Document:

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                                                                   EXHIBIT 10.16

                                                                  EXECUTION COPY
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                              EMPLOYMENT AGREEMENT
                              --------------------

          This Employment Agreement (the "Agreement") is made as of this 17th
day of April, 2000 by and between KMC TELECOM HOLDINGS, INC., a Delaware
corporation with its principal place of business located at 1545 Route 206,
Suite 300, Bedminster, New Jersey 07921 ("KMC") and William F. Lenahan, an
individual, residing at 6 Pegasus Drive, Colts Neck, New Jersey 07722 ("Mr.
Lenahan").

                             W I T N E S S E T H :
                             --------------------

          WHEREAS, KMC is engaged in, among other things, the business of a
competitive local exchange carrier providing telecommunications services
principally in Tier III and Tier IV Markets, including, but not limited to,
providing on-net, special access and private line and Internet access services
and, primarily on a resale basis, switchboard-based local and long distance
services; and

          WHEREAS, KMC and Mr. Lenahan wish to enter into an agreement pursuant
to which Mr. Lenahan will serve as the Chief Executive Officer of KMC and a
member of the Board of Directors ("KMC Board").

          NOW, THEREFORE, in consideration of the mutual promises, agreements
and covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which hereby is acknowledged, KMC and Mr. Lenahan
agree as follows:

          1.   CERTAIN DEFINITIONS.  As used in this Agreement, the following
               -------------------
terms shall have the meanings set forth below:
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          "Business" shall mean the business conducted by KMC or a majority
           --------
owned subsidiary ("Subsidiary"), controlled affiliate ("Affiliate") or KMC
controlled joint venture ("Joint Venture") since 1996 and as of the date of
execution of this Agreement, including business activities under substantial
review or in substantial development, all business activities which emanate
therefrom by a reasonable expansion of the present activities of KMC or a
Subsidiary, Affiliate or Joint Venture thereof during the Term (as defined in
Section 2(a) hereof), including all business activities which may hereafter be
developed by KMC or a Subsidiary, Affiliate or Joint Venture thereof, including
without limitation:  providing telecommunications and data services to business,
government and institutional end users and Internet service providers, long
distance companies and wireless service providers (including, without
limitation, providing on-net special access and private line and Internet access
services, switch-based local and long distance services, wireless, Centrex-type,
frame relay ISDN and ATM services for applications including LAN-to-LAN
interconnect, Internet access, WAN and high speed video conferencing).

          "Good Reason" shall mean (i) any reduction in the Base Salary or
           -----------
opportunity for an annual bonus (ii) failure by KMC to provide life, medical,
dental, hospitalization plan or other benefits for Mr. Lenahan on the same basis
as other senior management of KMC or (iii) material diminution in Mr. Lenahan's
reporting authority, function or position in KMC which continues after 20 days
of the date notice is given to KMC's Board by Mr. Lenahan.

          "Person" shall mean any individual, firm, corporation, partnership,
           ------
limited liability company, trust, governmental agency or authority, court,
tribunal, arbitrator or other entity.

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          Wherever from the context it appears appropriate, each word or phrase
stated in either the singular or the plural shall include the singular and the
plural, and each pronoun stated in the masculine, feminine or neuter gender
shall include the masculine, feminine and neuter.

          2.   EMPLOYMENT AND DUTIES.
               ---------------------

          (a) Employment and Term.  KMC hereby agrees to employ Mr. Lenahan, and
              -------------------
Mr. Lenahan hereby agrees to be employed by KMC, as KMC's Chief Executive
Officer, upon and subject to the terms and conditions set forth herein.  Mr.
Lenahan shall be a member of the KMC Board at all times during the Term of this
Agreement.  The term of Mr. Lenahan's employment hereunder (the "Term") shall
become effective as of May 1, 2000 and, unless earlier terminated in accordance
with this Agreement, shall continue for a period of five (5) consecutive years,
ending on April 30, 2005, provided, however, that the Term shall automatically
be extended for successive two year periods unless either party provides notice
to the other, at least ninety (90) days prior to the end of the Term, that the
Agreement shall not be extended.

          (b) Duties and Responsibilities.  As Chief Executive Officer, Mr.
              ---------------------------
Lenahan shall report and be accountable to the KMC Board.  Mr. Lenahan shall
have such duties and responsibilities consistent with his position as may from
time to time be assigned by the KMC Board, including, without limitation, the
responsibility and authority to:

               (i) supervise and administer the implementation of all aspects of
the Business with a view to meeting KMC's short-term and long-term targets,
including, but not limited to, (A) the management of all operations relating to
the Business, and in particular KMC's wireless strategy, (B) the preparation,
review, recommendation and implementation of areas for modification of KMC's
business plans, including the submission to the KMC Board of

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a business plan for each fiscal year not later than thirty (30) days prior to
the commencement of such fiscal year, and (C) the development and implementation
of the Business as it relates to KMC and its Subsidiaries, Affiliates or Joint
Ventures; and

               (ii) perform such other duties and responsibilities as are
usually incumbent upon a chief executive officer.

          (c) Performance of Services.  During the term of his employment
              -----------------------
hereunder, Mr. Lenahan shall:

               (i) perform and discharge, faithfully, diligently and competently
the duties and responsibilities assigned to him hereunder to the best of his
ability;

               (ii) devote his full and undivided business time, other than
during vacations taken in accordance with KMC's established policies and in
accordance with this Agreement, to the performance and discharge of such duties
and responsibilities, provided that Mr. Lenahan may devote a reasonable amount
of time to charitable, civic and professional organizations (including serving
on boards of companies not in the Business) and activities so long as they do
not interfere with the performance and discharge of his duties and
responsibilities;

               (iii) not engage, without the prior written approval of the
Chairman of KMC, in any business or activities which interfere or are reasonably
likely to interfere with the proper performance and discharge of such duties or
responsibilities, other than passive, personal investments in a Person (A) all
of whose business or activities are not in competition with the Business;
provided that if such Person is engaged in any such business or activity, this
clause (A) shall not preclude Mr. Lenahan from beneficially owning or
controlling not more than two percent (2%) of any class of securities issued by
such Person which class is registered under

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Section 12 of the Securities Exchange Act of 1934, as amended, and (B) in which
Mr. Lenahan has no managerial or active role; and

               (iv) if requested by the KMC Board, perform the responsibilities
assigned to him hereunder or related services for the benefit of joint ventures,
subsidiaries or affiliates of KMC, or other Persons with which KMC may have a
business relationship, including without limitation acting as an officer or
director thereof.

          (d) Place of Employment.  The principal place of employment of Mr.
              -------------------
Lenahan shall be in Bedminster, New Jersey or such other location within 50
miles of Bedminster, New Jersey, established as the corporate headquarters of
KMC.  If KMC relocates its corporate headquarters outside of 50 miles of
Bedminster, New Jersey then Mr. Lenahan shall be entitled to full relocation
costs in connection with moving his home to within 50 miles of the new
headquarters. Notwithstanding the foregoing, Mr. Lenahan acknowledges that he
will be required, in connection with the performance and discharge of his duties
and responsibilities hereunder to travel elsewhere.

          3.   NONCOMPETITION; PROPRIETARY RIGHTS; CONFIDENTIAL INFORMATION;
               -------------------------------------------------------------
UNIQUE SERVICES.
---------------

          (a) Noncompetition.  During the Term and for a period of twenty-four
              --------------
(24) months after the date of termination of Mr. Lenahan's employment hereunder
(unless such termination occurs pursuant to Section 7 (a)(ii) or Section 7
(a)(iii), in which case the period shall be twelve (12) months), Mr. Lenahan
shall not within the United States (i) directly or indirectly, whether
individually or as an employee, agent, manager, director, officer, stockholder,
partner, investor, consultant, advisor or in any other capacity whatsoever, own,
manage, operate, control, be employed by, participate in or be connected in any
manner whatsoever with the

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ownership, management, operation or control of, or have any financial interest
in, any Person, business or venture in competition with the Business at the time
of the termination of Mr. Lenahan's employment, (ii) recruit, solicit or
otherwise seek to induce any individual employed by KMC or any of its
subsidiaries, affiliates or joint ventures in a managerial or higher position to
terminate his or her employment with or to violate any agreement, duty or
responsibility with or to any of the foregoing, (iii) solicit from any Person
with which KMC, any of its Subsidiaries, Affiliates or Joint Ventures, or any
individual employed by any of the foregoing, has a business relationship
relating to the Business, any business relating to services similar to the
services which are or were performed for such Person by KMC or its Subsidiaries,
Affiliates or Joint Ventures during the Term or (iv) solicit, induce, influence
or encourage any joint venture, customer, supplier or other Person having a
business relationship with KMC or any of its subsidiaries, affiliates or joint
ventures to terminate, discontinue, reduce or materially diminish or change its
relationship with KMC or any of its subsidiaries, affiliates or joint ventures.
This Section 3 (a) shall not apply in the event this Mr. Lenahan serves the full
Term of this Agreement and is not re-employed by KMC.

          (b) Proprietary Rights.  Mr. Lenahan (i) shall promptly and fully
              ------------------
disclose to KMC, and with all necessary detail for development, marketing, sale
and installation, any and all know-how, discoveries, inventions, compositions,
works, improvements, ideas, concepts, writings, patents, copyrights,
intellectual property, methods, plans, customer lists, supplier lists and other
data and information directly or indirectly relating to in the Business (whether
copyrightable, patentable or otherwise) made, developed, created, received,
conceived, acquired or written by Mr. Lenahan (whether or not at the request or
upon the suggestion of KMC) during the Term and for twelve (12) months
thereafter, solely or jointly with others

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(collectively "Proprietary Rights"), and (ii) hereby acknowledges and agrees
that all of such Proprietary Rights are and will be works made for hire and are
and will be the sole and exclusive property of KMC. Without limiting the
foregoing, Mr. Lenahan hereby (x) assigns and transfers, and agrees to assign
and transfer, to KMC all of his right, title and interest in and to all present
and future Proprietary Rights, (y) agrees promptly to deliver to KMC all papers,
drawings, models, data and other material relating to or embodying any of the
Proprietary Rights and (z) agrees to execute, acknowledge and deliver all such
further agreements, documents and instruments, including, without limitation,
applications for copyrights and patents, and do all other acts and things as may
be necessary or reasonably requested by KMC to obtain copyrights or patents for
any thereof in any and all countries, to register, confirm and vest title and
ownership thereto to KMC and further to effectuate the purposes of this Section
3(b). Mr. Lenahan shall reasonably assist KMC in obtaining such copyrights or
patents during the Term and any time thereafter and agrees to testify in any
prosecution or litigation involving any of the Proprietary Rights; provided that
KMC shall pay or reimburse Mr. Lenahan for all ordinary, necessary, reasonable
and proper expenses actually incurred or paid by him in connection therewith.

          (c) Confidential Information.  Mr. Lenahan acknowledges that from time
              ------------------------
to time he shall receive information concerning KMC, its subsidiaries,
affiliates and joint ventures, the Business which involves, trade secrets,
proprietary information or other confidential information, including without
limitation, the Proprietary Rights, names of actual or potential customers which
have been solicited or are on any mailing lists, rolodexes, files, information
relating to agreements, research, methods, writings, manuals, developments and
marketing and any embodiments of any of the foregoing (all of which is
collectively called

                                      -7-
<PAGE>

"Confidential Information"). Except as is necessary within the scope of and in
connection with the performance and discharge of his duties and responsibilities
hereunder, Mr. Lenahan shall not, during the Term or at any time thereafter,
directly or indirectly, disclose to any Person any Confidential Information.
Notwithstanding the foregoing, Confidential Information shall not include any
information that can be established by reasonable written evidence (i) is in the
public domain other than by reason of a breach by Mr. Lenahan of this Agreement;
or (ii) was in the possession of Mr. Lenahan at the time of the disclosure; or
(iii) was obtained by Mr. Lenahan in good faith from a third party entitled to
disclose it; or (iv) was required to be disclosed by a court of competent
jurisdiction or a governmental authority with authority over Mr. Lenahan or KMC,
in which case Mr. Lenahan shall use his reasonable best efforts, prior to such
disclosure, to give timely notice of such requirement to the KMC Board, in order
to permit KMC to object to such disclosure or seek confidential treatment of the
Confidential Information.

          (d) Return of Confidential Information.  Upon termination of Mr.
              ----------------------------------
Lenahan's employment with KMC, Mr. Lenahan shall forthwith return to KMC all
Confidential Information in his possession or control, including without
limitation, all documents, records, reports, writings and other documents
containing or embodiments of Confidential Information and all copies thereof.

          (e) Remedies.  Mr. Lenahan and KMC acknowledge that the services to be
              --------
rendered hereunder are of a special, unique, unusual, extraordinary and
intellectual character involving a high degree of skill and having a peculiar
value, the loss of which may cause KMC immediate and irreparable harm which
cannot be adequately compensated in monetary damages.  Accordingly, in the event
of a breach or threatened breach by Mr. Lenahan of this Section 3, and following
20 days notice to Mr. Lenahan to cease such activity and his

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failure to do so, Mr. Lenahan consents that KMC shall be entitled to injunctive
or other equitable relief, both preliminary and permanent, without posting a
bond or other security, and Mr. Lenahan will not raise the defense that KMC has
an adequate remedy at law. In addition, KMC shall be entitled to any other legal
or equitable remedies as may be available. The rights and remedies provided in
this Agreement shall be deemed cumulative, and not exclusive, and the exercise
of one shall not preclude the exercise of any other right or remedy at law or in
equity for the same event or any other event.

          (f) Invalidity.  If any portion of the restrictions set forth in this
              ----------
Section 3 should, for any reason whatsoever, be declared invalid by a court of
competent jurisdiction, the validity or enforceability of the remainder of such
restrictions shall not thereby be adversely affected.

          (g) Reasonable Scope and Limitations.  Mr. Lenahan acknowledges and
              --------------------------------
agrees that the scope, area and time limitations set forth in this Section 3 are
reasonable and customary, and properly required for the adequate protection of
the Business of KMC and its subsidiaries, affiliates, joint ventures and
employees.  If at the time of enforcement, any such scope, area or time
limitation is deemed to be unreasonable under circumstances then existing by a
court of competent jurisdiction, then the parties agree that the maximum scope,
area or time limitation which said court shall deem reasonable under such
circumstances shall be substituted for the stated scope, area or time
limitation.

          (h) Claim not a Defense.  The existence of any claim or cause of
              -------------------
action by Mr. Lenahan against KMC, whether or not under this Agreement, shall
not constitute a defense to the enforcement by KMC of this Section 3.

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<PAGE>

               (i) Survival.  The provisions of this Section 3 shall survive the
                   --------
termination of Mr. Lenahan's employment for any reason whatsoever.

          4.   COMPENSATION; BENEFITS.
               ----------------------
          As full compensation to Mr. Lenahan, KMC shall pay or provide, or
cause to be paid or provided, to Mr. Lenahan the following compensation and
benefits:

          (a) Base Salary.  Mr. Lenahan shall receive base salary (the "Base
              -----------
Salary") at the rate of $500,000 per year which shall be earned by and payable
to Mr. Lenahan in arrears in consecutive semi-monthly installments, each of
which shall be approximately equal, in accordance with KMC's standard payroll
practices, as such practices may be amended from time to time.

          (b) Annual Bonus.  In addition to the Base Salary, Mr. Lenahan shall
              ------------
be entitled to be eligible and considered for a bonus each year in the sole
discretion of the Compensation Committee of the KMC Board in an amount up to one
hundred percent (100%) (or such higher amount as may be applicable to other
members of KMC's senior management but not duplicative of Section 4(c)) of the
Base Salary.

          (c)   Public Capital Event Bonuses.   In addition to the annual bonus,
                -----------------------------
Mr. Lenahan will be entitled to receive a total of Three Million Dollars
($3,000,000) in bonus payments at the following milestones.  Within thirty 30
days after the closing of  (i) the initial public offering of  KMC's common
stock ("IPO") and (ii) the first two public capital equity or debt events
subsequent to the IPO, including, but not limited to, a secondary offering of
the common stock of KMC, or a high yield debt issuance, Mr. Lenahan will be
entitled to receive a bonus for each such event equal to One Million Dollars
($1,000,000).  Upon agreement by KMC,  Mr. Lenahan may elect, upon sixty (60)
days notice to KMC, to receive any of the

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foregoing bonus payments in common stock of KMC, such amount of common stock to
be calculated at the then fair market value as of the date of the event giving
rise to the bonus. Mr. Lenahan shall also have the right to defer the payment of
any of the bonuses payable pursuant to this section at his sole discretion.

          (d) Stock Options; Group Plans.  Mr. Lenahan shall be eligible to
              --------------------------
participate, on terms and conditions at least comparable with all other senior
executives of KMC, in (i) any  stock option plan KMC adopts, (ii) KMC's 401(k)
plan for salaried employees of KMC, subject to any eligibility requirements
thereof, (iii) KMC's group life, medical, dental, hospitalization or
accident/disability insurance plans and health programs, but in all events,
subject to applicable terms of the plans, and (iv) and any other benefits
generally accorded to employees of KMC.  KMC will use its reasonable efforts to
assist Mr. Lenahan in obtaining sufficient funds to exercise the stock options
granted to him as of the date hereof and pay any applicable tax relating to a
Section 83 (b) election under the United States tax code.  KMC shall not be
obligated to loan or guarantee any funds obtained by Mr. Lenahan for this
purpose.

          (d) Vacation.  Mr. Lenahan shall be entitled to three (3) weeks'
              --------
vacation and one (1) week illness allowance with pay in each calendar year on
terms comparable to that afforded other senior executives of KMC.  In the event
KMC's vacation or illness allowance policy is increased for such senior
executives generally, then Mr. Lenahan will be entitled to any increase in
vacation or illness allowance such modification provides.  There will be no
carryover of unused vacation time or pay or illness allowance from year to year.
Mr. Lenahan shall also be entitled to all holiday privileges regularly observed
by KMC during the Term.

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<PAGE>

          (e) Makeup Bonus.  In the event (i) Mr. Lenahan is terminated without
              -------------
Cause or (ii) the Term of this Agreement expires,  prior to an IPO or a Change
in Control, Mr. Lenahan will be entitled to receive a cash bonus equal to Five
Million Dollars ($5,000,000) ("Makeup Bonus") within thirty (30) days following
either the event specified in (i) or (ii) of this sentence.  Upon payment of the
Makeup Bonus, all stock options, stock or other rights which Mr. Lenahan then
may have with regard to KMC's equity, accrued, vested or otherwise shall,
without further action by KMC or Mr. Lenahan, be terminated; however, at Mr.
Lenahan's sole discretion, he may waive the Makeup Bonus and retain all rights
he then has to stock options, stock and equity in KMC.

          (f) Automobile Lease.  Mr. Lenahan shall be entitled to the use of a
              ----------------
leased automobile acceptable to KMC, including payment by KMC of lease payments,
insurance, maintenance and repair expenses and the cost of gasoline used by Mr.
Lenahan, not to exceed six hundred dollars ($600.00) per month.  In addition, at
Company expense subject only to reasonable cost, Mr. Lenahan shall have the
right to use a car service between his home in Colts Neck and the Company's
headquarters in Bedminster from time to time as he sees fit.

          (f) Reimbursement of Expenses.  KMC shall pay or reimburse Mr. Lenahan
              -------------------------
for all ordinary, necessary, reasonable and proper expenses actually incurred or
paid by him during the Term in the performance and discharge of his duties and
responsibilities under this Agreement in accordance with the policies and
procedures established by KMC from time to time for its senior management
generally.  As part of such policies and procedures, the KMC Board may from time
to time for members of senior management generally require prior approval for
individual expense items in excess of pre-established aggregate amounts for a
fixed period or in excess of pre-established amounts for any type of expenditure
during any fixed

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period. Mr. Lenahan will not incur expenses other than in accordance with KMC's
policies and procedures both as to the nature and amount of such expenses.

          5.   KEY MAN LIFE POLICY.
               -------------------

          In addition to any life insurance policy provided by KMC for the
benefit of Mr. Lenahan pursuant to Section 4, KMC shall be permitted, at its own
expense, to maintain a "key man life insurance policy", in such amount and on
such terms as KMC shall in its sole discretion determine, on the life of Mr.
Lenahan for so long as this Agreement remains in effect.  Mr. Lenahan shall
fully cooperate with and assist KMC in obtaining or maintaining any such
insurance, including without limitation, submitting to medical examinations and
providing information to insurance brokers, agents or carriers.  Any proceeds
from any such "key man" policy shall be payable solely to KMC; Mr. Lenahan's
legal representatives, heirs, successors, assigns and beneficiaries shall have
no rights with respect thereto.  Mr. Lenahan represents and warrants that to the
best of his knowledge he is in good health and has no reason to believe that
such insurance will not be available to KMC at standard rates.

          6.   REPRESENTATIONS AND WARRANTIES BY MR. LENAHAN.    Mr. Lenahan
               ----------------------------------------------
hereby represents and warrants, the same being part of the essence of this
Agreement, that he is not, and during the Term will not be, a party to any
agreement, contract or understanding, and that he has no knowledge of any
physical or mental illness, condition, impairment, restriction or incapacity,
which in any way restrict or prohibit or will restrict or prohibit him from
undertaking or performing or discharging any of his duties and responsibilities
under this Agreement.

          7.   TERMINATION.
               -----------

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          (a) This Agreement, and Mr. Lenahan's employment, shall terminate
prior to the scheduled termination date set forth in Section 2(a) hereof upon
the following terms and conditions:

               (i) If Mr. Lenahan dies or becomes permanently disabled, this
Agreement shall terminate effective upon his death or when his Disability (as
hereinafter defined) is deemed to have become permanent.  If Mr. Lenahan is
unable to perform his normal duties for KMC and/or its subsidiaries, affiliates
or joint ventures because of Disability for a period of at least ninety (90)
consecutive days, or for shorter periods totaling more than one hundred and
eighty (180) days during any period of three hundred and sixty five (365) or
fewer consecutive days for the same cause, the KMC Board may at its option deem
such Disability to have become permanent.  For purposes of this Agreement, the
term "Disability" shall mean the physical or mental illness, condition,
impairment, restriction or incapacity of Mr. Lenahan, such that Mr. Lenahan
shall be substantially unable to perform and discharge his duties and
responsibilities under this Agreement, as certified by a physician, psychiatrist
or other medical practitioner satisfactory to KMC if KMC so requests.

               (ii) KMC may terminate this Agreement other than for reasons
specified in Section 7(a)(i) or (iii), upon ninety (90) days' prior written
notice to Mr. Lenahan.

               (iii) Mr. Lenahan may terminate this Agreement for Good Reason
upon notice to the KMC Board of his intent to resign for Good Reason provided
Mr. Lenahan, with his counsel, shall have met with the KMC Board, if requested
by the KMC Board, during the twenty (20) day period required for notice of his
intent to resign for Good Cause.

               (iv) KMC may terminate this Agreement for Cause (as defined
below), by notice to Mr. Lenahan. The term "Cause" shall mean any of the
following: (A) Mr. Lenahan

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commits malfeasance towards KMC and/or any of its subsidiaries, affiliates or
joint ventures (including without limitation misappropriation of funds, acts of
fraud or dishonesty, or a material violation of corporate policy), or is
convicted of any crime or offense involving dishonesty, or improper taking of
monies or other property, or any felony offense, or any crime of moral
turpitude, or commits fraud or embezzlement, or any other violation of law which
materially impairs his ability to perform and discharge his duties or
responsibilities hereunder or which otherwise materially adversely affects KMC
and/or its subsidiaries, affiliates or joint ventures; (B) Mr. Lenahan has
breached any of his material duties to KMC and/or its subsidiaries, affiliates
or joint ventures or otherwise violated any other material provision of this
Agreement or has made a material misrepresentation which breach, violation or
misrepresentation adversely affects the business of KMC and/or its subsidiaries
or affiliates or joint ventures and, if such breach, violation or
misrepresentation can reasonably be expected to be cured within twenty (20)
days, such breach, violation or misrepresentation has not been cured to KMC's
satisfaction within twenty (20) days after it notifies Mr. Lenahan thereof; or
(C) Mr. Lenahan has neglected or failed to discharge any of his material duties
or responsibilities under this Agreement or failed to obey appropriate
directions from KMC and/or its subsidiaries, affiliates or joint ventures
consistent with this Agreement, and if such neglect or failure can reasonably be
expected to be cured within twenty (20) days, such neglect or failure has not
been cured to KMC's satisfaction within twenty (20) days after it notifies Mr.
Lenahan thereof.

          (b) Upon any termination pursuant to this Section 7, all rights of Mr.
Lenahan under this Agreement shall cease to be effective as of the date of
termination, Mr. Lenahan shall be removed from his position and Mr. Lenahan
shall have no right to receive any payments or benefits hereunder except for (i)
installments of Base Salary which have been earned in

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accordance with Section 4(a) hereof up to the effective date of such
termination, (ii) reimbursement of ordinary, reasonable and necessary expenses
incurred in accordance with Section 4(f) hereof and, to the extent permitted by
law, accrued vacation and illness allowance, in each case up to the effective
date of such termination, (iii) all other benefits due Mr. Lenahan under benefit
programs in which he participated and under which he is due a benefit, (iv) if
the termination is pursuant to Section 7(a)(i) by reason of Mr. Lenahan's
Disability, KMC shall pay the greater of (x) sixty percent (60%) of the Base
Salary and (y) the amount payable to Mr. Lenahan under any disability plan
adopted by KMC from time to time, (v) if the termination is pursuant to Section
7 (a)(i) by reason of Mr. Lenahan's death, Section 7(a)(ii) or Section 7 (a)
(iii), KMC shall pay to Mr. Lenahan a severance payment in an amount equal to
the two times the annual Base Salary and (v) continuation of Mr. Lenahan's
health and dental benefits at the same level as all other senior management of
KMC for the period for which the severance is paid. If the termination is
pursuant to Section 7(a)(ii) one-half of any severance payment will be payable
in a lump sum on the date the termination becomes effective, with the balance
being payable in arrears in approximately equal consecutive semi-monthly
installments in accordance with KMC's standard payroll practices, as such
practices may be amended from time to time, over the period beginning on KMC's
first payroll payment date after the termination becomes effective and ending on
the earlier of (x) the first anniversary of such date and (y) April 30, 2005,
subject to Mr. Lenahan's compliance with the provisions of Section 3 hereof.

          (c) (i) If Mr. Lenahan's employment is terminated pursuant to Section
7(a)(iv) or (ii) if Mr. Lenahan at any time permits or suffers to exist any act,
event or circumstances which violates, or would violate if occurring within the
time periods set forth in Section 3 hereof violate, any provision of Section 3
hereof, then (x) any loans, extensions of credit or other

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amounts owed by Mr. Lenahan to KMC or any of its subsidiaries or affiliates
(including without limitation, any interest thereon) shall automatically and
immediately be accelerated and become due and payable, without any further
notice, protest, demand or formality of any kind, and be paid by Mr. Lenahan on
the date his employment is terminated or such violation occurs and (y) Mr.
Lenahan shall automatically and immediately, without any further notice, demand
or formality of any kind, forfeit all of his rights with respect to, and further
deliver or pay to KMC, (A) (x) any unexercised stock options, whether vested or
unvested, and (y) and unvested or callable stock pursuant to any stock option
plan of KMC or any of its subsidiaries or affiliates, (B) any stock which he
acquired within the twelve (12) month period ending on the date the termination
of his employment becomes effective pursuant to the exercise of options granted
by KMC or any of its subsidiaries or affiliates and (C) the proceeds (net of any
ordinary, reasonable and customary brokerage commissions and expenses of sale
actually paid or incurred by Mr. Lenahan) derived from the sale, pledge or other
disposition of any such stock or any interest therein. If Mr. Lenahan disposes
of any such stock or any interest therein by gift, bequest or other means by
which he did not receive cash in an amount reasonably equivalent to the fair
market value of such stock or interest and is thereafter required to make a
payment to KMC under the foregoing clause (C), he shall pay to KMC in cash an
amount equal to the fair market value of such stock at the time of the
disposition, as reasonably and conclusively determined by the KMC Board.

          (d) In the event there is a Change in Control of KMC, and as a result
thereof Mr. Lenahan is terminated from his employment by KMC, then,
notwithstanding such termination, he shall receive the remaining payments of
Base Salary at the times set forth in Section 4(a) for the unexpired Term of
this Agreement unless the parties otherwise agree to a

                                      -17-
<PAGE>

lesser amount. In addition, following a Change in Control one hundred percent
(100%) of the shares subject to the options granted to Mr. Lenahan pursuant to
that certain Non-Qualified Executive Stock Option Agreement dated the date
hereof between KMC and Mr. Lenahan ("Stock Option Agreement") or otherwise
during the Term shall automatically be deemed "Vested" pursuant to Section 3.1
of the Stock Option Agreement and not subject to repurchase or call. Prior to an
IPO KMC shall use its reasonable efforts to obtain the agreement of more than
seventy five (75%) percent of its shareholders for any payments payable to Mr.
Lenahan by reason of any Change in Control. Following an IPO and in the event of
a Change in Control, to the extent that a nationally recognized accounting firm
certifies to KMC that Mr. Lenahan is and will be subject to any excise tax
pursuant to Code Section 4999, KMC shall pay to Mr. Lenahan an amount equal to
such excise tax and any income, excise or employment tax payable by Mr. Lenahan
by reason of such payment of tax by KMC; provided, however that the total amount
of such payments shall not exceed $3,000,000. Further, to the extent it would
reduce the excess parachute payments (as defined in Code Section 280G), KMC
shall have the right to require Mr. Lenahan to exercise any vested stock options
prior to the year of the Change in Control. For purposes of this Agreement and
the options granted to Mr. Lenahan under the Non-Qualified Stock Option
Agreement, dated the date hereof, "Change in Control" shall mean in the event
(A) Harold Kamine and Nassau Capital LLC do not own or control (i) greater than
35% of the outstanding voting stock of KMC on a fully diluted basis or (ii) a
combined percentage of voting stock of KMC which is greater than that owned by
any other single shareholder or group of shareholders and (B) Harold Kamine is
not the Chairman of KMC or Mr. Kamine and Nassau do not have the ability,
directly or indirectly, to elect a majority of the KMC Board or the individuals
comprising the KMC Board on the commencement date of Mr. Lenahan's

                                      -18-
<PAGE>

employment, or individuals selected or nominated by the existing members do not
constitute a majority of the KMC Board.

          (e) In the event this Agreement is terminated pursuant to Section 7
(a)(ii) or Section 7(a)(iii), Mr. Lenahan shall be entitled to permanently
retain all options or stock on the date of termination then not subject to any
repurchase or call pursuant to Section 3.1 of the Stock Option Agreement and, in
addition, that amount of options or stock which would have no longer been
subject to repurchase or call pursuant to Section 3.1 of the Stock Option
Agreement on the six month anniversary of the termination of this Agreement.  In
the event there is a Change in Control within six months of the termination of
this Agreement pursuant to Section 7(a) ii) or Section 7(a)(iii) one hundred
percent (100%) percent of the shares subject to the Option shall not be subject
to any repurchase or call right by KMC and any shares purchased by KMC pursuant
to Section 5.3 of the Stock Option Agreement will be returned to Mr. Lenahan in
exchange for the proceeds previously paid to him by KMC for such shares.

          (f) In the event of the termination of this Agreement pursuant to
Section 7(a)(i) by reason of Mr. Lenahan's death, one hundred percent (100%) of
the shares subject to the Option (as defined in the Stock Option Agreement)
shall not be subject to any repurchase or call right by KMC.

          (g) In the event of the termination of this Agreement pursuant to
Section 7 (a)(i) by reason of Mr. Lenahan's Disability, Mr. Lenahan shall be
entitled to permanently retain all options or stock not subject to repurchase or
call as of the date of termination pursuant to Section 3.1 of the Stock Option
Agreement and, in addition, that amount of options or stock which would have no
longer been subject to repurchase or call pursuant to Section 3.1 of the Stock
Option Agreement on the twelve month anniversary of the termination of this
Agreement.

                                      -19-
<PAGE>

          8.   ASSIGNABILITY; SUCCESSORS.  The obligations of Mr. Lenahan
               -------------------------
hereunder are personal and may not be delegated, assigned or transferred by him
to any Person in any manner whatsoever.  Any such purported delegation,
assignment or transfer shall be null and void.  This Agreement may be assigned
by KMC to any parent, subsidiary or affiliate of KMC or any Person which
succeeds to the business of KMC, if the obligations of KMC hereunder are
expressly assumed by, and shall be binding upon such Person, and such Person is
or will then be engaged in the Business.  Subject to the foregoing, this
Agreement shall be binding on and inure to the benefit of the legal
representatives, heirs and permitted successors and assigns of the parties
hereto.

          9.   WITHHOLDING.  All payments made by KMC under this Agreement shall
               -----------
be net of any tax or other amounts required to be withheld by KMC under any
applicable law or legal requirement.

          10.  ENTIRE AGREEMENT; AMENDMENT; WAIVER.  This Agreement constitutes
               -----------------------------------
the entire agreement of KMC and Mr. Lenahan with respect to the subject matter
hereof and supersedes all prior written and oral agreements and understandings
with respect to such subject matter, except for (to the extent not inconsistent
with this Agreement, and in such event this Agreement shall govern) stock
options granted in connection with KMC's Stock Option Plan and stock option
agreements entered in connection therewith.  Neither this Agreement nor any of
the terms hereof may be terminated, amended, supplemented, waived or modified
orally, but only by an instrument in writing signed by both parties.  No failure
or delay of either party in exercising any right or remedy under this Agreement
or at law or equity shall operate as a waiver hereof or thereof, nor shall any
single or partial exercise of any such right or

                                      -20-
<PAGE>

remedy, or any abandonment or discontinuance of steps to enforce such a right or
remedy, preclude any other or further exercise thereof or the exercise of any
other right or remedy.

          11.  NOTICES.  Any notice, request or communication required or
               -------
permitted to be given hereunder shall be deemed to have been properly given if
it is given in writing and is delivered personally or sent by registered or
certified mail, return receipt requested.  If to Mr. Lenahan, such notice shall
be sent to him at the address set forth in the first paragraph hereof, with a
copy to Robert J. Lichtenstein, Esq., Morgan Lewis Bokius LLP, 1701 Market
Street, Philadelphia, Pennsylvania 19103.  If to KMC, such notice shall be
directed to the attention of Harold N. Kamine at the address of KMC set forth in
the first paragraph hereof, with a copy Alan M. Epstein, Esq., Kelley Drye &
Warren LLP, 101 Park Avenue, New York, New York 10178.  Either party may change
the address to which notices, requests or communications are to be directed by a
notice to the other party in accordance with this Section 11.

          12.  SEVERABILITY.  Any provision of this Agreement that shall be
               ------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.  To the extent permitted
by applicable law, KMC and Mr. Lenahan hereby waive any provision of law that
renders any provision hereof prohibited or unenforceable in any respect;
provided that any final decision of any court of competent jurisdiction in the
State of New York that is not subject to appeal with respect to Section 3 shall
be binding on the parties in all jurisdictions.  Following a Change in Control,
in the event of a dispute between Mr. Lenahan and KMC with regard to his
employment by KMC, and should Mr. Lenahan prevail in the proceedings concerning
such dispute on any

                                      -21-
<PAGE>

material issue, Mr. Lenahan shall be entitled to his counsel fees in connection
with such proceedings.

          13.  GOVERNING LAW.  THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED
               -------------
BY, AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH, THE LAW
(EXCLUDING PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT APPLICATION THEREOF
WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION) OF THE
STATE OF NEW YORK.

          14.  COUNTERPARTS.  This Agreement may be executable in counterparts,
               ------------
each of which, for all purposes, shall be deemed an original.

          15.  Counsel Fees.  KMC shall, upon presentation of an appropriate
               ------------
statement,  pay the reasonable costs and expenses, up to Ten Thousand Dollars
($10,000), of Morgan Lewis & Bockius LLP in connection with the negotiation and
preparation of this Agreement and related agreements.

          16.  Ambiguity in Drafting.  Each party shall be deemed to have
               ---------------------
participated equally in the drafting of this Agreement and any ambiguity in this
Agreement shall not be construed against any purported author thereof.  Mr.
Lenahan acknowledges that he is capable of evaluating the merits of entering
into this Agreement from a professional and financial perspective and has been
given the opportunity to make such inquiries and investigations as Mr. Lenahan
has deemed appropriate under the circumstances and that, at all times during the
course of the negotiations and execution of this Agreement, Mr. Lenahan has been
advised by counsel.

                                      -22-
<PAGE>

          IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first above written.

EMPLOYEE                         EMPLOYER
--------                         --------

/s/ William F. Lenahan
------------------------------   KMC TELECOM HOLDINGS, INC.
William F. Lenahan
                                     /s/ HAROLD N. KAMINE
                                 By: ---------------------------------

                                 Title: Chairman
                                        ------------------------------

                                      -23-<PAGE>

                                                                   EXHIBIT 10.17

                                                                  Execution Copy
                                                                  --------------

                              EMPLOYMENT AGREEMENT
                              --------------------

                  This Employment Agreement (the "Agreement") is made as of this
9th day of March, 2000 by and between KMC TELECOM HOLDINGS, INC., a Delaware
corporation with its principal place of business located at 1545 Route 206,
Suite 300, Bedminster, New Jersey 07921 ("KMC") and William H. Stewart, an
individual, residing at 329 Sentinel Avenue, Newtown, PA 18940 ("Mr. Stewart").

                              W I T N E S S E T H :
                              - - - - - - - - - -

                  WHEREAS, KMC is engaged in, among other things, the business
of a competitive local exchange carrier providing telecommunications services
principally in Tier III and Tier IV Markets, including, but not limited to,
providing on-net, special access and private line and Internet access services
and, primarily on a resale basis, switchboard-based local and long distance
services; and

                  WHEREAS, KMC and Mr. Stewart wish to enter into an agreement
pursuant to which Mr. Stewart will serve as the Chief Financial Officer and
Executive Vice President of KMC ("KMC Board").

                  NOW, THEREFORE, in consideration of the mutual promises,
agreements and covenants contained herein and other good and valuable
consideration, the receipt and sufficiency of which hereby is acknowledged, KMC
and Mr. Stewart agree as follows:

                  1.       CERTAIN DEFINITIONS.  As used in this Agreement, the
                           -------------------
following terms shall have the meanings set forth below:
<PAGE>

                  "Business" shall mean the business conducted by KMC or a
                   --------
majority owned subsidiary ("Subsidiary"), controlled affiliate ("Affiliate") or
KMC controlled joint venture ("Joint Venture") since 1996 and as of the date of
execution of this Agreement, including business activities under substantial
review or in substantial development, all business activities which emanate
therefrom by a reasonable expansion of the present activities of KMC or a
Subsidiary, Affiliate or Joint Venture thereof during the Term (as defined in
Section 2(a) hereof), including all business activities which may hereafter be
developed by KMC or a Subsidiary, Affiliate or Joint Venture thereof, including
without limitation: providing telecommunications and data services to business,
government and institutional end users and Internet service providers, long
distance companies and wireless service providers (including, without
limitation, providing on-net special access and private line and Internet access
services, switch-based local and long distance services, wireless, Centrex-type,
frame relay ISDN and ATM services for applications including LAN-to-LAN
interconnect, Internet access, WAN and high speed video conferencing).

                  "Person" shall mean any individual, firm, corporation,
                   ------
partnership, limited liability company, trust, governmental agency or authority,
court, tribunal, arbitrator or other entity.
                  Wherever from the context it appears appropriate, each word or
phrase stated in either the singular or the plural shall include the singular
and the plural, and each pronoun stated in the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.

                  2.       EMPLOYMENT AND DUTIES.
                           ---------------------

                           (a)      Employment and Term.  KMC hereby agrees to
                                    -------------------
employ Mr. Stewart, and Mr. Stewart hereby agrees to be employed by KMC, as
KMC's Chief Financial

                                      -2-
<PAGE>

Officer and Executive Vice President, upon and subject to the terms and
conditions set forth herein. The term of Mr. Stewart's employment hereunder (the
"Term") shall become effective as of March 9, 2000 and, unless earlier
terminated in accordance with this Agreement, shall continue for a period of
three (3) consecutive years, ending on March 31, 2003. KMC shall provide notice
to Mr. Stewart at least ninety (90) days prior to the end of the Term if KMC
does not intend to negotiate with Mr. Stewart to extend the Term.

                           (b)      Duties and Responsibilities. As Chief
                                    ---------------------------
Financial Officer and Executive Vice President, Mr. Stewart shall report and be
accountable to the KMC Board and to the Chief Executive Officer of KMC. Mr.
Stewart shall have such duties and responsibilities consistent with his position
as may from time to time be assigned by the KMC Board, including, without
limitation, the responsibility and authority to:

                                    (i) supervise and administer the
implementation of all financial aspects of the Business with a view to meeting
KMC's short-term and long-term targets, including, but not limited to, (A) the
management of all financial operations relating to the Business, (B) the
preparation, review, recommendation and implementation of areas for modification
of KMC's business plans, including the submission to the KMC Board and the Chief
Executive Officer of a business plan for each fiscal year not later than thirty
(30) days prior to the commencement of such fiscal year, and (C) the development
and implementation of the Business as it relates to KMC and its Subsidiaries,
Affiliates or Joint Ventures; and

                                    (ii) perform such other duties and
responsibilities as are usually incumbent upon a Chief Financial Officer.

                           (c) Performance of Services. During the term
                               -----------------------
of his employment hereunder, Mr. Stewart shall:

                                      -3-
<PAGE>

                                    (i) perform and discharge, faithfully,
diligently and competently the duties and responsibilities assigned to him
hereunder to the best of his ability;

                                    (ii) devote his full and undivided business
time, other than during vacations taken in accordance with KMC's established
policies and in accordance with this Agreement, to the performance and discharge
of such duties and responsibilities, provided that Mr. Stewart may devote a
reasonable amount of time to charitable, civic and professional organizations
(including serving on boards of companies not in the Business) and activities so
long as they do not interfere with the performance and discharge of his duties
and responsibilities;

                                    (iii) not engage, without the prior written
approval of the Chairman of KMC, in any business or activities which interfere
or are reasonably likely to interfere with the proper performance and discharge
of such duties or responsibilities, other than passive, personal investments in
a Person (A) all of whose business or activities are not in competition with the
Business; provided that if such Person is engaged in any such business or
activity, this clause (A) shall not preclude Mr. Stewart from beneficially
owning or controlling not more than two percent (2%) of any class of securities
issued by such Person which class is registered under Section 12 of the
Securities Exchange Act of 1934, as amended, and (B) in which Mr. Stewart has no
managerial or active role; and

                                    (iv) if requested by the KMC Board, perform
the responsibilities assigned to him hereunder or related services for the
benefit of joint ventures, subsidiaries or affiliates of KMC, or other Persons
with which KMC may have a business relationship, including without limitation
acting as an officer or director thereof.

                                      -4-
<PAGE>

                           (d)      Place of Employment. The principal place of
employment of Mr. Stewart shall be in Bedminster, New Jersey or such other
location within 50 miles of Bedminster, New Jersey, established as the corporate
headquarters of KMC. If KMC relocates its corporate headquarters outside of 50
miles of Bedminster, New Jersey and not closer to Newtown, Pennsylvania then Mr.
Stewart shall be entitled to full relocation costs in connection with moving his
home to within 50 miles of the new headquarters. Notwithstanding the foregoing,
Mr. Stewart acknowledges that he will be required, in connection with the
performance and discharge of his duties and responsibilities hereunder to travel
elsewhere.

                  3.       NONCOMPETITION; PROPRIETARY RIGHTS; CONFIDENTIAL
                           ------------------------------------------------
INFORMATION; UNIQUE SERVICES.
----------------------------

                           (a)      Noncompetition. During the Term and for a
                                    --------------
period of twenty-four (24) months after the date of termination of Mr. Stewart's
employment hereunder, Mr. Stewart shall not within the United States (i)
directly or indirectly, whether individually or as an employee, agent, manager,
director, officer, stockholder, partner, investor, consultant, advisor or in any
other capacity whatsoever (collectively "engaged"), own, manage, operate,
control, be employed by, participate in or be connected in any manner whatsoever
(collectively "participate") with the ownership, management, operation or
control of, or have any financial interest in, any Person, business or venture
in competition with the Business at the time of the termination of Mr. Stewart's
employment, (ii) recruit, solicit or otherwise seek to induce any individual
employed by KMC or any of its subsidiaries, affiliates or joint ventures in a
managerial or higher position to terminate his or her employment with or to
violate any agreement, duty or responsibility with or to any of the foregoing,
(iii) solicit from any Person with which KMC, any of its Subsidiaries,
Affiliates or Joint Ventures, or any individual

                                      -5-
<PAGE>

employed by any of the foregoing, has a business relationship relating to the
Business, any business relating to services similar to the services which are or
were performed for such Person by KMC or its Subsidiaries, Affiliates or Joint
Ventures during the Term or (iv) solicit, induce, influence or encourage any
joint venture, customer, supplier or other Person having a business relationship
with KMC or any of its subsidiaries, affiliates or joint ventures to terminate,
discontinue, reduce or materially diminish or change its relationship with KMC
or any of its subsidiaries, affiliates or joint ventures; provided, however,
                                                          --------  -------
that nothing in this Agreement shall prohibit Mr. Stewart from doing any of the
actions prohibited by this Section 3(a) through becoming engaged in or
participating with a private equity, buyout or other investment fund or vehicle
("Investment Fund") provided, further, that Mr. Stewart may not divulge,
                    --------  -------
directly or indirectly, any information about the Business to any competitor of
KMC, nor serve as an officer or director of any competitor in which the
Investment Fund may have an interest.

                           (b)      Proprietary Rights. Mr. Stewart (i) shall
                                    ------------------
promptly and fully disclose to KMC, and with all necessary detail for
development, marketing, sale and installation, any and all know-how,
discoveries, inventions, compositions, works, improvements, ideas, concepts,
writings, patents, copyrights, intellectual property, methods, plans, customer
lists, supplier lists and other data and information directly or indirectly
relating to in the Business (whether copyrightable, patentable or otherwise)
made, developed, created, received, conceived, acquired or written by Mr.
Stewart (whether or not at the request or upon the suggestion of KMC) during the
Term and for twelve (12) months thereafter, solely or jointly with others
(collectively "Proprietary Rights"), and (ii) hereby acknowledges and agrees
that all of such Proprietary Rights are and will be works made for hire and are
and will be the sole and exclusive property of KMC. Without limiting the
foregoing, Mr. Stewart hereby (x) assigns and transfers,

                                      -6-
<PAGE>

and agrees to assign and transfer, to KMC all of his right, title and interest
in and to all present and future Proprietary Rights, (y) agrees promptly to
deliver to KMC all papers, drawings, models, data and other material relating to
or embodying any of the Proprietary Rights and (z) agrees to execute,
acknowledge and deliver all such further agreements, documents and instruments,
including, without limitation, applications for copyrights and patents, and do
all other acts and things as may be necessary or reasonably requested by KMC to
obtain copyrights or patents for any thereof in any and all countries, to
register, confirm and vest title and ownership thereto to KMC and further to
effectuate the purposes of this Section 3(b). Mr. Stewart shall reasonably
assist KMC in obtaining such copyrights or patents during the Term and any time
thereafter and agrees to testify in any prosecution or litigation involving any
of the Proprietary Rights; provided that KMC shall pay or reimburse Mr. Stewart
for all ordinary, necessary, reasonable and proper expenses actually incurred or
paid by him in connection therewith.

                           (c)      Confidential Information. Mr. Stewart
                                    ------------------------
acknowledges that from time to time he shall receive information concerning KMC,
its subsidiaries, affiliates and joint ventures, the Business which involves,
trade secrets, proprietary information or other confidential information,
including without limitation, the Proprietary Rights, names of actual or
potential customers which have been solicited or are on any mailing lists,
rolodexes, files, information relating to agreements, research, methods,
writings, manuals, developments and marketing and any embodiments of any of the
foregoing (all of which is collectively called "Confidential Information").
Except as is necessary within the scope of and in connection with the
performance and discharge of his duties and responsibilities hereunder, Mr.
Stewart shall not, during the Term or at any time thereafter, directly or
indirectly, disclose to any Person any

                                      -7-
<PAGE>

Confidential Information. Notwithstanding the foregoing, Confidential
Information shall not include any information that can be established by
reasonable written evidence (i) is in the public domain other than by reason of
a breach by Mr. Stewart of this Agreement; or (ii) was in the possession of Mr.
Stewart at the time of the disclosure; or (iii) was obtained by Mr. Stewart in
good faith from a third party entitled to disclose it; or (iv) was required to
be disclosed by a court of competent jurisdiction or a governmental authority
with authority over Mr. Stewart or KMC, in which case Mr. Stewart shall use his
reasonable best efforts, prior to such disclosure, to give timely notice of such
requirement to the KMC Board, in order to permit KMC to object to such
disclosure or seek confidential treatment of the Confidential Information.

                           (d)      Return of Confidential Information. Upon
                                    ----------------------------------
termination of Mr. Stewart's employment with KMC, Mr. Stewart shall forthwith
return to KMC all Confidential Information in his possession or control,
including without limitation, all documents, records, reports, writings and
other documents containing or embodiments of Confidential Information and all
copies thereof.

                           (e)      Remedies. Mr. Stewart and KMC acknowledge
                                    --------
that the services to be rendered hereunder are of a special, unique, unusual,
extraordinary and intellectual character involving a high degree of skill and
having a peculiar value, the loss of which may cause KMC immediate and
irreparable harm which cannot be adequately compensated in monetary damages.
Accordingly, in the event of a breach or threatened breach by Mr. Stewart of
this Section 3, and following 20 days notice to Mr. Stewart to cease such
activity and his failure to do so, Mr. Stewart consents that KMC shall be
entitled to injunctive or other equitable relief, both preliminary and
permanent, without posting a bond or other security, and Mr. Stewart will not
raise the defense that KMC has an adequate remedy at law. In addition, KMC shall
be entitled to

                                      -8-
<PAGE>

any other legal or equitable remedies as may be available. The rights and
remedies provided in this Agreement shall be deemed cumulative, and not
exclusive, and the exercise of one shall not preclude the exercise of any other
right or remedy at law or in equity for the same event or any other event.

                           (f)      Invalidity. If any portion of the
                                    ----------
restrictions set forth in this Section 3 should, for any reason whatsoever, be
declared invalid by a court of competent jurisdiction, the validity or
enforceability of the remainder of such restrictions shall not thereby be
adversely affected.

                           (g)      Reasonable Scope and Limitations. Mr.
                                    --------------------------------
Stewart acknowledges and agrees that the scope, area and time limitations set
forth in this Section 3 are reasonable and customary, and properly required for
the adequate protection of the Business of KMC and its subsidiaries, affiliates,
joint ventures and employees. If at the time of enforcement, any such scope,
area or time limitation is deemed to be unreasonable under circumstances then
existing by a court of competent jurisdiction, then the parties agree that the
maximum scope, area or time limitation which said court shall deem reasonable
under such circumstances shall be substituted for the stated scope, area or time
limitation.

                           (h)      Claim not a Defense. The existence of any
                                    -------------------
claim or cause of action by Mr. Stewart against KMC, whether or not under this
Agreement, shall not constitute a defense to the enforcement by KMC of this
Section 3.

                           (i)      Survival. The provisions of this Section 3
                                    --------
shall survive the termination of Mr. Stewart's employment for any reason
whatsoever.

                  4.       COMPENSATION; BENEFITS.
                           ----------------------

                                      -9-
<PAGE>

                  As full compensation to Mr. Stewart, KMC shall pay or provide,
or cause to be paid or provided, to Mr. Stewart the following compensation and
benefits:

                           (a)      Base Salary. Mr. Stewart shall receive base
                                    -----------
salary (the "Base Salary") at the rate of $350,000 per year which shall be
earned by and payable to Mr. Stewart in arrears in consecutive semi-monthly
installments, each of which shall be approximately equal, in accordance with
KMC's standard payroll practices, as such practices may be amended from time to
time.

                           (b)      Annual Bonus. In addition to the Base
                                    ------------
Salary, Mr. Stewart shall be entitled to be eligible and considered for a bonus
each year in the sole discretion of the Compensation Committee of the KMC Board
in an amount up to one hundred percent (100%) of the Base Salary.

                           (c)      Other Bonuses.   In addition to the annual
bonus, within thirty 30 days after the closing of the initial public offering of
KMC's common stock ("IPO") Mr. Stewart will be entitled to receive a bonus equal
to Five Hundred Thousand Dollars ($500,000), provided, however, in the event the
closing of a private equity issuance of at least $200 million ("Private Equity
Issuance") occurs prior to the IPO, Mr. Stewart shall be entitled to receive a
bonus equal to $250,000 within 30 days after the closing of the Private Equity
Issuance and $250,000 within 30 days after the closing of the IPO. Mr. Stewart
will be entitled to receive a bonus for the first two public capital equity or
debt events subsequent to the IPO, including, but not limited to, a secondary
offering of the common stock of KMC, or a high yield debt issuance in the sole
discretion of the Compensation Committee of the KMC Board, which bonus shall not
be less than $100,000 for each such event. Upon agreement by KMC, Mr. Stewart
may elect, upon sixty (60) days notice to KMC, to receive any of the foregoing
bonus payments in common

                                      -10-
<PAGE>

stock of KMC, such amount of common stock to be calculated at the then fair
market value as of the date of the event giving rise to the bonus. Mr. Stewart
shall also have the right to defer the payment of any of the bonuses payable
pursuant to this section at his sole discretion.

                           (d) Stock Options; Group Plans. Mr. Stewart shall be
                               --------------------------
eligible to participate, on terms and conditions at least comparable with all
other senior executives of KMC, in (i) any stock option plan KMC adopts, (ii)
KMC's 401(k) plan for salaried employees of KMC, subject to any eligibility
requirements thereof, (iii) KMC's group life, medical, dental, hospitalization
or accident/disability insurance plans and health programs, but in all events,
subject to applicable terms of the plans, and (iv) and any other benefits
generally accorded to employees of KMC. KMC will use its reasonable efforts to
assist Mr. Stewart in obtaining sufficient funds to exercise the stock options
granted to him as of the date hereof and pay any applicable tax relating to a
Section 83 (b) election under the United States tax code. KMC shall not be
obligated to loan or guarantee any funds obtained by Mr. Stewart for this
purpose.

                           (d) Vacation. Mr. Stewart shall be entitled to three
                               --------
(3) weeks' vacation and one (1) week illness allowance with pay in each calendar
year on terms comparable to that afforded other senior executives of KMC. In the
event KMC's vacation or illness allowance policy is increased for such senior
executives generally, then Mr. Stewart will be entitled to any increase in
vacation or illness allowance such modification provides. There will be no
carryover of unused vacation time or pay or illness allowance from year to year.
Mr. Stewart shall also be entitled to all holiday privileges regularly observed
by KMC during the Term.

                           (e) Automobile Lease. Mr. Stewart shall be entitled
                               ----------------
to the use of a leased automobile acceptable to KMC, including payment by KMC of
lease payments,

                                      -11-
<PAGE>

insurance, maintenance and repair expenses and the cost of gasoline used by Mr.
Stewart, not to exceed six hundred dollars ($600.00) per month.

                           (f)      Reimbursement of Expenses. KMC shall pay or
                                    -------------------------
reimburse Mr. Stewart for all ordinary, necessary, reasonable and proper
expenses actually incurred or paid by him during the Term in the performance and
discharge of his duties and responsibilities under this Agreement in accordance
with the policies and procedures established by KMC from time to time for its
senior management generally. As part of such policies and procedures, the KMC
Board may from time to time for members of senior management generally require
prior approval for individual expense items in excess of pre-established
aggregate amounts for a fixed period or in excess of pre-established amounts for
any type of expenditure during any fixed period. Mr. Stewart will not incur
expenses other than in accordance with KMC's policies and procedures both as to
the nature and amount of such expenses.

                                      -12-
<PAGE>

                  5.       KEY MAN LIFE POLICY.
                           -------------------
                  In addition to any life insurance policy provided by KMC for
the benefit of Mr. Stewart pursuant to Section 4, KMC shall be permitted, at its
own expense, to maintain a "key man life insurance policy", in such amount and
on such terms as KMC shall in its sole discretion determine, on the life of Mr.
Stewart for so long as this Agreement remains in effect. Mr. Stewart shall fully
cooperate with and assist KMC in obtaining or maintaining any such insurance,
including without limitation, submitting to medical examinations and providing
information to insurance brokers, agents or carriers. Any proceeds from any such
"key man" policy shall be payable solely to KMC; Mr. Stewart's legal
representatives, heirs, successors, assigns and beneficiaries shall have no
rights with respect thereto. Mr. Stewart represents and warrants that to the
best of his knowledge he is in good health and has no reason to believe that
such insurance will not be available to KMC at standard rates.

                  6.       REPRESENTATIONS AND WARRANTIES BY MR. STEWART.
                           ----------------------------------------------
                           Mr. Stewart hereby represents and warrants, the same
being part of the essence of this Agreement, that he is not, and during the Term
will not be, a party to any agreement, contract or understanding, and that he
has no knowledge of any physical or mental illness, condition, impairment,
restriction or incapacity, which in any way restrict or prohibit or will
restrict or prohibit him from undertaking or performing or discharging any of
his duties and responsibilities under this Agreement.

                  7.       TERMINATION.
                           -----------
                  (a)      This Agreement, and Mr. Stewart's employment, shall
terminate prior to the scheduled termination date set forth in Section 2(a)
hereof upon the following terms and conditions:

                                      -13-
<PAGE>

                           (i) If Mr. Stewart dies or becomes permanently
disabled, this Agreement shall terminate effective upon his death or when his
Disability (as hereinafter defined) is deemed to have become permanent. If Mr.
Stewart is unable to perform his normal duties for KMC and/or its subsidiaries,
affiliates or joint ventures because of Disability for a period of at least
ninety (90) consecutive days, or for shorter periods totaling more than one
hundred and eighty (180) days during any period of three hundred and sixty five
(365) or fewer consecutive days for the same cause, the KMC Board may at its
option deem such Disability to have become permanent. For purposes of this
Agreement, the term "Disability" shall mean the physical or mental illness,
condition, impairment, restriction or incapacity of Mr. Stewart, such that Mr.
Stewart shall be substantially unable to perform and discharge his duties and
responsibilities under this Agreement, as certified by a physician, psychiatrist
or other medical practitioner satisfactory to KMC if KMC so requests.

                           (ii) KMC may terminate this Agreement other than for
reasons specified in Section 7(a)(i) or (iii), upon ninety (90) days' prior
written notice to Mr. Stewart.

                           (iii) KMC may terminate this Agreement for Cause (as
defined below), by notice to Mr. Stewart. The term "Cause" shall mean any of the
following: (A) Mr. Stewart commits criminal malfeasance towards KMC and/or any
of its subsidiaries, affiliates or joint ventures (including without limitation
misappropriation of funds or acts of fraud or dishonesty), or is convicted of
any crime or offense involving dishonesty, or improper taking of monies or other
property, or any felony offense, or any crime of moral turpitude, or commits
fraud or embezzlement, or any other violation of law which materially impairs
his ability to perform and discharge his duties or responsibilities hereunder or
which otherwise materially adversely affects KMC and/or its subsidiaries,
affiliates or joint ventures; or (B) Mr. Stewart has breached any of

                                      -14-
<PAGE>

his material duties to KMC and/or its subsidiaries, affiliates or joint ventures
or otherwise violated any other material provision of this Agreement or has made
a material misrepresentation which breach, violation or misrepresentation
materially and adversely affects the business of KMC and/or its subsidiaries or
affiliates or joint ventures and, if such breach, violation or misrepresentation
can reasonably be expected to be cured within twenty (20) days, such breach,
violation or misrepresentation has not been cured to KMC's satisfaction within
twenty (20) days after it notifies Mr. Stewart thereof.

                  (b) Upon any termination pursuant to this Section 7, all
rights of Mr. Stewart under this Agreement shall cease to be effective as of the
date of termination, Mr. Stewart shall be removed from his position and Mr.
Stewart shall have no right to receive any payments or benefits hereunder except
for (i) installments of Base Salary which have been earned in accordance with
Section 4(a) hereof up to the effective date of such termination, (ii)
reimbursement of ordinary, reasonable and necessary expenses incurred in
accordance with Section 4(f) hereof and, to the extent permitted by law, accrued
vacation and illness allowance, in each case up to the effective date of such
termination, (iii) all other benefits due Mr. Stewart under benefit programs in
which he participated and under which he is due a benefit, (iv) if the
termination is pursuant to Section 7(a)(i) by reason of Mr. Stewart's
Disability, KMC shall pay the greater of (x) sixty percent (60%) of the Base
Salary and (y) the amount payable to Mr. Stewart under any disability plan
adopted by KMC from time to time, (v) if the termination is pursuant to Section
7 (a)(i) by reason of Mr. Stewart's death or Section 7(a)(ii), KMC shall pay to
Mr. Stewart a severance payment in an amount equal to the two times the annual
Base Salary and (v) continuation of Mr. Stewart's health and dental benefits at
the same level as all other senior management of KMC for the period for which
the severance is paid. If the termination is

                                      -15-
<PAGE>

pursuant to Section 7(a)(ii) one-half of any severance payment will be payable
in a lump sum on the date the termination becomes effective, with the balance
being payable in arrears in approximately equal consecutive semi-monthly
installments in accordance with KMC's standard payroll practices, as such
practices may be amended from time to time, over the period beginning on KMC's
first payroll payment date after the termination becomes effective and ending on
the earlier of (x) the first anniversary of such date and (y) March 31, 2003,
subject to Mr. Stewart's compliance with the provisions of Section 3 hereof.

                  (c) (i) If Mr. Stewart's employment is terminated pursuant to
Section 7(a)(iii) or (ii) if Mr. Stewart at any time permits or suffers to exist
any act, event or circumstances which violates, or would violate if occurring
within the time periods set forth in Section 3 hereof violate, any provision of
Section 3 hereof, then (x) any loans, extensions of credit or other amounts owed
by Mr. Stewart to KMC or any of its subsidiaries or affiliates (including
without limitation, any interest thereon) shall automatically and immediately be
accelerated and become due and payable, without any further notice, protest,
demand or formality of any kind, and be paid by Mr. Stewart on the date his
employment is terminated or such violation occurs and (y) Mr. Stewart shall
automatically and immediately, without any further notice, demand or formality
of any kind, forfeit all of his rights with respect to, and further deliver or
pay to KMC, (A) (x) any unexercised stock options, whether vested or unvested,
and (y) and unvested or callable stock pursuant to any stock option plan of KMC
or any of its subsidiaries or affiliates, (B) any stock which he acquired within
the twelve (12) month period ending on the date the termination of his
employment becomes effective pursuant to the exercise of options granted by KMC
or any of its subsidiaries or affiliates and (C) the proceeds (net of any
ordinary, reasonable and customary brokerage commissions and expenses of sale
actually paid or incurred by Mr.

                                      -16-
<PAGE>

Stewart) derived from the sale, pledge or other disposition of any such stock or
any interest therein. If Mr. Stewart disposes of any such stock or any interest
therein by gift, bequest or other means by which he did not receive cash in an
amount reasonably equivalent to the fair market value of such stock or interest
and is thereafter required to make a payment to KMC under the foregoing clause
(C), he shall pay to KMC in cash an amount equal to the fair market value of
such stock at the time of the disposition, as reasonably and conclusively
determined by the KMC Board.

                  (d) In the event there is a Change in Control of KMC, and as a
result thereof Mr. Stewart is terminated from his employment by KMC, then,
notwithstanding such termination, he shall receive the remaining payments of
Base Salary at the times set forth in Section 4(a) for the unexpired Term of
this Agreement unless the parties otherwise agree to a lesser amount. In
addition, following a Change in Control one hundred percent (100%) of the shares
subject to the options granted to Mr. Stewart pursuant to that certain
Non-Qualified Executive Stock Option Agreement dated the date hereof between KMC
and Mr. Stewart ("Stock Option Agreement") or otherwise during the Term shall
automatically be deemed "Vested" pursuant to Section 3.1 of the Stock Option
Agreement and not subject to repurchase or call. Prior to an IPO KMC shall use
its reasonable efforts to obtain the agreement of more than seventy five (75%)
percent of its shareholders for any payments payable to Mr. Stewart by reason of
any Change in Control. Following an IPO or in the event of a Change in Control,
to the extent that a nationally recognized accounting firm certifies to KMC that
Mr. Stewart is and will be subject to any excise tax pursuant to Code Section
4999, KMC shall pay to Mr. Stewart an amount equal to such excise tax and any
income, excise or employment tax payable by Mr. Stewart by reason of such
payment of tax by KMC; provided, however that the total amount of

                                      -17-
<PAGE>

such payments shall not exceed $2,000,000. Further, to the extent it would
reduce the excess parachute payments (as defined in Code Section 280G), KMC
shall have the right to require Mr. Stewart to exercise any vested stock options
prior to the year of the Change in Control only to the extent KMC loans Mr.
Stewart funds to exercise such options and pay taxes thereon. For purposes of
this Agreement and the options granted to Mr. Stewart under the Non-Qualified
Stock Option Agreement, dated the date hereof, "Change in Control" shall mean in
the event (A) Harold Kamine and Nassau Capital LLC do not own or control (i)
greater than 35% of the outstanding voting stock of KMC on a fully diluted basis
or (ii) a combined percentage of voting stock of KMC which is greater than that
owned by any other single shareholder or group of shareholders and any one of
(B) (i) Harold Kamine is not the Chairman of KMC or (ii)Mr. Kamine and Nassau do
not have the ability, directly or indirectly, to elect a majority of the KMC
Board or (iii) the individuals comprising the KMC Board on the commencement date
of Mr. Stewart's employment, or individuals selected or nominated by the
existing members do not constitute a majority of the KMC Board.

                  (e) Notwithstanding anything contained in this Agreement or
elsewhere to the contrary, in the event this Agreement is terminated pursuant to
Section 7 (a)(ii), Mr. Stewart shall be entitled to permanently retain all
options or stock on the date of termination then not subject to any repurchase
or call pursuant to Section 3.1 of the Stock Option Agreement and, in addition,
that amount of options or stock which would have no longer been subject to
repurchase or call pursuant to Section 3.1 of the Stock Option Agreement on the
six month anniversary of the termination of this Agreement. In the event there
is a Change in Control within six months of the termination of this Agreement
pursuant to Section 7(a)(ii) one hundred percent (100%) percent of the shares
subject to the Option shall not be subject to any repurchase or call right by

                                      -18-
<PAGE>

KMC and any shares purchased by KMC pursuant to Section 5.3 of the Stock Option
Agreement will be returned to Mr. Stewart in exchange for the proceeds
previously paid to him by KMC for such shares.

                  (f) Notwithstanding anything contained in this Agreement or
elsewhere to the contrary, in the event of the termination of this Agreement
pursuant to Section 7(a)(i) by reason of Mr. Stewart's death, one hundred
percent (100%) of the shares subject to the Option (as defined in the Stock
Option Agreement) shall not be subject to any repurchase or call right by KMC.

                  (g) Notwithstanding anything contained in this Agreement or
elsewhere to the contrary, in the event of the termination of this Agreement
pursuant to Section 7 (a)(i) by reason of Mr. Stewart's Disability, Mr. Stewart
shall be entitled to permanently retain all options or stock not subject to
repurchase or call as of the date of termination pursuant to Section 3.1 of the
Stock Option Agreement and, in addition, that amount of options or stock which
would have no longer been subject to repurchase or call pursuant to Section 3.1
of the Stock Option Agreement on the twelve month anniversary of the termination
of this Agreement.

                  8. ASSIGNABILITY; SUCCESSORS. The obligations of Mr. Stewart
                     -------------------------
hereunder are personal and may not be delegated, assigned or transferred by him
to any Person in any manner whatsoever. Any such purported delegation,
assignment or transfer shall be null and void. This Agreement may be assigned by
KMC to any parent, subsidiary or affiliate of KMC or any Person which succeeds
to the business of KMC, if the obligations of KMC hereunder are expressly
assumed by, and shall be binding upon such Person, and such Person is or will
then be engaged in the Business. Subject to the foregoing, this Agreement shall
be binding on and inure

                                      -19-
<PAGE>

to the benefit of the legal representatives, heirs and permitted successors and
assigns of the parties hereto.

                   9. WITHHOLDING. All payments made by KMC under this Agreement
                      -----------
shall be net of any tax or other amounts required to be withheld by KMC under
any applicable law or legal requirement.

                  10. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement
                      -----------------------------------
constitutes the entire agreement of KMC and Mr. Stewart with respect to the
subject matter hereof and supersedes all prior written and oral agreements and
understandings with respect to such subject matter, except for (to the extent
not inconsistent with this Agreement, and in such event this Agreement shall
govern and the Company will take all actions necessary to amend, modify or waive
any provision of the Stock Option Plan and stock option agreements that are
inconsistent, including without limitation, the last paragraph of the Stock
Option Plan) stock options granted in connection with KMC's Stock Option Plan
and stock option agreements entered in connection therewith. Neither this
Agreement nor any of the terms hereof may be terminated, amended, supplemented,
waived or modified orally, but only by an instrument in writing signed by both
parties. No failure or delay of either party in exercising any right or remedy
under this Agreement or at law or equity shall operate as a waiver hereof or
thereof, nor shall any single or partial exercise of any such right or remedy,
or any abandonment or discontinuance of steps to enforce such a right or remedy,
preclude any other or further exercise thereof or the exercise of any other
right or remedy.

                  11. NOTICES. Any notice, request or communication required or
                      -------
permitted to be given hereunder shall be deemed to have been properly given if
it is given in writing and is delivered personally or sent by registered or
certified mail, return receipt requested. If to Mr.

                                      -20-
<PAGE>

Stewart, such notice shall be sent to him at the address set forth in the first
paragraph hereof, with a copy to William Welke, Esq., Kirkland & Ellis, 200 E.
Randolph Drive, Chicago, IL 60601. If to KMC, such notice shall be directed to
the attention of Harold N. Kamine at the address of KMC set forth in the first
paragraph hereof, with a copy Alan M. Epstein, Esq., Kelley Drye & Warren LLP,
101 Park Avenue, New York, New York 10178. Either party may change the address
to which notices, requests or communications are to be directed by a notice to
the other party in accordance with this Section 11.

                  12. SEVERABILITY. Any provision of this Agreement that shall
                      ------------
be prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, KMC and Mr. Stewart hereby waive any provision of
law that renders any provision hereof prohibited or unenforceable in any
respect; provided that any final decision of any court of competent jurisdiction
in the State of New York that is not subject to appeal with respect to Section 3
shall be binding on the parties in all jurisdictions.

                  13. GOVERNING LAW. THIS AGREEMENT SHALL IN ALL RESPECTS BE
                      -------------
GOVERNED BY, AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH, THE LAW
(EXCLUDING PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT APPLICATION THEREOF
WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION) OF THE
STATE OF NEW YORK.

                  14. COUNTERPARTS. This Agreement may be executable in
                      ------------
counterparts, each of which, for all purposes, shall be deemed an original.

                                      -21-
<PAGE>

                  15. AMBIGUITY IN DRAFTING. Each party shall be deemed to have
                      ---------------------
participated equally in the drafting of this Agreement and any ambiguity in this
Agreement shall not be construed against any purported author thereof. Mr.
Stewart acknowledges that he is capable of evaluating the merits of entering
into this Agreement from a professional and financial perspective and has been
given the opportunity to make such inquiries and investigations as Mr. Stewart
has deemed appropriate under the circumstances and that, at all times during the
course of the negotiations and execution of this Agreement, Mr. Stewart has been
advised by counsel.

                   16. NASSAU CARVE-OUT. Notwithstanding anything contained in
                       ----------------
this Agreement or elsewhere to the contrary, Mr. Stewart can at any time and
from time to time, without breaching this Agreement in any way, devote up to ten
percent (10%) of his time and attention to, perform services on behalf of,
become engaged by or participate with, and disclose information to, and use such
information for the benefit of Nassau Capital Partners L.P., Randall Hack, John
G. Quigley and its and their affiliates and receive equity and other
compensation in connection therewith.

                                      -22-
<PAGE>

                  IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year first above written.

EMPLOYEE                                   EMPLOYER
--------                                   --------

                                           KMC TELECOM HOLDINGS, INC.
/s/ William H. Stewart
----------------------------------
William H. Stewart

                                           By: /s/ HAROLD N. KAMINE
                                               ---------------------------

                                           Title: Chairman
                                                  ------------------------
                                      -23-

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