a partner in such partnership shall be deemed not to be an Event of Bankruptcy or dissolution of such General Partner if the business of such General Partner is continued by the remaining partner or partners thereof), the Partnership shall be dissolved and terminated unless the Partnership is continued pursuant to Section 7.03(b). The merger of the General Partner with or into any entity that is admitted as a substitute or successor General Partner pursuant to Section 7.02 shall not be deemed to be the withdrawal, dissolution or removal of the General Partner.
(b)Following the occurrence of an Event of Bankruptcy as to a General Partner (and its removal pursuant to Section 7.04(a)) or the dissolution, termination, removal or withdrawal of a General Partner (except that, if a General Partner is, on the date of such occurrence, a partnership, the dissolution, death, withdrawal or Event of Bankruptcy of a partner in such partnership shall be deemed not to be an Event of Bankruptcy or dissolution of such General Partner if the business of such General Partner is continued by the remaining partner or partners thereof), the Limited Partners, within 90 days after such occurrence, may elect to continue the business of the Partnership for the balance of the term specified in Section 2.04 by selecting, subject to Section 7.02 and any other applicable provisions of this Agreement, a substitute General Partner by consent of Partners holding a majority of the Partnership Percentage Interest. If the Limited Partners
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elect to continue the business of the Partnership and admit a substitute General Partner, the relationship with the Partners and of any Person who has acquired an interest of a Partner in the Partnership shall be governed by this Agreement.
Section 1.04.Removal of a General Partner.
(a)Upon the occurrence of an Event of Bankruptcy as to, or the dissolution of, a General Partner, such General Partner shall be deemed to be removed automatically; provided, however, that if a General Partner is on the date of such occurrence a partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to or removal of a partner in such partnership shall be deemed not to be an Event of Bankruptcy or dissolution of the General Partner if the business of such General Partner is continued by the remaining partner or partners thereof. The Limited Partners may not remove the General Partner, with or without cause.
(b)If a General Partner has been removed pursuant to this Section 7.04 and the Partnership is continued pursuant to Section 7.03, such General Partner shall promptly transfer and assign its General Partnership Interest for fair market value to the substitute General Partner approved by Partners holding a majority of the Partnership Percentage Interest in accordance with Section 7.03(b) and otherwise admitted to the Partnership in accordance with Section 7.02.
(c)The General Partnership Interest of a removed General Partner, during the time after removal until the date of transfer under Section 7.04(b), shall be converted to that of a special Limited Partner; provided, however, such removed General Partner shall not have any rights to participate in the management and affairs of the Partnership, and shall not be entitled to any portion of the distributions payable to the Limited Partners. Instead, such removed General Partner shall receive and be entitled to retain only distributions that it would have been entitled to receive in its capacity as General Partner, until the transfer is effective pursuant to Section 7.04(b).
(d)All Partners shall have given and hereby do give such consents, shall take such actions and shall execute such documents as shall be legally necessary and sufficient to effect all the foregoing provisions of this Section 7.04.
Article 8
Rights and Obligations of the Limited Partners
Rights and Obligations of the Limited Partners
Section 1.01.Management of the Partnership. The Limited Partners (in their capacity as such) shall not participate in the management or control of Partnership business, nor shall they transact any business for or on behalf of the Partnership, nor shall they have the power to sign for or bind the Partnership, such powers being vested solely and exclusively in the General Partner.
Section 1.02.Power of Attorney. Each Limited Partner hereby irrevocably appoints the General Partner its true and lawful attorney-in-fact, who may act for each Limited Partner and in its name, place and stead, and for its use and benefit, sign, acknowledge, swear to, deliver, file or record, at the appropriate public offices, any and all documents, certificates, and instruments as may be deemed necessary or desirable by the General Partner to carry out fully the provisions of this Agreement and the Act in accordance with their terms, which power of attorney is coupled with an interest and shall survive the death, dissolution or legal incapacity of the Limited Partner, or the transfer by the Limited Partner of any part or all of its Partnership Interest.
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Section 1.03.Limitation on Liability of Limited Partners. No Limited Partner in its capacity as such shall be liable for any debts, liabilities, contracts or obligations of the Partnership, except as expressly provided herein or under the Act. After its Capital Contribution is fully paid, no Limited Partner shall, except as otherwise required by the Act, be required to make any further Capital Contributions or other payments or lend any funds to the Partnership.
Section 1.04.Ownership by Limited Partner of General Partner or Affiliate. No Limited Partner shall at any time, either directly or indirectly, own any stock or other interest in the General Partner or in any Affiliate thereof, if such ownership by itself or in conjunction with other stock or other interests owned by other Limited Partners would, in the opinion of counsel for the Partnership, jeopardize the classification of the Partnership as a partnership (or as a disregarded entity, as the case may be) for federal income tax purposes. The General Partner shall be entitled to make such reasonable inquiry of the Limited Partners as is required to establish compliance by the Limited Partners with the provisions of this Section 8.04.
Section 1.05.Exchange Right.
(a)Subject to Sections 8.05(b), 8.05(c), 8.05(d), and 8.05(e), and subject to the potential modification of any rights or obligations provided for herein by agreement(s) between the Partnership and any one or more Limited Partners with respect to Partnership Units held by them, each Limited Partner shall have the right (the “Exchange Right,” and a Limited Partner exercising the Exchange Right, an “Exchanging Partner”) to require the Partnership to redeem on the applicable Specified Exchange Date all or a portion of the Partnership Common Units held by such Limited Partner (such Partnership Units, the “Tendered Units”) at a redemption price equal to, and in the form of, the Cash Amount or the REIT Shares Amount, as elected by the Partnership (acting through the General Partner) in its sole and absolute discretion; provided, that such Partnership Common Units shall have been outstanding for at least one year; and provided, further, that if the Partnership elects to deliver the REIT Shares Amount in redemption of the Tendered Units pursuant to this Section 8.05(a), and the General Partner does not elect to purchase the Tendered Units pursuant to Section 8.05(b), the Partnership shall direct the General Partner to issue and deliver the corresponding REIT Shares Amount to the Exchanging Partner on or prior to the Specified Exchange Date, in which case, (i) the General Partner, acting as a distinct legal entity, shall assume directly the obligation of the Partnership to deliver the REIT Shares Amount to the Exchanging Partner, and (ii) such transaction shall be treated, for federal income tax purposes, as a transfer by the Exchanging Partner of such Tendered Units to the General Partner in exchange for REIT Shares. The Exchange Right shall be exercised pursuant to the delivery of an Exchange Notice to the Partnership (with a copy to the General Partner) by the Exchanging Partner; provided, however, that the Partnership shall not be obligated to satisfy such Exchange Right if the General Partner elects to purchase the Tendered Units subject to the Exchange Notice pursuant to Section 8.05(b); and provided further, that no Limited Partner may deliver more than two Exchange Notices during each calendar year. A Limited Partner may not exercise the Exchange Right for less than 1,000 Partnership Common Units or, if such Limited Partner holds less than 1,000 Partnership Common Units, all of the Partnership Common Units held by such Partner. The Exchanging Partner shall have no right, with respect to any Tendered Units so exchanged, to receive any distribution paid with respect to such Tendered Units if the record date for such distribution is on or after the Specified Exchange Date. In the event that the Partnership (acting through the General Partner) determines to pay the Exchanging Partner the REIT Shares Amount, and the REIT Shares Amount is not a whole number of shares, the Exchanging Partner shall be paid that number of REIT
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Shares which equals the nearest whole number less than such amount. In case of any reclassification of the REIT Shares (including, but not limited to, any reclassification upon a consolidation or merger in which the General Partner is the continuing entity) into securities other than REIT Shares, for purposes of this Section 8.05(a), the General Partner (or its successor) may thereafter exercise its right to purchase Tendered Units for the kind and amount of shares of such securities receivable upon such reclassification by a holder of the number of REIT Shares for which such Tendered Units could be purchased pursuant to this Section 8.05(a) immediately prior to such reclassification.
(b)Notwithstanding the provisions of Section 8.05(a), a Limited Partner that exercises the Exchange Right shall be deemed to have also offered to sell the Tendered Units to the General Partner, and the General Partner may, in its sole and absolute discretion, elect to purchase directly and acquire such Tendered Units by paying to the Exchanging Partner either the Cash Amount or the REIT Shares Amount, as elected by the General Partner (in its sole and absolute discretion), on the Specified Exchange Date, whereupon the General Partner shall acquire the Tendered Units and shall be treated for all purposes of this Agreement as the owner of such Tendered Units. If the General Partner shall elect to exercise its right to purchase Tendered Units under this Section 8.05(b) with respect to an Exchange Notice, it shall so notify the Exchanging Partner within five business days after the receipt by the General Partner of such Exchange Notice. Unless the General Partner (in its sole and absolute discretion) shall exercise its right to purchase Tendered Units from the Exchanging Partner pursuant to this Section 8.05(b) or the Partnership shall elect to deliver the REIT Shares Amount in satisfaction of the Partnership’s obligations under Section 8.05(a), the General Partner shall have no obligation to the Exchanging Partner or the Partnership with respect to the Exchanging Partner’s exercise of an Exchange Right. In the event the General Partner shall exercise its right to purchase Tendered Units with respect to the exercise of an Exchange Right in the manner described in the first sentence of this Section 8.05(b), the Partnership shall have no obligation to pay any amount to the Exchanging Partner with respect to such Exchanging Partner’s exercise of such Exchange Right, and each of the Exchanging Partner and the General Partner shall treat the transaction between the General Partner and the Exchanging Partner for federal income tax purposes as a sale of the Exchanging Partner’s Tendered Units to the General Partner. Each Exchanging Partner agrees to execute such documents as the General Partner may reasonably require in connection with the issuance of REIT Shares to such Exchanging Partner upon exercise of its Exchange Right. In the event that the General Partner determines to pay the Exchanging Partner the REIT Shares Amount, and the REIT Shares Amount is not a whole number of shares, the Exchanging Partner shall be paid that number of REIT Shares which equals the nearest whole number less than such amount. In case of any reclassification of the REIT Shares (including, but not limited to, any reclassification upon a consolidation or merger in which the General Partner is the continuing entity) into securities other than REIT Shares, for purposes of this Section 8.05(b), the Partnership (or its successor) may thereafter exercise its right to redeem Tendered Units for the kind and amount of shares of such securities receivable upon such reclassification by a holder of the number of REIT Shares for which such Tendered Units could be purchased pursuant to this Section 8.05(b) immediately prior to such reclassification.
(c)Notwithstanding the provisions of Sections 8.05(a) and 8.05(b), a Limited Partner shall not be entitled to exercise the Exchange Right if the delivery of REIT Shares to such Partner on the Specified Exchange Date pursuant to Section 8.05(b) (regardless of whether or not the General Partner would in fact exercise its rights under Section 8.05) would (i) result in such Partner or any other person owning, directly or indirectly, REIT Shares in excess of the ownership limitations described in the Articles of Incorporation and calculated in accordance therewith, (ii) result in REIT Shares being owned by fewer
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than 100 persons (determined without reference to any rules of attribution), except as provided in the Articles of Incorporation, (iii) result in the General Partner being “closely held” within the meaning of Section 856(h) of the Code, (iv) cause the General Partner to own, directly or constructively, 10% or more of the ownership interests in a tenant of the General Partner’s or the Partnership’s real property within the meaning of Section 856(d)(2)(B) of the Code (except to the extent the General Partner determines that such ownership would be permitted pursuant to Section 856(d)(8)), (v) cause the acquisition of REIT Shares by such Partner to be “integrated” with any other distribution of REIT Shares for purposes of complying with the registration provisions of the Securities Act or (vi) would otherwise be prohibited under applicable federal or state securities laws. The General Partner, in its sole and absolute discretion, may waive any of the restrictions on exchange set forth in this Section 8.05(c).
(d)Any Cash Amount to be paid to an Exchanging Partner pursuant to this Section 8.05 shall be paid on the Specified Exchange Date; provided, however, that the General Partner may elect to cause the Specified Exchange Date to be delayed for up to 180 days to the extent required for the General Partner to cause additional REIT Shares to be issued to provide financing to be used to make such payment of the Cash Amount. Notwithstanding the foregoing, the General Partner agrees to use its best efforts to cause the closing of the acquisition of Tendered Units hereunder to occur on the Specified Exchange Date or as soon thereafter as is reasonably possible.
(e)Notwithstanding any other provision of this Agreement, the General Partner shall place appropriate restrictions on the ability of the Limited Partners to exercise their Exchange Rights as and if deemed necessary to ensure that the Partnership does not constitute a “publicly traded partnership” under Section 7704 of the Code. If and when the General Partner determines that imposing such restrictions is necessary, the General Partner shall give prompt written notice thereof to each of the Limited Partners, which notice shall be accompanied by a copy of an opinion of counsel to the Partnership which states that, in the opinion of such counsel, restrictions are reasonably necessary in order to avoid the Partnership being treated as a “publicly traded partnership” under Section 7704 of the Code.
(f)Each Limited Partner covenants and agrees with the General Partner that all Tendered Units shall be delivered to the Partnership or the General Partner, as the case may be, free and clear of all liens; and, notwithstanding anything contained herein to the contrary, neither the General Partner nor the Partnership shall be under any obligation to acquire Tendered Units that are or may be subject to any liens. Each Limited Partner further agrees that, if any state or local property transfer tax is payable as a result of the transfer of its Tendered Units to the Partnership or the General Partner, such Limited Partner shall assume and pay such transfer tax.
(g)The General Partner may, at its election and from time to time, (i) designate one or more of its controlled Affiliates to purchase all or any portion of the Tendered Units to be purchased by the General Partner pursuant to this Section 8.05 and (ii) thereafter revoke any such designation. From and after any such designation (unless and until such designation shall be revoked by the General Partner), a Limited Partner that exercises the Exchange Right shall be deemed to have also offered to sell the Tendered Units to each such designee and any such designee shall be entitled to elect to purchase directly and acquire such Tendered Units pursuant to Section 8.05(b) applied mutatis mutandis. Furthermore, notwithstanding the fact that the General Partner may have previously notified an Exchanging Partner that the General Partner will acquire the Tendered Units, any such designee may elect to purchase directly and acquire such Tendered Units pursuant to Section 8.05(b) applied mutatis mutandis. Without limiting
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the foregoing, Talk America Services, LLC is hereby designated pursuant to this Section 8.05(g) and shall continue as such unless and until the General Partner revokes such designation.
Section 1.06.Duties and Conflicts. The General Partner recognizes that the Limited Partners and their Affiliates have or may have other business interests, activities and investments, some of which may be in conflict or competition with the business of the Partnership, and that such Persons are entitled to carry on such other business interests, activities and investments. The Limited Partners and their Affiliates may engage in or possess an interest in any other business or venture of any kind, independently or with others, on their own behalf or on behalf of other entities with which they are affiliated or associated, and such Persons may engage in any activities, whether or not competitive with the Partnership, without any obligation to offer any interest in such activities to the Partnership or to any Partner. Neither the Partnership nor any Partner shall have any right, by virtue of this Agreement, in or to such activities, or the income or profits derived therefrom, and the pursuit of such activities, even if competitive with the business of the Partnership, and such activities shall not be deemed wrongful or improper.
Section 1.07.Right of Offset. The General Partner shall have the right to offset any amounts owed to the Partnership or the General Partner by any Limited Partner pursuant to (i) any written agreement between such Limited Partner and the Partnership, the General Partner or an Affiliate of either of them pursuant to which such Limited Partner acquired Partnership Units or (ii) the provisions of Section 5.02(b) of this Agreement, against any amounts owed to such Limited Partner by the Partnership or the General Partner hereunder, including distributions and the right to cancel or acquire, as applicable, the Partnership Common Units held by such Limited Partner, based on the Cash Amount that would be payable therefor, assuming a redemption as of the date of cancellation or acquisition, as applicable. In exercising the foregoing offset rights, the General Partner shall be required to give a Limited Partner, in the case of an offset against a distribution, five (5) days prior written notice (provided, however, that if a distribution is to be made at any time during such five day period the General Partner may retain the distribution payable to any Limited Partner to whom such a written notice has been given to the extent of the amount owed by such Limited Partner pending the passage of such period and upon the passage of such period without payment of all amounts owed by the applicable Limited Partner, the General Partner shall be entitled to the right of offset described above, it being understood that if the Limited Partner pays in full the amount owed the General Partner shall promptly release the retained distribution to such Limited Partner) and, in the case of an offset against Partnership Units (through cancellation or acquisition), ten (10) days’ prior written notice, in each case of the amount owed (determined as of a date reasonably close to the date of such notice) and the proposed offset and the Limited Partner has not paid the amount owed within such period.
Section 1.08.Notice of Mergers. The General Partner shall not effect a merger (including a triangular merger) of the General Partner or the Partnership without notifying the Limited Partners of its intention to effect such merger not later than the time, if any, at which the General Partner is required to provide notice of such transaction to its shareholders. This provision for such notice shall not be deemed to require a Consent of the Limited Partners to a transaction that does not otherwise require such consent under this Agreement. Each Limited Partner agrees, as a condition to the receipt of the notice pursuant hereto, to keep confidential the information set forth therein until such time as the General Partner has made public disclosure thereof and to use such information during such period of confidentiality solely for purposes of determining whether or not to exercise the Exchange Right.
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Section 1.09.Limited Partner Representations and Warranties. Each Limited Partner, severally, and not jointly and severally, represents and warrants to the Partnership and the General Partner as follows:
(a)Organization; Authority. The Limited Partner (i) in the case of a Person who is a natural person, has full power and authority to execute, deliver and perform this Agreement or (ii) in the case of a Person which is a corporation, limited liability company, partnership or trust, is a corporation, limited liability company, partnership, corporation or trust, as the case may be, duly formed, validly existing and in good standing (to the extent applicable) under the laws of its jurisdiction of formation with the requisite authority to execute, deliver and perform this Agreement.
(b)Due Authorization; Binding Agreement. The execution, delivery and performance of this Agreement by the Limited Partner has been duly and validly authorized by all necessary action of the Limited Partner in the case of a Limited Partner which is an in the case of a Person which is a corporation, limited liability company, partnership or trust, is a corporation, limited liability company, partnership, corporation or trust, as the case may be. This Agreement has been duly executed and delivered by the Limited Partner, or an authorized representative of the Limited Partner, and constitutes a legal, valid and binding obligation of the Limited Partner, enforceable against the Limited Partner in accordance with the terms hereof.
(c)Consents and Approvals. No consent, waiver, approval or authorization of, or filing, registration or qualification with, or notice to, any governmental unit or any other Person is required to be made, obtained or given by the Limited Partner in connection with the execution, delivery and performance of this Agreement.
(d)No Violation. None of the execution, delivery or performance of this Agreement by the Limited Partner does or will, with or without the giving of notice, lapse of time or both, (i) violate, conflict with or constitute a default under any term or condition of (A) the organizational documents of the Limited Partner or other agreement to which the Limited Partner is a party or by which it is bound or (B) any judgment, decree, order, statute, injunction, rule or regulation of a governmental unit applicable to the Limited Partner or by which it or its assets or properties are bound or (ii) result in the creation of any lien or other encumbrance upon the assets or properties of the Limited Partner.
Article 9
Transfers of Limited Partnership Interests
Transfers of Limited Partnership Interests
Section 1.01.Purchase for Investment.
(a)Each Limited Partner hereby represents and warrants to the General Partner and to the Partnership that the acquisition of its Partnership Interest is made as a principal for its account for investment purposes only and not with a view to the resale or distribution of such Partnership Interest.
(b)Each Limited Partner agrees that it will not sell, assign or otherwise Transfer its Partnership Interest or any fraction thereof, whether voluntarily or by
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operation of law or at judicial sale or otherwise, to any Person who does not make the representations and warranties to the General Partner set forth in Section 9.01(a) above.
Section 1.02.Restrictions on Transfer of Limited Partnership Interests.
(a)Subject to the provisions of Sections 9.02(b), 9.02(c), and 9.02(d), no Limited Partner may offer, sell, gift, donate, assign, hypothecate, pledge, encumber, mortgage, exchange or otherwise transfer or dispose of all or any portion of its Limited Partnership Interest, or any of such Limited Partner’s economic rights as a Limited Partner, whether voluntarily or by operation of law or at judicial sale or otherwise (collectively, a “Transfer”), without the consent of the General Partner, which consent may be granted or withheld in its sole and absolute discretion; provided that, the term Transfer when used in this Article 9 does not include (i) any redemption or repurchase of Partnership Units by the Partnership from a Partner (including the Original Limited Partner) or (ii) any exchange of Partnership Common Units pursuant to Section 8.05 hereof. Any such purported Transfer (including an exchange pursuant to Section 8.05 hereof prohibited by Section 9.02(e)) undertaken without such consent shall be considered to be null and void ab initio and shall not be given effect. The General Partner may require, as a condition of any Transfer to which it consents, that the transferor assume all costs incurred by the Partnership in connection therewith.
(b)No Limited Partner may withdraw from the Partnership other than (i) as a result of a permitted Transfer (i.e., a Transfer to which the General Partner consents as contemplated by Section 9.02(a) or a Transfer made pursuant to Section 9.02(c) or Section 9.04) of all of its Partnership Units pursuant to this Article 9; or (ii) pursuant to a redemption or exchange of all of its Partnership Units pursuant to Section 8.05. Upon the permitted Transfer or redemption of all of a Limited Partner’s Partnership Units, such Limited Partner shall cease to be a Limited Partner.
(c)Subject to Sections 9.02(d), 9.02(e), 9.02(f), 9.02(g) and 9.02(h), a Limited Partner may Transfer, without the consent of the General Partner, all or a portion of its Limited Partnership Interest to (i) a parent or parent’s spouse, natural or adopted descendants, a spouse of any such descendant, a brother or sister, or a trust created by such Limited Partner for the benefit of such Limited Partner and/or any such person(s), for which trust such Limited Partner or any such person(s) is a trustee, (ii) a corporation, limited liability company, partnership or other entity controlled by the Limited Partner or a Person or Persons named in (i) above, or (iii) in the case of the Original Limited Partner, its beneficial owners, provided, that, in the case of (i) or (ii), if such transferee ceases to be either, in the case of (i), a parent or parent’s spouse, natural or adopted descendants, a spouse of any such descendant, a brother or sister, or a trust created by such Limited Partner for the benefit of such Limited Partner and/or any such Person(s), for which trust such Limited Partner or any such Person(s) is a trustee or, in the case of (ii), a corporation, limited liability company, partnership or other entity controlled by the Limited Partner a Person or Persons named in (i) above, then immediately prior to ceasing to have the above described relationship with the transferring Limited Partner Transfer that provided grounds to Transfer such Limited Partnership Interests without the consent of the General Partner, such transferee shall Transfer all Limited Partnership Interests held by such Person to such transferring Limited Partner. Any Limited Partner undertaking a Transfer pursuant to this Section 9.02(c) shall first give the General Partner prior notice of such Transfer, which notice shall include the full name and business address of the transferee.
(d)No Limited Partner may effect a Transfer of its Limited Partnership Interest, in whole or in part, (i) to any Person that is not an “accredited investor” as
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defined in Rule 501 promulgated under the Securities Act or (ii) if, in the opinion of legal counsel for the Partnership, such proposed Transfer would require the registration of the Limited Partnership Interest under the Securities Act, or would otherwise violate any applicable federal or state securities or blue sky law (including investment suitability standards). At the request of the Partnership, the transferor shall deliver or cause to be delivered to the General Partner an opinion of counsel reasonably satisfactory to it to the effect that the proposed Transfer may be effected without registration under the Securities Act and will not otherwise violate the any applicable federal or state securities or blue sky law (including investment suitability standards). Any transferring Partner must Transfer not less than the lesser of (i) 1,000 Partnership Units or (ii) all of the remaining Partnership Units owned by such Transferring Partner, unless, in each case, otherwise agreed to by the General Partner in its sole and absolute discretion.
(e)No Transfer of Partnership Units by a Limited Partner (including an exchange pursuant to Section 8.05 hereof) may be made to any Person if (i) in the determination of the General Partner, after consulting with legal counsel for the Partnership, it could result in the Partnership being treated as an association taxable as a corporation for federal income tax purposes or would result in a termination of the Partnership for federal or state income tax purposes (except as a result of the exchange for REIT Shares of all Partnership Units held by all Limited Partners other than the General Partner or any Subsidiary of either the General Partner or pursuant to a transaction not prohibited under Section 7.01 hereof), (ii) in the determination of the General Partner, after consulting with legal counsel for the Partnership, it would adversely affect the ability of the General Partner to continue to qualify as a REIT or would subject the General Partner to any additional taxes under Section 857 or Section 4981 of the Code, (iii) such Transfer would cause the Partnership to become, with respect to any employee benefit plan subject to Title I of ERISA, a “party-in-interest” (as defined in Section 3(14) of ERISA) or a “disqualified person” (as defined in Section 4975(e) of the Code), (iv) such Transfer would, in the opinion of legal counsel for the Partnership, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.3-101, (v) such transfer would subject the Partnership to regulation under the Investment Company Act of 1940, the Investment Advisors Act of 1940, or the fiduciary responsibility provisions of ERISA, or (vi) such transfer is effectuated through an “established securities market” or a “secondary market (or the substantial equivalent thereof)” within the meaning of Section 7704 of the Code or would otherwise cause the Partnership to be treated as a “publicly traded partnership” within the meaning of Section 7704(b) of the Code and the regulations promulgated thereunder.
(f)No Transfer of Partnership Units by a Limited Partner (including an exchange pursuant to Section 8.05 hereof) may be made to a lender to the Partnership or any Person who is related (within the meaning of Regulations Section 1.752-4(b)) to any lender to the Partnership whose loan constitutes a nonrecourse liability (within the meaning of Regulations Section 1.752-1(a)(2)), without the consent of the General Partner, which may be withheld in its sole and absolute discretion; provided, that as a condition to such consent the lender will be required to enter into an arrangement with the Partnership and the General Partner to exchange or redeem for the Cash Amount any Partnership Units in which a security interest is held simultaneously with the time at which such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Section 752 of the Code.
(g)It is a condition to any Transfer otherwise permitted by this Article 9 that the transferee assumes by operation of law or express agreement all of the obligations of the transferor Partner under this Agreement with respect to such Transferred Partnership
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Interest, and no such Transfer shall relieve the transferor Partner of its obligations under this Agreement without the approval of the General Partner, in its sole and absolute discretion. Notwithstanding the foregoing, any transferee of any Transferred Partnership Interest shall be subject to any and all restrictions on ownership or transfer of stock of the General Partner contained in the Certificate that may limit or restrict such transferee’s ability to exercise its redemption rights, including, without limitation, the ownership limits described in the Articles of Incorporation and calculated in accordance therewith. Unless admitted as a Substitute Limited Partner, no transferee, whether by a voluntary Transfer, by operation of law or otherwise, shall have any rights hereunder, other than the rights of an Assignee as provided in Section 9.04 hereof.
(h)Any Transfer in contravention of any of the provisions of this Article 9 shall be void ab initio and ineffectual and shall not be binding upon, or recognized by, the Partnership.
(i)Prior to the consummation of any Transfer under this Article 9, the transferor and/or the transferee shall deliver to the General Partner such opinions, certificates and other documents as the General Partner shall request in connection with such Transfer.
Section 1.03.Admission of Substitute Limited Partner.
(a)Subject to the other provisions of this Article 9, an assignee of a Limited Partnership Interest (which shall be understood to include any purchaser, transferee, donee or other recipient of any disposition of such Limited Partnership Interest) shall be deemed admitted as a Limited Partner (each, a “Substitute Limited Partner”) only with the consent of the General Partner, in its sole and absolute discretion, and upon the satisfactory completion of the following:
(i)the assignee shall have accepted and agreed to be bound by the terms and provisions of this Agreement by executing a counterpart or an amendment thereof, including a revised Exhibit A, and such other documents or instruments as the General Partner may require in order to effect the admission of such Person as a Limited Partner;
(ii)to the extent required, an amended Certificate evidencing the admission of such Person as a Limited Partner shall have been signed, acknowledged and filed for record in accordance with the Act;
(iii)the assignee shall have delivered a letter containing the representation set forth in Section 8.09 and Section 9.01(a) and the agreement set forth in Section 9.01(b);
(iv)if the assignee is a corporation, partnership or trust, the assignee shall have provided the General Partner with evidence satisfactory to counsel for the Partnership of the assignee’s authority to become a Limited Partner under the terms and provisions of this Agreement;
(v)the assignee shall have executed a power of attorney containing the terms and provisions set forth in Section 8.02 or shall have specifically agreed to be bound by the provisions of Section 8.02;
(vi)the assignee shall have paid all legal fees and other expenses of the Partnership and the General Partner and filing and publication costs (including
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reasonably attorney’s fees and expenses) in connection with its substitution as a Limited Partner; and
(vii)the assignee shall have obtained the prior written consent of the General Partner to its admission as a Substitute Limited Partner, which consent may be given or denied in the exercise of the General Partner’s sole and absolute discretion.
(b)For the purpose of allocating Net Profit and Net Loss and distributing cash from the Partnership, a Substitute Limited Partner shall be treated as having become, and appearing in the records of the Partnership as, a Partner upon the filing of the Certificate described in Section 9.03(a)(ii) or, if no such filing is required, the later of the date specified in the transfer documents or the date on which the General Partner has received all necessary instruments of transfer and substitution.
(c)The General Partner shall cooperate with the Person seeking to become a Substitute Limited Partner by preparing the documentation required by this Section 9.03 and making all official filings and publications. The Partnership shall take all such action as promptly as practicable after the satisfaction of the conditions in this Article 9 to the admission of such Person as a Limited Partner of the Partnership.
Section 1.04.Rights of Assignees of Limited Partnership Interests. If the General Partner, in its sole and absolute discretion, does not consent to the admission of any transferee of a transfer permitted by Section 9.02(c) as a Substitute Limited Partner, as described in Section 9.03 hereof, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be entitled to all the rights of an assignee of a limited partnership interest expressly provided under the Act, including the right to receive distributions from the Partnership attributable to the Partnership Units assigned to such transferee and the status thereof shall be noted on Exhibit A, but an Assignee shall not be deemed to be a holder of Partnership Units for any other purpose under this Agreement, and shall not be entitled to effect a consent or vote with respect to such Partnership Units on any matter presented to the Limited Partners for approval (such right to consent or vote, to the extent provided in this Agreement or under the Act, being deemed to have been voted on such matter in the same proportion as all other Partnership Interests held by Limited Partners are voted)); provided, however, that such Assignee (i) shall be treated as a partner in the Partnership for U.S. federal income tax purposes and shall be allocated Net Profit, Net Loss and other items of income, gain, loss, deduction and credit of the Partnership attributable to such Partnership Units, (ii) shall be subject to the provisions of this Agreement relating to the withholding and payment of taxes attributable to allocations or distributions made to such Assignee, including Sections 5.02(b) and 10.05 and (iii) shall be subject to the other obligations applicable to Limited Partners set forth in this Agreement, including Section 9.02(g). In the event that any such transferee desires to make a further Transfer of any such Partnership Units, such Transfer shall be subject to all the provisions of this Article 9 to the same extent and in the same manner as any Limited Partner desiring to make a Transfer of Partnership Units.
Section 1.05.Termination of Status as Limited Partner. Any Limited Partner who shall Transfer all of its Partnership Interest in a Transfer permitted pursuant to this Article 9 shall cease to be a Limited Partner upon the admission of all Assignees of such Partnership Interest as Substitute Limited Partners. Similarly, any Limited Partner who shall Transfer all of its Partnership Units pursuant to an exchange of all of its Partnership Units, or the acquisition thereof by the General Partner, under Section 8.05 shall cease to be a Limited Partner. Upon any Limited Partner ceasing to be a Limited
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Partner, the General Partner shall amend the Partnership Agreement, including Exhibit A, and the books and records of the Partnership as appropriate to reflect such occurrence.
Section 1.06.Effect of Bankruptcy, Death, Incompetence or Termination of a Limited Partner. The occurrence of an Event of Bankruptcy as to a Limited Partner, the death of a Limited Partner, or a final adjudication that a Limited Partner is incompetent (which term shall include, but not be limited to, insanity) shall not cause the termination or dissolution of the Partnership, and the business of the Partnership shall continue if an order for relief in a bankruptcy proceeding is entered against a Limited Partner, the trustee or receiver of his estate or, if he dies, his executor, administrator or trustee, or, if he is finally adjudicated incompetent, his committee, guardian or conservator, and any such Person shall have the rights of such Limited Partner for the purpose of settling or managing his estate property and such power as the bankrupt, deceased or incompetent Limited Partner possessed to assign all or any part of his Limited Partnership Interest and to join with the assignee in satisfying conditions precedent to the admission of the assignee as a Substitute Limited Partner.
Section 1.07.Joint Ownership of Interests. A Limited Partnership Interest may be acquired by two individuals as joint tenants with right of survivorship, provided, that such individuals either are married or are related and share the same personal residence. The written consent or vote of both owners of any such jointly-held Limited Partnership Interest shall be required to constitute the action of the owners of such Limited Partnership Interest; provided, however, that the written consent of only one joint owner will be required if the Partnership has been provided with evidence satisfactory to the counsel for the Partnership that the actions of a single joint owner can bind both owners under the applicable laws of the state of residence of such joint owners. Upon the death of one owner of a Limited Partnership Interest held in a joint tenancy with a right of survivorship, the Limited Partnership Interest shall become owned solely by the survivor as a Limited Partner and not as an assignee. The Partnership need not recognize the death of one of the owners of a jointly held Limited Partnership Interest until it shall have received notice of such death. Upon notice to the General Partner from either owner, the General Partner shall cause the Limited Partnership Interest to be divided into two equal Limited Partnership Interests, which shall thereafter be owned separately by each of the former joint owners.
Article 10
Books and Records; Accounting; Tax Matters
Books and Records; Accounting; Tax Matters
Section 1.01.Books and Records. (a) At all times during the continuance of the Partnership, the Partners shall keep or cause to be kept at the Partnership’s specified office true and complete books of account maintained in accordance with generally accepted accounting principles, including (i) a current list of the full name and business address of each Partner and Assignee; (ii) a copy of the Certificate and all certificates of amendment thereto; (iii) copies of the Partnership’s federal, state and local income tax returns and reports (if any); (iv) copies of the Agreement and any financial statements of the Partnership for the three most recent years; and (v) all documents and information required under the Act.
(a)The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with U.S. generally accepted accounting principles (“GAAP”), or on such other basis as the General Partner determines to be necessary or appropriate. To the extent permitted by sound accounting
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practices and principles, the Partnership and the General Partner may operate with integrated or consolidated accounting records, operations and principles.
Section 1.02.Custody of Partnership Funds; Bank Accounts.
(a)All funds of the Partnership not otherwise invested shall be deposited in one or more accounts maintained in such banking or brokerage institutions as the General Partner shall determine, and withdrawals shall be made only on such signature or signatures as the General Partner may, from time to time, determine.
(b)All deposits and other funds not needed in the operation of the business of the Partnership may be invested by the General Partner in investment grade instruments (or investment companies whose portfolio consists primarily thereof), government obligations, certificates of deposit, bankers’ acceptances and municipal notes and bonds. The funds of the Partnership shall not be commingled with the funds of any other Person except for such commingling as may necessarily result from an investment in those investment companies permitted by this Section 10.02(b) or from an investment in a Joint Venture, partnership, limited liability company or other business as contemplated by Article 3.
Section 1.03.Fiscal and Taxable Year. The fiscal and taxable year of the Partnership shall be the calendar year (unless otherwise required by the Code).
Section 1.04.Annual Tax Information and Report. The General Partner will use its commercially reasonable efforts to supply within 75 days after the end of each taxable year of the Partnership to each person who was a Limited Partner at any time during such year the tax information necessary to file such Limited Partner’s individual tax returns as shall be reasonably required by law, and in all events the General Partner shall furnish such information within the time required by applicable law.
Section 1.05.Tax Matters Partner; Partnership Representative; Tax Elections; Special Basis Adjustments.
(a)For tax returns filed with respect to fiscal years beginning before the December 31, 2017, for the purposes of the Code, the General Partner shall serve as the tax matters partner of the Partnership (the “Tax Matters Partner”) under Section 6231 of the Code (as in effect prior to such section’s amendment by the Bipartisan Budget Act of 2015 (P.L. 114-74) (the “2015 Budget Act”)). Each Partner hereby consents to the General Partner serving as the Tax Matters Partner and agrees upon request of the General Partner to execute, certify, acknowledge, deliver, swear to, file and record at the appropriate public offices such further documents as may be necessary or appropriate to evidence such consent. References to Sections of the Code in this Section 10.05 refer to Code sections before amendment by the 2015 Budget Act. The Tax Matters Partner may:
(i)agree to extend any statute of limitations with respect to the Partnership or any Subsidiary under Section 6229 of the Code;
(ii)file a request for administrative adjustment (including a request for substituted return treatment) under Section 6227 of the Code;
(iii)file a petition for judicial review, or any appeal with respect to any judicial determination, under Section 6226 or 6228 of the Code;
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(iv)take any action to consent to, or to refuse to consent to, a settlement reflected in a decision of a court; or
(v)enter into any tax settlement agreement affecting the Partnership or any Subsidiary.
(b)For tax returns filed with respect to fiscal years beginning after December 31, 2017, the General Partner, in its sole discretion, may cause, and take such actions as determines necessary or appropriate to enable, the Partnership to elect out of the application of the provisions of Sections 6221 through 6241 of the Code, as amended by the 2015 Budget Act. If, however, such provisions do apply to the Partnership for any taxable year, the General Partner shall also act as the partnership representative (“Partnership Representative”) for purposes of said Sections 6221 through 6241 of the Code. Each Partner hereby consents to the General Partner serving as the Partnership Representative and agrees upon request of the General Partner to execute, certify, acknowledge, deliver, swear to, file and record at the appropriate public offices such further documents as may be necessary or appropriate to evidence such consent. The Partnership Representative will be authorized to represent the Partnership (at the Partnership’s expense) in connection with all examinations of the Partnership’s affairs by tax authorities, including resulting administrative and judicial proceedings, and to (i) sign consents, enter into settlement and other agreements with such authorities with respect to any such examinations or proceedings and (ii) expend the Partnership’s funds for professional services incurred in connection therewith. Each Partner hereby agrees to execute, certify, acknowledge and deliver such documents and certifications as the Partnership Representative may request in connection with any such examinations and proceedings. The Partnership Representative may duly and timely elect under Code Section 6226 of the Code and the Treasury Regulations promulgated thereunder to require each Person who was a Partner during the taxable year of Partnership that was audited to personally bear any tax, interest and penalty resulting from adjustments based on such audit and, if such an election is made, shall notify each such Person (and the Internal Revenue Service) of their share of such audit adjustments. If for any reason the Partnership is liable for a tax (including imputed underpayments), interest, addition to tax or penalty as a result of any audit (including state and local audits), each Person who was a Partner during the taxable year of the Partnership that was audited, even if such Person is no longer a Partner (unless a Substitute Limited Partner has agreed to bear such liability in an appropriate document evidencing a transfer), shall pay to the Partnership an amount equal to such Person’s proportionate share of such liability (and any expenses incurred by the Partnership in adjudicating or otherwise resolving such liability), as determined by the General Partner, based on the amount each such Person should have borne (computed at the tax rate used to compute the Partnership’s liability) had the Partnership’s tax return for such taxable year reflected the audit adjustment, and the expense for the Partnership’s payment, adjudication or other resolution of such tax, interest, addition to tax and penalty shall be specially allocated to such Persons (or their successors) in such proportions.
(c)The Partnership shall indemnify and reimburse the Tax Matters Partner and Partnership Representative for all expenses, including legal and accounting fees, claims, liabilities, losses and damages incurred by it, in its capacity as the Tax Matters Partner (or Partnership Representative), in connection with any administrative or judicial proceeding with respect to the tax liability of the Partnership or the Partners. The taking of any action and the incurring of any expense by the General Partner in its capacity as the Tax Matters Partner or Partnership Representative, in connection with any such proceeding, except to the extent required by law, is a matter in the sole discretion of the Tax Matters Partner (or Partnership Representative) and the provisions on protection and
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indemnification of set forth in Section 6.03 above will be fully applicable to the General Partner when acting in its capacity as the Tax Matters Partner or Partnership Representative.
(d)All elections required or permitted to be made by the Partnership under the Code or any applicable state or local tax law shall be made and, if made, later revoked by the General Partner in its sole and absolute discretion. Without limiting the generality of the foregoing, the Partnership, at the option and in the sole and absolute discretion of the General Partner, may make an election pursuant to Section 754 of the Code, and each Partner agrees to furnish the Partnership with all information necessary to give effect to such election.
Section 1.06.Reports to Limited Partners. As soon as practicable after the close of each fiscal quarter (other than the last quarter of the fiscal year), the General Partner shall cause to be mailed to each Limited Partner any quarterly report delivered to holders of REIT Common Shares containing financial statements of the Partnership, or of the General Partner if such statements are prepared on a consolidated basis with the General Partner, for such fiscal quarter presented in accordance with generally accepted accounting principles (it being agreed that any quarterly report filing on Form 10-Q delivered by the General Partner promptly after filing such report with the SEC shall satisfy the General Partner’s obligations pursuant to this sentence). As soon as practicable after the close of each fiscal year, the General Partner shall cause to be mailed to each Limited Partner any annual report delivered to holders of REIT Common Shares containing financial statements of the Partnership, or of the General Partner if such statements are prepared on a consolidated basis with the General Partner, for such fiscal year, presented in accordance with generally accepted accounting principles. The annual financial statements shall be audited by accountants selected by the General Partner (it being agreed that any annual report filing on Form 10-K delivered by the General Partner promptly after filing such report with the SEC shall satisfy the General Partner’s obligations pursuant to this sentence).
Article 11
Amendment of Agreement; Meetings
Amendment of Agreement; Meetings
Section 1.01.Amendment. The General Partner’s consent shall be required for any amendment to this Agreement. The General Partner, without the consent of the Limited Partners, may amend this Agreement in any respect; provided, however, that the following amendments shall require the consent of the General Partner and Consent of the Limited Partners:
(a)any amendment affecting the operation of the Correspondence Ratio or the Exchange Right (except as required by applicable law or regulation or as expressly provided herein, including in Sections 8.05(d) or 7.01(d)) in a manner adverse to the Limited Partners;
(b)any amendment that would adversely affect the rights of the Limited Partners to receive the distributions payable to them hereunder, other than with respect to the issuance of additional Partnership Units pursuant to Section 4.02 (and the admission of additional Partners in connection therewith);
(c)any amendment that would alter the Partnership’s allocations of Net Profit and Net Loss to the Limited Partners, other than with respect to the issuance of additional
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Partnership Units pursuant to Section 4.02 (and the admission of additional Partners in connection therewith);
(d)any amendment that would impose on the Limited Partners any obligation to make additional Capital Contributions to the Partnership; or
(e)any amendment to Section 6.01(c) or this Section 11.01.
The foregoing notwithstanding, the approval of any amendment to this Agreement that shall be part of a plan of merger, plan of exchange or plan of conversion involving the Partnership or the Partnership Interests shall be governed by Article 7. Notwithstanding anything to the contrary contained in this Agreement, the Partners acknowledge that this Agreement shall be deemed to be automatically amended and the General Partner is authorized to amend this Agreement to the extent provided in Section 4.01 hereof.
Section 1.02.Meetings of Partners.
(a)The Partners may but shall not be required to hold any annual, periodic or other formal meetings. Meetings of the Partners may be called only by the General Partner. The Limited Partners shall have no right to vote on or consent to any matter except as expressly provided herein.
(b)Subject to Section 11.02(k), the General Partner may designate any place as the place of meeting for any meeting of the Partners. If no designation is made, the place of meeting shall be the principal place of business of the Partnership.
(c)Except as provided in Section 11.02(d), written notice stating the Meeting Medium, the place, day and hour of the meeting and the purpose or purposes for which the meeting is called shall be delivered not less than five (5) nor more than ninety (90) days before the date of the meeting, either personally or by mail to each Partner entitled to vote at such meeting.
(d)Anything in this Agreement to the contrary notwithstanding, with respect to any meeting of the Partners, any Partner who in person or by proxy shall have waived in writing notice of the meeting, either before or after such meeting, or who shall attend the meeting in person or by proxy, shall be deemed to have waived notice of such meeting unless such Partner attends for the express purpose of objecting, at the beginning of the meeting, and does so object to the transaction of any business because the meeting is not lawfully called or convened.
(e)If Partners holding a majority of the Partnership Units shall meet at any time and place, either within or outside of the State of Delaware, in person or by proxy or through any Meeting Medium, and consent to the holding of a meeting at such time and place, such meeting shall be valid without call or notice, and at such meeting lawful action may be taken.
(f)For the purpose of determining Partners entitled to notice of or to vote at any meeting of Partners or any adjournment thereof, the close of business on the date on which notice of the meeting is mailed shall be the record date (unless a different record date is fixed by the General Partner, which date shall not be before the close of business on the day the record date is fixed and not more than 90 days, nor less than 5 days, before the date when such meeting is to be held). When a determination of Partners entitled to vote at any meeting of Partners has been made as provided in this Section 11.02(f), such determination shall apply to any adjournment thereof.
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(g)Partners holding at least a majority of the Partnership Units entitled to vote at a meeting, represented in person or by proxy, shall constitute a quorum at any meeting of Partners. In the absence of a quorum at any such meeting, General Partner may adjourn the meeting to another time and place. Any business that might have been transacted at the original meeting may be transacted at any adjourned meeting at which a quorum is present. No notice of an adjourned meeting need be given if the time and place are announced at the meeting at which the adjournment is taken unless the adjournment is for more than 120 days. The Partners present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal during such meeting of that number of Partnership Units whose absence would cause less than a quorum to be present.
(h)If a quorum is present, the affirmative vote of Partners holding a majority of the Partnership Units entitled to vote, present in person or represented by proxy, shall be binding on all Partners, unless the vote of a greater or lesser proportion or number of Partnership Units or Partners is otherwise required by applicable law or by this Agreement. Unless otherwise expressly provided herein or required under applicable law, Partners who have an interest (economic or otherwise) in the outcome of any particular matter upon which the Partners’ vote or consent is required may vote or consent upon any such matter and their Partnership Units, vote or consent, as the case may be, shall be counted in the determination of whether the requisite matter was approved by the Partners.
(i)At all meetings of Partners, a Partner may vote in person or by proxy executed in writing by the Partner or by the Partner’s duly authorized attorney-in-fact. Such proxy shall be filed with the General Partner before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy.
(j)Action required or permitted to be taken at a meeting of Partners may be taken without a meeting if the action is evidenced by one or more written consents or approvals describing the action taken and signed by sufficient Partners or Partners holding sufficient Partnership Units, as the case may be, to approve such action had such action been properly voted on at a duly called meeting of the Partners. Action taken under this Section 11.02(j) is effective when the requisite Partners or Partners with the requisite Partnership Units, as the case may be, have signed the consent or approval, unless the consent specifies a different effective date. The record date for any action taken pursuant to this Section 11.02(j) shall be the effective time of such action.
(k)Any meeting of Partners may be held in person, by telephone conference, by webcast or by other electronic means where all Partners participating can hear one another through such medium (a “Meeting Medium”). Any Partner may vote at any meeting of the Partners held in any Meeting Medium by participating through such Meeting Medium or by e-mail or other means designed to ensure such Partner’s vote is communicated to the General Partner. Any vote of the Partners may be held by any of the foregoing means or by written consent of the Partners, each of which may be referred to as a “meeting” of the Partners.
Article 12
General Provisions
General Provisions
Section 1.01.Notices. All communications required or permitted under this Agreement shall be in writing and shall be deemed to have been given when delivered
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personally or upon deposit in the United States mail, registered, postage prepaid return receipt requested, to the Partners or Assignees at the addresses set forth on the books and records of the Partnership; provided, however, that any Partner or Assignee may specify a different address by notifying the General Partner in writing of such different address. Notices to the Partnership shall be delivered at or mailed to its specified office.
Section 1.02.Survival of Rights. Subject to the provisions limiting transfers, this Agreement shall be binding upon and inure to the benefit of the Partners and the Partnership and their respective legal representatives, successors, transferees and assigns.
Section 1.03.Additional Documents. Each Partner agrees to perform all further acts and execute, swear to, acknowledge and deliver all further documents that may be reasonable, necessary, appropriate or desirable to carry out the provisions of this Agreement or the Act.
Section 1.04.Severability. If any provision of this Agreement shall be declared illegal, invalid, or unenforceable in any jurisdiction, then such provision shall be deemed to be severable from this Agreement (to the extent permitted by law) and in any event such illegality, invalidity or unenforceability shall not affect the remainder.
Section 1.05.Entire Agreement. This Agreement and exhibits attached hereto constitute the entire Agreement of the Partners and supersede all prior written agreements and prior and contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof, except as otherwise set forth herein.
Section 1.06.Pronouns and Plurals. When the context in which words are used in the Agreement indicates that such is the intent, words in the singular number shall include the plural and the masculine gender shall include the neuter or female gender as the context may require, and vice versa in each case.
Section 1.07.Headings. The Article and Section headings in this Agreement are for convenience only and shall not be used in construing the scope of this Agreement or any particular Article or Section.
Section 1.08.Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original copy and all of which together shall constitute one and the same instrument binding on all parties hereto, notwithstanding that all parties shall not have signed the same counterpart. The exchange of copies of this Agreement and of signature pages by facsimile transmission and/or by electronic mail in Portable Document Format or similar format (“PDF”) constitutes effective execution and delivery of this Agreement and may be used in lieu of the original agreement for all purposes. Signatures of the parties transmitted by facsimile and/or by electronic mail in PDF will be deemed to be their original signatures for all purposes.
Section 1.09.Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to its conflicts of laws principles.
Section 1.10.Arbitration. Notwithstanding anything to the contrary contained in this Agreement, all claims, disputes and controversies between the parties hereto (including, without limitation, any claims, disputes and controversies between the Partnership and any one or more of the Partners and between or among any Partners) arising out of or in connection with this Agreement or the Partnership created hereby, or any act or failure to act by the General Partner or any other Partner hereunder, shall be
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resolved by binding arbitration in New York City, New York by the American Arbitration Association (the “AAA”), in accordance with this Section 12.10. Any arbitration called for by this Section 12.10 shall be conducted in accordance with the following procedures:
(a)The Partnership or any Partner (the “Requesting Party”) may demand arbitration pursuant to this Section 12.10 at any time by giving written notice of such demand (the “Demand Notice”) to all other Partners and (if the Requesting Party is not the Partnership) to the Partnership which Demand Notice shall describe in reasonable detail the nature of the claim, dispute or controversy.
(b)Within 15 days after the giving of a Demand Notice or such additional time as required by the AAA, the AAA shall select and designate in writing three reputable, disinterested individuals willing to act as an arbitrator of the claim, dispute or controversy in question.
(c)The presentations of the parties hereto in the arbitration proceeding shall be commenced and completed within sixty (60) days after the selection of the arbitration panel pursuant to Section 12.10(b) above, and the arbitration panel shall render its decision (and specify in reasonable detail its reasons therefor) in writing within thirty (30) days after the completion of such presentations. Any decision concurred in by any two (2) of the arbitrators shall constitute the decision of the arbitration panel, and unanimity shall not be required.
(d)The arbitration panel shall include in its decision a direction that all of the attorneys’ fees and costs of any party or parties and the costs of such arbitration be paid by the losing party or parties in the arbitration. On the application of a party before or after the initial decision of the arbitration panel, and proof of its attorneys’ fees and costs, the arbitration panel shall order the other party to make any payments directed pursuant to the preceding sentence.
(e)Any decision rendered by the arbitration panel in accordance herewith shall be final and binding on the parties hereto, and judgment thereon may be entered by any state or federal court of competent jurisdiction. Arbitration shall be the exclusive method available for resolution of claims, disputes and controversies arising between and among the parties relating to this Agreement and the conduct of the parties hereto in relation to Partnership matters, and the Partnership and its Partners stipulate that the provisions of this Agreement shall be a complete defense to any suit, action or proceeding in any court or before any administrative or arbitration tribunal with respect to any such claim, controversy or dispute. The provisions of this Section 12.10 shall survive the dissolution of the Partnership.
(f)Nothing contained herein shall be deemed to give the arbitrators any authority, power or right to alter, change, amend, modify, add to, or subtract from any of the provisions of this Agreement.
Section 1.11.Acknowledgement as to Exculpation and Indemnification. THE PARTIES HERETO ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT CONTAINS EXCULPATION AND INDEMNIFICATION IN RESPECT OF THE ACTIONS OR OMISSIONS OF THE GENERAL PARTNER AND DIRECTORS, OFFICERS AND AFFILIATES OF THE GENERAL PARTNER BY THE PARTNERSHIP EVEN IF SUCH ACTIONS OR OMISSIONS CONSTITUTE NEGLIGENCE OF SUCH PERSONS.
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[Signatures Commence on Following Page]
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IN WITNESS WHEREOF, the parties hereto have hereunder affixed their signatures to this Agreement of Limited Partnership effective as of the date first above written.
GENERAL PARTNER: UNITI GROUP INC., a Maryland Corporation. | |||||
| By: | /s/ Daniel Heard | ||||
| Name: Daniel Heard | |||||
Title: EVP, General Counsel and Secretary | |||||
[Signature Page to Limited Partnership Agreement of Uniti Group LP]
#96603748v1
INDEX OF EXHIBITS
Exhibit C [Reserved]……..……………………………………………………………. C-1
Exhibit D Preferences, Rights and Limitations of Partnership 7.50% Perpetual Convertible Preferred Units...…………………………………………………………. D-1
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Exhibit A
Form of Partners and Partnership Units
Form of Partners and Partnership Units
As of December 23, 2022
| Partners | Partnership Common Units | Partnership Perpetual Convertible Preferred Units | ||||||
| General Partner (in its capacity as a General Partner and as a Limited Partner): | ||||||||
| Uniti Group Inc. 2101 Riverfront Drive, Suite A Little Rock, Arkansas 72202 | 235,756,325.09 | 306,500 | ||||||
| Original Limited Partner: | ||||||||
| Uniti Group LP LLC 2101 Riverfront Drive, Suite A Little Rock, Arkansas 72202 | 17,481 | |||||||
| Additional Limited Partners: | ||||||||
| Talk America Services, LLC 2101 Riverfront Drive, Suite A Little Rock, Arkansas 72202 | 433,616.86 | |||||||
| [name] xxxxxxx [address] xxxxxxx | 14,722.24 | |||||||
| [name] xxxxxxx [address] xxxxxxx | 22,804.74 | |||||||
| [name] xxxxxxx [address] xxxxxxx | 53,662.55 | |||||||
| [name] xxxxxxx [address] xxxxxxx | 14,722.24 | |||||||
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Exhibit B
Notice of Exercise of Exchange Right
Notice of Exercise of Exchange Right
In accordance with the Second Amended and Restated Agreement of Limited Partnership of Uniti Group LP, as amended (the “Agreement”), the undersigned hereby irrevocably (i) presents for exchange Partnership Units in Uniti Group LP in accordance with the terms of the Agreement and the Exchange Right referred to therein; (ii) surrenders such Partnership Units and all right, title and interest therein; and (iii) directs that the Cash Amount or REIT Shares Amount (as defined in the Agreement) as determined by the General Partner deliverable upon exercise of the Exchange Right be delivered to the address specified below, and if REIT Shares (as defined in the Agreement) are to be delivered, such REIT Shares be registered or placed in the name(s) and at the address(es) specified below.
Dated:
(Signature of Limited Partner)
(Printed Name of Limited Partner)
Mailing Address and Phone No.:
( ) -
(Signature of Limited Partner)
(Printed Name of Limited Partner)
Mailing Address and Phone No.:
( ) -
Signature Guaranteed by:
If REIT Shares are to be issued, issue to:
Name:
Mailing Address and Phone No.:
( ) -
( ) -
Social security or other tax identification number:
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Exhibit C
[Reserved]
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EXHIBIT D
PREFERENCES, RIGHTS AND LIMITATIONS OF
PARTNERSHIP 7.50% PERPETUAL CONVERTIBLE PREFERRED UNITS
PARTNERSHIP 7.50% PERPETUAL CONVERTIBLE PREFERRED UNITS
Section 1. Designation and Number of Units. Pursuant to the Amended and Restated Agreement of Limited Partnership of the Partnership (the “LP Agreement”), the General Partner hereby establishes a series of Partnership Units designated as the “Partnership 7.50% Perpetual Convertible Preferred Units” (the “Partnership Perpetual Convertible Preferred Units”). The total number of Partnership Perpetual Convertible Preferred Units constituting such series shall be 345,000. Such number of units may be decreased by resolution of the General Partner, subject to the terms and conditions hereof; provided that no decrease shall reduce the number of Partnership Perpetual Convertible Preferred Units to a number less than the number of units then outstanding. Capitalized terms used in this Exhibit D but not defined herein shall have the meanings ascribed to them in the LP Agreement.
Section 2. General Matters; Ranking. Each Partnership Perpetual Convertible Preferred Unit shall be identical in all respects to every other Partnership Perpetual Convertible Preferred Unit. The Partnership Perpetual Convertible Preferred Units, with respect to distribution rights and rights upon the liquidation, winding-up or dissolution of the Partnership, shall rank (i) senior to all Partnership Junior Units, (ii) on a parity with all Partnership Parity Preferred Units and (iii) junior to all Partnership Senior Units and the Partnership’s existing and future indebtedness.
Section 3. Standard Definitions. As used in this Exhibit D with respect to the Partnership Perpetual Convertible Preferred Units:
“Business Day” means any day other than a Saturday, a Sunday or a day on which the Federal Reserve Bank of New York is authorized or required by law or executive order to close or be closed.
“close of business” means 5:00 p.m., New York City time.
“Conversion” shall have the meaning set forth in Section 7(a).
“Convertible Notes” mean the 7.50% Convertible Senior Notes due 2027 issued by the General Partner under the Indenture.
“Distribution Amount” shall have the meaning set forth in Section 4(a).
“Distribution Payment Date” means June 1 and December 1 of each year, beginning on June 1, 2023.
“Distribution Period” means the period from, and including, a Distribution Payment Date to, but excluding, the next Distribution Payment Date, except that the initial Distribution Period shall commence on, and include, the Initial Issue Date and shall end on, but exclude, the first Distribution Payment Date.
“Holder” means each person in whose name the Partnership Perpetual Convertible Preferred Units are registered, who shall be treated by the Partnership as the absolute owner of
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those Partnership Perpetual Convertible Preferred Units for the purpose of making payment and settling conversions and for all other purposes.
“Indenture” means the Indenture dated as of December 12, 2022 by and among the General Partner, the guarantors party thereto (including the Partnership) and Deutsche Bank Trust Company Americas, as trustee, establishing the terms of the Convertible Notes, as the same may be amended or supplemented from time to time.
“Initial Issue Date” shall mean December 12, 2022.
“Issue Price” shall mean the price per Partnership Perpetual Convertible Unit as set forth in the purchase agreement dated as of December 12, 2022 between the General Partner and the Partnership.
“Liquidation Distribution Amount” shall have the meaning set forth in Section 5(a).
“LP Agreement” shall have the meaning set forth in Section 1.
“Optional Redemption” shall have the meaning set forth in Section 6(a).
“open of business” means 9:00 a.m., New York City time.
“Partnership Perpetual Convertible Preferred Unit” shall have the meaning set forth in Section 1.
“Partnership Junior Units” means (i) the Partnership Common Units and (ii) each other class or series of Partnership Interests established after the Initial Issue Date, the terms of which do not expressly provide that such class or series ranks either (x) senior to the Partnership Perpetual Convertible Preferred Units as to priority of payment of distributions or rights upon voluntary or involuntary liquidation, winding-up or dissolution or (y) on a parity with the Partnership Perpetual Convertible Preferred Units as to priority of payment of distributions and rights upon voluntary or involuntary liquidation, winding-up or dissolution.
“Partnership Parity Preferred Units” means any class or series of Partnership Interests established after the Initial Issue Date, the terms of which expressly provide that such class or series shall rank on a parity with the Partnership Perpetual Convertible Preferred Units as to the priority of payment of distributions and rights upon voluntary or involuntary liquidation, winding-up or dissolution.
“Partnership Reference Property” shall have the meaning set forth in Section 8(a).
“Partnership Reorganization Event” shall have the meaning set forth in Section 8(a).
“Partnership Senior Units” means each class or series of Partnership Interests established after the Initial Issue Date, the terms of which expressly provide that such class or series shall rank senior to the Partnership Perpetual Convertible Preferred Units as to priority of payment of distributions or rights upon voluntary or involuntary liquidation, winding-up or dissolution.
“Person” means any individual, partnership, firm, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature.
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“PPCPU Sub-Account” shall have the meaning set forth in Section 11(a).
“Preferential Net Income Allocation Amount” shall have the meaning set forth in Section 11(c).
“Record Holder” means, with respect to any Distribution Payment Date, a Holder of record of the Partnership Perpetual Convertible Preferred Units as such Holder appears on the register of the Partnership at the close of business on the related Regular Record Date.
“Redeemed Convertible Notes” shall have the meaning set forth in Section 6(b).
“Redemption” shall have the meaning set forth in Section 6(a).
“Regular Record Date” means, with respect to any Distribution Payment Date, the May 15 or November 15 (whether or not such day is a Business Day), as the case may be, immediately preceding the applicable June 1 or December 1 Distribution Payment Date, respectively.
“Settlement Amount” means the cash, Partnership Common Units or the combination thereof due pursuant to the terms hereof in respect of a Conversion or an Optional Redemption, as applicable, of Partnership Perpetual Convertible Preferred Units.
“Stated Amount” means, as to the Partnership Perpetual Convertible Preferred Units, $1,000 per unit.
Section 4. Distributions. Subject to the rights of holders of any class or series of Partnership Interests ranking senior to the Partnership Perpetual Convertible Preferred Units with respect to priority of payment of distributions, Holders shall be entitled to receive, when, as and if declared by the General Partnership out of funds of the Partnership legally available therefor, cumulative distributions at the rate per annum of 7.50% on the Stated Amount per Partnership Perpetual Convertible Preferred Unit (equivalent to $75.00 per annum per unit (the “Distribution Amount”)), payable in cash. No distributions upon the Partnership Perpetual Convertible Preferred Units shall be authorized by the General Partner or declared by the Partnership or paid or set apart by the Partnership at such times as such authorization, declaration, payment or setting apart for payment shall be restricted or prohibited by law. Declared distributions on the Partnership Perpetual Convertible Preferred Units shall be payable semi-annually on each Distribution Payment Date at such annual rate, and distributions shall accumulate from the most recent date as to which distributions shall have been paid or, if no distributions have been paid, from the Initial Issue Date, whether or not in any Distribution Period or Distribution Periods there have been funds legally available for the payment of such distributions. Distributions shall be payable on the relevant Distribution Payment Date to Record Holders at the close of business on the immediately preceding Regular Record Date, whether or not the Partnership Perpetual Convertible Preferred Units held by such Record Holders on such Regular Record Date are converted, redeemed or repurchased after such Regular Record Date. Partnership Perpetual Convertible Preferred Units surrendered for Conversion during the period from the close of business on any Regular Record Date to the open of business on the immediately following Distribution Payment Date must be accompanied by funds equal to the amount of distributions payable on such Distribution Payment Date on the Partnership Perpetual Convertible Preferred Units so converted if such an amount is due on the corresponding Converted Note, as determined by the General Partner. If a Distribution Payment Date is not a Business Day, payment shall be made on the next succeeding Business Day, without any interest or other payment in lieu of interest accruing with respect to this delay.
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Distributions payable on the Partnership Perpetual Convertible Preferred Units for any partial Distribution Period shall be computed based upon the number of days elapsed during such period over a 360-day year (consisting of twelve 30-day months) and, for a partial month, on the basis of the number of days actually elapsed in a 30-day month.
Section 5. Liquidation, Dissolution or Winding Up. (a) In the event of any liquidation, winding-up or dissolution of the Partnership, whether voluntary or involuntary, each Holder of a Partnership Perpetual Convertible Preferred Unit shall be entitled to receive an amount equal to the positive balance of the PPCPU Sub-Account maintained in respect of such Partnership Perpetual Convertible Preferred Unit (the “Liquidation Distribution Amount”), after satisfaction of liabilities owed to the Partnership’s creditors and holders of any Partnership Senior Units and before any payment or distribution is made to holders of any Partnership Junior Units, including, without limitation, Partnership Common Units.
(a)Neither the sale (for cash, shares of stock, securities or other consideration) of all or substantially all of the assets or business of the Partnership (other than in connection with the liquidation, winding-up or dissolution of the Partnership), nor the merger or consolidation of the Partnership into or with any other Person, shall be deemed to be a voluntary or involuntary liquidation, winding-up or dissolution of the Partnership for the purposes of this Section 5.
(b)If, upon the voluntary or involuntary liquidation, winding-up or dissolution of the Partnership, the amounts payable with respect to Liquidation Distribution Amount of the Partnership Perpetual Convertible Preferred Units and (2) the liquidation preference of, and the amount of accumulated and unpaid distributions to, but excluding, the date fixed for liquidation, dissolution or winding up, on, all Partnership Parity Preferred Units are not paid in full, the Holders and all holders of any Partnership Parity Preferred Units shall share equally and ratably in any distribution of the Partnership’s assets in proportion to the respective liquidation preferences and amounts equal to the accumulated and unpaid distributions to which they are entitled.
(c)After the payment to any Holder of the full amount of the Liquidation Distribution Amount for each of such Holder’s Partnership Perpetual Convertible Preferred Units, such Holder as such shall have no right or claim to any of the remaining assets of the Partnership in respect of such Holder’s Partnership Perpetual Convertible Preferred Units.
(d)In determining whether a distribution (other than upon voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Partnership) by distribution, redemption or other acquisition of units of the Partnership or otherwise is permitted under the Act, no effect shall be given to amounts that would be needed, if the Partnership were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of Holders of the Partnership Perpetual Convertible Preferred Units.
Section 6. Optional Redemption. (a) Notwithstanding anything herein to the contrary, the Partnership may, at the sole option of the General Partner, redeem any Partnership Perpetual Convertible Preferred Unit at any time by delivering the amount and kind of consideration as described in Section 6(b) (an “Optional Redemption”); provided, however, that if a Convertible Note corresponding to a Partnership Perpetual Convertible Preferred Unit is redeemed, repurchased or otherwise retired (other than upon a conversion, as to which the provisions of Section 7 shall apply) (each, a “Redemption”) in accordance with, or in a manner not prohibited by, the terms of the Indenture, then unless the Partnership by notice to the Holder shall have affirmatively elected not to redeem such Partnership Perpetual Convertible Preferred Unit, such Partnership Perpetual Convertible Preferred Unit shall be automatically redeemed (as
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an Optional Redemption), and shall no longer be deemed outstanding, without any notice or action on the part of the Partnership, the Holder or any other Person.
(b)Upon any Optional Redemption of a Partnership Perpetual Convertible Preferred Unit, the Partnership shall pay or deliver, as the case may be, to the Holder, in respect of such Partnership Perpetual Convertible Preferred Unit, a Settlement Amount in respect thereof (or, in the case of the following clause (i), if subsection (1) or (2) thereof shall produce a negative number, the Holder shall pay or deliver, as the case may be, to the Partnership the absolute value of the negative portion of such Settlement Amount) consisting of: (i) if such Optional Redemption occurs in connection with the Redemption of any Convertible Notes in accordance with, or in a manner not prohibited by, the terms of the Indenture (such Convertible Notes, “Redeemed Convertible Notes”), (1) cash equal to the amount of cash that the General Partner delivers in respect of the corresponding Redeemed Convertible Notes to the holder thereof, less any cash received by the General Partner upon the corresponding settlement of any portion of a derivative contract that was entered into in connection with the issuance of the Convertible Notes, and (2) a number of Partnership Common Units equal to the number of Partnership Common Units that would be exchangeable for the number of REIT Common Shares that the General Partner issues in respect of such Redeemed Convertible Notes, less a number of Partnership Common Units equal to the number of Partnership Common Units that would be exchangeable for the number of REIT Common Shares that the General Partner received upon the corresponding settlement of any portion of a derivative contract that was entered into in connection with the issuance of the Convertible Notes and (ii) otherwise, an amount of cash equal to the positive balance, at the time of such Optional Redemption (after giving effect to allocations made for the relevant taxable year or other period pursuant to Section 11(c)), of the PPCPU Sub-Account maintained in respect of such Partnership Perpetual Convertible Preferred Unit.
(c)If an Optional Redemption occurs in connection with the Redemption of a Redeemed Convertible Note, the Settlement Amount due upon any Optional Redemption of a Partnership Perpetual Convertible Preferred Unit shall be paid or delivered, as the case may be, on the date on which the General Partner pays or delivers, as the case may be, the consideration due upon Redemption of the corresponding Redeemed Convertible Note.
(d)No sinking fund is provided for the Partnership Perpetual Convertible Preferred Units.
Section 7. Conversion of Partnership Perpetual Convertible Preferred Units. (a) Notwithstanding anything herein to the contrary, if any Convertible Notes are converted into REIT Common Shares, cash or a combination of REIT Common Shares and cash in accordance with the terms of the Indenture, then a corresponding number of Partnership Perpetual Convertible Preferred Units shall be automatically converted, and shall no longer be deemed as outstanding, without any notice or action on the part of the Partnership, the Holder or any other Person (a “Conversion”). The Partnership shall deliver to the Holder, in respect of such converted Partnership Convertible Preferred Units, a Settlement Amount calculated as (x) a number of Partnership Common Units equal to the number of REIT Common Shares into which the Convertible Notes are then convertible (without regard to whether the General Partner elects to deliver REIT Common Shares or cash, or a combination thereof, upon such conversion of the Convertible Notes), (y) reduced by the number of shares of REIT Common Shares receivable by the General Partnership upon the settlement of any portion of a derivative contract entered into in connection with the issuance of the Convertible Notes pursuant to the terms thereof in connection with such Conversion (without regard to whether the General Partnership receives REIT Common Shares or cash pursuant to the settlement of such derivative contract); provided
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that the Partnership shall have the option, in the sole discretion of the General Partner, to elect to deliver cash in lieu of some or all of the Partnership Common Units it is otherwise required to deliver to the Holder in connection with a Conversion, where the amount of cash to be delivered in lieu of a Partnership Common Unit shall be determined in the same manner as the amount of cash to be delivered in lieu of REIT Common Shares is determined pursuant to the Indenture in connection with such conversion of Convertible Notes.
(b)The Partnership shall pay or deliver, as the case may be, the Settlement Amount due upon a Conversion of Partnership Perpetual Convertible Preferred Units on the date on which the General Partner pays or delivers, as the case may be, the consideration due upon conversion of the corresponding Convertible Notes.
(c)Notwithstanding anything to the contrary herein, no fractional Partnership Common Units shall be issued as a result of any conversion of Partnership Perpetual Convertible Preferred Units.
(d)In lieu of any fractional Partnership Common Unit otherwise issuable in respect of the aggregate number of Partnership Perpetual Convertible Preferred Units that are subject to conversion pursuant to this Section 7, the number of Partnership Common Units to be issued will be rounded down to the nearest whole number.
Section 8. Reorganizations.
(b)In the case of any event as a result of which the Partnership Common Units would be converted into, or exchanged for, stock, other securities, other property or assets (including cash or any combination thereof) (any such event, a “Partnership Reorganization Event”), then, at and after the effective time of such Partnership Reorganization Event, any obligation to deliver Partnership Common Units pursuant to any Conversion or Optional Redemption shall be changed into an obligation to deliver the kind and amount of shares of stock, other securities or other property or assets (including cash or any combination thereof) (the “Partnership Reference Property”) that a holder of that number of Partnership Common Units would have been entitled to receive in such Partnership Reorganization Event.
(c)The above provisions of this Section shall similarly apply to successive Partnership Reorganization Events and the provisions of this Section shall apply to any Partnership Reference Property.
Section 9. [Reserved]
Section 10. Form of Partnership Perpetual Convertible Preferred Units.
(b)Certificates evidencing the Partnership Perpetual Convertible Preferred Units may be issued at the discretion of the General Partner. The Partnership Perpetual Convertible Preferred Units shall initially be issued without certificates and shall be kept and evidenced on the books and records of the Partnership.
(c)The General Partner is initially the registered owner of 300,000 of the Partnership Perpetual Convertible Preferred Units and is the sole Holder.
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Section 11. Allocations; Capital Accounts.
(b) The Partnership shall maintain a separate sub-account within the Capital Account of each Holder of Partnership Perpetual Convertible Preferred Units in respect of each Partnership Perpetual Convertible Preferred Unit held by such Holder (each, a “PPCPU Sub-Account”). The balance of each PPCPU Sub-Account shall initially be equal to the Issue Price of the corresponding Partnership Perpetual Convertible Preferred Unit and shall be (i) increased (decreased) by any allocations of Net Income (Net Loss) made in respect of such Partnership Perpetual Convertible Preferred Unit pursuant to this Section 11, (ii) reduced by any payments of the Distribution Amount on such Partnership Perpetual Convertible Preferred Unit and any payments made in redemption of such Partnership Perpetual Convertible Preferred Unit and (iii) otherwise adjusted in accordance with the rules under Section 704(b) and 721 of the Code with respect to non-compensatory partnership options.
(c) Notwithstanding Section 5.01(a) of the LP Agreement, for so long as any Partnership Perpetual Convertible Preferred Unit is outstanding, (i) Net Profit (if any) for any taxable year or other period shall be allocated to the Holder of such Partnership Perpetual Convertible Preferred Unit in the amounts set forth in this Section 11 before any allocation of Net Profit or Net Loss for such taxable year or other period is made pursuant to Section 5.01(a) of the LP Agreement, (ii) no other amount of Net Profit shall be allocated to the Holder of such Partnership Perpetual Convertible Preferred Unit in respect of such Partnership Perpetual Convertible Preferred Unit for such taxable year or other period, (iii) except as provided in Section 11(d) or 11(e), no allocations of Net Loss shall be made to the Holder of such Partnership Perpetual Convertible Preferred Unit in respect of such Partnership Perpetual Convertible Unit until such time as the portion of the balance of each Partner’s Capital Account that is not attributable to Partnership Perpetual Convertible Preferred Units is equal to $0, and (iv) no allocations of Net Profit or Net Loss shall be made under Section 5.01(a) of the LP Agreement in respect of Partnership Common Units if the effect of such allocations would be to negate the effects of the allocation rules set forth in the preceding clauses of this Section 11(b).
(d)For each taxable year or other period, the Holder of each Partnership Perpetual Convertible Preferred Unit shall be allocated Net Income (to the extent thereof) in respect of such Partnership Perpetual Convertible Preferred Unit in an amount equal to the sum of (x) the sum of (i) the Distribution Amount that accrues on the Perpetual Convertible Preferred Units in such taxable year or other period and (ii) the amortized portion of the difference between the Issue Price and the Stated Amount over five years, on a constant-yield basis (the sum described in this clause (x) in any taxable year or other period, the “Preferential Net Income Allocation Amount”), (y) the excess of (i) the cumulative Preferential Net Income Allocation Amounts for all prior taxable years or other periods over (ii) the actual cumulative amount of Net Income allocated in respect of such Partnership Perpetual Convertible Preferred Unit for such prior taxable years or other periods pursuant to clause (x) or this clause (y) of this Section 11(c), and (z) the amount of any Net Loss previously allocated in respect of such Partnership Perpetual Convertible Preferred Unit (other than any such Net Loss allocated pursuant to Section 11(d)) and not previously reversed by allocations under this clause (z).
(e)If, in any taxable year or other period, any Convertible Note shall have been redeemed or repurchased by the General Partner for an amount of cash that differs from the balance, at the time of such redemption or repurchase, of the PPCPU Sub-Account maintained in respect of the corresponding Partnership Perpetual Convertible Preferred Unit (after giving effect to allocations made for such taxable year or other period pursuant to Section 11(c)), (x) the Holder of such Partnership Perpetual Convertible Preferred Unit shall be allocated Net Income or Net Loss for such taxable year or other period (and, if necessary, for future taxable years or other
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periods) in an amount equal to such difference and (y) for each taxable year or other period thereafter, no further allocations of Net Income shall be made in respect of such Partnership Perpetual Convertible Preferred Unit pursuant Section 11(c); provided, that if such Partnership Perpetual Convertible Preferred Unit is not redeemed, pursuant to an Optional Redemption, in connection with the redemption or repurchase of the corresponding Convertible Note, the General Partner shall adjust the allocation of Net Profit or Net Loss otherwise required under this Section 11(d) with respect to such Partnership Perpetual Convertible Preferred Unit so as to give effect to the intended economic arrangement of the Partners.
(f)If, in any taxable year or other period, any Partnership Perpetual Convertible Preferred Unit shall have been converted pursuant to Section 7, such conversion shall be treated as the exercise of a “noncompensatory option” within the meaning of Treasury Regulations Section 1.721-2(f) and, upon any such conversion, the Partnership shall comply with the allocation provisions set forth in Treasury Regulations Section 1.704-1(b)(2)(iv)(s) and 1.704-1(b)(4)(x) (including making any required "corrective" allocations in accordance with the Treasury Regulations).
Section 12 Miscellaneous.
(b)The Stated Amount, the Distribution Amount, and any other term of the Partnership Perpetual Convertible Preferred Units each shall be subject to equitable adjustment whenever there shall occur an equity split, combination, reclassification or any other event involving the Partnership Perpetual Convertible Preferred Units, any other Partnership Units or the REIT Common Shares. Such adjustments shall be determined in good faith by the General Partner.
(c)All Partnership Perpetual Convertible Preferred Units redeemed, repurchased or otherwise acquired in any manner by the Partnership shall be retired and shall be restored to the status of authorized but unissued Partnership Interests, without designation as to series or class.
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Exhibit 10.18
SEVERANCE AGREEMENT
This Severance Agreement (the “Agreement”), dated as of _____________ (the “Effective Date”), is made by and between Uniti Group Inc., a Maryland corporation (the “Corporation”), and _____________ (“Executive”).
WHEREAS, the Board of Directors of the Corporation (the “Board”) has determined that it is in the best interests of the Corporation to retain the services of Executive by the Corporation;
WHEREAS, Executive desires to be employed by the Corporation; and
WHEREAS, the Corporation and Executive desire to enter into this Agreement to set forth their understanding as to their respective rights and obligations in the event of a termination of Executive’s employment.
NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Corporation and Executive hereby agree as follows:
1. Defined Terms. For purposes of this Agreement, the following terms have the meanings indicated below:
(A) “Affiliate” means any business entity that is a Subsidiary of the Corporation and any limited liability company, partnership, corporation, joint venture, or any other entity in which the Corporation or any such Subsidiary owns an equity interest.
(B) “Annual Incentive Plan” means any short-term cash incentive plan of Uniti Group Inc.
(C) “Annual Incentive Target” means, with respect to any measuring period, the amount of cash compensation that would be payable to Executive under the Annual Incentive Plan for such measuring period, computed assuming that the level of performance with respect to a performance goal identified in accordance with the terms of the Annual Incentive Plan as the “target” level of performance has been achieved. Where no level of performance has been specifically identified as the “target” level, the “target” level shall be (i) the only level if one level is identified and (ii) the midpoint between the lowest level and the highest level if two or more levels are identified. Where the amount of compensation depends on the achievement of multiple performance goals, the achievement of each target level of performance with respect to each goal shall be assumed.
(D) “Cause” means the occurrence of any of the following: (i) Executive’s failure to make a good faith effort to substantially perform his or her duties (other than any such failure due to Executive’s Disability) or Executive’s insubordination with respect to a specific lawful directive of his/her direct report (if Executive reports directly to an officer) or the Board (if Executive reports directly to the Board) to which Executive reports directly or indirectly; (ii) Executive’s dishonesty, gross negligence in the performance of his or her duties hereunder or engaging in willful misconduct, which in the case of any such gross negligence, has caused or is reasonably expected to result in direct or indirect material injury to the Corporation or any Affiliate; (iii) breach by Executive of any material provision of any written agreement, including, without limitation, this Agreement, with the Corporation or any Affiliate or material violation of any Corporation policy applicable to Executive; or (iv) Executive’s commission of a crime that constitutes a felony or other crime of moral turpitude or fraud. If, subsequent to Executive’s
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termination of employment hereunder for other than Cause, the Corporation in good faith determines that Executive’s employment could have been terminated for Cause hereunder, Executive’s employment shall, at the election of the Corporation, be deemed to have been terminated for Cause retroactively to the date the events giving rise to Cause occurred.
(E) A “Change in Control” means, at any time subsequent to the date of this Agreement, the occurrence of any of the following events:
(i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Corporation to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a “Group”), together with any affiliates thereof;
(ii) the commencement of the liquidation or dissolution of the Corporation that occurs following the approval by the holders of capital stock of the Corporation of any plan or proposal for such liquidation or dissolution of the Corporation;
(iii) any Person or Group becomes the beneficial owner (within the meaning of Section 13(d) of the Exchange Act), directly or indirectly, of shares representing more than 50% of the aggregate voting power of the issued and outstanding stock entitled to vote in the election of directors, managers or trustees of the Corporation and such Person or Group actually has the power to vote such shares in any such election;
(iv) the replacement of a majority of the Board over a two-year period from the directors who constituted the Board at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board then still in office who either were members of such Board at the beginning of such period; or
(v) a merger or consolidation of the Corporation with another entity in which holders of the Corporation’s common stock immediately prior to the consummation of the transaction hold, directly or indirectly, immediately following the consummation of the transaction, 50% or less of the common equity interest in the surviving corporation in such transaction.
Notwithstanding anything herein to the contrary, an event described above shall be considered a Change in Control hereunder only if it also constitutes a “change in control event” under Section 409A of the Code, to the extent necessary to avoid the adverse tax consequences thereunder with respect to any award subject to Section 409A of the Code.
(F) “Code” means the Internal Revenue Code of 1986 and the rules and regulations promulgated thereunder, as such law, rules and regulations may be amended, supplemented or replaced from time to time.
(G) “Date of Termination” has the meaning stated in paragraph (B) of Section 8 hereof.
(H) “Disability” means that Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The determination of whether an individual has a Disability shall be determined under procedures established by the Board. The Board may rely on any determination that Executive is disabled for purposes of benefits under any long-term disability
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plan maintained by the Corporation or any Affiliate in which Executive participates, provided that the definition of disability applied under such disability plan meets the requirements of a Disability in the first sentence hereof.
(I) “Exchange Act” means the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder, as such law, rules and regulations may be amended, supplemented or replaced from time to time.
(J) “Good Reason” means any one of the following: (i) a material diminution in Executive’s base compensation; (ii) a material diminution in authority, duties, or responsibilities of Executive; (iii) a material diminution in the budget over which executive retains authority; (iv) a material change in the geographic location (i.e., to a location more than 50 miles from Executive’s primary work location prior to such change) at which Executive is required to perform services; and (v) any other action or inaction that constitutes a material breach of Executive’s employment agreement, if any, with the Corporation or any Affiliate; provided, however, that for Executive to be able to resign for “Good Reason,” Executive must give the Corporation and the applicable Affiliate, if any, notice of the above conditions within 90 days after the condition first exists, the Corporation and/or Affiliate must not have remedied the condition within 30 days after receiving written notice, and Executive must resign within 60 days after Executive’s and/or Affiliate’s failure to remedy.
(K) “Non-Interference / Assistance Period” means the period commencing with the Date of Termination and ending on the first anniversary of the Date of Termination; provided that if a court of competent jurisdiction determines that such period is unenforceable, then such time period shall end on the date that is 6 months after the Date of Termination.
(L) “Notice of Termination” has the meaning stated in Paragraph (A) of Section 8 hereof.
(M) “Payment Trigger” means the termination of Executive’s employment with the Corporation or an Affiliate in a manner that constitutes a “separation from service”, as defined in Section 409A, (i) for any reason other than (a) by Executive without Good Reason, (b) by the Corporation as a result of the Disability of Executive or with Cause or, (c) as a result of the death of Executive; and (ii) coincident with or within one year following a Change in Control.
(N) “Person” means an individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof.
(O) “Section 409A” means Section 409A of the Code and any proposed, temporary or final regulations, or any other guidance, promulgated with respect to such Section 409A by the U.S. Department of Treasury or the Internal Revenue Service.
(P) “Subsidiary” means a “subsidiary corporation,” as that term is defined in Section 424(f) of the Code, or any successor provision.
(Q) “Term” has the meaning stated in Paragraph (A) of Section 2 hereof.
2. Term of Agreement.
(A) This Agreement shall become effective on the Effective Date and shall continue in effect until the earliest of (as the same may be extended, the “Term”) (i) a Date of Termination determined in accordance with Section 8 shall have occurred prior to a Change in
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Control, (ii) if a Payment Trigger shall have occurred during the Term of this Agreement, the performance by the Corporation of all its obligations under this Agreement, (iii) March 1, 2024, if, as of such date, a Change in Control shall not have occurred and be continuing; or (iv) if, as of March 1, 2024, a Change in Control shall have occurred and be continuing, either the expiration of such period thereafter within which a Payment Trigger may occur or the ensuing occurrence of a Payment Trigger and the performance by the Corporation of all of its obligations under this Agreement.
(B) To the extent not previously terminated, the Term shall be automatically extended for successive one-year periods upon the terms and conditions set forth herein, commencing on March 1, 2024, and on each anniversary of such Term extension thereafter, unless the Corporation or the Executive elect not to extend the Term by notifying the other party of such non-renewal in writing not later than sixty (60) days before any such anniversary date. For purposes of this Agreement, any reference to the “Term” of this Agreement shall include the original term and any extension thereof.
3. General Provisions.
(A) The Corporation hereby represents and warrants to Executive as follows: (i) the execution and delivery of this Agreement and the performance by the Corporation of the actions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Corporation; (ii) this Agreement is a legal, valid and legally binding obligation of the Corporation, enforceable in accordance with its terms; (iii) neither the execution or delivery of this Agreement nor the consummation by the Corporation of the actions contemplated hereby (a) will violate any provision of the certificate of incorporation or bylaws (or other charter documents) of the Corporation; or (b) will violate or be in conflict with any applicable law or any judgment, decree, injunction or order of any court or governmental agency or authority. Executive hereby represents and warrants to the Corporation that (x) Executive’s execution, delivery and performance of this Agreement does not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (y) Executive is not a party to or bound by any employment agreement, non-compete agreement or confidentiality agreement with any other person or entity, and (z) upon the execution and delivery of this Agreement by the Corporation, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. Executive hereby acknowledges and represents that s/he fully understands the terms and conditions contained herein.
(B) In no event shall payments be made under this Agreement in respect of more than one termination of Executive’s employment with the Corporation and its Affiliates.
(C) This Agreement does not create, and shall not be construed as creating, an express or implied contract of employment and, except as otherwise agreed in writing between Executive and the Corporation, Executive does not and shall not have any right to be retained in the employ of the Corporation or any Affiliate. Notwithstanding the immediately preceding sentence or any other provision of this Agreement, a termination of Executive’s employment with the Corporation or any Affiliate must be effected in accordance with a Notice of Termination satisfying paragraph (A) of Section 8 in order to constitute a termination for purposes of this Agreement.
4. Severance Payments.
(A) Not in Connection with a Change in Control. In the event that the Executive’s employment with the Corporation and its Affiliates terminates during the Term of
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this Agreement and such termination does not occur coincident with or within one year following a Change in Control, the terms of this Paragraph (A) of Section 4 shall apply.
(i) By the Corporation for Cause or by Executive without Good Reason. If the Corporation terminates Executive’s employment for Cause or Executive terminates his or her employment with the Corporation without Good Reason, then the Corporation shall pay to Executive Executive’s base salary and any accrued vacation pay through the Date of Termination to the extent not theretofore paid, and such amount shall be paid in a lump sum within 30 days following the Date of Termination.
(ii) By the Corporation not for Cause or by Executive with Good Reason. If the Corporation terminates Executive’s employment not for Cause or Executive terminates his or her employment with the Corporation with Good Reason, then the Corporation shall pay to Executive:
(a) Executive’s base salary and any accrued vacation pay through the Date of Termination to the extent not theretofore paid and such amount shall be paid in a lump sum within 30 days following the Date of Termination;
(b) within (I) 30 days following the Date of Termination or (II) any earlier date as required by the Annual Incentive Plan, and subject to Sections 7 and 10 of this Agreement, the amount of any incentive compensation that has been allocated to, accrued to, earned by, or awarded to Executive for a completed fiscal year or other completed measuring period preceding the occurrence of the Date of Termination under any incentive compensation plan that has not yet been paid to Executive;
(c) Commencing on the first payroll date on or immediately following the 60th day following the Date of Termination, subject to Sections 7 and 10 of this Agreement, the Corporation shall pay to Executive an amount equal to the product of: (I) 1.5 (one and one-half) multiplied by (II) the sum of (x) Executive’s annual base salary in effect on the Date of Termination and (y) the average of the bonus payments paid to Executive under an Annual Incentive Plan during the three years (or lesser period if the Executive has been employed fewer than three full fiscal years) preceding the year in which the Date of Termination occurs. This amount will be paid to Executive in equal installments over a period of 1 year. Such installment payments will be made to Executive in accordance with the Corporation’s customary payroll practices; and
(d) Commencing on the first payroll date on or immediately following the 60th day following the Date of Termination and continuing for a period of 1 year, and subject to Sections 7 and 10 of this Agreement the Corporation shall pay to Executive, in equal installments over the course of the applicable payment period, an amount equal to the product of (I) Executive’s monthly premium for health, vision and dental insurance continuation coverage for Executive and Executive’s family under the Consolidated Omnibus Budget Reconciliation Act of 1985, based on the monthly premium rate for such coverage in effect on the Date of Termination, multiplied by (II) 12 months. The installment payments will be made to Executive in accordance with the Corporation’s customary payroll practices.
(B) Coincident with or within one year following a Change in Control. In the event that Executive’s employment with the Corporation and its Affiliates terminates during the
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Term of this Agreement and such termination occurs coincident with or within one year following a Change in Control, the terms of this Paragraph (B) of Section 4 shall apply:
(i) By the Corporation for Cause or by Executive without Good Reason. If the Corporation terminates Executive’s employment for Cause or Executive terminates his or her employment without Good Reason, then the Corporation shall pay to Executive Executive’s base salary and any accrued vacation pay through the Date of Termination to the extent not theretofore paid, and such amount shall be paid in a lump sum within 30 days following the Date of Termination.
(ii) Upon the occurrence of a Payment Trigger. If a Payment Trigger occurs during the Term of this Agreement, then the Corporation shall provide to Executive:
(a) within 30 days following the Date of Termination, Executive’s base salary and accrued vacation pay through the Date of Termination to the extent not theretofore paid;
(b) within (I) 30 days following the Date of Termination or (II) any earlier date as required by the Annual Incentive Plan, and subject to Sections 7 and 10 of this Agreement, the amount of any incentive compensation that has been allocated to, accrued to, earned by, or awarded to Executive for a completed fiscal year or other completed measuring period preceding the occurrence of the Date of Termination under any incentive compensation plan that has not yet been paid to Executive;
(c) within (I) the 30-day period commencing on the 60th day following the Date of Termination, or (II) such later period as required by Section 6, and subject to Sections 7 and 10 of this Agreement, a lump sum payment equal to the product of (x) the Annual Incentive Target in effect immediately prior to the Payment Trigger and (y) a fraction, the numerator of which is the number of calendar days in the current fiscal year through the Date of Termination, and the denominator of which is 365, reduced by the amount, if any, paid to Executive under the Annual Incentive Plan’s terms with respect to the fiscal year during which the Date of Termination occurs;
(d) Commencing on the first payroll date on or immediately following the 60th day following the Date of Termination and continuing for a period of 1 year, or within such other period as required by Section 6, and subject to Sections 7 and 10 of this Agreement, the Corporation shall pay to Executive, in equal installments over the course of the applicable payment period, an amount equal to the product of: (I) two multiplied by, (II) the sum of: (x) the higher of (1) Executive’s annual base salary in effect immediately prior to the occurrence of the Change in Control and (2) Executive’s annual base salary in effect immediately prior to the Payment Trigger; and (y) the average of the bonus payments paid to Executive under an Annual Incentive Plan during the three years (or lesser period if the Executive has been employed fewer than three full fiscal years) preceding the year in which the Date of Termination occurs. The installment payments will be made to Executive in accordance with the Corporation’s customary payroll practices;
(e) Commencing on the first payroll date on or immediately following the 60th day following the Date of Termination and continuing for a period of 1 year, and subject to Sections 7 and 10 of this Agreement, the
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Corporation shall pay to Executive, in equal installments over the course of the applicable payment period, an amount equal to the product of (I) Executive’s monthly premium for health, vision and dental insurance continuation coverage for Executive and Executive’s family under the Consolidated Omnibus Budget Reconciliation Act of 1985, based on the monthly premium rate for such coverage in effect on the Date of Termination, multiplied by (II) 24 months. The installment payments will be made to Executive in accordance with the Corporation’s customary payroll practices; and
(f) subject to Sections 7 and 10 of this Agreement, up to $25,000 for executive transition/outplacement services received by Executive (I) prior to the expiration of the Non-Interference / Assistance Period (II) through a third party professional provider of such services identified and retained by Executive. Such payment will be paid directly to such third-party provider by the Corporation promptly following its receipt of an invoice from such provider confirming the provision of such services to Executive.
(C) Death or Disability. If Executive’s employment terminates as a result of Executive’s death or Disability, then the Corporation shall pay to Executive or Executive’s estate, as appropriate: (I) Executive’s base salary and any accrued vacation pay through the Date of Termination to the extent not theretofore paid; (II) the amount of any incentive compensation that has been allocated to, accrued to, earned by or awarded to Executive for a completed fiscal year or other completed measuring period preceding the occurrence of the Date of Termination under any incentive compensation plan that has not yet been paid to Executive (III) one (1) times the Executive’s annual base salary in effect on the Date of Termination. Such payments shall be made in a lump sum within 30 days following the Date of Termination.
(D) Exclusive Severance Benefit. Notwithstanding the foregoing provisions of this Article 4, and except as specifically provided below, any severance payments or benefits received by Executive pursuant to this Agreement shall be in lieu of any benefits under the Uniti Group Inc. Severance Program or any other severance or reduction‑in‑force plan, program, policy, agreement or arrangement maintained by the Corporation or an Affiliate (not including an equity award agreement, retirement or deferred compensation plan or similar plan or agreement which may contain provisions operative on a termination of Executive’s employment or which may incidentally refer to accelerated vesting or accelerated payment upon a termination of employment) and in lieu of any severance or separation pay benefit that may be required under applicable law.
5. Certain Reductions in Change in Control Payments.
(A) In the event that the Accounting Firm determines that any Change in Control Payment to Executive would be subject to the Excise Tax, the Accounting Firm shall determine, in accordance with the following restrictions, whether to reduce the aggregate amount of the Change in Control Payments payable to Executive to the Reduced Amount. For clarity, the Change in Control Payments shall be reduced to the Reduced Amount only if the Accounting Firm determines that Executive would receive a greater Net After-Tax Benefit if Executive’s Change in Control Payments were reduced to the Reduced Amount.
(B) If the Accounting Firm determines that the aggregate Change in Control Payments otherwise payable to Executive should be reduced to the Reduced Amount in accordance with Section 5(A), the Corporation shall promptly notify Executive to that effect and provide Executive a copy of the detailed calculation thereof. All determinations made by the Accounting Firm under this Section 5 shall be binding upon the Corporation and Executive and shall be made within 30 business days after termination of Executive’s employment. The
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reduction of Executive’s Change in Control Payments to the Reduced Amount, if applicable, shall be made by reducing the Change in Control Payments under the following Paragraphs of Section 4 (and no other Change in Control Payments) in the following order: (i) Paragraph (B)(ii)(d), (ii) Paragraph (B)(ii)(c), (iii) Paragraph (B)(ii)(e), and (iv) Paragraph (B)(ii)(f). All fees and expenses of the Accounting Firm pursuant to this Section 5 shall be borne solely by the Corporation.
(C) The following terms have the following meanings for purposes of this Section 5:
(i) “Accounting Firm” means an independent, nationally recognized accounting firm designated by the Corporation in good faith prior to a Change in Control; provided that if the Accounting Firm is not willing or able to value the restrictive covenants in Section 9, then the restrictive covenants shall be valued by an independent third-party valuation specialist selected by the Corporation in good faith.
(ii) “Change in Control Payment” means any payment or distribution by the Corporation in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of Executive that is contingent on a Change in Control, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise.
(iii) “Excise Tax” means the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.
(iv) “Net After-Tax Benefit” means the aggregate Value of all Change in Control Payments to Executive, net of all taxes imposed on Executive with respect thereto under Sections 1 and 4999 of the Code and under applicable state and local laws, as determined by the Accounting Firm after taking into account any value attributable to the restrictive covenants in Section 9 that is treated as reasonable compensation described in Section 280G(b)(4) of the Code.
(v) “Reduced Amount” means the greatest amount of Change in Control Payments that can be paid to Executive that would not result in the imposition of the Excise Tax upon Executive if the Accounting Firm determines to reduce Change in Control Payments to Executive pursuant to this Section 5, determined after taking into account any value attributable to the restrictive covenants in Section 9 that is treated as reasonable compensation described in Section 280G(b)(4) of the Code.
(vi) “Value” of a Change in Control Payment means the economic present value of a Change in Control Payment as of the date of the Change in Control (or such other date as required pursuant to Section 280G), as determined by the Accounting Firm pursuant to Section 280G of the Code using the discount rate required by Section 280G(d)(4) of the Code.
6. Compliance with Section 409A.
(A) Notwithstanding anything contained in this Agreement to the contrary, if Executive is a “specified employee,” as determined under the Corporation’s policy for determining specified employees on the Date of Termination, all payments, benefits or reimbursements paid or provided under this Agreement that constitute a “deferral of compensation” within the meaning of Section 409A of the Code, that are provided as a result of a “separation from service” within the meaning of Section 409A and that would otherwise be paid or provided during the first six months following such Date of Termination shall be accumulated
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through and paid or provided (together with interest at the applicable Federal short-term rate, compounded semi-annually, in effect under Section 1274(d) of the Code as of the Date of Termination) within 30 calendar days after the first business day following the six month anniversary of such Date of Termination (or, if Executive dies during such six-month period, within 10 calendar days after Executive’s death).
(B) It is intended that the payments and benefits provided under this Agreement either shall be exempt from the application of or shall comply with the requirements of Section 409A. For purposes of Section 409A, each payment hereunder shall be considered a separate payment. This Agreement shall be construed, administered, and governed in a manner that effects such intent, and the Corporation shall not take any action that would be inconsistent with such intent. Without limiting the foregoing, the payments and benefits provided under this Agreement may not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A upon Executive. Although the Corporation shall use its best efforts to avoid the imposition of taxation, interest and penalties under Section 409A, the tax treatment of the benefits provided under this Agreement is not warranted or guaranteed. Neither the Corporation, its Affiliates nor any of their respective directors, officers, employees or advisors shall be held liable for any taxes, interest, penalties or other monetary amounts owed by Executive or any other taxpayer as a result of the Agreement.
7. Release. Notwithstanding anything contained herein to the contrary, the Corporation shall only be obligated to pay or provide, or continue to pay or provide, any benefit under Paragraphs (A)(ii), (B)(ii)(c), (B)(ii)(d), (B)(ii)(e) and (B)(ii)(f) of Section 4 to the extent that: (A) within the 45-day period after the Date of Termination, Executive executes a waiver and release substantially in the form attached hereto as Exhibit A; (B) Executive does not revoke such waiver and release; (C) the waiver and release becomes effective and irrevocable in accordance with its terms; (D) Executive remains in compliance with the terms and conditions of Section 9; and (E) Executive is not then-currently subject to any claims for recoupment or clawback of any of his or her compensation from the Corporation under any clawback and/or recoupment policy of the Corporation applicable to Executive.
8. Termination Procedures.
(A) Except in the event that Executive’s employment terminates as a result of Executive’s death (in which case no Notice of Termination is required), any purported termination of Executive’s employment shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 13 hereof. For purposes of this Agreement, a “Notice of Termination” means a written notice that indicates the specific termination provision in this Agreement relied upon, and, if applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated. Further, a Notice of Termination for Cause shall include a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board (excluding for these purposes Executive himself or herself) at a meeting of the Board that was called and held for the purpose of considering the termination (after reasonable notice to Executive and an opportunity for Executive, together with his or her counsel, to be heard by the members of the Board) finding that, in the informed, reasonable, good faith judgment of the Board, Executive was guilty of conduct set forth in the definition of Cause in Section 1(D), and specifying the particulars thereof in detail.
(B) “Date of Termination” means the effective date of the termination of Executive’s employment with the Corporation resulting from Executive’s death or an event that constitutes a “separation from service” within the meaning of Section 409A of the Code. Except as provided in the next sentence, the Date of Termination shall be determined as follows: (i) if
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Executive’s employment is terminated for Disability, 20 business days after Notice of Termination is given (provided that Executive shall not have returned to the full-time performance of Executive’s duties during that 20 business day period); (ii) if Executive’s employment is terminated as a result of Executive’s death, the date of Executive’s death; and (iii) if Executive’s employment is terminated for any other reason, the date specified in the Notice of Termination, which, in the case of a termination by the Corporation, shall not be less than 10 business days except in the case of a termination for Cause (in which case the date of termination may be earlier), and, in the case of a termination by Executive, shall not be less than 10 business days nor more than 20 business days, respectively, after the date such Notice of Termination is given. The Corporation and Executive shall take all steps necessary (including with regard to any post-termination services by Executive) to ensure that any termination described in this Paragraph (B) of Section 8 constitutes a “separation from service” (or is otherwise a permissible distribution event) within the meaning of Section 409A of the Code and that the date on which such separation from service (or permissible distribution event) takes place is the “Date of Termination”.
9. Non-Disclosure; Non-Competition; and Non-Interference.
(A) Executive acknowledges that in the course of his or her employment with the Corporation and its Affiliates s/he has had and will have access to confidential information and trade secrets proprietary to the Corporation and its Affiliates, including, without limitation, information relating to the Corporation’s and its Affiliates’ products, suppliers, and customers, the sources, nature, processes, costs and prices of the Corporation’s and its Affiliates’ products, the names, addresses, contact persons, purchasing and sales histories, and preferences of the Corporation’s and its Affiliates’ suppliers and customers, the Corporation’s and its Affiliates’ business plans and strategies, and the names and addresses of, amounts of compensation paid to, and the trading and sales performance of the Corporation’s and its Affiliates’ employees and agents (hereinafter referred to as the “Confidential Information”). Confidential Information excludes information which (i) is in the public domain through no act or omission of Participant in violation of any agreement that Participant is a party to with the Corporation, or (ii) has become available to Participant on a nonconfidential basis from a source other than the Corporation without breach of such source’s confidentiality or nondisclosure obligations to the Corporation. Executive further acknowledges that the Confidential Information is proprietary to the Corporation and its Affiliates, that the unauthorized disclosure of any of the Confidential Information to any person or entity will result in immediate and irreparable competitive injury to the Corporation and its Affiliates, and that such injury cannot adequately be remedied by an award of monetary damages. Accordingly, Executive shall not at any time disclose any Confidential Information to any person or entity who is not properly authorized by the Corporation or its Affiliates to receive the information without the prior written consent of the Chairman of the Board (which consent may be withheld for any reason or no reason) unless and except to the extent that such disclosure is required by any subpoena or other legal process (in which event Executive shall give the Chairman of the Board prompt written notice of such subpoena or other legal process in order to permit the Corporation and its Affiliates to seek appropriate protective orders), and that s/he shall not use any Confidential Information for his or her own account without the prior written consent of the Chairman of the Board (which consent may be withheld for any reason or no reason).
(B) Executive shall not during his or her employment with the Corporation or its Affiliates and thereafter until the expiration of the Non-Interference/Assistance Period, in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, shareholder, investor or employee of or in any other corporation or enterprise or otherwise, (i) engage in or be engaged in, or collaborate or partner with, or assist or provide perform any executive, managerial, supervisory, sales, marketing, research, consulting, or customer-related services to any other person, firm, corporation or
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enterprise in engaging or being engaged in, any Competitive Business within any state in which the Corporation or any Affiliate conducts business as of Executive’s Date of Termination, or (ii) directly or indirectly solicit, divert, take away, service, or accept the business of any active customer of the Corporation or any Affiliate, or any person or entity who is or was at any time during the previous one-year period a customer of the Corporation or any Affiliate. Nothing in this Section 9 prohibit Executive from being: (a) owning shares of a mutual fund or a diversified investment company or (b) passively owning not more than 5% of any class of outstanding equity securities of any corporation or other entity that is publicly traded, so long as Executive does not actively participate in the business of such corporation or other entity. For purposes of this Section 9, “Competitive Business” means the business then actively being conducted by the Corporation or any Affiliate as of the Date of Termination, and any area of business in which the Corporation or any Affiliate has engaged during the one year period immediately preceding the Date of Termination, including, but not limited to, the business of owning, acquiring, developing, building and/or leasing communication distribution systems.
(C) Executive shall not during his or her employment with the Corporation or its Affiliates and thereafter until the expiration of the Non-Interference/Assistance Period, employ, partner or collaborate on a business enterprise with or assist any person or entity in employing, any employee of the Corporation or an Affiliate. Executive shall not during his or her employment with the Corporation or its Affiliates and thereafter until the expiration of the Non-Interference/Assistance Period solicit, or assist any person or entity to solicit, any employee of the Corporation or any Affiliate to leave the employment of the Corporation or such Affiliate or to become employed by, or partner or collaborate on a business enterprise with, any other entity.
(D) If a court of competent jurisdictions holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties agree to substitute the maximum period, scope or geographical area reasonable under such circumstances for the stated period, scope or area and that the court shall be allowed to revise and/or modify the restrictions contained herein to cover the maximum period, scope and area permitted by applicable law.
(E) Executive acknowledges that the covenants contained in this Section 9 are a principal inducement for the willingness of the Corporation to enter into this Agreement and make the payments and provide to Executive the benefits described in this Agreement and that the Corporation and Executive intend the covenants (i) to be binding upon and enforceable against Executive in accordance with their terms, notwithstanding any common or statutory law to the contrary; and (ii) to survive and continue in full force in accordance with their terms notwithstanding the termination of this Agreement. Executive agrees that the obligations of the Corporation under this Agreement (specifically including, but not limited to, the obligation to make any payment or provide any benefit under any of Paragraphs (A)(ii), (B)(ii)(c), (B)(ii)(d), (B)(ii)(e) and (B)(ii)(f) of Section 4) constitute sufficient consideration for the covenants contained in this Section 9. The Corporation and Executive further agree that the restrictions contained in this Section 9 are reasonable in period, scope and geographical area and are necessary to protect the legitimate business interests and Confidential Information of the Corporation and its Affiliates. Executive agrees that s/he will notify the Corporation in writing if s/he has any questions regarding the applicability of this Section 9. Because Executive’s services are unique and because Executive has access to Confidential Information, the parties agree that the Corporation and its Affiliates would be damaged irreparably in the event any of the provisions of this Section 9 were not performed in accordance with their specific terms or were otherwise breached and that money damages would be an inadequate remedy for any such non-performance or breach. In the event that Executive breaches or threatens to breach any such provision of this Section 9, the parties agree that the Corporation and its Affiliates shall be entitled to seek any and all equitable and legal relief provided by law, specifically including immediate and permanent injunctive relief to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other
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security). Executive hereby waives any claim that the Corporation and its Affiliates have an adequate remedy at law. The parties agree that the foregoing relief shall not be construed to limit or otherwise restrict the ability of the Corporation and its Affiliates to pursue any other remedy provided by law, including the recovery of any actual, compensatory or punitive damages.
10. Cessation of Payments; Recoupment. The Corporation and Executive acknowledge and agree that the Corporation may cease making any and all payments payable under Paragraphs (A)(ii), (B)(ii)(c), (B)(ii)(d), (B)(ii)(e) and (B)(ii)(f) of Section 4 if the Corporation reasonably believes that Executive has breached, or is in breach of, any of his/her obligations under Section 9 as evidenced by a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board that was called and held for the purpose of considering such action (after reasonable notice to Executive and an opportunity for Executive, together with his or her counsel, to be heard by the members of the Board) finding that, in the informed, reasonable, good faith judgment of the Board, Executive has breached, or is in breach of, any of his/her obligations under Section 9, and specifying the particulars thereof in detail. Without prejudice to any other remedies available to the Corporation under this Agreement or applicable law, the Corporation may also seek to recoup, and Executive agrees to return upon Corporation’s written request, any payments (other than Executive’s annual base salary and any accrued vacation pay through the Date of Termination) made to Executive under Paragraphs (A)(ii), (B)(ii)(c), (B)(ii)(d), (B)(ii)(e) and (B)(ii)(f) of Section 4 if Executive has breached, or is in breach of, any of Executive’s obligations under this Agreement.
11. Disputes.
(A) Except as set forth in Section 11(B) below, any dispute or controversy arising out of or in connection with this Agreement shall, upon a written notice from Executive to the Corporation either before suit thereupon is filed or within 20 business days thereafter, be settled exclusively by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration proceeding shall be conducted before a panel of three arbitrators sitting in the municipality in which Executive’s principal place of employment with the Corporation (or, if applicable, an Affiliate) is (or was, in the event that Executive’s employment is terminated prior to the initiation of arbitration proceedings) located. Judgment may be entered on the arbitrator’s award in any court having jurisdiction.
(B) Notwithstanding anything to the contrary in Section 11(A), the Corporation shall not be required to seek or participate in arbitration regarding any breach or threatened breach by Executive of his or her obligations under Section 9, and may instead pursue its remedies for such breach in a court of competent jurisdiction in accordance with Section 15.
(C) Corporation undertakes and agrees that if Corporation breaches or threatens to breach any material provision of this Agreement, Corporation shall be liable for any attorneys’ fees and costs reasonably incurred by Executive in enforcing, in accordance with the terms of this Agreement, Executive’s rights under this Agreement. Executive undertakes and agrees that if Executive breaches or threatens to breach any provision of this Agreement, Executive shall be liable for any attorneys’ fees and costs reasonably incurred by the Corporation in enforcing, in accordance with the terms of this Agreement, its rights under this Agreement.
12. Successors; Binding Agreement.
(A) Except as otherwise provided herein, all covenants and agreements contained in this Agreement shall bind and inure to the benefit of and be enforceable by and upon the Corporation and its successors and assigns.
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(B) This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. Any and all amounts payable to Executive hereunder that, as a result of Executive’s death, would not be paid until after Executive’s death (other than amounts which, by their terms, terminate upon the death of Executive) shall be paid in accordance with the terms of this Agreement to the executors, personal representatives, or administrators of Executive’s estate.
13. Notices. For purposes of this Agreement, all notices and other communications provided pursuant to the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:
To the Corporation: Uniti Group Inc.
2101 Riverfront Drive, Suite A
Little Rock, AR 72202
Attention: Chief Executive Officer
To Executive: [name]
[address]
14. Miscellaneous. Except as otherwise provided in Section 6, no provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by Executive and an officer of the Corporation specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state, or local law and any additional withholding to which Executive has agreed.
15. Governing Law. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Maryland, without giving effect to any choice of law or conflict of law provision or rule (whether of the State or Maryland or any other jurisdiction). Any legal action, other than an arbitration described in Paragraph (A) of Section 11, relating to or arising out of this Agreement shall be filed and litigated exclusively in a state court of competent jurisdiction located in Little Rock, Arkansas.
16. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, each of which shall remain in full force and effect.
17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.
18. Entire Agreement. This Agreement supersedes any prior agreements or understandings, oral or written, between the parties hereto with respect to the subject matter hereof and constitutes the entire agreement of the parties with respect thereto. No agreements or
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representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement.
[Signature page follows]
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IN WITNESS WHEREOF, the parties have signed this Agreement as of the date set forth above.
UNITI GROUP INC.
Signed:
Print Name:
Date:
EXECUTIVE
Signed:
Print Name:
Date:
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EXHIBIT A
******
WAIVER AND RELEASE AGREEMENT
THIS WAIVER AND RELEASE AGREEMENT (this “Waiver and Release”) is entered into by and between ____________(“Executive”) and Uniti Group Inc. (the “Company”) (collectively, the “Parties”).
WHEREAS, the Parties have entered into a Severance Agreement dated as of ____, 20__ (the “Agreement”);
WHEREAS, Executive’s employment has been or will be terminated in accordance with the Agreement as of [DATE] (the “Date of Termination”); and
WHEREAS, the Parties seek to fully and finally settle all existing claims, whether or not now known, arising out of Executive’s employment and termination of employment on the terms set forth herein.
NOW, THEREFORE, in consideration of the promises and agreements contained herein and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, and intending to be legally bound, the Parties agree as follows:
1. In consideration of the payments to be made and the benefits to be received by Executive pursuant to Paragraphs (A)(ii), (B)(ii)(c), (B)(ii)(d), (B)(ii)(e) and (B)(ii)(f) of Section 4 of the Agreement (the “Severance Benefits”) which Executive acknowledges are in addition to payments and benefits to which Executive would otherwise be entitled upon termination of employment without providing a release of claims under the normal operation of the Company’s benefit plans, policies, and/or practices Executive hereby agrees to provide the waiver and release set forth in Section 2 below.
2. For valuable consideration from the Company, receipt of which is hereby acknowledged, Executive waives, releases, and forever discharges the Company and its current and former parents, subsidiaries, affiliates, divisions, shareholders, owners, members, officers, directors, attorneys, agents, employees, successors, and assigns, and the Company’s parents’, subsidiaries’, and affiliates’ divisions, shareholders, owners, members, officers, directors, attorneys, agents, employees, successors, and assigns (collectively referred to as the “Company Releasees”) from any and all rights, causes of action, claims or demands, whether express or implied, known or unknown, that arise on or before the date that Executive executes this Waiver and Release, which Executive has or may have against the Company and/or the Company Releasees, including, but not limited to, any rights, causes of action, claims, or demands relating to or arising out of the following:
a. anti-discrimination, anti-harassment, and anti-retaliation laws, such as the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, and Executive Order 11141, which prohibit employment discrimination based on age; Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866 (42 U.S.C. § 1981), the Equal Pay Act, and Executive Order 11246, which prohibit discrimination based on race, color, national origin, religion, or sex; the Genetic Information Nondiscrimination Act, which prohibits discrimination on the basis of genetic information; the Americans With Disabilities Act and Sections 503 and 504 of the Rehabilitation Act of 1973, which
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prohibit discrimination based on disability; and any other federal, state, or local laws prohibiting employment or wage discrimination; and
b. other employment laws, such as the Worker Adjustment and Retraining Notification Act, which requires that advance notice be given of certain workforce reductions; the Employee Retirement Income Security Act of 1974, which, among other things, protects employee benefits; the Family and Medical Leave Act, which requires employers to provide leaves of absence under certain circumstances; state laws which regulate wage and hour matters, including all forms of compensation, vacation pay, sick pay, compensatory time, overtime, commissions, bonuses, and meal and break periods; state family, medical, and military leave laws, which require employers to provide leaves of absence under certain circumstances; the Sarbanes Oxley Act; and any other federal, state, or local laws relating to employment which—to the extent Employee performed work for the Company in West Virginia—would include, without limitation, the West Virginia Human Rights Act, and—to the extent Employee performed work for the Company in New Jersey—would include, without limitation, the New Jersey Conscientious Employee Protection Act; and
c. tort, contract, and quasi-contract claims, such as claims for wrongful discharge, physical or personal injury, intentional or negligent infliction of emotional distress, fraud, fraud in the inducement, negligent misrepresentation, defamation, invasion of privacy, interference with contract or with prospective economic advantage, breach of express or implied contract, unjust enrichment, promissory estoppel, breach of covenants of good faith and fair dealing, negligent hiring, negligent supervision, negligent retention, and similar or related claims; and
d. all remedies of any type, including, but not limited to, damages and injunctive relief, in any action that may be brought on Executive’s behalf against the Company and/or the Company Releasees by any government agency or other entity or person.
Executive understands that Executive is releasing claims about which Executive may not know anything at the time Executive executes this Waiver and Release. Executive acknowledges that it is Executive’s intent to release such unknown claims, even though Executive recognizes that someday Executive might learn new facts relating to Executive’s employment or learn that some or all of the facts Executive currently believes to be true are untrue, and even though Executive might then regret having signed this Waiver and Release. Nevertheless, Executive acknowledges Executive’s awareness of that risk and agrees that this Waiver and Release shall remain effective in all respects in any such case. Executive expressly waives all rights Executive might have under any laws, including, without limitation, the laws set forth in Schedule I to this Waiver and Release, intended to protect Executive from waiving unknown claims.
3. Notwithstanding anything to the contrary in this Waiver and Release, the waiver and release contained herein shall exclude any rights or claims (a) that may arise after the date on which Executive executes this Waiver and Release; (b) that cannot be released under applicable law (such as worker’s compensation and unemployment insurance claims); or (c) for indemnification or directors and officers liability insurance coverage, if any, to which s/he was entitled immediately prior to his or her Date of Termination with regard to his or her service as an officer or director of the Company or any company(ies) controlled by, controlling or under common control with the Company, and any predecessors, successors or assigns to the foregoing (the “UNIT Group”). In addition, the Parties agree that this Waiver and Release shall not adversely affect, alter, or extinguish (i) any vested right that Executive may have with respect to any pension or other retirement benefits to which Executive is or will be entitled by virtue of Executive’s employment with the UNIT Group; (ii) Executive’s rights under the Consolidated
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Omnibus Budget Reconciliation Act of 1985; or (iii) Executive’s rights under Sections 4 and 5 of the Agreement which are intended to survive termination of employment, and nothing in this Waiver and Release shall prohibit Executive from enforcing such rights. Moreover, nothing in this Waiver and Release shall prevent or preclude Executive from challenging in good faith the validity of this Waiver and Release, nor does it impose any conditions precedent, penalties, or costs for doing so, unless specifically authorized by applicable law.
4. Except to the extent previously disclosed by Executive in writing to the Company, Executive represents and warrants that Executive has (a) filed no claims, lawsuits, charges, grievances, or causes of action of any kind against the Company and/or the Company Releasees and, to the best of Executive’s knowledge, Executive possesses no claims (including Fair Labor Standards Act (“FLSA”) and worker’s compensation claims); (b) received any and all compensation (including overtime compensation), meal periods, and rest periods to which Executive may have been entitled, and Executive is not currently aware of any facts or circumstances constituting a violation by the Company and/or the Company Releasees of the FLSA or other applicable wage, hour, meal period, and/or rest period laws; and (c) not suffered any work-related injury or illness within the twelve (12) months preceding Executive’s execution of this Waiver and Release, and Executive is not currently aware of any facts or circumstances that would give rise to a worker’s compensation claim against the Company and/or the Company Releasees.
5. Executive agrees that Executive will remain reasonably available to the Company as needed to assist in the smooth transition of Executive’s duties to one or more other employees of the Company and without additional compensation to Executive and to assist in the defense of the Company’s interests in pending or threatened litigation and any other administrative and regulatory proceedings which currently exist or which may arise in the future and involve the conduct of the Company’s business activities during the period of Executive’s employment with the Company. Executive’s obligations with respect to transition duties under this Section 5 shall terminate eight (8) weeks following the Date of Termination; however, Executive’s obligations under this Section 5 with respect to the defense of the Company’s interests shall survive the Date of Termination and the termination of this Waiver and Release.
6. Executive specifically agrees and understands that the existence and terms of this Waiver and Release are strictly CONFIDENTIAL and that such confidentiality is a material term of this Waiver and Release. Accordingly, except as required by applicable law or unless authorized to do so by the Company in writing, Executive agrees that s/he shall not communicate, display or otherwise reveal any of the contents of this Waiver and Release to anyone other than his or her spouse, attorney or financial advisor, provided, however, that they are first advised of the confidential nature of this Waiver and Release and Executive obtains their agreement to be bound by the same. The Company agrees that Executive may respond to legitimate inquiries regarding his or her employment with the Company by stating that the Parties terminated their relationship on an amicable basis and that the Parties have entered into a confidential Waiver and Release that prohibits him or her from further discussing the specifics of his or her separation. Nothing contained herein shall be construed to prevent Executive from discussing or otherwise advising subsequent employers of the existence of any obligations as set forth in the Agreement or this Waiver and Release. Further, nothing contained herein shall be construed to limit or otherwise restrict the UNIT Group’s ability to disclose the terms and conditions of this Waiver and Release as may be required by applicable law or business necessity.
7. In the event that Executive breaches or threatens to breach any provision of this Waiver and Release, s/he agrees that the UNIT Group shall be entitled to seek any and all equitable and legal relief provided by law, specifically including immediate and permanent injunctive relief. Executive hereby waives any claim that the UNIT Group has an adequate
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remedy at law. In addition, and to the extent not prohibited by law, Executive agrees that the UNIT Group shall be entitled to an award of all costs and attorneys’ fees incurred by the UNIT Group in any successful effort to enforce the terms of this Waiver and Release. Executive agrees that the foregoing relief shall not be construed to limit or otherwise restrict the UNIT Group’s ability to pursue any other remedy provided by law, including the recovery of any actual, compensatory or punitive damages. Moreover, if Executive pursues any claims against any Company Releasee subject to the foregoing Waiver and Release, Executive agrees to immediately reimburse the Company for the value of all Severance Benefits received to the fullest extent permitted by law.
8. The Parties acknowledge that this Waiver and Release is entered into solely for the purpose of ending their employment relationship on an amicable basis and shall not be construed as, or used as evidence of, an admission of liability or wrongdoing by either Party and that both the UNIT Group and Executive have expressly denied any such liability or wrongdoing. Executive agrees that s/he is eligible for re-employment by the UNIT Group only by mutual agreement and consent of the Parties.
9. Each of the promises and obligations contained in this Waiver and Release shall be binding upon and shall inure to the benefit of the heirs, executors, administrators, assigns and successors in interest of each of the Parties.
10. The Parties agree that each and every paragraph, sentence, clause, term and provision of this Waiver and Release is severable and that if any portion of this Waiver and Release should be deemed not enforceable for any reason, such portion shall be stricken and the remaining portion(s) thereof should continue to be enforced to the fullest extent permitted by applicable law.
11. This Waiver and Release shall be interpreted, enforced and governed under the laws of the State of Maryland, without regard to any applicable state’s choice of law provisions.
12. Executive represents and acknowledges that in signing this Waiver and Release s/he does not rely, and has not relied, upon any representation or statement made by the UNIT Group or by any of the UNIT Group’s employees, officers, agents, stockholders, directors or attorneys with regard to the subject matter, basis or effect of this Waiver and Release other than those specifically contained herein.
13. Executive acknowledges that Executive has been given at least forty-five (45) days to consider this Waiver and Release from the date that it was first given to Executive. Executive agrees that changes in the terms of this Waiver and Release, whether material or immaterial, do not restart the running of the forty-five (45)-day consideration period. Executive may accept this Waiver and Release by executing this Waiver and Release within the designated time period, but no sooner than the first day after the Date of Termination. Executive shall have seven (7) days from the date that Executive executes this Waiver and Release to revoke Executive’s acceptance of this Waiver and Release by delivering written notice of revocation within the seven (7)-day period to the following Company contact:
Uniti Group Inc.
2101 Riverfront Drive, Suite A
Little Rock, AR 72202
Attn: Human Resources Department
If Executive does not revoke acceptance, this Waiver and Release will become effective and irrevocable by Executive on the eighth day after Executive has executed it.
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14. This Waiver and Release represents the entire agreement between the Parties concerning the subject matter hereof, shall supersede any and all prior agreements which may otherwise exist between them concerning the subject matter hereof (specifically excluding, however, the post-termination obligations contained in the Agreement), and shall not be altered, amended, modified or otherwise changed except by a writing executed by both Parties.
BY SIGNING BELOW, EXECUTIVE ACKNOWLEDGES THAT S/HE HAS READ THIS WAIVER AND RELEASE AND THAT IT INCLUDES A COMPLETE RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS; THAT THE COMPANY HAS ADVISED EXECUTIVE TO CONSULT WITH AN ATTORNEY PRIOR TO SIGNING THIS WAIVER AND RELEASE; THAT S/HE HAS BEEN GIVEN SUFFICIENT TIME TO CONSULT WITH AN ATTORNEY AND CONSIDER THE TERMS OF THIS WAIVER AND RELEASE; THAT S/HE UNDERSTANDS EACH OF ITS TERMS; AND THAT S/HE HAS SIGNED THIS WAIVER AND RELEASE KNOWINGLY AND VOLUNTARILY.
[Signature page follows]
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IN WITNESS WHEREOF, the Parties have themselves signed, or caused a duly authorized agent thereof to sign, this Waiver and Release on their behalf and thereby acknowledge their intent to be bound by its terms and conditions.
UNITI GROUP INC.
Signed:
Print Name:
Date:
EXECUTIVE
Signed:
Name:
Date:
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[Schedule I to Waiver and Release
As emphasized in the Waiver and Release, Executive understands that Executive is releasing claims that Executive may not know about and that Executive expressly waives and relinquishes all rights and benefits which Executive may have under any state or federal statute or common law principle that would otherwise limit the effect of this release to claims known or suspected prior to the date Executive signs this Waiver and Release, including, but not limited to, the effect of protections afforded by the following laws:
1. California Employees. Section 1542 of the Civil Code of the State of California states as follows:
“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.”
2. Montana Employees. Section 28-1-1602 of the Montana Code Annotated states as follows:
“A general release does not extend to claims which the creditor does not know or suspect to exist in the creditor’s favor at the time of executing the release, which, if known by the creditor, must have materially affected the creditor’s settlement with the debtor.”
3. North Dakota Employees. Section 9-13-02 of the North Dakota Century Code states as follows:
“A general release does not extend to claims which the creditor does not know or suspect to exist in the creditor’s favor at the time of executing the release, which if known by the creditor, must have materially affected the creditor’s settlement with the debtor.”
4. South Dakota Employees. Section 20-7-11 of the South Dakota Codified Laws states as follows:
“A general release does not extend to claims which the creditor does not know or suspect to exist in his [or her] favor at the time of executing the release, which if known by him [or her] must have materially affected his [or her] settlement with the debtor.”
Thus, notwithstanding the provisions of Section 1542 of the Civil Code of the State of California, Section 28-1-1602 of the Montana Code Annotated, Section 9-13-02 of the North Dakota Century Code, and Section 20-7-11 of the South Dakota Codified Laws, and for the purpose of implementing a full and complete release and discharge of the Company and the Company Releasees, Employee expressly acknowledges that this release is intended to include in its effect, without limitation, all claims which Employee does not know or suspect to exist in Employee’s favor at the time Employee executes this Agreement, and that this Agreement contemplates the extinguishment of any such claims.]
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Exhibit 10.22
UNITI GROUP INC.
2015 EQUITY INCENTIVE PLAN
2015 EQUITY INCENTIVE PLAN
PERFORMANCE-BASED RESTRICTED STOCK UNIT AGREEMENT
Summary of Restricted Stock Unit Award
As of the Date of Grant set forth below, Uniti Group Inc., a Maryland corporation (the “Company”), grants to the Grantee named below, in accordance with the terms of the Uniti Group Inc. 2015 Equity Incentive Plan (the “Plan”), and this Restricted Stock Unit Agreement (the “Agreement”), the contingent right to receive all, a portion or a multiple of the Target Number of Restricted Stock Units set forth below:
Name of Grantee:
Target Number of Restricted Stock Units:
Date of Grant:
Terms of Agreement
1. Grant of Restricted Stock Units. Subject to and upon the terms, conditions, and restrictions set forth in this Agreement and in the Plan, the Company hereby grants to the Grantee as of the Date of Grant this Performance-Based Restricted Stock Unit Award, which represents the contingent right to receive all, a portion, or a multiple of the Target Number of Restricted Stock Units (the “Restricted Stock Units”) set forth herein. Except as otherwise provided herein, each Restricted Stock Unit shall represent the right to receive one Common Share and shall at all times be equal in value to one Common Share.
2. Right to Receive Payment.
(a) In General.
(i) The Grantee shall vest in all or a portion of the Target Number of Restricted Stock Units on [Date] (the “Vesting Date”), in accordance with the performance matrix attached hereto as Appendix A (the “Performance Matrix”); provided that the Grantee shall have remained in the continuous employ of the Company or any Subsidiary through the Vesting Date.
(ii) Notwithstanding the provisions of Section 2(a)(i), in the event the Grantee’s employment with the Company and its Subsidiaries is terminated without Cause, the Grantee terminates his employment with the Company or a Subsidiary for Good Reason, the Grantee experiences a Company-approved retirement (as determined in the sole discretion of the Committee), or the Grantee dies or becomes permanently disabled (as determined by the Committee) while in the employ of the Company or any Subsidiary, the Grantee shall remain eligible to vest in his Restricted Stock Units on the Vesting Date subject to the Performance Matrix and actual performance achieved. On the Vesting Date following such termination of employment, the Grantee shall vest in a pro-rated portion of the Restricted Stock Units which Grantee would have been entitled had such termination of employment not occurred, based on the number days the Grantee was employed by the Company between the Date of Grant and the Vesting Date.
4889-3164-3936.2
(iii) Notwithstanding the provisions of Section 2(a)(i) or 2(a)(ii), if, prior to the applicable Vesting Date, the Grantee’s employment with the Company or any Subsidiary is terminated without Cause or the Grantee terminates his employment with the Company or any Subsidiary for Good Reason, in each case within the one year period immediately following a Change in Control, then the Restricted Stock Units covered by this Agreement (and not previously vested under Section 2(a) or forfeited under Section 3) shall immediately become vested in an amount based on the Company’s achievement of the Performance Goals set forth in the Performance Matrix as of the last day of the month immediately preceding such termination of employment.
(iv) Notwithstanding anything contained in this Agreement to the contrary, the Committee may, in its sole discretion, at any time declare the Restricted Stock Units vested and nonforfeitable on such terms and conditions as it deems appropriate.
(c) Adjustment of Performance Goals. If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company or any Subsidiary, the manner in which it conducts business or other events or circumstances render any of the Performance Goals to be unsuitable, the Committee may modify such Performance Goal or the level of achievement, in whole or in part, as the Committee deems appropriate.
3. Forfeiture. The Restricted Stock Units that have not yet vested pursuant to Section 2(a) (and any right to unpaid Dividend Equivalents under Section 7 with respect to the Restricted Stock Units) shall be forfeited automatically without further action or notice (i) except as otherwise provided pursuant to Section 2(a)(ii), to the extent that the Performance Goal for a fiscal year has not been achieved, but only with respect to the percentage of the Target Number of Restricted Stock Units allocated to such fiscal year; or (ii) in the event the Grantee ceases to be employed by the Company or any Subsidiary other than as provided in Section 2(a)(ii).
4. Payment of Restricted Stock Units.
(a) In General. Except as may be otherwise provided in this Section 4, the Company shall deliver to the Grantee (or the Grantee’s estate in the event of death) the Shares underlying the vested Restricted Stock Units within sixty (60) days after the date that they become vested in accordance with Section 2.
(b) Special Payment Terms. To the extent that the Grantee’s right to receive payment of the Restricted Stock Units constitutes a “deferral of compensation” within the meaning of Section 409A of the Code, then notwithstanding Section 4(a), the Shares underlying the Restricted Stock Units that become vested pursuant to Section 2(a), if any, shall be subject to the following rules:
(i) Except as provided in Section 4(b)(ii), the Shares underlying the Restricted Stock Units that become vested pursuant to Section 2(a) shall be delivered to the Grantee (or the Grantee’s estate in the event of death) within sixty (60) days after the earlier of (x) the Grantee’s “separation from service” within the meaning of Section 409A of the Code; or (y) the Vesting Date next following the date that the Restricted Stock Units become vested pursuant to Section 2(a).
(ii) If the Restricted Stock Units would otherwise become payable as a result of Section 4(b)(i)(x) but the Grantee is a “specified employee” at that time within the meaning of Section 409A of the Code (as determined pursuant to Company’s policy for identifying specified employees), then to the extent required to comply with Section 409A of the Code, payment of the Restricted Stock Units shall not be made as described Section 4(b)(i) and (x) in the case of a separation from service pursuant to Section 2(a)(ii) the Shares shall instead be delivered to the Grantee within sixty (60) days after the first business day that is more than six months after the date of his or her separation from service or, if the Grantee dies during such six-month period, within ninety (90) days after the Grantee’s death (such date the “409A Settlement Date”) and (y)
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in the case of a separation from service pursuant to Section 2(a)(iii) payment of the Restricted Stock Units shall be made on the 409A Settlement Date in cash (in lieu of payment in Shares) with a value equal to the number of Shares that otherwise would have been paid multiplied by the Market Value per Share as of the date of such separation from service, together with interest from the date of such separation from service until the 409A Settlement Date at the applicable Federal short-term rate, compounded semi-annually, in effect under 1274(d) of the Code as of the date of such separation from service.
(c) Satisfaction of the Company’s Obligations. The Company’s obligations with respect to the Restricted Stock Units shall be satisfied in full upon the delivery of the Shares underlying the Vested Restricted Stock Units or the cash payment described in Section 4(b)(ii)(y).
5. Transferability. The Restricted Stock Units or the right to the cash payment described in Section 4(b)(ii)(y) may not be sold, exchanged, assigned, transferred, pledged, encumbered or otherwise disposed of by the Grantee, unless otherwise provided under the Plan. Any purported transfer or encumbrance in violation of the provisions of this Section 5 shall be void, and the other party to any such purported transaction shall not obtain any rights to or interest in such Restricted Stock Units or cash payment right.
6. No Dividend, Voting or Other Rights. The Grantee shall not possess any incidents of ownership (including, without limitation, dividend and voting rights) in the Common Shares underlying the Restricted Stock Units credited to his or her account until such Common Shares have been delivered to the Grantee in accordance with Section 4. The obligations of the Company under this Agreement will be merely that of an unfunded and unsecured promise of the Company to deliver Common Shares or cash as the case may be (and pay Dividend Equivalents as defined in Section 7) in the future, and the rights of the Grantee will be no greater than that of an unsecured general creditor. No assets of the Company or any Subsidiary will be held or set aside as security for the obligations of the Company under this Agreement.
7. Dividend Equivalents. Upon payment of a vested Restricted Stock Unit, the Grantee shall be entitled to a cash payment equal to the aggregate cash dividends declared and paid or payable with respect to one (1) Common Share for each record date that occurs during the period beginning on the Date of Grant and ending on the date the vested Restricted Stock Unit is paid or, in the case of a separation from service pursuant to Section 2(a), the date of the separation from service (the “Dividend Equivalent”). The Dividend Equivalents shall be forfeited to the extent that the underlying Restricted Stock Unit is forfeited and shall be paid to the Grantee, if at all, at the same time that the related vested Restricted Stock Unit is paid to the Grantee in accordance with Section 4.
8. Continuous Employment. For purposes of this Agreement, the continuous employment of the Grantee with the Company or any Subsidiary shall not be deemed to have been interrupted, and the Grantee shall not be deemed to have ceased to be an employee of the Company or any Subsidiary, by reason of the transfer of his or her employment among the Company and any Subsidiary, or a leave of absence approved by the Committee.
9. No Employment Contract; Disclaimer. Nothing contained in this Agreement shall confer upon the Grantee any right with respect to continuance of employment by the Company or any Subsidiary, nor limit or affect in any manner the right of the Company and any Subsidiary to terminate the employment or adjust the compensation of the Grantee, in each case with or without Cause. By acceptance of this Agreement, the Grantee acknowledges and agrees that neither this Agreement nor any other agreement awarded prior to the date hereof under any equity compensation plan of the Company or its Subsidiaries has created or shall create, or be deemed or construed to create or have created, (i) a contractual, equitable, or other right to receive future grants of equity awards, or other benefits in lieu of equity awards, or (ii) a
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fiduciary duty or other comparable duty of trust or confidence owed to the Grantee (or any successor, assign, affiliate or family member of the Grantee) by the Company and its affiliates and its respective officers, directors, employees, agents or contractors.
10. Relation to Other Benefits. Any economic or other benefit to the Grantee under this Agreement or the Plan shall not be taken into account in determining any benefits to which the Grantee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company or any Subsidiary and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company or any Subsidiary.
11. Taxes and Withholding. The Grantee is responsible for any federal, state, local or other taxes with respect to the Restricted Stock Units (including the vesting of the Restricted Stock Units, the receipt of Common Shares or cash and the receipt of Dividend Equivalents). The Company does not guarantee any particular tax treatment or results in connection with the grant or vesting of the Restricted Stock Units, the delivery of Common Shares or cash or the payment of Dividend Equivalents. To the extent the Company or any Subsidiary of the Company is required to withhold any federal, state, local, foreign or other taxes in connection with the delivery of Common Shares or cash under this Agreement, the Grantee shall pay the tax or make provisions that are satisfactory to the Company or such Subsidiary for the payment thereof. The Grantee may elect (on a form provided by the Company) for the Company or any Subsidiary (as applicable) to retain a number of Common Shares otherwise deliverable hereunder (to the extent any cash otherwise payable is insufficient) with a value equal to the required withholding (based on the Market Value of the Common Shares on the date of delivery) in order to satisfy the withholding obligation; provided that in no event shall the value of the Common Shares together with any cash retained exceed the minimum amount of taxes required to be withheld or such other amount that will not result in a negative accounting impact. If the Company or any Subsidiary is required to withhold any federal, state, local or other taxes at any time other than upon delivery of Common Shares or cash under this Agreement, then the Company or the Subsidiary (as applicable) shall have the right in its sole discretion to (a) require the Grantee to pay or provide for payment of the required tax withholding, or (b) deduct the required tax withholding from any amount of salary, bonus, incentive compensation or other amounts otherwise payable in cash to the Grantee (other than deferred compensation subject to Section 409A of the Code). If the Company or any Subsidiary is required to withhold any federal, state, local or other taxes with respect to Dividend Equivalents, then the Company or Subsidiary (as applicable) shall have the right in its sole discretion to reduce the cash payment related to the Dividend Equivalent by the applicable tax withholding.
12. Compliance with Law. The Company shall make reasonable efforts to comply with all applicable federal and state securities laws and listing requirements of the NASDAQ or any national securities exchange with respect to the Restricted Stock Units; provided, however, notwithstanding any other provision of this Agreement, the Restricted Stock Units shall not be delivered if the delivery thereof would result in a violation of any such law or listing requirement.
13. Amendments. Subject to the terms of the Plan, the Committee may modify this Agreement upon written notice to the Grantee. Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto. Notwithstanding the foregoing, and except as specifically provided in Sections 2(a)(iii) and 2(b), no amendment of the Plan or this Agreement shall adversely affect the rights of the Grantee under this Agreement regarding vested Restricted Share Units under the Plan and this Agreement without the Grantee’s consent.
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14. Severability. In the event that one or more of the provisions of this Agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable.
15. Claw-Back Policy. Notwithstanding any provision contained herein to the contrary, this Agreement, the Restricted Stock Units and any Common Shares that the Grantee may receive pursuant to this Agreement, are subject to the Uniti Group Inc. Claw-Back Policy then in affect (the “Policy”), and the Claw-Back Policy Acknowledgement and Agreement that the Grantee signed in accordance with the Policy (the “Claw-Back Agreement”).
16. Relation to Plan. This Agreement is subject to the terms and conditions of the Plan. This Agreement, the Policy, the Claw-Back Agreement and the Plan contain the entire agreement and understanding of the parties with respect to the subject matter contained in this Agreement, and supersede all prior written or oral communications, representations and negotiations in respect thereto. In the event of any inconsistency between the provisions of this Agreement and the Plan, the Plan shall govern. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan. The Committee acting pursuant to the Plan, as constituted from time to time, shall, except as expressly provided otherwise herein, have the right to determine any questions which arise in connection with the grant of the Restricted Stock Units.
17. Successors and Assigns. Without limiting Section 5, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of the Grantee, and the successors and assigns of the Company and its affiliates.
18. Governing Law. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Maryland, without giving effect to the principles of conflict of laws thereof.
19. Electronic Delivery. The Grantee hereby consents and agrees to electronic delivery of any documents that the Company may elect to deliver (including, but not limited to, prospectuses, prospectus supplements, grant or award notifications and agreements, account statements, annual and quarterly reports, and all other forms of communications) in connection with this and any other award made or offered under the Plan. The Grantee understands that, unless earlier revoked by the Grantee by giving written notice to the Secretary of the Company, this consent shall be effective for the duration of the Agreement. The Grantee also understands that he or she shall have the right at any time to request that the Company deliver written copies of any and all materials referred to above at no charge. The Grantee hereby consents to any and all procedures the Company has established or may establish for an electronic signature system for delivery and acceptance of any such documents that the Company may elect to deliver, and agrees that his or her electronic signature is the same as, and shall have the same force and effect as, his or her manual signature. The Grantee consents and agrees that any such procedures and delivery may be effected by a third party engaged by the Company or any Subsidiary to provide administrative services related to the Plan.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer and the Grantee has also executed this Agreement, as of the Date of Grant.
UNITI GROUP INC.
By: Kenneth Gunderman
Title: President and CEO
By clicking the [Approve] button, the Grantee hereby acknowledges that a copy of the Plan, Plan Summary and Prospectus and the Company’s most recent Annual Report and Proxy Statement (the “Prospectus Information”) are available for viewing on the Company’s intranet site at www.uniti.com. The Grantee hereby consents to receiving this Prospectus Information electronically, or, in the alternative, agrees to contact [name and phone number] to request a paper copy of the Prospectus Information at no charge. The Grantee represents that he or she is familiar with the terms and provisions of the Prospectus Information and hereby accepts the award of Restricted Shares on the terms and conditions set forth herein and in the Plan. These terms and conditions constitute a legal contract that will bind both you and the Company as soon as you click the [Approve] button.
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APPENDIX A
PERFORMANCE MATRIX
Exhibit 21.1
Subsidiaries of the Registrants
| Subsidiary | State or other jurisdiction of incorporation or organization | |||||||
| ANS Connect LLC | Georgia | |||||||
| CSL Capital, LLC | Delaware | |||||||
| Contact Network, LLC | Alabama | |||||||
| CSL Alabama System, LLC | Delaware | |||||||
| CSL Arkansas System, LLC | Delaware | |||||||
| CSL Florida System, LLC | Delaware | |||||||
| CSL Georgia Realty, LLC | Delaware | |||||||
| CSL Georgia System, LLC | Delaware | |||||||
| CSL Iowa System, LLC | Delaware | |||||||
| CSL Kentucky System, LLC | Delaware | |||||||
| CSL Mississippi System, LLC | Delaware | |||||||
| CSL Missouri System, LLC | Delaware | |||||||
| CSL National, LP | Delaware | |||||||
| CSL National GP, LLC | Delaware | |||||||
| CSL New Mexico System, LLC | Delaware | |||||||
| CSL North Carolina Realty, LP | Delaware | |||||||
| CSL North Carolina Realty GP, LLC | Delaware | |||||||
| CSL North Carolina System, LP | Delaware | |||||||
| CSL Ohio System, LLC | Delaware | |||||||
| CSL Oklahoma System, LLC | Delaware | |||||||
| CSL Realty, LLC | Delaware | |||||||
| CSL Tennessee Realty, LLC | Delaware | |||||||
| CSL Tennessee Realty Partner, LLC | Delaware | |||||||
| CSL Texas System, LLC | Delaware | |||||||
| Hunt Brothers of Louisiana, L.L.C. | Louisiana | |||||||
| Hunt Telecommunications, LLC | Louisiana | |||||||
| Information Transport Solutions, LLC | Alabama | |||||||
| InLine Services, LLC | Delaware | |||||||
| Integrated Data Systems, L.L.C. | Louisiana | |||||||
| Nexus Systems, LLC | Louisiana | |||||||
| Nexus Wireless, L.L.C. | Louisiana | |||||||
| PEG Bandwidth DC, LLC | Delaware | |||||||
| PEG Bandwidth DE, LLC | Delaware | |||||||
| PEG Bandwidth LA, LLC | Delaware | |||||||
| PEG Bandwidth MA, LLC | Delaware | |||||||
| PEG Bandwidth MD, LLC | Delaware | |||||||
| PEG Bandwidth MS, LLC | Delaware | |||||||
| PEG Bandwidth NJ, LLC | Delaware | |||||||
| PEG Bandwidth NY Telephone Corp. | New York | |||||||
| PEG Bandwidth PA, LLC | Delaware | |||||||
| PEG Bandwidth Services, LLC | Delaware | |||||||
| PEG Bandwidth TX, LLC | Delaware | |||||||
| PEG Bandwidth VA, LLC | Delaware | |||||||
| Southern Light, LLC | Alabama | |||||||
| Talk America Services, LLC* | Delaware | |||||||
| Uniti Dark Fiber LLC | Delaware | |||||||
| Uniti Fiber Holdings Inc. | Delaware | |||||||
| Uniti Fiber LLC | Delaware | |||||||
| Uniti Fiber 2020 LLC | Delaware | |||||||
| Uniti Group Finance Inc. | Delaware | |||||||
| Uniti Group Finance 2019 Inc. | Delaware | |||||||
| Uniti Group Holdco LLC | Delaware | |||||||
| Uniti Group LP* | Delaware | |||||||
| Uniti Group LP LLC* | Delaware | |||||||
| Uniti Holdings GP LLC | Delaware | |||||||
| Uniti Holdings LP | Delaware | |||||||
| Uniti LATAM GP LLC | Delaware | |||||||
| Uniti LATAM LP | Delaware | |||||||
| Uniti Leasing LLC | Delaware | |||||||
| Uniti Leasing X LLC | Delaware | |||||||
| Uniti Leasing XI LLC | Delaware | |||||||
| Uniti Leasing XII LLC | Delaware | |||||||
| Uniti National LLC | Delaware | |||||||
| Uniti QRS Holdings GP LLC | Delaware | |||||||
| Uniti QRS Holdings LP | Delaware | |||||||
| Uniti Towers NMS Holdings LLC | Delaware | |||||||
| Uniti Wireless Holdings LLC | Delaware | |||||||
____________________________
*Uniti Group LP LLC and Talk America Services, LLC are direct, wholly-owned subsidiaries of Uniti Group Inc. Uniti Group LP is a direct, majority-owned subsidiary of Uniti Group Inc. The remaining subsidiaries are direct or indirect, wholly-owned subsidiaries of Uniti Group LP.
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the registration statements (Nos. 333-203591 and 333-225501) on Form S-8 and (No. 333-237139) on Form S-3 of our reports dated February 28, 2023, with respect to the consolidated financial statements and financial statement schedules I to III, of Uniti Group Inc. and the effectiveness of internal control over financial reporting.
/s/ KPMG LLP
Dallas, Texas
February 28, 2023
February 28, 2023
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth A. Gunderman, certify that:
1.I have reviewed this Annual Report on Form 10-K of Uniti Group Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2023 | By: | /s/ Kenneth A. Gunderman | ||||||
| Kenneth A. Gunderman | ||||||||
| President and Chief Executive Officer | ||||||||
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Paul E. Bullington, certify that:
1.I have reviewed this Annual Report on Form 10-K of Uniti Group Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2023 | By: | /s/ Paul E. Bullington | ||||||
| Paul E. Bullington | ||||||||
| Senior Vice President – Chief Financial Officer and Treasurer | ||||||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Uniti Group Inc. (the “Company”) for the period ending December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2023 | By: | /s/ Kenneth A. Gunderman | ||||||
| Kenneth A. Gunderman | ||||||||
| President and Chief Executive Officer | ||||||||
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Uniti Group Inc. (the “Company”) for the period ending December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2023 | By: | /s/ Paul E. Bullington | ||||||
| Paul E. Bullington | ||||||||
| Senior Vice President – Chief Financial Officer and Treasurer | ||||||||