Document:

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                                                                   EXHIBIT 10.12

                        SEVERANCE COMPENSATION AGREEMENT

         This SEVERANCE COMPENSATION AGREEMENT (the "Agreement") is made as of
September 15, 2000 between MCE COMPANIES, INC., a Michigan corporation (the
"Company"), and JON E. CARLSON, currently an executive officer of the Company
employed in the position of Vice-President-Finance and Chief Financial Officer
of the Company (the "Executive").

                                    Recitals:

         A.    The Company and Executive have heretofore agreed to the terms of
Executive's employment by the Company.

         B.    The Company believes that it is in the best interests of the
Company and its shareholders if the Executive is assured that he will receive
appropriate financial protection in the event of his termination for reasons
other than death, Disability (as defined below), Retirement (as defined below)
or Cause (as defined below) or in the event of his Resignation for Good Reason
(as defined below), thus ensuring that the Executive will have an incentive to
perform valuable services for the Company and will not be distracted in the
event of an actual or threatened termination for such reasons, subject to the
terms and conditions of this Agreement.

         C.    The Executive is willing to provide dedicated services to the
Company on the condition that he receives adequate assurance that he will
receive appropriate financial protection in the event of his termination by the
Company for reasons other than death, Disability, Retirement or Cause or in the
event of his Resignation for Good Reason, subject to the terms and conditions of
this Agreement.

                                   Agreement:

         NOW, THEREFORE, in return for good and valuable consideration and in
consideration of the premises and the mutual promises made hereafter, the
Executive and the Company agree as follows:

         1.    Involuntary Termination and Resignation for Good Reason. The
Executive shall be entitled to and shall receive the severance payments and
benefits described in Section 2 of this Agreement if, and only if there has been
an Involuntary Termination (as defined below) of the Executive's employment by
the Company or there has been a Resignation for Good Reason, provided that, as a
condition to the Executive receiving the severance payments and benefits
described in Section 2, the Executive shall have executed and delivered to the
Company, and shall not have revoked, the Release and Settlement Agreement in the
form attached hereto as Schedule 1 prior to or simultaneously with receiving
such severance payments and benefits.

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         2.      Severance Payment and Benefits upon Involuntary Termination or
Resignation for Good Reason. If there has been an Involuntary Termination or a
Resignation for Good Reason, the Executive will be entitled to and shall receive
all of the following:

                 (a)      Salary. A continuance of his salary at one hundred
percent (100%) of his then current base salary, as severance payment, for a
period of twelve (12) months beyond the effective date of any Involuntary
Termination or any Resignation for Good Reason (the "Severance Period").
Severance will be paid through the Severance Period in conjunction with the
Company's routine payroll or may be paid in a lump sum, at the discretion of the
Company.

                 (b)      Automobile Allowance; Life Insurance Coverage.

                          (i)    A continuance of his automobile allowance at
         one hundred percent (100%) of his then current rate of automobile
         allowance through the end of the Severance Period; and

                          (ii)   A continuance of his life insurance coverage at
         one hundred percent (100%) of his then current rate of life insurance
         coverage through the end of the Severance Period, but only to the
         extent such continued coverage is permitted by the insurance carrier
         providing benefits to similarly situated active employees and can be
         obtained by the Company at the same cost the Company would incur for
         such coverage but for the Involuntary Termination of the Executive or
         the Resignation for Good Reason. The Company disclaims any liability
         for disputes relating to the Executive's entitlement to such insurance
         coverage, with it being understood and agreed that the underlying
         insurance policies shall govern all issues relating to such insurance
         coverage.

                 (c)      Accrued Bonus.  One hundred percent (100%) of the
bonus, if any, accrued on the books and records of the Company with respect to
the Executive and unpaid as of the effective date of any Involuntary Termination
or any Resignation for Good Reason.

                 (d)      COBRA. Should the Executive elect COBRA health care
continuation coverage in the event of an Involuntary Termination or a
Resignation for Good Reason, he shall pay for the first twelve (12) months of
such COBRA coverage at the same rate he would have paid for health care coverage
if his employment with the Company had not terminated as a result of an
Involuntary Termination or a Resignation for Good Reason. For subsequent months'
COBRA coverage after an Involuntary Termination or a Resignation for Good
Reason, the Executive shall pay the prevailing COBRA rate (up to 102% of the
Company's cost). If the Company's insurance carrier (the Company has the right
to change insurance carriers at any time and at its sole discretion) is willing
to extend the Executive's COBRA coverage to a period of time of up to six (6)
months beyond the period of time required by COBRA, the Company will not object
to such extension of coverage. The Executive will continue to pay the prevailing
COBRA rate for such extended coverage. The Executive will not be permitted to
extend coverage beyond the maximum period of time required by COBRA under any of
the Company's self-funded or partially self-funded health options or plans. The
Executive's rights under this Section 2(d) shall be in addition to any rights he
may have under applicable COBRA laws.

                 (e)      Immediate Vesting of Stock Options, Etc. Any
outstanding stock option or stock appreciation right granted to the Executive by
the Company under the 2000 Stock

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Incentive Plan or otherwise (regardless of the date of grant) immediately shall
become fully vested and exercisable in full, regardless of any installment
provision applicable to such stock option or stock appreciation right, and the
remaining restriction period on any restricted stock granted to the Executive by
the Company under the 2000 Stock Incentive Plan or otherwise (regardless of the
date of grant) immediately shall lapse and the shares shall become fully
transferable, subject to any applicable federal or state securities laws.

                 (f)    Offset upon Subsequent Employment. In the event that
the Executive finds subsequent employment prior to the termination of the
Severance Period, the remaining payments under Sections 2(a), (b), (c) and (d)
above will be offset by the salary, automobile allowance, life insurance
coverage, accrued bonus and healthcare coverage, as the case may be, actually
received by the Executive in his subsequent employment.

                 (g)    Reduction for "Parachute Payments". Notwithstanding
anything in this Agreement to the contrary, the cash payments described in this
Section 2, when aggregated with any other "parachute payments", as defined under
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"),
payable under any other plans, agreements or policies of the Company, shall be
reduced to the highest amount permissible under Sections 280G and 4999 of the
Code before the Executive becomes subject to the excess parachute payment excise
tax under Section 4999 of the Code and the Company loses all or part of its
compensation deduction for such payments.

         3.      Rights upon Change in Control. In the event of a Change in
Control (as defined below), any outstanding stock option or stock appreciation
right granted to the Executive by the Company under the 2000 Stock Incentive
Plan or otherwise (regardless of the date of grant) immediately shall become
fully vested and exercisable in full, regardless of any installment provision
applicable to such stock option or stock appreciation right, and the remaining
restriction period on any restricted stock granted to the Executive by the
Company under the 2000 Stock Incentive Plan or otherwise (regardless of the date
of grant) immediately shall lapse and the shares shall become fully
transferable, subject to any applicable federal or state securities laws,
provided that, at the request of the Company, as a condition to the Executive
receiving the rights described in this Section 3, the Executive shall have
executed and delivered to the Company, and shall not have revoked, the Release
and Settlement Agreement in the form attached hereto as Schedule 1 prior to or
simultaneously with receiving such rights (such form to be modified such that
the release contained therein shall be with respect to matters arising from
facts and circumstances occurring prior to or as of such date, shall exclude any
matter arising from facts and circumstances occurring after such date and shall
exclude any obligations of the Company due to the Executive relative to the
Executive's employment with the Company), and provided further that it is
acknowledged and agreed that, depending on the facts and circumstance, the
Executive may be obligated to execute and deliver such a Release and Settlement
Agreement both in connection with this Section 3 and in connection with Section
1.

         4.      Defined Terms.  For purposes of this Agreement, the following
terms shall have the set forth below:

                 (a)    "Accepted Duties" shall mean the Executive's current
duties and responsibilities as Vice-President-Finance and Chief Financial
Officer of the Company, or as any

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other officer or in any other position to which the Executive is appointed and
in which he mutually agrees to serve (collectively, the "Accepted Duties").

                 (b)      "Affiliated Group" shall mean, at any time, the
Company and any of its direct or indirect subsidiaries (whether now or
hereinafter in existence) and any of its other affiliates which are controlled
by the Company (whether now or hereinafter in existence), including, without
limitation, as of the date hereof, the following subsidiaries of the Company:
DML Microwave Limited; Inmet Corporation; KDI/Triangle Corporation; Metelics
Corporation; and Weinschel Corporation.

                 (c)     "Cause" shall mean a termination of the Executive's
employment by the Company for any of the following reasons:

                          (i)   the Executive's failure to substantially perform
         his services with respect to his Accepted Duties, in any material
         manner, other than any such failure resulting from his Disability or
         for Good Reason, including the failure to comply in any material manner
         with the policies, rules or directives of the Chairman, President or
         Chief Executive Officer of the Company or of the Board of Directors of
         the Company, with such failure to be determined in the good faith
         opinion of the Board of Directors by the affirmative vote of at least
         two-thirds of the directors (but not including the Executive if the
         Executive is a Director), provided that the Executive shall have
         received ninety (90) days prior written notice of the Board's concern
         with respect to such failure and shall have failed to cure such failure
         within such ninety (90) day period; or

                          (ii)   the Executive's engaging in any serious
         misconduct which, in the good faith opinion of the Board of Directors
         of the Company by affirmative vote of two-thirds of the directors (but
         not including the Executive if the Executive is a Director), is
         substantially injurious to the Company's business (it being understood
         that such misconduct shall be deemed substantially injurious only if
         the injury is reasonably likely to exceed $100,000); or

                          (iii)  the Executive's performance of any act or acts
         of dishonesty resulting or intended to result directly or indirectly in
         significant gain or personal enrichment at the expense of the Company,
         with the foregoing to be determined in the good faith opinion of the
         Board of Directors by the affirmative vote of at least two-thirds of
         the directors (but not including the Executive if the Executive is a
         Director); or

                          (iv)   The Executive's gross negligence or willful
         misconduct in the performance of his Accepted Duties, in any material
         manner, other than any such failure resulting from his Disability or
         for Good Reason, with such gross negligence or willful misconduct to be
         determined in the good faith opinion of the Board of Directors by the
         affirmative vote of at least two-thirds of the directors (but not
         including the Executive if the Executive is a Director), provided that
         the Executive shall have received ninety (90) days prior written notice
         of the Board's concern with respect to such gross negligence or willful
         misconduct and shall have failed to cure same within such ninety (90)
         day period; or

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                          (v)    the Executive's conviction of a felony,
         misdemeanor resulting in a jail sentence or any crime involving moral
         turpitude; or

                          (vi)   any material breach by the Executive of the
         obligations set forth below in Section 8.

                  (d)     As used herein "Change in Control" means the
occurrence of any one of the following events:

                          (i)    If any "person" (as such term is used in
         Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
         amended (the "Exchange Act")) or group of persons acting in concert
         (other than (A) the Company, (B) a subsidiary, (C) the current holders
         of Common Stock or securities providing a holder the right to acquire
         Common Stock or the "affiliates" (as such term is defined in Rule 12b-2
         promulgated under the Exchange Act) of such current holders, or (D) an
         employee benefit plan or employee benefit plan trust maintained by the
         Company or a subsidiary) becomes the "beneficial owner" (as such term
         is defined in Rule 13d-3 promulgated under the Exchange Act, except
         that a person also shall be deemed the beneficial owner of all
         securities which such person may have a right to acquire, whether or
         not such right is presently exercisable), directly or indirectly, of
         securities of the Company representing fifty percent (50%) or more of
         the combined voting power of the Company's then outstanding securities
         ordinarily having the right to vote in the election of directors;
         provided that the occurrence of an initial public offering or
         subsequent public offering of the securities of the Company under the
         Securities Act of 1933, as amended, shall be excluded from the
         foregoing. Notwithstanding the foregoing, the beneficial ownership
         requirement in this Section 4(d)(i) shall not be satisfied if the
         attainment of the applicable percentage of beneficial ownership is the
         result of an acquisition of voting stock by the Company which, by
         reducing the number of shares outstanding, increases the proportionate
         number of shares beneficially owned by any person; provided, however,
         that, if a person shall become the beneficial owner of 50% or more of
         the voting stock of the Company then outstanding by reason of share
         purchases by the Company and shall, after such share purchases by the
         Company, become the beneficial owner of any additional voting stock,
         then the beneficial ownership requirement in this Section 4(d)(i) shall
         have been satisfied.

                          (ii)   If there shall be consummated any merger or
         consolidation (or series of mergers or consolidations) of the Company,
         or any sale, lease, exchange, liquidation or other transfer (in one
         transaction or a series of related transactions) of all, or
         substantially all, of the assets of the Company, other than (A) a
         merger or consolidation which would result in the voting stock of the
         Company immediately prior thereto continuing to represent (either by
         remaining outstanding or by being converted into voting stock of the
         surviving entity) more than 60% of the combined voting power of the
         voting stock of the Company (or such surviving entity) outstanding
         immediately after such merger or consolidation, or (B) a merger or
         consolidation effected to implement a recapitalization (or similar
         transaction) of the Company in which no person becomes the owner of
         50% or more of the combined voting power of the then outstanding voting
         stock of the Company, or (C) a merger or consolidation effected to
         implement a reorganization of the Company's ownership wherein the
         Company shall become a wholly-owned

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         subsidiary of another corporation and the shareholders of the Company
         shall become shareholders of such other corporation without any
         material change in each shareholder's proportionate ownership of such
         other corporation from that owned in the Company prior to such merger
         or consolidation.

                          (iii)  If there is the addition of new members to the
         Board of Directors of the Company within any consecutive twenty-four
         (24) month period, which members constitute a majority of the Board,
         unless a majority of the Board consists of incumbent members of the
         Board in office prior to the commencement of such twenty-four (24)
         month period, plus new members who were recommended or appointed by a
         majority of the incumbent directors in office immediately prior to the
         addition of such new members to the Board.

                 (e)      "Disability" shall mean the Executive's total and
permanent disability which prevents the Executive from performing his Accepted
Duties for a continuous period exceeding nine (9) months. The determination of
Disability shall be made by a medical board certified physician mutually
acceptable to the Company and the Executive (or the Executive's legal
representative, if one has been appointed), and if the parties cannot mutually
agree to the selection of a physician, then each party shall select such a
physician and the two physicians so selected shall select a third physician who
shall make this determination. The Company and the Executive shall each bear
one-half of the fees and expenses for all such physicians.

                 (f)      "Involuntary Termination" shall mean an involuntary
termination of the Executive's employment by the Company for any reason other
than death, Disability, Retirement or Cause.

                 (g)      "Good Reason" shall mean any of the following,
provided that the Company shall have received ninety (90) days prior written
notice of the Executive's concern with respect to any of the following and shall
have failed to cure such failure within such ninety (90) day period:

                          (i)    A material change by the Company in the
         Executive's then Accepted Duties which is inconsistent with and
         materially less important than the then Accepted Duties;

                          (ii)   A reduction by the Company in the Executive's
         base compensation; or

                          (iii)  The Company's relocation of the Executive's
         principal place of employment to a place more than thirty (30) miles
         from 310 Dino Drive, Ann Arbor, Michigan.

                 (h)      "Resignation for Good Reason" shall mean a termination
of the Executive's employment by resignation of the Executive for Good Reason.

                 (i)      "Retirement" shall mean retirement by the Executive on
 or after age 65.

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                 (j)      "2000 Stock Incentive Plan" shall meant the MCE
Companies, Inc. 2000 Stock Incentive Plan adopted by the Company's Board of
Directors on July 20, 2000 and subsequently approved by the Company's
shareholders effective as of August 15, 2000.

         5.      Notice of Voluntary Termination. The Executive agrees that if
he decides to terminate his employment with the Company of his own volition,
including any Resignation for Good Reason, he will provide the Company with at
least thirty (30) days prior written notice.

         6.      Tax Withholding. The Company shall use its best commercially
reasonable efforts to withhold from any amounts payable to the Executive under
this Agreement such sums as are necessary to satisfy all applicable Federal,
State, local or other income and employment withholding taxes. In the event the
Company fails to withhold such sums for any reason, the Executive shall
promptly, upon a request by the Company, remit to the Company sufficient cash to
satisfy all applicable income and employment withholding taxes.

         7.      Termination of Certain Obligations of the Company.  The
Company's obligations under Sections 1, 2 and 3 of this Agreement shall
terminate upon the termination of the Executive's employment upon death,
Disability, Retirement or Cause.

         8.      Confidentiality and Noncompetition Matters. The Executive
hereby acknowledges and recognizes the competitive nature of the business of the
Company and, accordingly, in partial consideration of the consummation of this
Agreement, and regardless of whether the Executive is entitled to receive any
severance compensation payments under this Agreement, the Executive agrees as
follows:

                 (a)      Confidentiality Matters. The Executive agrees to at
all times during and after his employment with the Company (regardless of
whether there occurs an Involuntary Termination or a Resignation for Good
Reason) to hold in confidence and keep secret and inviolate all of the
confidential information of the Affiliated Group, including, without limitation,
all unpublished matters relating to the business, property, accounts, books,
records, customers and contracts of the Company which he may or hereafter come
to know; provided, however, that the Executive may:

                          (i)    disclose any such information which (A) has
         otherwise entered the public domain (other than through a breach of
         this Agreement) or which he is required to disclose to any governmental
         authority by law or subpoena or judicial process, or (B) was available
         to the Executive on a nonconfidential basis prior to the disclosure,
         provided that the source of such information was not known by the
         Executive to be bound by a confidentiality agreement with or other
         contractual, legal or fiduciary obligation of confidentiality to the
         Company with respect to such information.

                          (ii)   disclose so much of such information to
         personal tax or financial advisors as may be reasonably appropriate to
         enable such advisors to render appropriate advice to the Executive.

                  (b)     Noncompetition Matters.

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                           (i) Covenant. The Executive agrees that, during the
         Noncompetition Period (as defined below), the Executive will not,
         directly or indirectly, whether as an officer, director, executive,
         proprietor, employee, partner, investor (other than as a holder of less
         than five percent (5%) of the outstanding stock of a publicly-traded
         corporation), consultant, independent contractor, advisor, agent, or
         otherwise, engage in any Business Activities (as defined below) in
         competition with the Affiliated Group in the United States and
         throughout the world, provided that, for purposes of this Section 8(b),
         the composition of the Affiliated Group shall be determined and fixed
         as of the effective time of the termination of the Executive's
         employment with the Company.

                           (ii) Noncompetition Period. As used herein, the term
         "Noncompetition Period" shall mean the period commencing with the date
         hereof and ending on the earlier to occur of (A) the effective date of
         any termination by the Company of the Executive's employment with the
         Company without Cause (and for reasons other than Disability), or (B)
         the first (1st) anniversary of the effective date of any Resignation
         for Good Reason or any termination of the Executive's employment with
         the Company arising from a Disability.

                           (iii) Business Activities. As used herein, the term
         "Business Activities" shall mean the business activities of the
         Affiliated Group as presently conducted or as conducted in the future
         (but in no event after the effective time of the termination of the
         Executive's employment with the Company), including, without
         limitation, the design, manufacture and sale of devices, components and
         subsystems which operate over the full range of frequencies commonly
         used in wireless communications transmission and which are used
         throughout mobile and fixed wireless infrastructure equipment and
         related test equipment applications, as well as wireless broadband
         access, fiber optic networking, radar and satellite applications.

                  (c) Irreparable Harm; Injunctive Relief. The Executive
acknowledges that if he violates the terms of this Section 8, he will cause
severe and irreparable injury to the business and goodwill of the Company, which
injury is not adequately compensable by money damages. Accordingly, in the event
of a breach of this Section 8, the Company shall, in addition to any other
rights and remedies, be entitled to immediate and appropriate injunctive relief,
or a decree of specific performance of this Agreement, without the necessity of
showing any irreparable injury or special damages, in an appropriate court
having equitable jurisdiction in the matter, provided, however, that this shall
in no way limit any other remedies which the Company may have (including,
without limitation, the right to seek monetary damages).

                  (d) Enforceability; Acknowledgments of the Parties. The
parties agree and acknowledge that the restrictions contained in this Section 8
are reasonable in scope and duration and are necessary to protect the Company.
If the terms of this Section 8 shall be held by a court to be invalid or
unenforceable because it is too broad in any respect, this Agreement shall be
narrowed by the court to the extent deemed necessary by the court to be
enforceable and the same shall in no way affect any other circumstance or the
validity or enforceability of any other provisions of this Agreement. It is the
intent of the parties that a court enforce these restrictions to the fullest
extent permitted by law.

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         9.  Effect on Employment. Neither this Agreement, nor the rights and
obligations set forth herein, shall be deemed to create any right with respect
to the Executive to be retained or continued in the employment of the Company or
any of its subsidiaries.

         10. Arbitration. The Company and the Executive agree that, except for
the injunctive relief described above in Section 8(d), any and all disputes,
claims or controversies arising in connection with this Agreement shall be
finally settled by arbitration pursuant to the Voluntary Labor Arbitration Rules
of the American Arbitration Association, as then in effect. In the event of any
conflict between such Rules and the provisions of this Agreement, the provisions
of this Agreement shall govern. In selecting the eligible arbitrators, the
American Arbitration Association will give due consideration to the subject
matter of the dispute. The arbitrator's(s') sole authority shall be to interpret
and apply the provisions of this Agreement and, in connection therewith, the
arbitrator(s) shall not change, add to, or subtract from, any of the provisions
of this Agreement. The arbitrator(s) shall have the power to compel attendance
of witnesses at the hearing. The arbitration hearing shall be conducted in the
metropolitan area of Ann Arbor, Michigan. All expenses of the arbitration shall
be divided equally between the Company and the Executive. Each of the Company
and the Executive shall be responsible for its/his own legal fees and other
costs relating to the arbitration proceeding. Any decision, award and/or
judgment rendered by the arbitrators may be entered in and enforced by any court
having competent jurisdiction thereof.

         11. Binding Effect.

             (a) This Agreement shall be binding upon the successors and assigns
of the Company. The Company shall take whatever actions are necessary to ensure
that any successor to its operations (whether by purchase, merger,
consolidation, sale of substantially all assets or otherwise) assumes the
obligations under this Agreement and will cause such successor to evidence the
assumption of such obligations in an agreement satisfactory to the Executive.
Notwithstanding any other provisions in this Agreement to the contrary, if the
Company fails to obtain an agreement evidencing the assumption of the Company's
obligations by any such successor, the Executive shall receive payment of the
severance compensation provided hereunder immediately after the effective time
of any such succession, irrespective of whether there has occurred an
Involuntary Termination or Resignation for Good Reason. For purposes of
implementing the foregoing, the date on which any succession becomes effective
shall be deemed to constitute the date of the Executive's Involuntary
Termination or Resignation for Good Reason.

             (b) This Agreement shall be binding upon the Executive and shall
inure to the benefit of and be enforceable by his estate, legal representatives
and heirs. However, the rights of the Executive under this Agreement shall not
be assigned, transferred, pledged, hypothecated or otherwise encumbered, except
by operation of law.

         12. Notices. Any notice required or permitted by this Agreement shall
be in writing, addressed as follows:

             Company:  If to the Company, to the following address:

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                               MCE Companies, Inc.
                               310 Dino Drive
                               Ann Arbor, Michigan  48103
                                  734-426-1230; fax 734-426-1510
                               Attn:  John L. Smucker
                                  e-mail:  jsmucker@mcecompanies.com

                               with a copy to:

                               Dykema Gossett PLLC
                               400 Renaissance Center
                               Detroit, Michigan 48243
                               Attn:  J. Michael Bernard
                                  313-568-5374; fax 313-568-6832
                                  e-mail:  jbernard@dykema.com

                Executive:  If to the Executive, at the Executive's last home
                address on file with the Company.

Any party hereto may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other party notice in the manner set forth in this Section 12. Notices shall be
deemed given (a) when received, if physically delivered, (b) when transmitted,
if telephonically transmitted by facsimile transmission and if such transmission
is confirmed within one (1) business day thereafter orally and by delivery by
certified or registered United States Mail (with first class postage pre-paid)
or guaranteed (in the ordinary course) overnight delivery, (c) when transmitted,
if transmitted via e-mail and if such transmission is confirmed within one (1)
business day thereafter orally and by delivery by certified or registered United
States Mail (with first class postage pre-paid) or guaranteed overnight
delivery, (d) five (5) business days after having been deposited in the United
States Mail, as certified or registered mail (with return receipt requested and
with first class postage pre-paid), or (e) one (1) business day after having
been transmitted to a third party providing delivery services in the ordinary
course of business which guarantees (in the ordinary course) delivery on the
next business day after such transmittal (e.g., via Federal Express).

         13. Arm's Length Negotiations. Each party herein expressly represents
and warrants to the other that: (a) before executing this Agreement, said party
has fully informed itself or himself of the terms, contents, conditions and
effects of this Agreement; (b) said party has relied solely and completely upon
its own judgment in executing this Agreement; (c) said party has had the
opportunity to seek and/or has obtained the advice of counsel before executing
this Agreement; (d) said party has acted voluntarily and of its own free will in
executing this Agreement; (e) said party is not acting under duress, whether
economic or physical, in executing this Agreement; and (f) this Agreement is the
result of arm's length negotiations conducted by and among the parties and their
respective counsel. In addition, the Executive represents and warrants to the
Company that his experience and capabilities are such that he understands the
nature of the restrictions and agreements set forth in this Agreement.

         14. Miscellaneous. The invalidity or unenforceability of any provision
of this

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Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall continue in full force and effect. This
Agreement shall not be deemed to create a contract of employment between the
Company and the Executive and shall create no right in the Executive to continue
in the Company's employment for any specific period of time, or to create any
other rights in the Executive or obligations on the part of the Company, except
as set forth herein. This Agreement shall not restrict the right of the Company
to terminate the Executive, or restrict the right of the Executive to terminate
his employment. The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
any provision hereof. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument, and shall bind and shall inure to the benefit of the
parties hereto, and their respective successors and assigns. Copies
(photostatic, facsimile or otherwise) of this Agreement and signatures hereto
shall be deemed to be originals and may be relied on to the same extent as the
manually-signed originals. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN.

         15. Entire Agreement; Modification. This Agreement contains the entire
agreement between the Executive and the Company with respect to the subject
matter hereof. Any modification of this Agreement must be made in writing and
signed by the Executive and the President or other officer specifically
authorized to do so by the Board of Directors of the Company.

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         IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.

Witness:
-------

                                        MCE COMPANIES, INC.

/s/ Daniel T. Hoag                      By: /s/ John L. Smucker
----------------------------               ------------------------------------

                                        Its: President
                                            -----------------------------------

/s/ Daniel T. Hoag                      /s/ Jon E. Carlson
-----------------------------           ---------------------------------------
                                        JON E. CARLSON, the Executive

Attachment:

         Schedule 1        Form of Release and Settlement Agreement
         ----------

<PAGE>   13

                                   SCHEDULE 1

                        RELEASE AND SETTLEMENT AGREEMENT

         This RELEASE AND SETTLEMENT AGREEMENT (the "Agreement") is made as of
            ,      between MCE COMPANIES, INC., a Michigan corporation (the
"Company"), and                       (the "Executive").

                                    Recitals:

         A. The Company and the Executive are parties to a Severance and
Compensation Agreement dated September 15, 2000 (the "Severance Compensation
Agreement"). Capitalized terms that are not otherwise defined herein shall have
the meanings ascribed to such terms in the Severance Compensation Agreement.

         B. Effective as of           ,     (the "Separation Date"), the
Executive's employment with the Company was or will be terminated due to the
occurrence of an Involuntary Termination or the Executive's Resignation for Good
Reason.

         C. The Company is not obligated to pay the Executive any additional
compensation or benefits other than that which has been earned as of the
Executive's Separation Date and other than that which is set forth in the
Severance Compensation Agreement. This Agreement is the Release and Settlement
Agreement referenced in the Severance Compensation Agreement and the payment of
the severance benefits set forth in the Severance Compensation Agreement is
conditioned upon the execution and delivery by the Executive of this Agreement.

                                   Agreement:

         NOW, THEREFORE, in return for good and valuable consideration and in
consideration of the premises and the mutual promises made hereafter, the
Executive and the Company agree as follows:

         1. Severance Compensation Agreement. Subject to the terms and
conditions of the Severance Compensation Agreement, (a) the Company agrees to
pay the Executive the severance payments and to provide the Executive with the
other benefits described in Section 2 of the Severance Compensation Agreement,
to provide the Executive with the rights described in Section 3 of the Severance
Compensation Agreement, and to otherwise comply with the provisions of the
Severance Compensation Agreement, as the case may be, and (b) the Executive
agrees to comply with the confidentiality and noncompetition covenants in
Section 8 of the Severance Compensation Agreement and to otherwise comply with
the provisions of the Severance Compensation Agreement.

<PAGE>   14

         2. Acknowledgment.  The Executive and the Company acknowledge that the
amounts to be paid pursuant to the Severance Compensation Agreement are in
excess of any earned wages or benefits due and owing the Executive through his
Separation Date.

         3. Release. In exchange for the good and valuable consideration set
forth in Section 1 of this Agreement, the Executive, on behalf of himself, his
heirs, executors and assigns, releases, waives and discharges any and all manner
of action, causes of action, claims, rights, charges, suits, damages, debts,
demands, obligations, attorneys' fees, or any and all other liabilities or
claims of whatsoever nature, whether in law or in equity, known or unknown,
including, but not limited to, any claim and/or claim of damages or other relief
for tort, breach of contract, personal injury, negligence, age discrimination
under The Age Discrimination In Employment Act of 1967 (as amended), employment
discrimination prohibited by other federal, state or local laws, including, but
not limited to, sex, race, national origin, marital status, age, handicap,
height, weight, or religious discrimination, and any other claims for unlawful
employment practices which the Executive has claimed or may claim or could claim
in any local, state or federal forum, against the Company, its directors,
officers, employees, successors and assigns, its and their respective affiliates
and all others, as a result of the Executive's employment at and separation of
employment from the Company, provided that, the Executive and the Company retain
the right to enforce this Agreement and the Severance Compensation Agreement.

         4. Irrevocable Bar. The parties intend that this Agreement will
irrevocably bar any action or claim whatsoever by the Executive against the
Company for any resultant injuries or damages, whether known or unknown,
sustained or to be sustained, as a result of any of the Company acts, omissions
and conduct having occurred up to the present date, including, but not limited
to, the Executive's employment with the Company and the termination of that
employment, other than those concerning this Agreement and the Severance
Compensation Agreement.

         5.  Rights or Claims Arising After the Date Hereof.  The Executive and
the Company understand that the Executive is not waiving rights or claims that
may arise after the date this Agreement is executed.

         6.  Review of Agreement.  The Executive understands and agrees that he
has read this Agreement carefully and understands all of its terms.

         7.  Advice to Consult Attorney.  The Executive understands and agrees
that he is advised to consult with an attorney prior to executing this
Agreement.

         8. Period within which to Consider Agreement. The Executive understands
and agrees that he has been given 21 days (or more) within which to consider
this Agreement.

         9. REVOCATION. THE EXECUTIVE UNDERSTANDS AND AGREES THAT HE MAY REVOKE
THIS AGREEMENT FOR A PERIOD OF SEVEN (7) CALENDAR DAYS FOLLOWING THE EXECUTION
OF THIS AGREEMENT. NEITHER THIS AGREEMENT NOR THE COMPANY'S OBLIGATIONS UNDER
SECTIONS 1, 2 OR 3 OF THE SEVERANCE COMPENSATION AGREEMENT SHALL BE EFFECTIVE
UNTIL THIS REVOCATION PERIOD HAS EXPIRED (AT WHICH TIME SUCH OBLIGATIONS SHALL
BE EFFECTIVE, RETROACTIVE TO THE TIME CONTEMPLATED IN THE SEVERANCE COMPENSATION
AGREEMENT). WITHOUT LIMITING THE GENERALITY

<PAGE>   15

OF THE FOREGOING, THE PROVISIONS OF SECTION 8 OF THE SEVERANCE COMPENSATION
AGREEMENT (RELATIVE TO CONFIDENTIALITY AND NONCOMPETITION MATTERS) SHALL NOT BE
TERMINATED OR OTHERWISE AFFECTED BY ANY REVOCATION OF THIS AGREEMENT. THE
EXECUTIVE UNDERSTANDS THAT ANY REVOCATION, TO BE EFFECTIVE, MUST BE IN WRITING
AND EITHER (A) POSTMARKED WITHIN SEVEN (7) DAYS OF EXECUTION OF THIS AGREEMENT
AND ADDRESSED TO THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY, ATTENTION:
PRESIDENT, OR (B) HAND DELIVERED WITHIN SEVEN (7) DAYS OF EXECUTION OF THIS
AGREEMENT TO THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY, ATTENTION:
PRESIDENT. THE EXECUTIVE UNDERSTANDS THAT IF REVOCATION IS MADE BY MAIL, MAILING
BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, IS RECOMMENDED TO SHOW PROOF OF
MAILING.

         10. Voluntary Action; No Reliance.  In agreeing to sign this
Agreement, the Executive is doing so completely voluntarily and agrees that he
has not relied on any oral statements or explanations made by the Company or its
representatives.

         11. Nondisclosure.  Both parties agree not to disclose the terms of
this Agreement to any third party, except as is required by law, or as is
necessary for purposes of securing counsel from either parties' attorneys or
accountants.

         12. No Disparaging Statements.  The Executive and the Company agree
not to make any disparaging statements about the other.

         13.  Full Accord and Satisfaction.  This Agreement is in full accord
and satisfaction and compromise of the claims of the Executive and the Company
and is not to be construed as an admission of liability on the part of the
Company.

         14. Miscellaneous. The headings in this Agreement are inserted for
convenience of reference only and shall not be a part of or control or affect
the meaning of any provision hereof. This Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, and shall bind and shall
inure to the benefit of the parties hereto, and their respective successors and
assigns. Copies (photostatic, facsimile or otherwise) of this Agreement and
signatures hereto shall be deemed to be originals and may be relied on to the
same extent as the manually-signed originals. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN.

         15. Entire Agreement. Modification.  This Agreement contains the entire
agreement between the Executive and the Company with respect to the subject
matter hereof. Any modification of this Agreement must be made in writing and
signed by the Executive and an officer specifically authorized to do so by the
Board of Directors of the Company.

                            [SIGNATURES ON NEXT PAGE]

<PAGE>   16

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.

Witness:

                                       MCE COMPANIES, INC.

                                       By:
-----------------------------             -----------------------------

                                       Its:
                                           ----------------------------

-----------------------------          --------------------------------
                                                             , the Executive
                                       ----------------------

<PAGE>   17<PAGE>

                                                                   Exhibit 10.15

================================================================================

                            PARTICIPATION AGREEMENT

                                     among

                              KMC TELECOM V, INC.,

                        TELECOM V INVESTOR TRUST 2000-A,

                           WILMINGTON TRUST COMPANY,
                       in its individual capacity and as
                                    Trustee

                                      and

                                 THE INVESTORS
                                  party hereto

                          ____________________________

                           Dated as of June 28, 2000
                          ____________________________

================================================================================
<PAGE>

          PARTICIPATION AGREEMENT, dated as of June 28, 2000, among KMC TELECOM
V, INC., a Delaware corporation (the "Lessee"); TELECOM V INVESTOR TRUST 2000-A,
                                      ------
a Delaware business trust (the "Lessor"); WILMINGTON TRUST COMPANY, in its
                                ------
individual capacity (in such capacity, the "Trust Company") and as trustee of
                                            -------------
the Lessor (in such capacity, the "Trustee"); and the INVESTORS party hereto.
                                   -------
Capitalized terms used but not otherwise defined in this Agreement shall have
the meanings set forth in Annex A hereto, and the rules of usage set forth in
Annex A hereto shall apply to this Agreement.

                             Preliminary Statement
                             ---------------------

          A.  The Lessee and Qwest have entered into the MGS Agreement, pursuant
to which the Lessee has agreed to provide the MGS Services to Qwest.

          B.  The Lessee has entered into the Equipment Purchase Agreement with
Qwest, pursuant to which the Lessee has agreed to purchase the Equipment, which
equipment will be used to provide the MGS Services.

          C.  The Lessee has entered into the Co-Location Agreements, the
Services Agreements, the Operating Agreement and certain other Project
Contracts, pursuant to which the Lessee will obtain space to locate the
Equipment, operational and maintenance services and other goods and services
required in connection with the operation of the Equipment.

          D.  The Investors desire to cause the Lessor to purchase the Equipment
from the Lessee and lease the Equipment to the Lessee pursuant to the Lease.

          E.  Concurrently with the execution and delivery of this Agreement,
the Investors and the Trust Company are executing and delivering the Trust
Agreement, pursuant to which the Investors have authorized the Lessor to, among
other things and subject to the terms and conditions thereof and hereof,
purchase the Equipment from the Lessee and lease the Equipment to the Lessee
pursuant to the Lease.

          F.  Pursuant to the Security Documents, the obligations of the Lessee
under the Lease and the other Operative Documents will be secured by the
Collateral specified therein.

          In consideration of the mutual agreements herein contained and other
good and valuable consideration, receipt of which is hereby acknowledged, the
parties hereto hereby agree as follows:

                        SECTION 1.   BASIC TRANSACTIONS

          1.1  Equipment Purchase and Lease. On the Closing Date and subject to
               ----------------------------
the terms and conditions of this Agreement (i) each Investor will make an
Investor Contribution to the Lessor in an amount equal to its Investor
Contribution Commitment, (ii) the Lessor will purchase all right, title and
interest of Lessee in and to each item of Equipment pursuant to the Bill of Sale
and (iii) the Lessor will simultaneously lease all of its right, title and
interest in such Equipment to the Lessee by executing and delivering the Lease.
<PAGE>

        1.2  Operative Documents.  On the Closing Date, each of the respective
             -------------------
parties thereto shall execute and deliver the Security Agreement, the Stock
Pledge Agreement, the Consents to Assignment and the Security Deposit Agreement
and such other documents, instruments, certificates and opinions of counsel as
agreed to by the parties hereto.

                           SECTION 2.   THE CLOSING

        2.1  Closing Date.  All documents and instruments required to be
             ------------
delivered on the Closing Date shall be delivered at the offices of Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, New York, or at such other
location as may be determined by the Investor and the Lessee.

        2.2  Trust Company Authorization.  Each Investor agrees that the
             ---------------------------
satisfaction or waiver of the conditions contained in Section 3 on the Closing
Date shall constitute, without further act, authorization and direction by such
Investor to the Trust Company to take on behalf of the Lessor the actions
specified in Section 2.1 of the Trust Agreement.

                       SECTION 3.   CONDITIONS PRECEDENT

        3.1  Closing Conditions Precedent to Each Financing Party.  The
             ----------------------------------------------------
obligations of the Financing Parties to consummate the transactions contemplated
hereby are subject to the fulfillment to the satisfaction of, or waiver by, the
Financing Parties of the following conditions precedent on the date specified by
the Lessee as the proposed Closing Date:

                (a)  Transaction Documents.  (i)  Each Operative Document to be
                     ---------------------
     entered into on or prior to the Closing Date shall have been duly
     authorized, executed and delivered by the parties thereto and shall be in
     full force and effect, and each Financing Party shall have received a fully
     executed copy of such Operative Document.

                        (ii) Each Project Contract to be entered into on or
                prior to the Closing Date shall be in form and substance
                satisfactory to the Investor, and shall have been duly
                authorized, executed and delivered by the parties thereto and
                shall be in full force and effect, and each Financing Party
                shall have received a fully executed copy of such Project
                Contract.

                (b)  Taxes.  All taxes, fees and other charges in connection
                     -----
     with the execution, delivery, and, where applicable, recording, filing and
     registration of the Transaction Documents shall have been paid or
     provisions for such payment shall have been made by the Lessee.

                (c)  Actions to Perfect Liens.  All filings, recordings,
                     ------------------------
     registrations and other actions, including the filing of duly executed UCC
     Financing Statements, necessary to establish, protect and preserve the
     Lessor's valid and first priority lien on, and perfected security interest
     in, all right, title, estate and interest in and to the

                                       2
<PAGE>

     respective Collateral thereunder, on the terms set forth in the Security
     Documents (which filings, etc., are listed on Schedule 3.1(c)), shall have
     been duly made or taken on or prior to the Closing Date, or the Lessee
     shall have made arrangements satisfactory to the other parties hereto to
     cause such filings, recordings, registrations and other actions to be made
     or taken promptly after the Closing Date. The Lessor shall have, on the
     terms set forth in the Security Documents, a first priority lien on, and
     perfected security interest in, the Collateral, and the Collateral shall be
     free and clear of all other Liens except Permitted Liens.

                (d)  Lien Searches.  Each Investor shall have received the
                     -------------
     results of recent searches of Uniform Commercial Code, judgment and tax
     lien filings with respect to the personal property of the Lessee, and the
     results of such searches shall be satisfactory to each Investor.

                (e)  Governmental Actions.  Each Financing Party shall have
                     --------------------
     received an Officer's Certificate of the Lessee, dated the Closing Date:
     (i) confirming that all material Governmental Actions necessary for the
     use, leasing, ownership and operation of the Equipment and the performance
     of the MGS Services, and all Governmental Actions necessary for the routine
     maintenance of the Equipment, are identified in Schedule 3.1(e); (ii)
     attaching copies of all Governmental Actions necessary for the use,
     leasing, ownership and operation of the Equipment and the performance of
     the MGS Services, and all Governmental Actions necessary for the routine
     maintenance of the Equipment, that have been obtained on or prior to the
     Closing Date (which Governmental Actions are set forth on Part A of
     Schedule 3.1(e)), and stating that all such Governmental Actions have been
     duly obtained and are in full force and effect on the Closing Date and,
     except as specified on Part A of Schedule 3.1(e), are not subject to any
     appeal or further proceeding; and (iii) stating that the Lessee has no
     reason to believe that all Governmental Actions necessary for the use,
     leasing, ownership and operation of the Equipment and the performance of
     the MGS Services, and all Governmental Actions necessary for the routine
     maintenance of the Equipment, that have not been obtained on or prior to
     the Closing Date (which Governmental Actions are set forth on Part B of
     Schedule 3.1(e)) will not be obtained in the ordinary course of business on
     or prior to the date such Governmental Actions will be required to permit
     the timely use, leasing, ownership, operation and routine maintenance of
     the Equipment and the performance of the MGS Services.

                (f)  Legal Requirements.  The transactions contemplated by the
                     ------------------
     Transaction Documents do not and will not violate in any respect any Legal
     Requirements and do not and will not subject any Financing Party to any
     adverse regulatory prohibitions or constraints.

                (g)  Authorization Proceedings and Documents of the Lessee.
                     -----------------------------------------------------
     Each Financing Party shall have received: (i) a certified copy of the
     resolutions or minutes or other appropriate documents evidencing the
     corporate actions of the Lessee authorizing the execution, delivery and
     performance of the Transaction

                                       3
<PAGE>

     Documents to which it is a party, certified by the Secretary or an
     Assistant Secretary of the Lessee as of the Closing Date, which certificate
     shall state that such resolutions or minutes or other appropriate documents
     have not been amended, modified, revoked or rescinded; (ii) an incumbency
     certificate of the Lessee regarding the officers thereof authorized to
     execute and deliver on its behalf any Transaction Document to which it is a
     party and any other documents and agreements to be delivered in connection
     therewith, certified by the Secretary or an Assistant Secretary of the
     Lessee as of the Closing Date; and (iii) true and complete copies of the
     articles of incorporation, by-laws and any other organizational documents
     of the Lessee, certified as of the Closing Date as complete and correct
     copies thereof by the Secretary or an Assistant Secretary of the Lessee.

                (h)  Officer's Certificates of the Lessee.  Each Financing Party
                     ------------------------------------
     shall have received an Officer's Certificate of the Lessee, dated the
     Closing Date, stating that: (i) the representations and warranties of the
     Lessee contained in the Transaction Documents to which it is a party are
     true and accurate in all material respects on and as of the Closing Date,
     except to the extent such representations and warranties relate solely to
     an earlier date, in which case such representations and warranties shall
     have been true and correct in all material respects on and as of such
     earlier date; (ii) all conditions precedent required to be fulfilled on the
     Closing Date have been fulfilled; and (iii) no Default or Event of Default
     has occurred and is continuing.

                (i)  Authorization Proceedings and Documents of the Trust
                     ----------------------------------------------------
     Company.  Each Financing Party shall have received: (i) a copy of the
     --------
     resolutions of the Board of Directors of the Trust Company authorizing the
     execution, delivery and performance of the Transaction Documents to which
     the Trust Company is a party, certified by the Secretary or an Assistant
     Secretary of the Trust Company as of the Closing Date, which certificate
     shall state that the resolutions thereby certified have not been amended,
     modified, revoked or rescinded; (ii) a certificate of the Trust Company,
     dated the Closing Date, as to the incumbency and signature of the officers
     of the Trust Company executing any Transaction Documents to which the Trust
     Company is a party and any other documents and agreements to be delivered
     in connection therewith, executed by the President or any Vice President,
     Assistant Vice President, Trust Officer and the Secretary or any Assistant
     Secretary of the Trust Company; (iii) true and complete copies of the
     articles of incorporation and by-laws of the Trust Company, certified as of
     the Closing Date as complete and correct copies thereof by the Secretary or
     an Assistant Secretary of the Trust Company; and (iv) evidence satisfactory
     to such Financing Party as to the qualification of (or absence of any
     requirement for qualification of) the Trust Company in each jurisdiction in
     which any Equipment is located.

                (j)  Officer's Certificate of the Trust Company.  Each
                     ------------------------------------------
     Financing Party shall have received an Officer's Certificate of the Trust
     Company, dated the

                                       4
<PAGE>

     Closing Date, stating that the respective representations and warranties of
     the Lessor and the Trust Company contained in the Transaction Documents to
     which it is a party are true and accurate in all material respects on and
     as of the Closing Date, except to the extent such representations and
     warranties relate solely to an earlier date, in which case such
     representations and warranties shall have been true and correct in all
     material respects on and as of such earlier date.

                (k)  Legal Opinions.  Each Financing Party shall have received
                     --------------
     the following executed legal opinions, dated the Closing Date and addressed
     to it, each in form and substance reasonably satisfactory to each Financing
     Party:

                        (i)   (a) the opinion of Kelley Drye & Warren LLP,
        special New York counsel to the Lessee and KMC, and (b) the opinion of
        Kelley Drye & Warren LLP, special regulatory counsel to the Lessee, as
        to certain regulatory matters;

                        (ii)  the opinion of Potter, Anderson & Corroon LLP,
        special Delaware counsel to the Trust Company, the Lessor and the
        Security Agent;

                        (iii) an opinion of Yash Rana, Esq., internal counsel to
        Qwest.

                (l)  No Default.  There shall not have occurred and be
                     ----------
     continuing any Default or Event of Default.

                (m)  Fees.  Each Financing Party shall have received the fees
                     ----
     payable to it on the Closing Date in connection with the transactions
     contemplated by the Operative Documents.

                (n)  Reference Pro Forma.  Each Investor shall have received
                     -------------------
     the Reference Pro Forma which shall, in form and substance, be satisfactory
     to each Investor.

                (o)  Telecommunications Consultant's Report.  Each Investor
                     --------------------------------------
     shall have received a copy of the report of the Telecommunications
     Consultant in form and substance satisfactory to such Investor.

                (p)  Financial Statements: No Material Adverse Change.  The
                     ------------------------------------------------
     Investor shall have received: (i) a copy of the most recent audited
     financial statements of KMC and (ii) a copy of the most recent unaudited
     financial statements of each of the Lessee and KMC, each certified as of
     the Closing Date by a Responsible Officer of such entity. Each of such
     financial statements shall be satisfactory to each Investor, and no
     material adverse change shall have occurred in the business, operations or
     financial condition of the Lessee, KMC since the date of such financial
     statements. No material adverse change shall have occurred in the business,
     operations or financial condition of Qwest since the date of its most

                                       5
<PAGE>

     recent annual report on Form 10-K405 filed with the Securities and Exchange
     Commission.

                (q)  Insurance.  All insurance required to be maintained by the
                     ---------
     Borrower under Section 13 of the Lease and each Project Contract to which
     the Lessee is a party shah be in full force and effect and the Financing
     Parties shall have received evidence thereof in the form of certificates of
     insurance signed in each case by the insurer or an agent authorized to bind
     the insurer.

                (r)  Appraisal.  Each Investor shall have received a copy of the
                     ---------
      Appraisal in form and substance satisfactory to the Investor.

                (s)  Officer's Certificate of Owest.  Each Investor shall have
                     ------------------------------
     received an Officer's Certificate of Qwest dated as of the Closing Date
     stating that no default has been declared under, and Qwest has not
     exercised any right of early termination with respect to, the MGS Agreement
     or the Original MGS Agreement.

                (t)  Equity Contribution to Lessee.  KMC shall have made the
                     -----------------------------
     Lessee Equity Contribution to be made by it on or prior to the Closing
     Date, in the amount of $15 million and shall have delivered to the
     Investors a written commitment to make an additional Lessee Equity
     Contribution in accordance with the terms of Section 5.1(k).

        3.2  Closing Conditions Precedent to the Lessee.  The obligations of the
             ------------------------------------------
Lessee under the Operative Documents are subject to the fulfillment to the
satisfaction of, or waiver by, the Lessee of the following conditions precedent
on the date specified by the Lessee as the proposed Closing Date:

                (a)  Operative Documents.  Each of the Operative Documents
                     -------------------
     entered into on or prior to the Closing Date shall have been duly
     authorized, executed and delivered by the parties thereto and shall be in
     full force and effect, and the Lessee shall have received a fully executed
     copy of each of the Operative Documents.

                (b)  Certain Documents.  The Lessee shall have received copies
                     -----------------
     of the documents referred to in Sections 3.1(i), (j) and (r).

                (c)  Legal Opinions.  The Lessee shall have received the
                     --------------
     executed legal opinions referred to in clauses (i), (ii) and (iii) of
     Section 3.1(k) addressed to it.

                  SECTION 4.   REPRESENTATIONS AND WARRANTIES

        4.1  Representations and Warranties of the Lessee.  The Lessee
             --------------------------------------------
represents and warrants to each of the other parties hereto as of the Closing
Date as follows:

                (a)  Organization: Powers.  The Lessee (i) is a corporation
                     --------------------
     duly formed, validly existing and in good standing under the laws of the
     State of Delaware; (ii)

                                       6
<PAGE>

     has all requisite corporate power, authority and legal right to own, lease
     and operate the Equipment and other property and assets it purports to own
     or lease and to carry on its business as now being conducted and as
     proposed to be conducted in respect of the Equipment; (iii) is duly
     qualified and authorized to do business in each jurisdiction where such
     qualification is required, except where the failure so to qualify would not
     materially and adversely affect the Lessee's ability to perform its
     obligations under the Transaction Documents; and (iv) has all requisite
     corporate power and authority to execute, deliver and perform its
     obligations under each Transaction Document and each other agreement or
     instrument contemplated thereby to which it is a party.

                (b)  Authorization and No Legal Bar.  The execution, delivery
                     ------------------------------
     and performance by the Lessee of each Transaction Document to which it is a
     party and the consummation of any of the transactions contemplated thereby
     (i) have been duly authorized by all requisite corporate action and (ii)
     will not (A) violate, result in the breach of or constitute a default
     under, any Legal Requirement or Requirement of Law or Contractual
     Obligation applicable to or binding on it as of the date hereof or (B)
     result in or require the creation or imposition of any Lien (other than a
     Permitted Lien) upon or with respect to any of the Collateral.

                (c)  Enforceability.  Each Transaction Document to which the
                     --------------
     Lessee is a party has been duly executed and delivered by the Lessee and
     constitutes a legal, valid and binding obligation of the Lessee enforceable
     against the Lessee in accordance with its terms, except as such
     enforceability (i) may be limited by applicable bankruptcy, insolvency,
     reorganization, moratorium and similar laws affecting the enforcement of
     creditor's rights and remedies generally and (ii) is subject to general
     principles of equity (regardless of whether enforceability is considered in
     a proceeding in equity or at law).

                (d)  Consents.  No consent (except as listed on Part B of
                     --------
     Schedule 3.1(e)) or other action by any holder or trustee of any
     indebtedness or other obligations of the Lessee or by any other Person is
     or will be required by the Lessee in connection with the execution,
     delivery and performance by the Lessee of each Transaction Document to
     which it is a party and the consummation of any of the transactions
     contemplated thereby, except such as have been made or obtained and are in
     full force and effect.

                (e)  Financial Statements.  The financial statements of the
                     --------------------
     Lessee furnished to the Financing Parties pursuant to Section 3.1(p) fairly
     present, and each financial statement of the Lessee delivered on or after
     the Closing Date pursuant to this Agreement will fairly present, the
     financial condition and results of operations and cash flows of the Lessee
     as of such dates and for such periods. All such financial statements were
     or will be prepared in accordance with GAAP. The Lessee does not and will
     not have any material liabilities, direct or contingent except as has been
     or, in the case of financial statements to be delivered after the

                                       7
<PAGE>

     Closing Date pursuant to this Agreement, will be, disclosed in such
     financial statements.

                (f)  Business.  The Lessee has not engaged in any business or
                     --------
     activity other than in connection with the development, acquisition,
     leasing, operation and financing of the Equipment, and the Lessee has no
     obligations or liabilities other than those directly related to the conduct
     of such business.

                (g)  Litigation.  Except as set forth on Schedule 4.1(g) and
                     ----------
     which could not, individually or in the aggregate, result in a Material
     Adverse Effect, there is no (i) injunction, writ, preliminary restraining
     order or other order of any nature by an arbitrator, court or any other
     Governmental Authority against the Lessee or KMC or, to the knowledge of
     the Lessee, against any other Material Project Participant in connection
     with the transactions provided for in the Transaction Documents, or (ii)
     action, suit, arbitration, investigation or proceeding at law or in equity
     by or before any arbitrator, court or any Governmental Authority pending
     against the Lessee, KMC or the Equipment or, to the best of the Lessee's
     knowledge, threatened against the Lessee, KMC or the Equipment or against
     any other Material Project Participant in connection with the transactions
     provided for in the Transaction Documents.

                (h)  Compliance with Law.  Except as set forth on Schedule
                     -------------------
     4.1(h) and with respect to which arrangements reasonably satisfactory to
     each Investor have been made, the Lessee and the Equipment are in material
     compliance with all Legal Requirements, all Governmental Actions applicable
     to either the Lessee or the Equipment and all material terms and provisions
     of all Project Contracts.

                (i)  No Default.  No Event of Default or Default has occurred
                     ----------
     and is continuing.

                (j)  Federal Reserve Regulations.  Neither the Lessee nor KMC
                     ---------------------------
     is engaged, directly or indirectly, principally, or as one of its important
     activities, in the business of extending, or arranging for the extension
     of, credit for the purposes of purchasing or carrying any margin stock,
     within the meaning of Regulation T, U or X of the Board of Governors of the
     Federal Reserve System. No part of the proceeds of any loans will be used
     for "purchasing" or "carrying" any "margin stock" as so defined, or for
     extending credit to others for the purpose of purchasing or carrying margin
     stock, or for any purpose which would violate, or cause a violation of, any
     such regulation.

                (k)  Investment Company Act.  The Lessee is not an "investment
                     ----------------------
     company" as defined in, or subject to regulation under, the Investment
     Company Act.

                (l)  Taxes.  The Lessee has filed, or caused to be filed, all
                     -----
     Federal, state, local and foreign tax and information returns that are
     required to have been

                                       8
<PAGE>

     filed by it in any jurisdiction, and has paid all taxes shown to be due and
     payable on such returns and all other taxes and assessments payable by it,
     to the extent the same have become due and payable, except to the extent
     there is a good faith contest thereof by appropriate proceedings by the
     Lessee which are described on Schedule 4.1(1) and for which the Lessee
     shall have set aside adequate reserves to the extent required by GAAP.

                (m)  Equipment.  The Lessor and the Lessee have good title to,
                     ---------
     or a valid leasehold interest in, the Equipment, subject to no Liens other
     than Permitted Liens.

                (n)  Trademarks, Patents and Licenses.  No licenses, trademarks,
                     --------------------------------
     patents oragreements with respect to the usage of technology or software,
     other than any thereof which have been obtained and are in full force and
     effect and have been validly assigned to the Lessor pursuant to the
     Security Documents, are necessary for the operation and maintenance of the
     Equipment and the performance of the MGS Services in accordance with the
     Transaction Documents and all applicable Governmental Actions and Legal
     Requirements.

                (o)  ERISA and Employees.  The Lessee does not sponsor,
                     -------------------
     maintain, administer, contribute to, participate in, or have any obligation
     to contribute to or any liability under, any employee benefit plan within
     the meaning of Section 3(3) of ERISA nor since the date which is six years
     immediately preceding the Closing Date has the Lessee established,
     sponsored, maintained, administered, contributed to, participated in, had
     any obligation to contribute to or liability under, any such plan. The
     Lessee and each ERISA Affiliate are in compliance in all material respects
     with all applicable provisions of ERISA and the Code and all other laws
     applicable to such plans, including the Age Discrimination in Employment
     Act, the Americans With Disabilities Act and Title VII of the Civil Rights
     Act

                (p)  Governmental Actions.  (i) All material Governmental
                     --------------------
     Actions necessary for the operation, use, leasing and ownership of the
     Equipment and the performance of the MGS Services, and all Governmental
     Actions necessary for the routine maintenance of the Equipment, are
     identified in Schedule 3.1(e); (ii) all Governmental Actions necessary for
     the operation of the Equipment and the performance of the MGS Services, and
     all Governmental Actions necessary for the routine maintenance of the
     Equipment, that have been obtained on or prior to the Closing Date (which
     Governmental Actions are set forth on Part A of Schedule 3.1(e)) have been
     duly obtained and are in full force and effect on the Closing Date and,
     except as specified on Part A of Schedule 3.1(e), are not subject to any
     appeal or further proceeding; and (iii) the Lessee has no reason to believe
     that all Governmental Actions necessary for the operation, use, leasing,
     ownership and routine maintenance of the Equipment and the performance of
     the MGS Services that have not been obtained on or prior to the Closing
     Date (which Governmental Actions are set forth on Part B of Schedule
     3.1(e)) will not be obtained in the ordinary course of business on or prior
     to the date such Governmental Actions will

                                       9
<PAGE>

     be required to permit the timely operation, use, leasing, ownership and
     routine maintenance of the Equipment and the performance of the MGS
     Services.

                (q)  Interim Services.  Until such time as the Lessee shall
                     ----------------
     have obtained all approvals and certifications necessary to enable it to
     deliver the MGS Services directly, it shall be entitled, pursuant to the
     Services Agreement, to purchase such services from various affiliated
     parties at cost. The rights granted to the Lessee pursuant to the Services
     Agreement, together with those Governmental Actions listed on Part A of
     Schedule 3.1(e), are sufficient to allow the Lessee to operate and maintain
     (either directly or through the use of affiliated subcontractors party to
     the Services Agreement) the Equipment and perform the MGS Services in
     accordance with all Requirements of Law and the provisions of the MGS
     Agreement and the other Transaction Documents.

                (r)  Sufficiency of Project Contracts.  The services to be
                     --------------------------------
     performed, the materials to be supplied and the property interests and
     other rights granted pursuant to the Project Contracts (and those licenses,
     trademarks and patents described in Section 4.1(n) which have been
     obtained, are in full force and effect and have been validly assigned to
     the Lessor), comprise substantially all of the services, materials and
     property interests and other rights required (including sufficient power
     and other utility services and sufficient physical space and access) for
     the installation, operation and maintenance of the Equipment and the
     performance of the MGS Services in accordance with the Transaction
     Documents. Upon the exercise by the Lessor of its remedies under the Lease
     and its rights under the Security Documents with respect to such Project
     Contracts and such licenses, trademarks and patents, Lessor or its assignee
     or designee will have rights to substantially all of the services,
     materials and property interests and other rights required for the
     installation, operation and maintenance of the Equipment and the
     performance of the MGS Service in accordance with the Transaction
     Documents.

                (s)  Regulation of Financing Parties.  No Financing Party will,
                     -------------------------------
     solely by reason of (A) the leasing, operation or maintenance of the
     Equipment by the Lessee, (B) the ownership of the Equipment by the Lessor
     or the leasing of the Equipment by the Lessor to the Lessee as contemplated
     by the Transaction Documents or (C) any other transaction contemplated by
     any Transaction Document (but solely for so long as the Financing Parties
     act in the capacity of passive investors and the MGS Services are provided
     by an entity or entities that hold the required Governmental Approvals to
     provide such services), be or otherwise become, or be required to be
     certified as, a "Competitive Local Exchange Carrier", or "Incumbent Local
     Exchange Carrier" or "Telecommunications Carrier" under the Act (including
     any of the rules and regulations under any thereof) or otherwise subject to
     regulation by any state public service commission (including any of the
     rules and regulations under any thereof).

                                       10
<PAGE>

                (t)  Security Documents.  Upon the execution and delivery
                     ------------------
     thereof, the Lease, the Security Agreement and the Security Deposit
     Agreement will be effective to create, in favor of the Lessor, legally
     valid and enforceable liens on and security interests in all right, title,
     estate and interest of the Lessee in and to the Collateral described
     therein and, on or prior to the Closing Date, all necessary recordings and
     filings will have been executed and delivered to the Lessor or its designee
     in proper form for filing, registration or recordation so that, when filed,
     registered or recorded by the Lessor or its designee, the liens and
     security interests created by each of such Security Documents will
     constitute perfected liens on and security interests in all right, title,
     estate and interest of the Lessee in and to the Collateral described
     therein (other than any item of Collateral as to which a lien or security
     interest cannot be perfected by filing or recording), prior and superior to
     all other Liens except Permitted Liens. Upon the execution and delivery of
     the Stock Pledge Agreement and the delivery to, and dominion and control
     of, the Lessor over, the capital stock thereby pledged to the Lessor, the
     Stock Pledge Agreement will be effective to create, in favor of the Lessor,
     a valid and enforceable Lien on and security interest in and to the Pledged
     Stock, prior and superior to all other Liens except Permitted Liens. The
     recordings and filings shown on Schedule 3.1(c) are all the recordings and
     filings necessary as of the Closing Date in order to establish, protect and
     perfect in favor of the Lessor the liens on and security interests in the
     right, title, estate and interest of the Lessee in and to the Collateral
     described in the Security Documents (other than any item of Collateral as
     to which a security interest cannot be perfected by filing or recording).

                (u)  Full Disclosure.  None of the information furnished in
                     ---------------
     writing by the Lessee or KMC or any of their Affiliates to any Financing
     Party or to the Telecommunications Consultant pursuant to any of the
     Transaction Documents or otherwise in connection with the negotiation,
     execution and delivery of any thereof (excluding the Reference Pro Forma),
     contains any untrue statement of a material fact or omits to state a
     material fact necessary in order to make the statements contained therein
     when made, in light of the circumstances under which they were made, not
     misleading. As of the Closing Date, there is no fact known to the Lessee
     which the Lessee has not disclosed to the Investor in writing prior to the
     Closing Date which could reasonably be expected to have a Material Adverse
     Effect. The Reference Pro Forma was prepared by the Lessee in good faith
     and represents, in the opinion of the Lessee, reasonable projections on the
     Closing Date of the future performance of the Lessee based on reasonable
     assumptions.

        4.2  Representations and Warranties of the Lessor.  The Lessor
             --------------------------------------------
represents and warrants to each of the other parties hereto as follows:

                (a)  Authorization; No Conflict.  The execution, delivery and
                     --------------------------
     performance of each Operative Document to which it is a party has been duly
     authorized by all necessary action on its part and neither the execution
     and delivery thereof by the Lessor, nor the consummation of the
     transactions contemplated

                                       11
<PAGE>

     thereby by the Lessor, nor compliance by it with any of the terms and
     provisions thereof (i) requires or will require any approval (which
     approval has not been obtained) of any party or approval or consent of any
     trustee or holders of any indebtedness or obligations of the Lessor; (ii)
     contravenes or will contravene any Legal Requirement or Requirement of Law
     applicable to or binding on it as of the date hereof; (iii) does or will
     contravene or result in any breach of or constitute any default under, or
     result in the creation of any Lien on any of its property under, any
     indenture, mortgage, chattel mortgage, deed of trust, conditional sales
     contract, bank loan or credit agreement or other material agreement or
     material instrument to which it is a party or by which it or its properties
     may be bound; or (iv) does or will require any Governmental Action by any
     Governmental Authority.

                (b)  Enforceability.  Each Operative Document to which it is a
                     --------------
     party has been duly executed and delivered by it and constitutes, or upon
     execution and delivery will constitute, a legal, valid and binding
     obligation enforceable against it in accordance with the terms thereof
     except as such enforceability (i) may be limited by applicable bankruptcy,
     insolvency, reorganization, moratorium and similar laws affecting the
     enforcement of creditors' rights and remedies generally and (ii) is subject
     to general principles of equity (regardless of whether enforceability is
     considered in a proceeding in equity or at law).

                (c)  Litigation.  No litigation, investigation or proceeding of
                     ----------
     or before any arbitrator or Governmental Authority is pending or threatened
     by or against the Lessor (i) with respect to any of the Operative Documents
     or any of the transactions contemplated hereby or thereby or (ii) that
     would reasonably be expected to have a Material Adverse Effect on the
     assets, liabilities, operations, business or financial condition of the
     Lessor.

                (d)  No Assignment.  The Lessor has not assigned or transferred
                     -------------
     any of its right, title or interest in or under, any Operative Document or
     the Equipment, except in accordance with the Operative Documents.

                (e)  Principal Place of Business.  The Trust's principal place
                     ---------------------------
     of business, chief executive office and office where the documents,
     accounts and records relating to the transactions contemplated by this
     Agreement and each other Operative Document are kept is located at the
     offices of the Trust Company in Wilmington, Delaware.

        4.3  Representations and Warranties of the Trust Company.  The Trust
             ---------------------------------------------------
Company represents and warrants to each of the other parties hereto that:

                (a)  Due Organization.  etc.  It is a Delaware banking
                     ----------------------
     corporation duly organized and validly existing and in good standing under
     the laws of the State of Delaware and has the power and authority to enter
     into and perform its obligations under the Trust Agreement and has the
     corporate power and authority to act as the trustee under the Trust
     Agreement and to enter into and perform the obligations

                                       12
<PAGE>

     under each of the other Operative Documents to which Trust Company or the
     Lessor, as the case may be, is or will be a party and each other agreement,
     instrument and document to be executed and delivered by it on or before the
     Closing Date in connection with or as contemplated by each such Operative
     Document to which the Trust Company or the Lessor, as the case may be, is
     or will be a party.

                (b)  Authorization; No Conflict.  The execution, delivery and
                     --------------------------
     performance of each Operative Document to which it or (assuming due
     authorization, execution and delivery of the Trust Agreement by the
     Investors) the Lessor, as the case may be, is a party has been duly
     authorized by all necessary action on its part and neither the execution
     and delivery thereof; nor the consummation of the transactions contemplated
     thereby, nor compliance by it with any of the terms and provisions thereof
     (i) does or will require any approval or consent of any trustee or holders
     of any of its indebtedness or obligations; (ii) does or will contravene any
     current United States federal law, governmental rule or regulation relating
     to its banking or trust powers; (iii) does or will contravene or result in
     any breach of or constitute any default under, or result in the creation of
     any Lien upon any of its property under, its charter or by-laws, or any
     indenture, mortgage, chattel mortgage, deed of trust, conditional sales
     contract, bank loan or credit agreement or other agreement or instrument to
     which it is a party or by which it or its properties may be bound or
     affected; or (iv) does or will require any Governmental Action by any
     Governmental Authority of the United States or the State of Delaware
     regulating its banking or trust powers.

                (c)  Trust Company Enforceability.  etc.  The Trust Agreement
                     ----------------------------------
     and, assuming the Trust Agreement is the legal, valid and binding
     obligation of each Investor, each other Operative Document to which Trust
     Company or the Lessor, as the case may be, is a party have been, or on or
     before the Closing Date will be, duly executed and delivered by Trust
     Company or the Lessor, as the case may be, and the Trust Agreement and each
     such other Operative Document to the extent entered into by the Trust
     Company constitutes, or upon execution and delivery will constitute, a
     legal, valid and binding obligation enforceable against Trust Company in
     accordance with the terms thereof except as such enforceability (A) may be
     limited by applicable bankruptcy, insolvency, reorganization, moratorium
     and similar laws affecting the enforcement of creditors' rights and
     remedies generally and (B) is subject to general principles of equity
     (regardless of whether enforceability is considered in a proceeding in
     equity or at law).

                (d)  Litigation.  No action, investigation, suit or proceeding
                     ----------
     of or before any arbitrator or Governmental Authority is pending or
     threatened by or against the Trust Company with respect to any of the
     Operative Documents to which it is or will be a party or any of the
     transactions contemplated hereby or thereby.

        4.4  Representations and Warranties of Each Investor.  Each Investor
             -----------------------------------------------
represents and warrants to each of the other parties hereto as of the Closing
Date as follows:

                                       13
<PAGE>

                (a)  Due Organization, etc.  It is a duly organized and validly
                     ---------------------
     existing corporation or limited liability company in good standing under
     the laws of the jurisdiction in which it is incorporated and has the power
     and authority to carry on its business as now conducted and to enter into
     and perform its obligations under this Agreement, each Operative Document
     to which it is a party and each other agreement, instrument and document
     executed and delivered by it on the Closing Date in connection with or as
     contemplated by each such Operative Document to which it is or will be a
     party.

                (b)  Authorization; No Conflict.  The execution, delivery and
                     --------------------------
     performance of each Operative Document to which it is a party has been duly
     authorized by all necessary action on its part and neither the execution
     and delivery thereof by the Investor, nor the consummation of the
     transactions contemplated thereby by the Investor, nor compliance by it
     with any of the terms and provisions thereof (i) requires or will require
     any approval of (which approval has not been obtained) the shareholders of,
     or approval or consent of any trustee or holders of any indebtedness or
     obligations of the Investor, (ii) contravenes or will contravene any Legal
     Requirement applicable to or binding on it as of the date hereof, (ill)
     does or will contravene or result in any breach of or constitute any
     default under, its articles of incorporation or by-laws, any indenture,
     mortgage, chattel mortgage, deed of trust, conditional sales contract, bank
     loan or credit agreement or other agreement or instrument to which it is a
     party or by which it or its properties may be bound or result in the
     creation of any Lessor Lien upon the Equipment; or (iv) does or will
     require any Governmental Action by any Governmental Authority.

                (c)  Enforceability.  Each Operative Document to which it is a
                     --------------
     party has been duly executed and delivered by it and constitutes, or upon
     execution and delivery will constitute, a legal, valid and binding
     obligation enforceable against it in accordance with the terms thereof
     except as such enforceability (A) may be limited by applicable bankruptcy,
     insolvency, reorganization, moratorium and similar laws affecting the
     enforcement of creditors' rights and remedies generally and (B) is subject
     to general principles of equity (regardless of whether enforceability is
     considered in a proceeding in equity or at law).

                (d)  ERISA.  It is making the Investor Contribution contemplated
                     -----
     to be made by it hereunder for its own account and with its general
     corporate assets in the ordinary course of its business, and such general
     corporate assets are either: (i) not assets of any Employee Benefit Plan
     (or its related trust) which is subject to Title I of ERISA of Section 4975
     of the Code; or (ii) assets of any Employee Benefit Plan (or its related
     trust) which is subject to Title I of ERISA or Section 4975 of the Code,
     but there is available an exemption from the prohibited transaction rules
     under Section 406(a) of ERISA and Section 4975 of the Code and such
     exemption is immediately applicable to each transaction contemplated by the
     Operative Documents to the extent that any other party to such transaction
     is a "party in interest" as defined in Section 3(14) of ERISA with respect
     to such plan assets.

                                       14
<PAGE>

                            SECTION 5. COVENANTS

        5.1  Affirmative Covenants of the Lessee.  Unless and until the Lease
             -----------------------------------
has terminated and all obligations payable under the Transaction Documents have
been paid in full, the Lessee covenants and agrees that:

                (a)  Maintenance of Existence and Governmental Action.  The
                     ------------------------------------------------
     Lessee shall at all times (i) preserve and maintain in full force and
     effect (A) its existence as a corporation and its good standing under the
     laws of the State of Delaware and (B) its qualification to do business in
     each jurisdiction in which the character of the properties owned or leased
     by it or in which the transaction of its business as conducted or proposed
     to be conducted makes such qualification necessary and (ii) except as
     otherwise expressly permitted in the Transaction Documents, obtain and
     maintain in full force and effect all material Governmental Actions and
     other consents and approvals (and cause to be obtained and maintained in
     full force and effect all requisite Governmental Actions held by any
     affiliate party to the Services Agreement) required at any time in
     connection with the use, leasing, maintenance, ownership or operation of
     the Equipment.

                (b)  Inspection of Books and Records.  The Lessee shall keep
                     -------------------------------
     proper books and records and accounts in accordance with GAAP and in
     compliance in all material respects with all applicable Legal Requirements,
     Requirements of Law and Governmental Actions and make the same available
     for inspection by the Investor.

                (c)  Financial Statements: Equipment Reports.  The Lessee shall
                     ---------------------------------------
     furnish to each Investor:

                        (i)   as soon as available, but in any event within 120
                days after the end of each fiscal year of the Lessee, the annual
                consolidating financial statements of KMC and its subsidiaries
                (including the Lessee) prepared in accordance with GAAP and
                audited by independent certified public accountants of
                recognized standing in the U.S.;

                        (ii)  as soon as available, but in any event within 60
                days after the end of each of the first three quarterly periods
                of each fiscal year of the Lessee, the unaudited financial
                statements of the Lessee for such quarter and the portion of the
                fiscal year through the end of each such quarter, prepared in
                accordance with GAAP, certified by a Responsible Officer of the
                Lessee as being fairly stated in all material respects (subject
                to normal year-end audit adjustments); and

                        (iii) within ten days after the end of each calendar
                month during the first [nine months] of the Term and with ten
                days after the end of each third calendar month thereafter
                during the Term, an Equipment Report for the relevant one or
                three-month period.

                                       15
<PAGE>

Each time the financial statements of the Lessee are delivered under clauses (i)
and (ii) of this Section 5.1(c), a certificate signed by a Responsible Officer
of the Lessee shall be delivered along with such financial statements,
certifying that such Responsible Officer has made or caused to be made a review
of the transactions and financial condition of the Lessee during the relevant
fiscal period and that such review has not, to the best of such Responsible
Officer's knowledge, disclosed the existence of any event or condition which
constitutes a Default or an Event of Default or if any such event or condition
existed or exists, the nature thereof and the corrective actions that the Lessee
has taken or proposes to take with respect thereto.

                (d)  Compliance with Laws.  The Lessee shall comply with, and
                     --------------------
     shall ensure that the Equipment is operated in compliance with, and shall
     make such alterations to the Equipment as may be required for compliance
     with, all applicable Legal Requirements and Governmental Actions, except
     where non-compliance would not reasonably be expected to have a Material
     Adverse Effect.

                (e)  Notices.  Promptly upon obtaining knowledge thereof, the
                     -------
     Lessee shall give notice to the Lessor and the Investor of:

                        (i)   any Default or Event of Default, or any incipient
                default by the Lessee under any Project Contract, together with
                a description of any action being taken or proposed to be taken
                with respect thereto;

                        (ii)  any action, suit, arbitration or litigation, or
                receipt of formal notice of any investigation by any
                Governmental Authority, involving or affecting the Lessee or the
                Equipment (A) involving $1,000,000 or more, (B) seeking any
                injunctive, declaratory or other equitable relief that, if
                adversely determined, would reasonably be expected to have a
                Material Adverse Effect, or (C) instituted for the purpose of
                revoking, terminating, suspending, withdrawing, modifying or
                withholding any Governmental Action which, if successful, would
                reasonably be expected to have a Material Adverse Effect;

                        (iii) any casualty, damage or loss to the Equipment,
                whether or not insured, through fire, theft, other hazard or
                casualty, involving a probable loss of $250,000 or more, or any
                curtailment of operation of the Equipment that would be
                reasonably expected to last more than seven days;

                        (iv)  any cancellation or receipt of written notice of
                threatened or potential cancellation of any insurance required
                under the Insurance Requirements;

                        (v)   the initiation of any Condemnation proceeding
                involving the Equipment or any material portion thereof;

                                       16
<PAGE>

                        (vi)  receipt of any termination notice under any
                Material Project Contract; and

                        (vii) any material upgrade or other Modification to the
                Equipment (including any software with respect thereto).

                (f)  Insurance Certificate.  Within 30 days after the end of
                     ---------------------
     each Fiscal Year, the Lessee shall submit to the Investor a certificate
     certifying that insurance meeting the Insurance Requirements is in full
     force and effect and that all premiums then due in respect of such
     insurance have been paid.

                (g)  Taxes.  The Lessee will pay and discharge promptly when
                     -----
     due all material Taxes and governmental charges imposed upon it or upon its
     income or profits or in respect of its property, in each case before the
     same shall become delinquent or in default and before penalties accrue
     thereon, unless and to the extent the same are being contested in good
     faith by appropriate proceedings and adequate reserves with respect thereto
     shall, to the extent required by GAAP, have been set aside, and failure to
     pay or comply with the contested item could not reasonably be expected to
     result in a Material Adverse Effect.

                (h)  Preservation of Security Interests.  The Lessee shall
                     ----------------------------------
     preserve the security interests granted under the Security Documents and
     upon request by the Investor or the Lessor undertake all actions which are
     necessary or appropriate in the reasonable judgment of the Investor or the
     Lessor to (i) maintain the Lessor's security interest in the Collateral in
     full force and effect at all times (including the priority thereof), and
     (ii) preserve and protect the Collateral and protect and enforce the
     Lessee's rights and title and the rights of the Lessor to the Collateral,
     including the making or delivery of all filings and recordations, the
     payments of fees and other charges and the issuance of supplemental
     documentation. The Lessee hereby authorizes the Lessor to sign and to cause
     to be filed any financing or continuation statements required in connection
     with the foregoing without the signature of the Lessee to the extent
     permitted by applicable law, and to file a carbon, photostatic,
     photographic or other reproduction of any Security Document or a Uniform
     Commercial Code financing statement. The Lessee shall, as of any date on
     which additional filings, registration or other such actions are required,
     cause to be delivered to the Financing Parties an opinion of Lessee's
     counsel stating that the Lessor's security interest in the Collateral
     remains in full force and effect and perfected, and that, as of the date of
     such opinion, no further filings, recordations or other actions are or will
     be necessary to maintain such security interest as such for the remainder
     of the then-elected Term, except as noted in such opinion.

                (i)  Inspection of Equipment.  The Lessee agrees that the
                     -----------------------
     Investors and any consultants engaged by any Investor may inspect any item
     of Equipment at its location at any time and from time to time after
     reasonable notice (and the reasonable costs and expenses of such Person
     incurred in connection with such

                                       17
<PAGE>

     visit shall be paid by Lessee) so long as such visit does not unreasonably
     interfere with the operation or maintenance of the Equipment.

                (j)  Operation and Maintenance.  The Lessee shall, or shall
                     -------------------------
     cause the Operator to, use, maintain and operate the Equipment in
     compliance with generally accepted prudent operating and maintenance
     practices and the material provisions of all relevant Project Contracts.

                (k)  Additional Equity.  Lessee shall cause KMC to make a
                     -----------------
     Lessee Equity Contribution in the amount of $20,000,000 (in addition to the
     amount specified to be contributed pursuant to Section 3.1(t)) no later
     than July 31, 2000.

                (l)  State Certifications.  The Lessee shall, as soon as
                     --------------------
     practicable, cause to be issued directly to it all certifications and
     approvals required to enable it to directly operate and maintain the
     Equipment and perform the MGS Services. As soon as possible after receipt
     of the necessary certifications and approvals by the Lessee, the Lessee
     shall terminate the portion of the Services Agreement pursuant to which one
     or more of its affiliated parties has been providing the corresponding
     portion of the MGS Services.

        5.2  Negative Covenants of the Lessee.  Unless and until the Lease has
             --------------------------------
terminated and all obligations payable under the Transaction Documents shall
have been paid in full, the Lessee covenants and agrees that:

                (a)  Limitation on Fundamental Changes.  Subsidiaries and
                     ----------------------------------------------------
     Disposition of Assets. The Lessee shall not enter into any transaction of
     ----------------------
     merger or consolidation, change its form of organization or its business,
     liquidate or dissolve itself (or suffer any liquidation or dissolution), or
     amend its governing instruments in any material respect. The Lessee shall
     not have any Subsidiaries, or purchase or otherwise acquire all or
     substantially all of the assets of any other Person.

                (b)  Limitation on Nature of Business.  The Lessee shall not
                     --------------------------------
     engage in any business other than the acquisition, leasing, operation,
     maintenance and financing of the Equipment as contemplated by the
     Transaction Documents.

                (c)  Limitation on Liens.  The Lessee shall not create, incur,
                     -------------------
     assume or suffer to exist any Lien upon the Equipment or any other part of
     the Collateral, whether now owned or hereafter acquired, other than
     Permitted Liens.

                (d)  Limitation on Indebtedness.  The Lessee shall not create
                     --------------------------
     or incur or suffer to exist any Indebtedness except for: (A) Indebtedness
     incurred under the Operative Documents, (B) trade accounts payable (other
     than for borrowed money) arising, and accrued expenses incurred, in the
     ordinary course of business so long as such trade accounts payable are
     payable within 90 days of the date the respective goods are delivered or
     the respective services are rendered and (C) Permitted Intercompany
     Obligations.

                                       18
<PAGE>

                (e)  Limitation on Transactions with Affiliates.  The Lessee
                     ------------------------------------------
     shall not, and shall not permit the Operator to, enter into any transaction
     or agreement related to the Equipment with any Affiliate, other than any
     Transaction Document in existence on the Closing Date, unless such
     transaction or agreement (i) is entered into in the ordinary course of
     business on fair and reasonable terms certified by a Responsible Officer of
     the Lessee as no less favorable to the Lessee than the Lessee would obtain
     in an arm's length transaction with a Person that is not an Affiliate of
     the Lessee; or (ii) is otherwise approved by the Required Investors.

                (f)  Limitation on Amendments to Project Contracts.  The Lessee
                     ---------------------------------------------
     shall not terminate, amend or modify any Project Contract except with the
     prior written consent of the Required Investors; provided that, so long as
                                                      --------
     no Event of Default has occurred and is continuing, the Lessee may make
     immaterial amendments and modifications to any Project Contract without the
     consent of the Required Investors.

                (g)  Limitation on Distributions.  The Lessee shall not
                     ---------------------------
     request the Security Agent to make, and the Lessee shall not accept, any
     transfer from the Distribution Account except transfers that comply with
     Section 4.3 of the Security Deposit Agreement. The Lessee shall not make
     any distribution or payment on account of any equity interest in the Lessee
     except with amounts transferred to the Lessee from the Distribution Account
     in accordance with Section 4.3 of the Security Deposit Agreement.

                (h)  Limitation on Actions Resulting in Regulation of Parties.
                     --------------------------------------------------------
     The Lessee shall not take any action (or omit to take any action which it
     has the authority to take) which action (or omission) could reasonably be
     expected to result in any Financing Party being deemed by any Governmental
     Authority having jurisdiction to be or otherwise becoming or being required
     to be certified as, solely by reason of the transactions contemplated by
     the Transaction Documents, a "Competitive Local Exchange Carrier" or
     "Telecommunications Carrier" (or an affiliate of any thereof) under the Act
     or otherwise subject to any regulation relating to any such type of entity
     (or affiliates thereof) under any Legal Requirement (including requirements
     of any state public service commission).

                (i)  Hazardous Substances.  The Lessee shall not release, emit
                     --------------------
     or discharge into the environment any Hazardous Substances in violation of
     any Legal Requirement which could reasonably be expected to have a Material
     Adverse Effect.

        5.3  Covenants of each Investor, the Lessor, the Trustee and the Trust
             -----------------------------------------------------------------
Company. So long as this Agreement is in effect:
--------

                (a)  Discharge of Liens.  Each of the Investors, the Lessor,
                     ------------------
     the Trustee and the Trust Company will not create, permit, incur, assume or
     suffer to exist at

                                       19
<PAGE>

     any time, and will, at its own cost and expense, promptly take such action
     as may be necessary duly to discharge, or to cause to be discharged, all
     Lessor Liens attributable to it or any of its Affiliates; provided,
                                                               --------
     however, that no such Person shall be required so to discharge any such
     -------
     Lessor Lien while the same is being contested in good faith by appropriate
     proceedings diligently prosecuted so long as such proceedings shall not
     involve any material danger of impairment of the Liens of the Security
     Documents or of the sale, forfeiture or loss of, and shall not interfere
     with the use or disposition of, the Equipment or title thereto or any
     interest therein or the payment of Rent.

                (b)  Trust Agreement.  Without prejudice to any right under the
                     ---------------
     Trust Agreement of the Trust Company to resign, or the Investors' right
     under the Trust Agreement to remove the Trust Company, each of the
     Investors, the Trustee and the Trust Company hereby agrees with the Lessee
     and other Financing Parties (i) not to terminate or revoke the trust
     created by the Trust Agreement so long as the Participation Agreement is in
     effect, (ii) not to amend, supplement, terminate or revoke or otherwise
     modify any provision of the Trust Agreement or any other Operative Document
     without the prior written consent of any party hereto adversely effected by
     such amendment and (iii) to comply with all of the terms of the Trust
     Agreement.

                (c)  Successor Trust Company.  The Trust Company or any
                     -----------------------
     successor may resign or be removed by the Investor as trustee, a successor
     trustee may be appointed, and a corporation may become the trustee under
     the Trust Agreement, only in accordance with the provisions of Article 10
     of the Trust Agreement and with the consent of the Lessee, which consent
     shall not be unreasonably withheld or delayed.

                (d)  Other Business: Indebtedness.  The Lessor shall not (i)
                     ----------------------------
     conduct, transact or otherwise engage in, or commit to transact, conduct or
     otherwise engage in, any business or operations other than the entry into,
     and exercise of rights and performance of obligations in respect of, the
     Transaction Documents and other activities incidental or related to the
     foregoing, or (ii) own, lease, manage or otherwise operate any properties
     or assets other than in connection with the activities described in clause
     (i), or incur, create, assume or otherwise suffer to exist any Indebtedness
     or other consensual liabilities or financial obligations other than as may
     be incurred, created or assumed or as may exist in connection with the
     activities described in clause (i).

                (e)  Change of Principal Place of Business.  Each of the
                     -------------------------------------
     Trustee, the Lessor and the Trust Company shall give at least 30 days prior
     written notice to the Lessee and the Investor if its principal place of
     business or chief executive office, or the office where the records
     concerning the accounts or contract rights relating to the Equipment are
     kept, shall cease to be located in Wilmington, Delaware or if it shall
     change its name.

                                       20
<PAGE>

                (f)  Disposition of Assets.  The Lessor shall not convey, sell,
                     ---------------------
     lease, assign, transfer or otherwise dispose of any of its property,
     business or assets, whether now owned or hereafter acquired, except to the
     extent expressly permitted by the Transaction Documents.

                (g)  Instructions to Trustee.  The Investor will not instruct
                     -----------------------
     the Trustee to take any action in violation of the terms of any Operative
     Documents.

                (h)  Compliance with Operative Documents; Actions Under
                     --------------------------------------------------
     Project Contracts.  The Lessor shall at all times observe and perform all
     ------------------
     of the covenants, conditions and obligations required to be performed by it
     under each Operative Document to which it is a party. Except as expressly
     contemplated by the related Consent to Assignment or, following the
     occurrence of an Event of Default, in connection with the enforcement of
     remedies under the Operative Documents, the Lessor shall not take any
     action under any Project Contract.

                (i)  No Voluntary Bankruptcy.  Each of the Lessor, the Trustee
                     -----------------------
     and the Trust Company shall not (i) commence any case, proceeding or other
     action under any existing or future law of any jurisdiction, domestic or
     foreign, relating to bankruptcy, insolvency, reorganization, arrangement,
     winding-up, liquidation, dissolution, composition or other relief with
     respect to it or its debts, or (ii) seek appointment of a receiver,
     trustee, custodian or other similar official for it or for all or any
     substantial benefit of its creditors; and each of the Lessor, the Trustee
     and the Trust Company shall not take any action in furtherance of, or
     indicating its consent to, approval of, or acquiescence in, any of the acts
     set forth in this paragraph.

        5.4  Quiet Enjoyment.  Each party hereto (other than the Lessee)
             ---------------
covenants that, unless an Event of Default shall have occurred and be
continuing, such party shall not take or cause to be taken any action contrary
to the Lessee's (or any permitted sublessee's) rights under the Lease (or any
permitted sublease) to possession, use and quiet enjoyment of the Equipment or
any part thereof.

              SECTION 6.   TRANSFERS OF INTEREST IN TRUST ESTATE

        6.1  Restrictions on Transfer.  Each Investor agrees that it may not
             ------------------------
assign, convey or otherwise transfer any of its right, title or interest in or
to the Trust Estate or the Trust Agreement except in accordance with following
conditions:

                (a)  Participations.  Any Investor may, in the ordinary course
                     --------------
     of its business and in accordance with the Trust Agreement and applicable
     Requirements of Law but without the consent of the Lessee, at any time sell
     or otherwise assign (including for security purposes) to one or more banks,
     financial institutions or other entities (each, an "Investor Participant")
                                                         --------------------
     participating interests in all or any part of the Investor Contribution
     owing to such Investor, its Investor Contribution

                                       21
<PAGE>

     Commitment or any other interest of such Investor hereunder and under the
     other Operative Documents. In the event of any such sale by an Investor of
     a participating interest to an Investor Participant, such Investor's
     obligations under this Agreement to the other parties to this Agreement
     shall remain unchanged, such Investor shall remain solely responsible for
     the performance thereof, such Investor shall remain the holder of its
     Investor Contribution for all purposes under this Agreement and the other
     Operative Documents and the other Financing Parties shall continue to deal
     solely and directly with such Investor in connection with its rights and
     obligations under this Agreement and the other Operative Documents. In no
     event shall any Investor Participant have any right to enforce any
     obligation of the Lessee or the Lessor against the Lessee or the Lessor, as
     the case may be, except to the extent such Investor Participant has rights
     as a third party beneficiary with respect thereto, or to approve any
     amendment or waiver of any provision of this Agreement or any other
     Operative Document, or any consent to any departure by any Person
     therefrom, except to the extent that such amendment, waiver or consent
     would (a) reduce the amount of any Investor Contribution, or postpone the
     date of the final maturity of any Investor Contribution, in each case to
     the extent subject to such participation or (b) release all or
     substantially all of the Collateral. The Lessee also agrees that each
     Investor Participant shall be entitled to the benefits of Section 7.2(b),
     (c) and (d) with respect to its participation in such Investor Contribution
     Commitments and such Investor Contributions outstanding from time to time
     as if it was an Investor; provided that, in the case of Section 7.2(d),
                               --------
     such Investor Participant shall have complied with the requirements of said
     Section; and provided, further, that no Investor Participant shall be
                  --------  -------
     entitled to receive any greater amount pursuant to any such Section than
     the transferor Investor would have been entitled to receive in respect of
     the amount of the participation transferred by such transferor Investor to
     such Investor Participant had no such transfer occurred.

                (b)  Assignments.  No Investor may during the Term transfer any
                     -----------
     of its right, title or interest in the Trust Estate without the prior
     written consent of the Lessee, which shall not be unreasonably withheld or
     delayed, except that any Investor may transfer all or any part of its
     interest in the Trust Estate without such consent to a Person (a
     "Purchasing Investor") assuming the obligations of such Investor under the
      -------------------
     Operative Documents with respect to the interest being transferred pursuant
     to a transfer instrument substantially in the form of Exhibit A (a
     `Transfer Instrument") so long as the Purchasing Investor is either (x)
      -------------------
     an Affiliate of the transferor Investor which does not otherwise qualify
     under clause (y) below, or (y) a Person which meets, or the payment and
     performance obligations of which with respect to the interest being
     transferred under the Operative Documents are guaranteed (pursuant to a
     guaranty substantially in the form of Exhibit B) by a Person (the
     "Guarantor") which meets, the following criteria: (1) the tangible net
      ---------
     worth of the Purchasing Investor or Guarantor is at least equal to $50
     million calculated in accordance with GAAP and (2) so long as no Event of
     Default shall have occurred and be continuing, such Purchasing

                                       22
<PAGE>

     Investor is not in material litigation with, or a material competitor of,
     KMC or any Affiliate of KMC.

                (c)  Lessee Cooperation.  Lessee agrees reasonably to
                     ------------------
     cooperate with Investors in connection with the syndication of their
     respective interests in the Trust Estate, including the execution and
     delivery of such other documents, instruments, notices, opinions,
     certificates and acknowledgments as reasonably may be required by such
     Investor or the relevant Purchasing Investor or Investor Participant
     provided, however that in no event shall Lessee be required to (x) provide
     --------
     opinions, certifications or acknowledgments that extend beyond the scope of
     those delivered as of the Closing Date, or (y) consent to any change that
     would adversely affect any of the economic terms of the transactions
     contemplated herein.

        6.2  Effect of Transfer.  From and after any transfer effected in
             ------------------
accordance with this Section 6.2, the transferor Investor shall be released, to
the extent of such transfer, from its liability hereunder and under the other
documents to which it is a party in respect of obligations to be performed on or
after the date of such transfer. Upon any transfer by an Investor as above
provided, any such transferee shall assume the obligations of the Investor with
respect to the interest being transferred, and shall be deemed an "Investor" for
all purposes of such documents and each reference herein to the transferor shall
thereafter be deemed a reference to such transferee to the extent of the
interest transferred for all purposes. Notwithstanding any transfer of all or a
portion of the transferor's interest as provided in this Section 6.2, the
transferor shall be entitled to all benefits accrued and all rights vested prior
to such transfer including rights to indemnification under any such document.

           SECTION 7.   INDEMNIFICATION; PAYMENT OF CERTAIN EXPENSES

        7.1  General Indemnity.  The Lessee, whether or not any of the
             -----------------
transactions contemplated hereby shall be consummated, hereby assumes liability
for and agrees to defend, indemnify and hold harmless each Indemnified Person on
an After Tax Basis from and against any Claims or threatened Claims which may be
imposed on, incurred by or asserted against an Indemnified Person in any way
relating to or arising or alleged to arise out of (a) the financing,
refinancing, purchase, acceptance, rejection, trusteeship, design, manufacture,
delivery, acceptance, nondelivery, leasing, subleasing, possession, use,
operation, repair, modification, transportation, condition, sale, return,
repossession (whether by summary proceedings or otherwise), or any other
disposition of the Equipment, or any part thereof; (b) any latent or other
defects in the Equipment whether or not discoverable by an Indemnified Person or
the Lessee; (c) a violation of Environmental Laws, Environmental Claims or other
loss of or damage relating to the Equipment; (d) the Transaction Documents or
any transaction contemplated thereby; (e) any breach by the Lessee of any of its
representations or warranties under the Transaction Documents or failure by the
Lessee to perform or observe any covenant or agreement to be performed by it
under any of the Transaction Documents; and (f) personal injury, death or
property damage relating to the Equipment, including Claims based on strict
liability in tort; provided that the foregoing indemnities in clauses (a)
                   --------
through (f) shall not, as to any Indemnified Person, apply to

                                       23
<PAGE>

Claims to the extent they arise out of or result from (i) the gross negligence
or willful misconduct of such Indemnified Person or any successor, assign,
director, shareholder, partner, officer, employee, agent or Affiliate of such
Indemnified Person as determined in a final, non-appealable judgment by a court
of competent jurisdiction, (ii) any breach of any obligation or representation
or warranty of such Indemnified Person under any Transaction Document, (iii) any
Taxes including any Claim (or any portion of a Claim) made upon an Indemnified
Person by a third party that at its origin is based upon a Tax (other than
amounts necessary to make any payments hereunder on an After Tax Basis, where
the Lessee is otherwise specifically required to make such payments on an After
Tax Basis), (iv) acts or omissions in connection with the ownership,
manufacture, operation or maintenance of the Equipment occurring on or after the
date the Lessee transfers possession of the Equipment to the Lessor or any third
party upon the exercise of remedies pursuant to the Lease and the Security
Documents, except to the extent such Claims are attributable to events that
occurred prior to such transfer (the Lessor agrees to indemnify the Trust
Company for any Claim which would be indemnifiable by the Lessee but for the
provisions of this clause (iv)), or (v) the imposition of any Lessor Lien for
which such Indemnified Person is responsible for discharging under the
Transaction Documents. No Indemnified Person shall settle, compromise or
otherwise pay or agree to pay any claim, damage, loss, liability or expense for
which the Lessee is required to provide indemnification hereunder without the
prior consent of the Lessee, which consent shall not be unreasonably delayed or
withheld. If any claim, action or proceeding for which indemnification by the
Lessee may be sought under a Transaction Document is brought against any
Indemnified Person, such Indemnified Person shall promptly notify the Lessee of
the institution of such claim, action or proceeding and the Lessee shall
thereupon participate in all respects in the defense thereof and have the right,
at its sole option, to elect to assume the defense of such claim, action or
proceeding, including the employment of counsel (reasonably satisfactory at all
times to such Indemnified Person) and payment of expenses. Once the Lessee has
assumed the defense of any such claim, action or proceeding, the Lessee shall no
longer be liable to any such Indemnified Person for any expenses subsequently
incurred thereby in connection with such claim, action or proceeding unless
specifically provided for in the next succeeding sentence. Such Indemnified
Person shall have the right to employ its or their own counsel in any such case,
but the fees and expenses of such counsel shall be at the expense of such
Indemnified Person unless (i) the employment of such counsel shall have been
authorized in writing by the Lessee in connection with the defense of such Claim
or such fees and expenses relate to the initial examination of such Claim, (ii)
the parties against which such Claim is brought include both such Indemnified
Person and the Lessee and such Indemnified Person reasonably concludes (based
upon the advice of counsel) that there are legal defenses available to it which
are different from or in addition to those available to the Lessee and that such
different or additional defenses conflict therewith (it being understood,
however, that the Lessee shall not, in connection with any one action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to one firm of attorneys acting as local counsel) for all Indemnified
Persons, and such firm shall be designated in writing by the Indemnified
Persons) or (iii) any such Claim is brought by the Lessee or for its benefit, in
which case the reasonable fees and expenses of such counsel shall be borne by
the Lessee and the Lessee shall not have the right to direct the defense of such
Claim on behalf of such Indemnified Person (but it shall retain the right to
direct the defense of such claim, action or proceeding on its own

                                       24
<PAGE>

behalf). If the Lessee shall have elected to assume the defense of any such
Claim, then upon the request of the Lessee, the Indemnified Person requesting
payment of indemnity under Section 7.1 shall promptly furnish the Lessee with
copies of any records or documents pertaining to the matter to be indemnified
and, to the extent known by such Indemnified Person, a reasonably detailed
explanation of the circumstances giving rise to the claim of indemnification and
the determination of the amount of the requested indemnity payment upon payment
in full to the Indemnified Person of any indemnity pursuant to Section 7.1, the
Lessee shall be subrogated to any right of such Indemnified Persons in respect
of the matter against which such indemnity has been paid. If the Lessee shall
have elected to assume the defense of any such Claim, upon the written request
at any time and from time to time of the Lessee, the Indemnified Person shall,
at the expense of the Lessee, take such reasonable actions and execute such
documents as are necessary or reasonably appropriate to assist the Lessee in the
preservation and enforcement against third parties of the Lessee's right of
subrogation hereunder. The Lessee shall not settle or compromise any Claim on
behalf of any Indemnified Person without such Indemnified Person's consent if
the settlement or compromise involves any non-monetary relief to be performed,
or admission of guilt or wrongdoing, by such Indemnified Person.

        7.2  General Tax Indemnity.  (a)  (i) The Lessee shall pay and assume
             ---------------------
liability for, and does hereby agree to indemnify, protect and defend the
Equipment and all Tax Indemnitees, and hold them harmless against, all
Impositions on an After Tax Basis. (ii) Any payment or indemnity to or for the
benefit of any Tax Indemnitee with respect to any Tax which is subject to
indemnification under Section 7.2(a)(i) shall be an amount sufficient, on an
After Tax Basis, to restore the Tax Indemnitee to the same position it would
have been in had such Tax not been incurred or imposed.

                (b)  All payments to or for the benefit any Financing Party
     under the Transaction Documents (including payments of Basic Rent and
     Supplemental Rent under the Lease) shall be made free and clear of and
     without deduction for any and all present or future Impositions. If the
     Lessee, any Financing Party or any other Person ("Applicable Payor") shall
                                                       ----------------
     be required by Law to deduct any Impositions from or in respect of any
     amounts payable under this Agreement or any other Operative Document to or
     for the benefit of any Financing Party ("Applicable Payee"), (A) the
                                              ----------------
     amounts payable by such Applicable Payor (as rent, interest or otherwise)
     shall be increased by the amount necessary so that after making all
     required deductions (including deductions applicable to additional sums
     payable under this Section 7.2(b)) the Applicable Payee shall receive an
     amount equal to the sum it would have received had no such deductions been
     made, (B) the Applicable Payor shall make such deductions and (C) the
     Applicable Payor shall pay the full amount deducted to the relevant taxing
     authority or other Governmental Authority in accordance with all Legal
     Requirements. The Lessee will indemnify each Tax Indemnitee on demand for
     the full amount of any sums paid by such Tax Indemnitee pursuant to the
     second sentence of this Section 7.2(b) on an After Tax Basis and any
     liability the Tax Indemnitee may incur or be required to pay.

                                       25
<PAGE>

                (c)  (i)  Subject to the terms of Section 7.2(e), the Lessee
     shall pay or cause to be paid all Impositions directly to the taxing
     authorities where feasible and otherwise to the Tax Indemnitee, as
     appropriate, and the Lessee shall at its own expense, upon such Tax
     Indemnitee's reasonable request, furnish to such Tax Indemnitee copies of
     official receipts or other satisfactory proof evidencing such payment.

                (ii) In the case of Impositions for which no contest is
        conducted pursuant to Section 7.2(e) and which the Lessee pays directly
        to the taxing authorities, the Lessee shall pay such Impositions prior
        to the latest time permitted by the relevant taxing authority for timely
        payment (other than in the case of withholding taxes, which shall be
        paid immediately). In the case of Impositions for which the Lessee
        reimburses a Tax Indemnitee, the Lessee shall do so within 20 days after
        receipt by the Lessee of demand by such Tax Indemnitee describing in
        reasonable detail the nature of the Imposition and the basis for the
        demand (including the computation of the amount payable), but in no
        event shall the Lessee be required to pay such reimbursement prior to 15
        days before the latest time permitted by the relevant taxing authority
        for timely payment. In the case of Impositions for which a contest is
        conducted pursuant to Section 7.2(e), the Lessee shall pay such
        Impositions or reimburse such Tax Indemnitee for such Impositions, to
        the extent not previously paid or reimbursed pursuant to subsection (a),
        prior to the latest time permitted by the relevant taxing authority for
        timely payment after conclusion of all contests under Section 7.2(e)
        unless payment shall be required before commencement of such contest, in
        which case the Lessee shall pay such Impositions or reimburse the Tax
        Indemnitee for such Impositions prior to the latest time permitted by
        the relevant taxing authority for timely payment prior to commencement
        of such contest.

                (iii) The determination of all Impositions to be paid or
        indemnified against by the Lessee under this Section 7.2 on an After Tax
        Basis shall be made (in good faith) by the Tax Indemnitee. Such
        determination shall state with reasonable clarity and detail the basis
        for such determination and shall, absent manifest error, be final and
        conclusive and binding on the Lessee. In no event shall the Lessee in
        connection with this Section 7.2 or for any other purpose whatsoever
        under any Operative Document have any right to examine any Tax return or
        related books and records of any Tax Indemnitee.

                (iv)  Impositions imposed with respect to the Equipment for a
        billing period during which the Lease expires or terminates with respect
        to the Equipment (unless the Lessee has exercised the Purchase Option
        with respect to the Equipment) shall be adjusted and prorated on a daily
        basis between the Lessee and the Lessor, whether or not such Imposition
        is

                                       26
<PAGE>

        imposed before or after such expiration or termination and each party
        shall pay or reimburse the other for each party's pro rata share
        thereof.

        (d)  The Lessee shall be responsible for preparing and filing any real
     and personal property or ad valorem tax returns in respect of the
     Equipment. In case any other report or tax return shall be required to be
     made with respect to any obligations of the Lessee under or arising out of
     Section 7.2(a) and of which the Lessee has knowledge, the Lessee, at its
     sole cost and expense, shall notify the relevant Tax Indemnitee of such
     requirement and (except if such Tax Indemnitee notifies the Lessee that
     such Person intends to file such report or return) (A) to the extent
     required or permitted by and consistent with Legal Requirements, make and
     file in its own name such return, statement or report; and (B) in the case
     of any other such return, statement or report required to be made in the
     name of such Tax Indemnitee, advise such Tax Indemnitee of such fact and
     prepare such return, statement or report for filing by such Tax Indemnitee
     or, where such return, statement or report shall be required to reflect
     items in addition to any obligations of the Lessee under or arising out of
     Section 7.2(a), provide such Tax Indemnitee at the Lessee's expense with
     information sufficient to permit such return, statement or report to be
     properly made with respect to any obligations of the Lessee under or
     arising out of Section 7.2(a). Such Tax Indemnitee shall, upon the Lessee's
     request and at the Lessee's expense, provide any data regularly maintained
     by such Tax Indemnitee (and not otherwise within the control of the Lessee)
     with respect to the Equipment which the Lessee may reasonably require to
     prepare any required tax returns or reports.

        (e)  (i)  If a written claim is made against any Tax Indemnitee or if
     any proceeding shall be commenced against such Tax Indemnitee (including a
     written notice of such proceeding), for any Impositions, such Tax
     Indemnitee shall promptly notify the Lessee in writing and shall not take
     action with respect to such claim or proceeding without the consent of the
     Lessee for 30 days after the receipt of such notice by Lessee; provided,
                                                                    --------
     that, in the case of any such claim or proceeding, if action shall be
     required by law or regulation to be taken prior to the end of such 30-day
     period, such Tax Indemnitee shall, in such notice to the Lessee, inform the
     Lessee, and no action shall be taken with respect to such claim or
     proceeding without the consent of the Lessee before the end of such shorter
     period; provided, further, that the failure of such Tax Indemnitee to give
             --------  -------
     the notices referred to this sentence shall not diminish the Lessee's
     obligation hereunder.

                (ii) If, within 30 days of receipt of such notice from the Tax
        Indemnitee (or such shorter period as determined pursuant to Section
        7.2(e)(i)), the Lessee shall request in writing that such Tax Indemnitee
        contest such Imposition, and the tax (including all related taxes that
        the Lessee could be responsible for under this Section 7.2) at issue is
        at least $50,000, the Tax Indemnitee shall, at the expense of the
        Lessee, in good faith conduct and control such contest (including,
        without limitation, by

                                       27
<PAGE>

        pursuit of appeals) relating to the validity, applicability or amount of
        such Impositions (provided, however, that (A) if such contest can be
        pursued independently from any other proceeding involving a tax
        liability of such Tax Indemnitee, the Tax Indemnitee, at the Lessee's
        request, shall allow the Lessee to conduct and control such contest and
        (B) in the case of any contest that the Lessee is not entitled to
        control, the Tax Indemnitee may request the Lessee to conduct and
        control such contest if possible or permissible under Legal
        Requirements) by, in the sole discretion of the Person conducting and
        controlling such contest, (1) resisting payment thereof, (2) not paying
        the same except under protest, if protest is necessary and proper, (3)
        if the payment be made, using reasonable efforts to obtain a refund
        thereof in appropriate administrative and judicial proceedings, or (4)
        taking such other action as is reasonably requested by the Lessee from
        time to time.

                (iii)  The party controlling any contest shall consult in good
        faith with the non-controlling party and shall keep the non-controlling
        party reasonably informed as to the conduct of such contest. No
        settlement of any context may be made by the Lessee without the Tax
        Indemnitee's written consent, which consent shall not be unreasonably
        withheld. The parties agree that a Tax Indemnitee may at any time
        decline to take further action with respect to the contest of any
        Imposition and may settle such contest if such Tax Indemnitee shall
        waive its rights to any indemnity from the Lessee that otherwise would
        be payable in respect of such claim (and any future claim by any taxing
        authority with respect to other taxable periods that are based, in whole
        or in part, upon the resolution of such claim) and shall pay to the
        Lessee any amount previously paid or advanced by the Lessee pursuant to
        this Section 7.2 by way of indemnification or advance for the payment of
        an Imposition.

                (iv) Notwithstanding the foregoing provisions of this Section
        7.2, a Tax Indemnitee shall not be required to take any action and the
        Lessee shall not be permitted to contest any Impositions in its own name
        or that of the Tax Indemnitee unless (A) the Lessee shall have agreed to
        pay and shall pay to such Tax Indemnitee on demand and on an After Tax
        Basis all reasonable costs, losses and expenses that such Tax Indemnitee
        actually incurs in connection with contesting such Impositions,
        including, without limitation, all reasonable legal, accounting and
        investigatory fees and disbursements, (B) the Tax Indemnitee shall have
        reasonably determined that the action to be taken will not result in any
        material danger of sale, forfeiture or loss of the Equipment, or any
        part thereof or interest therein, and will not result in risk of
        criminal liability, (C) if such contest shall involve the payment of the
        Imposition prior to the contest, the Lessee shall provide to the Tax
        Indemnitee an interest-free advance in an amount equal to the Imposition
        that the Tax Indemnitee is required to pay (with no additional net
        after-tax cost to such Tax Indemnitee), (D) in the case of a

                                       28
<PAGE>

        claim that must be pursued in the name of an Tax Indemnitee (or an
        Affiliate thereof), the Lessee shall have provided to such Tax
        Indemnitee an opinion of independent tax counsel selected by the Lessee
        and reasonably satisfactory to such Tax Indemnitee stating that a
        reasonable basis exists to contest such claim (or, in the case of an
        appeal of an adverse determination, an opinion of such counsel to the
        effect that there is substantial authority for the position asserted in
        such appeal) and (E) no Event of Default shall have occurred and be
        continuing unless the Lessee has provided security satisfactory to the
        Tax Indemnitee in its good faith discretion. In no event shall a Tax
        Indemnitee be required to appeal an adverse judicial determination to
        the United States Supreme Court. In addition, a Tax Indemnitee shall not
        be required to contest any claim in its name (or that of an Affiliate)
        if the subject matter thereof shall be of a continuing nature and shall
        have previously been decided adversely by a court of competent
        jurisdiction pursuant to the contest provisions of this Section 7.2,
        unless there shall have been a change in law (or interpretation thereof)
        and the Tax Indemnitee shall have received, at the Lessee's expense, an
        opinion of independent tax counsel selected by the Lessee and reasonably
        acceptable to the Tax Indemnitee stating that as a result of such change
        in law (or interpretation thereof), it is more likely than not that the
        Tax Indemnitee will prevail in such contest.

                (f)  Each Tax Indemnitee agrees to furnish to the Lessee from
     time to time such duly executed and properly completed forms that are
     reasonably requested by the Lessee in order to claim any reduction of or
     exemption from any withholding or other Tax imposed by any taxing authority
     in respect of any payments otherwise required to be made by the Lessee
     pursuant to the Operative Documents, which reduction or exemption may be
     available to such Tax Indemnitee under Legal Requirements (but only if and
     to the extent such Tax Indemnitee is legally entitled to furnish such forms
     and shall have determined, in its sole discretion, that the providing of
     such forms will not adversely affect it).

                (g)  If as a result of the payment or reimbursement by the
     Lessee of any expenses of a Tax Indemnitee or the payment of any
     Transaction Expenses incurred in connection with the transactions
     contemplated by the Transaction Documents, any Tax Indemnitee shall suffer
     a net increase in any federal, state or local income tax liability, the
     Lessee shall indemnify such Tax Indemnitees (without duplication of any
     indemnification required by Section 7.2(a)) on an After Tax Basis for the
     amount of such increase.

        7.3  Transaction Costs and Expenses.  The Lessee shall, whether or not
             ------------------------------
the transactions herein contemplated are consummated, pay or cause to be paid
the following (the "Transaction Expenses"):
                    --------------------

                (a)  all reasonable out-of-pocket costs and expenses of each
     Financing Party (including reasonable fees and disbursements of counsel)
     made, paid or

                                       29
<PAGE>

     incurred in connection with: (i) the preparation, negotiation, execution
     and delivery and, where appropriate, authentication, registration and
     recordation of the Operative Documents and any other documents and
     instruments related hereto or thereto or related to the transactions
     contemplated hereby or thereby (including legal opinions); (ii) the
     Lessee's exercise of its rights to arrange financing of any Modification,
     to replace any Project Contract or to amend or modify its existing
     contracts, or to enter into new contracts with respect to the Equipment;
     (iii) any amendment or modification to, or the protection or preservation
     of any right or claim under, or consent or waiver in connection with, this
     Agreement or any other Transaction Document or any such other document or
     instrument related hereto or thereto or related to the transactions
     contemplated hereby or thereby; (iv) the authentication, registration,
     recordation (where appropriate), filing and delivery of evidences of
     indebtedness relating to the Secured Obligations and the disbursements
     thereof; (v) the enforcement (including with respect to a work out) of this
     Agreement and the other Transaction Documents and any other documents and
     instruments referred to herein or therein (including the reasonable fees
     and disbursements of counsel) and (vi) any syndication by the Investors of
     their respective interests in the Trust Estate occurring during the first
     180 days after the Closing Date;

        (b)  the fees and expenses of the Telecommunications Consultant, the
     Appraiser and of any other independent expert retained for other services
     performed pursuant to this Agreement or any other Transaction Document or
     related to the transactions contemplated hereby or thereby;

        (c)  all reasonable costs and expenses incurred by the Financing Parties
     in connection with any purchase of the Equipment by the Lessee pursuant to
     the Operative Documents or in connection with the exercise of the Sale
     Option;

        (d)  all fees specified in the Fee Letter at the time and in the manner
     required by the Fee Letter;

        (e)  the initial and annual Trust Company's fee and all expenses of the
     Trust Company and any necessary co-trustees (including reasonable counsel
     fees and expenses) or any successor owner trustee, for acting as trustee
     under the Trust Agreement and performing its obligations thereunder;

        (f)  the fees and expenses of the Security Agent for performing its
     obligations under the Security Deposit Agreement; and

        (g)  all brokers' fees and any and all stamp, transfer and other similar
     taxes, fees and excises, if any, including any interest and penalties,
     which are payable in connection with the transactions contemplated by this
     Agreement and the other Transaction Documents.

                                       30
<PAGE>

        7.4  Permitted Contests Other Than in Respect of Impositions.  Except
             -------------------------------------------------------
to the extent otherwise provided for in Section 7.2, the Lessee, on its own or
on the Lessor's behalf but at the Lessee's sole cost and expense, may contest,
by appropriate administrative or judicial proceedings conducted in good faith
and with due diligence, (i) the amount, validity or application, in whole or in
part, of any applicable Legal Requirement or Requirement of Law or (ii) the
amount, validity, existence or removal of any Lien (other than a Permitted
Lien), and the Lessee agrees not to pay, settle or otherwise compromise any such
item; provided that (a) the commencement and continuation of such proceedings
      --------
shall suspend the collection thereof from, and suspend the enforcement thereof
against the Equipment, the Lessee and the Financing Parties; (b) there shall be
no substantial risk that the imposition of a Lien (other than a Permitted Lien)
on the Equipment would result in any part of the Equipment or any Rent or other
amount payable by the Lessee being in any danger of being sold, forfeited, lost
or deferred; (c) at no time during the permitted contest shall there be any risk
of the imposition of criminal liability or a substantial risk of civil liability
on any Financing Party for failure to comply therewith; and (d) there shall not
be a material risk of extending the application of such item beyond the
Expiration Date unless the Lessee has exercised the Purchase Option pursuant to
the Lease at such time.  The Lessor, at the Lessee's sole cost and expense,
shall execute and deliver to the Lessee such authorizations and other documents
as may reasonably be required in connection with any such contest and, if
reasonably requested by the Lessee, shall join as a party therein at the
Lessee's sole cost and expense.

        7.5  Tax Shelter Registration.  The Lessee shall cause the transactions
             ------------------------
contemplated by the Operative Documents to be registered with the Internal
Revenue Service as a corporate tax shelter.  The Lessee agrees to indemnify,
protect and defend each Tax Indemnitee from, and hold them harmless against, any
Impositions resulting from (i) the failure of the Lessee to register such
transactions with the Internal Revenue Service in accordance with the
immediately proceeding sentence, or (ii) the failure to properly so register.

                          SECTION 8.   MISCELLANEOUS

        8.1  Survival of Agreements.  The representations, warranties,
             ----------------------
covenants, indemnities and agreements of the parties provided for in the
Operative Documents, and the parties' obligations under any and all thereof,
shall survive the consummation of the transactions contemplated hereby and by
the other Operative Documents and shall be and continue in effect
notwithstanding any investigation made by any party and the fact that any party
may waive compliance with any of the other terms, provisions or conditions of
any of the Operative Documents. Except as otherwise expressly set forth herein
or in other Operative Documents, the indemnities of the parties provided for in
the Operative Documents and the non-recourse provisions of Section 8.8(b) shall
survive the expiration or termination of any thereof.

        8.2  Notices.  Unless otherwise specifically provided herein, all
             -------
notices, consents, directions, approvals, instructions, requests and other
communications required or permitted by the terms hereof to be given to any
Person shall be given in writing by nationally recognized courier service and
any such notice shall become effective five Business Days after being deposited
in the mails, certified or registered with appropriate postage prepaid or one
Business

                                       31
<PAGE>

Day after delivery to a nationally recognized courier service specifying
overnight delivery and shall be directed to the address of such Person as
indicated:

          If to the Lessee:

                KMC Telecom V, Inc.
                do KMC Telecom Holdings, Inc.
                1546 Route 206, Suite 300
                Bedminster, NJ 07921
                Attn:  General Counsel
                Tel:   908-719-2100
                Fax:   908-719-8775

          If to the Lessor:

               Telecom V Investor Trust 2000-A
               do Wilmington Trust Company
               1100 North Market Street
               Rodney Square North
               Wilmington, DE 19890-0001
               Attn:   Corporate Trust Administration
               Tel:    302-651-1000
               Fax:    302-651-8882

          If to the Trustee or the Trust Company:

               Wilmington Trust Company
               1100 North Market Street
               Rodney Square North
               Wilmington, DE 19890-0001
               Attn:   Corporate Trust Administration
               Tel:    302-651-1000
               Fax:    302-651-8882

          If to an Investor, at the address set forth for such Investor set
forth on Schedule 1.

From time to time any party may designate a new address for purposes of notice
hereunder by notice to each of the other parties hereto.

        8.3  Counterparts.  This Agreement may be executed by the parties
             ------------
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same instrument.

        8.4  Amendments and Waivers.  This Agreement may not be terminated or
             ----------------------
amended, nor may compliance with any term of this Agreement be waived, except by
an instrument or instruments in writing executed by the Lessee, the Trustee and
the Required Investors.

                                       32
<PAGE>

        8.5  Headings, etc.  The Table of Contents and headings of the various
             --------------
Sections and Subsections of this Agreement are for convenience of reference only
and shall not modify, define, expand or limit any of the terms or provisions
hereof.

        8.6  Governing Law.  This Agreement shall be governed by the laws of
             -------------
the State of New York.

        8.7  Severability.  Any provision of this Agreement that is 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.

        8.8  Liability Limited.  (a) The Lessee and each Investor each
             -----------------
acknowledge and agree that the Trust Company is (except as otherwise expressly
provided herein or therein) entering into this Agreement and the other Operative
Documents to which it is a party (other than the Trust Agreement), solely in its
capacity as trustee under the Trust Agreement and not in its individual
capacity, and that Trust Company shall not be liable or accountable under any
circumstances whatsoever in its individual capacity for or on account of any
statements, representations, warranties, covenants or obligations stated to be
those of the Trustee, except for its own gross negligence or willful misconduct
and as otherwise expressly provided herein or in the other Operative Documents.
Except as specifically provided in the Trust Agreement and except to the extent
that the Trust Company shall have acted in its individual capacity, all Persons
having any claim against the Lessor or the Trust Company acting in its capacity
as Trustee by reason of the transactions contemplated hereby shall look only to
the Trust Estate for payment or satisfaction thereof (and, without limiting the
foregoing, no Investor shall have any liability for payment or satisfaction of
claims against the Lessor or the Trustee except to the extent any such claim
arises out of or results from the breach by such Investor of its obligations
hereunder or under any other Operative Document).

                (b)  Except as otherwise expressly provided in this Agreement
        and the other Transaction Documents, each of the parties hereto other
        than the Lessee (the "Non-Lessee Parties") agrees that all obligations
                              -------------------
        of the Lessee under the Transaction Documents shall be obligations
        solely of the Lessee, and each Non-Lessee Party shall have recourse only
        to the assets of the Lessee in enforcing such obligations. Except as
        otherwise expressly provided in the Participation Agreement and the
        other Transaction Documents, each Non-Lessee Party hereby acknowledges
        and agrees that none of the partners of the Lessee, their respective
        Affiliates and their past, present or future officers, directors,
        employees, shareholders, agents or representatives (collectively, the
        "Nonrecourse Parties") shall have any liability to any
         -------------------
        Non-Lessee Party for the payment of any sums now or hereafter owing by
        the Lessee under the Transaction Documents or for the performance of any
        of the obligations of the Lessee contained therein or shall otherwise be
        liable or responsible with respect thereto (such liability, including
        such as may arise by operation of law, being hereby expressly waived).
        Except as otherwise expressly provided in the other Transaction
        Documents, if any Event of

                                       33
<PAGE>

        Default shall occur and be continuing or if any claim of any Non-Lessee
        Party against, or alleged liability to any Non-Lessee Party of, the
        Lessee shall be asserted under the Participation Agreement or the other
        Transaction Documents, each Non-Lessee Party agrees that it shall not
        have the right to proceed directly or indirectly against the Nonrecourse
        Parties or against their respective properties and assets for the
        satisfaction of any of the obligations of the Lessee under the
        Participation Agreement or the other Transaction Documents or of any
        such claim or liability or for any deficiency judgment in respect of
        such obligation or any such claim or liability or for any deficiency
        judgment in respect of such obligation or any such claim or liability.
        The foregoing notwithstanding, it is expressly understood and agreed
        that nothing contained in this Section 8.8(b) shall be deemed to release
        any Nonrecourse Party from liability for its fraudulent actions or
        willful misconduct. The foregoing acknowledgments, agreements and waiver
        shall be enforceable by any Nonrecourse Party.

        8.9  Further Assurances.  The parties hereto shall promptly cause to be
             ------------------
taken, executed, acknowledged or delivered, at the sole expense of the Lessee,
all such further acts, conveyances, documents and assurances as the other
parties may from time to time reasonably request in order to carry out and
effectuate the intent and purposes of this Agreement, the other Operative
Documents and the transactions contemplated hereby and thereby (including,
without limitation, the preparation, execution and filing of any and all Uniform
Commercial Code financing statements and other filings or registrations which
the parties hereto may from time to time request to be filed or effected). The
Lessee, at its own expense, shall take such action as may be reasonably
requested in order to maintain and protect all security interests provided for
hereunder or under any other Operative Document.

        8.10  Successors and Assigns.  This Agreement shall be binding upon and
              ----------------------
inure to the benefit of the parties hereto and their respective successors and
assigns.

        8.11  No Representation or Warranty.  Nothing contained herein, in any
              -----------------------------
other Operative Document or in any other materials delivered to the Lessee in
connection with the transactions contemplated hereby or thereby shall be deemed
a representation or warranty by any Financing Party or any of their Affiliates
as to the proper accounting treatment or tax treatment that should be afforded
to the Lease and the Trust's ownership of the Equipment and each Creditor
expressly disclaims any representation or warranty with respect to such matters.

        8.12  No Waiver: Cumulative Remedies.  No failure to exercise and no
              ------------------------------
delay in exercising, on the part of any Financing Party, any right, remedy,
power or privilege hereunder or under the other Operative Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, remedy, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or privilege.
The rights, remedies, powers and privileges herein provided are cumulative and
not exclusive of any rights, remedies, powers and privileges provided by law.

        8.13  Integration.  This Agreement and the other Operative Documents
              -----------
represent the agreement of the Lessee, the Lessor and the Financing Parties with
respect to the subject matter

                                       34
<PAGE>

hereof and there are no promises, undertakings, representations or warranties by
any Financing Party relative to subject matter hereof not expressly set forth or
referred to herein or in the other Operative Documents.

        8.14  Confidentiality.  Each Financing Party agrees to hold any
              ---------------
confidential information that it may receive from the Lessee pursuant to this
Agreement or the other Operative Documents in confidence, except for disclosure:
                                                          ------
(a) to other Financing Parties; (b) to legal counsel and accountants for the
Lessee or such Financing Party; (c) to other professional advisors to the Lessee
or such Financing Party, provided that the recipient has accepted such
                         --------
information subject to a confidentiality agreement substantially similar to this
Section 8.14; (d) to regulatory officials having jurisdiction over such
Financing Party; (e) as required by applicable law or legal process, provided
                                                                     --------
that such Financing Party agrees promptly to notify the Lessee of any such
disclosures unless prohibited by applicable laws, or in connection with any
legal proceeding to which such Financing Party and the Lessee are adverse
parties; or (f) to another financial institution in connection with a
disposition or proposed disposition to that financial institution of all or part
of such Financing Party's interests hereunder and under the Transaction
Documents or a participation interest therein, provided that the recipient has
accepted such information subject to a confidentiality agreement substantially
similar to this Section 8.14. For purposes of the foregoing, "confidential
information" shall mean any information respecting the Lessee reasonably
considered by the Lessee to be confidential, other than (i) information
                                             ----------
previously filed with any Governmental Authority and available to the public,
(ii) information previously published in any public medium from a source other
than, directly or indirectly, such Financing Party and (iii) information
previously disclosed by the Lessee to any Person not associated with the Lessee
which is not known to the Financing Parties to have a professional duty of
confidentiality to the Lessee or which has not executed an appropriate
confidentiality agreement with the Lessee. Nothing in this Section 8.14 shall be
construed to create or give rise to any fiduciary duty on the part of any
Financing Party to the Lessee or its Subsidiaries.

        8.15  Submission To Jurisdiction: Waivers.  The Lessee hereby
              -----------------------------------
irrevocably and unconditionally:

                (a)  submits for itself and its property in any legal action or
     proceeding relating to this Agreement and the other Operative Documents to
     which it is a party, or for recognition and enforcement of any judgment in
     respect thereof to the non-exclusive general jurisdiction of the courts of
     the State of New York, the courts of the United States for the Southern
     District of New York, and appellate courts from any thereof;

                (b)  consents that any such action or proceeding may be brought
     in such courts and waives any objection that it may now or hereafter have
     to the venue of any such action or proceeding in any such court or that
     such action or proceeding was brought in an inconvenient court and agrees
     not to plead or claim the same;

                (c)  agrees that service of process in any such action or
     proceeding may be effected by mailing a copy thereof by registered or
     certified mail (or any substantially similar form of mail), postage
     prepaid, to the Lessee, as the case may

                                       35
<PAGE>

     be at its address set forth in Section 8.2 or at such other address of
     which the Investor shall have been notified pursuant thereto;

                (d)  agrees that nothing herein shall affect the right to effect
     service of process in any other manner permitted by law or shall limit the
     right to sue in any other jurisdiction; and

                (e)  waives, to the maximum extent not prohibited by law, any
     right it may have to claim or recover in any legal action or proceeding
     referred to in this Section any special, exemplary, punitive or
     consequential damages.

        8.16  Acknowledgments.  The Lessee hereby acknowledges that:
              ---------------

                (a)  it has been advised by counsel in the negotiation,
     execution and delivery of this Agreement and the other Operative Documents;
     and

                (b)  no joint venture is created hereby or by the other
     Operative Documents or otherwise exists by virtue of the transactions
     contemplated hereby among the Financing Parties or among the Lessee and the
     Financing Parties.

        8.17  WAIVERS OF JURY TRIAL.  EACH OF THE PARTIES HERETO HEREBY
              ---------------------
IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT AND FOR
ANY COUNTERCLAIM THEREIN.

        8.18  Termination.  This Agreement shall terminate when all Secured
              -----------
Obligations have been indefeasibly paid in full and the Lease terminated and the
security interest granted under the Security Documents has terminated and the
Collateral has been released.

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.

                              KMC TELECOM V, INC.

                              By:  /s/ Marcy Dean
                                   ------------------------------------
                                   Name: Marcy Dean
                                   Title: Vice President

                                       36
<PAGE>

                              TELECOM V INVESTOR TRUST 2000-A, by and through
                              Wilmington Trust Company, not in its individual
                              capacity, but solely as Trustee under the Trust
                              Agreement

                              By:  /s/ Patricia A. Evans
                                   ---------------------------------
                                   Name: Patricia A. Evans
                                   Title: Senior Financial Services Officer

                              WILMINGTON TRUST COMPANY, in its individual
                              capacity and as Trustee

                              By:  /s/ Patricia A. Evans
                                   ---------------------------------
                                   Name: Patricia A. Evans
                                   Title: Senior Financial Services Officer

                              GENERAL ELECTRIC CAPITAL CORPORATION

                              By:  /s/ Molly S. Ferguson
                                   ---------------------------------
                                   Name: Molly S. Ferguson
                                   Title: Manager, Operations

                              CIT LENDING SERVICES CORPORATION

                              By:  /s/ James L. Hudak
                                   ---------------------------------
                                   Name: James L. Hudak
                                   Title:  Managing Director

                                       37
<PAGE>

                                                               Schedule 1 to the
                                                         Participation Agreement
                                                         -----------------------

                INVESTORS AND INVESTOR CONTRIBUTIONS COMMITMENTS
                ------------------------------------------------

INVESTORS:

GENERAL ELECTRIC CAPITAL CORPORATION
c/o GE Capital Services Structured Finance Group, Inc.
120 Long Ridge Road
Stamford, CT 06927
Attention:  Portfolio- Operations/Domestic Telecom
Telephone:  (203) 357-3735
Fax:        (203) 961-2017

CIT LENDING SERVICES CORPORATION
c/o The CIT Group
44 Whippany Road
Morristown, New Jersey 07960
Attention:  Vice President Legal Services
Attention:  Assistant Portfolio Manager
Telephone:  (973) 401-6760
Fax:        (973) 401-6785

INVESTOR CONTRIBUTION COMMITMENTS:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Investor                                       Amount                     Commitment %
--------                                       ------                     ------------
----------------------------------------------------------------------------------------------
<S>                                  <C>                          <C>
General Electric Capital                     $100,000,000                    68.97%
 Corporation
----------------------------------------------------------------------------------------------
CIT Lending Services Corporation             $ 45,000,000                    31.03%
----------------------------------------------------------------------------------------------
</TABLE>

                                       38
<PAGE>

                                                     Exhibit A to the
                                                Participation Agreement
                                                -----------------------

                          FORM OF TRANSFER INSTRUMENT
                          ---------------------------

[_________ __, 20_]

          Reference is made to the Participation Agreement, dated as of June 28,
2000, among KMC Telecom V Inc., a Delaware corporation, Telecom V Investor Trust
2000-A, a Delaware business trust, Wilmington Trust Company, in its individual
capacity and as trustee of the Lessor and the Investors party thereto (as
amended, supplemented or otherwise modified from time to time, the
"Participation Agreement"). Unless otherwise defined herein, terms used herein
--------------------------
and not otherwise defined shall have the meanings assigned to such terms in
Annex A of the Participation Agreement.  ________________ (the "Transferor") and
_________________ (the "Purchasing Investor") agree as follows:
                        -------------------

          (a) The Transferor hereby irrevocably sells and assigns to the
Purchasing Investor without recourse to the Transferor, and the Purchasing
Investor hereby irrevocably purchases and assumes from the Transferor without
recourse to the Transferor, as of the Effective Date (as defined below), [all
of] [ __% of] the Transferor's Investor Contribution (as specified in Schedule
1) and the Transferor's rights and obligations under the Participation Agreement
and the other Operative Documents (the "Transferred Interest").
                                        ----------------------

          (b) The Transferor (i) makes no representation or warranty and assumes
no responsibility with respect to any statements, warranties or representations
made in or in connection with the Participation Agreement or with respect to the
execution, legality, validity, enforceability, genuineness, sufficiency or value
of the Participation Agreement, any other Operative Document or any other
instrument or document furnished pursuant thereto, other than that the
Transferor has not created any adverse claim upon the interest being assigned by
it hereunder and that such interest is free and clear of any such adverse claim
and that it is legally authorized to enter into this Transfer Instrument; and
(ii) makes no representation or warranty and assumes no responsibility with
respect to the financial condition of the Lessee or any other obligor or the
performance or observance by the Lessee or any other obligor of any of their
respective obligations under the Participation Agreement or any other Operative
Document or any other instrument or document furnished pursuant hereto or
thereto.

          (c) The Purchasing Investor (i) represents and warrants that it is
legally authorized to enter into this Transfer Instrument; (ii) confirms that it
has received a copy of the Participation Agreement, together with copies of the
financial statements delivered pursuant to the Participation Agreement and such
other documents and information as it has deemed

                                       39
<PAGE>

appropriate to make its own credit analysis and decision to enter into this
Transfer Instrument; (iii) agrees that it will, independently and without
reliance upon the Transferor, the Lessor or any other Investor and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under the
Participation Agreement, the other Operative Documents or any other instrument
or document furnished pursuant hereto or thereto; (d) appoints and authorizes
the Lessor to take such action as agent on its behalf and to exercise such
powers and discretion under the Participation Agreement, the other Operative
Documents or any other instrument or document furnished pursuant hereto or
thereto as are delegated to the Lessor by the terms thereof, together with such
powers as are incidental thereto; and (e) agrees that it will be bound by the
provisions of the Participation Agreement and the other Operative Documents to
the extent of the Transferred Interest and will perform in accordance with its
terms all the obligations which by the terms of the Participation Agreement and
the other Operative Documents are required to be performed by it as an Investor.

          (d) The Purchasing Investor represents, warrants and agrees as of the
Effective Date that it is purchasing the Transferred Interest for its own
account and with its general corporate assets in the ordinary course of its
business, and such general corporate assets are, or will be, either: (i) not
assets of any Employee Benefit Plan (or its related trust) which is subject to
Title I of ERISA or Section 4975 of the Code; or (ii) assets of any Employee
Benefit Plan (or its related trust) which is subject to Title I of ERISA or
Section 4975 of the Code, but there is available an exemption from the
prohibited transaction rules under Section 406(a) of ERISA and Section 4975 of
the Code and such exemption is immediately applicable to each transaction
contemplated by the Operative Documents to the extent that any other party to
such transaction is a "party in interest" as defined in Section 3(14) of ERISA
with respect to such plan assets.

          (e) The effective date of this Transfer Instrument shall be _______
___, 20__ (the "Effective Date").
                --------------

          (f) From and after the Effective Date, the Lessor shall make all
payments in respect of the Transferred Interest to the Purchasing Investor. The
Transferor and the Purchasing Investor shall make all appropriate adjustments in
payments by the Lessor for periods prior to the Effective Date or with respect
to the making of this assignment directly between themselves.

          (g) From and after the Effective Date, (i) the Purchasing Investor
shall be a party to the Participation Agreement and the other Operative
Documents to the extent of the Transferred Interest and, to the extent provided
in this Transfer Instrument, have the rights and obligations of an Investor
thereunder and under the other Operative Documents and shall be bound by the
provisions thereof and (ii) the Transferor shall with respect to the Transferred
Interest, to the extent provided in this Transfer Instrument, relinquish its
rights and be released from its obligations under the Participation Agreement
and the other Operative Documents.

          (h) This Transfer Instrument shall be governed by the laws of the
State of New York.

          (i) This Transfer Instrument may be executed by one or more of the
parties to this Transfer Instrument on any number of separate counterparts
(including by facsimile

                                       40
<PAGE>

transmission), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.

          IN WITNESS WHEREOF, the parties hereto have caused this Transfer
Instrument to be executed as of the date first above written by their respective
duly authorized officers.

                                       41
<PAGE>

                                   SCHEDULE 1

                             TO TRANSFER INSTRUMENT

--------------------------------------------------------------------------------

Name of Transferor:

Name of Purchasing Investor:

Effective Date of Transfer:

<TABLE>
<CAPTION>
         Principal Amount of Investor                       Percentage of Investor
           Contribution Transferred                        Contribution Transferred
----------------------------------------------  -----------------------------------------------
<S>                                             <C>
                $____________                                    $____________
</TABLE>

<TABLE>
<CAPTION>
[NAME OF PURCHASING INVESTOR]                                 [NAME OF TRANSFEROR]
<S>                                                           <C>
By                                                            By
   ----------------------------------                            ----------------------------------
Name:                                                         Name:
Title:                                                        Title:
</TABLE>

                                       42
<PAGE>

                                                                Exhibit B to the
                                                         Participation Agreement
                                                         -----------------------

                               FORM OF GUARANTEE

          GUARANTEE, dated as of June ___, 20__, made by [INVESTOR PARENT], a
_____________ (the "Guarantor"), in favor of KMC TELECOM V, INC., a Delaware
                    ---------
corporation (the "Lessee"); TELECOM V INVESTOR TRUST 2000-A, a Delaware business
                  ------
trust (the "Lessor"); and WILMINGTON TRUST COMPANY, in its individual capacity
            ------
(in such capacity, the "Trust Company") and as trustee of the Lessor (in such
                        -------------
capacity, the "Trustee") (the "Guaranteed Parties").
               -------         ------------------

                                   RECITALS:
                                   --------

          A.          WHEREAS, the Guarantor is the parent company of
[Transferee Investor] (the "Transferee Investor");
                            -------------------

          B.          WHEREAS, the Transferee Investor is a party to the
Participation Agreement, dated as of June 28, 2000 (the "Participation
                                                         -------------
Agreement"), among KMC Telecom V, Inc., (the "Lessee"); Telecom V Investor Trust
                                              ------
2000-A, (the "Lessor"); Wilmington Trust Company, in its individual capacity (in
              ------
such capacity, the "Trust Company") and as trustee of the Lessor (in such
                    -------------
capacity, the `Trustee"); and the other Investors party thereto;

          C.          WHEREAS, pursuant to 6.1(b) of the Participation
Agreement, this Guarantee is required to be provided by the Guarantor in favor
of the Guaranteed Parties;

          NOW, THEREFORE, the parties hereby agree as follows:

          1.   Defined Terms. (a) Unless otherwise defined herein, capitalized
               ------- -----
terms used in this Guarantee shall have the meanings assigned to them in Annex A
to the Participation Agreement.

          (b) As used herein, "Obligations" means the collective reference to
                               -----------
all obligations and liabilities of Transferee Investor to the Guaranteed
Parties, whether direct or indirect, absolute or contingent, due or to become
due, or now existing or hereafter incurred, which may arise under, out of, or in
connection with, the Operative Documents or any other document made, delivered
or given in connection therewith, in each case whether on account of principal,
interest, reimbursement obligations, fees, indemnities, costs, expenses or
otherwise (including, without limitation, all fees and disbursements of counsel
to the Guaranteed Parties that are required to be paid by Transferee Investor or
the Guarantor pursuant to the terms of this Agreement or the Operative
Documents).

          (c) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Guarantee shall refer to this Guarantee as a whole and
not to any particular provision of this Guarantee, and section and paragraph
references are to this Guarantee unless otherwise specified.

                                       43
<PAGE>

          (d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.

          2.   Guarantee. (a) The Guarantor hereby unconditionally and
               ---------
irrevocably guarantees to the Guaranteed Parties and their respective
successors, endorsees, transferees and assigns, the prompt and complete payment
and performance by Transferee Investor when due (whether at the stated maturity,
by acceleration or otherwise) of the Obligations.

          (b) The Guarantor further agrees to pay any and all expenses
(including, without limitation, all fees and disbursements of counsel) which may
be paid or incurred by the Guaranteed Parties in enforcing, or obtaining advice
of counsel in respect of, any rights with respect to, or collecting, any or all
of the Obligations and/or enforcing any rights with respect to, or collecting
against, the Guarantor under this Guarantee.

          (c) No payment or payments made by Transferee Investor or any other
Person or received or collected by the Guaranteed Parties from Transferee
Investor or any other Person by virtue of any action or proceeding or any set-
off or appropriation or application, at any time or from time to time, in
reduction of or in payment of the Obligations shall be deemed to modify, reduce,
release or otherwise affect the liability of the Guarantor hereunder which
shall, notwithstanding any such payment or payments (other than payments made by
the Guarantor in respect of the Obligations or payments received or collected
from the Guarantor in respect of the Obligations), remain liable for the
Obligations until the Obligations are paid in full.

          (d) The Guarantor agrees that whenever, at any time, or from time to
time, it shall make any payment to the Guaranteed Parties on account of its
liability hereunder, it will notify such Guaranteed Parties in writing that such
payment is made under this Guarantee for such purpose.

          3.   No Subrogation. Notwithstanding any payment or payments made by
               --------------
the Guarantor hereunder, or any set-off or application of funds of the Guarantor
by the Guaranteed Parties, the Guarantor shall not be entitled to be subrogated
to any of the rights of the Guaranteed Parties against Transferee Investor or
against any collateral security or guarantee or right of offset held by the
Guaranteed Parties for the payment of the Obligations, nor shall the Guarantor
seek or be entitled to seek any contribution or reimbursement from Transferee
Investor in respect of payments made by the Guarantor hereunder, until all
amounts owing to the Guaranteed Parties by Transferee Investor on account of the
Obligations are paid in full. If any amount shall be paid to the Guarantor on
account of such subrogation rights at any time when all of the Obligations shall
not have been paid in full, such amount shall be held by the Guarantor in trust
for the Guaranteed Parties, segregated from other funds of the Guarantor, and
shall, forthwith upon receipt by the Guarantor, be turned over to the Guaranteed
Parties in the exact form received by the Guarantor (duly indorsed by the
Guarantor to the Guaranteed Parties, if required), to be applied against the
Obligations, whether matured or unmatured, in such order as the Guaranteed
Parties may determine.

          4.   Amendments, etc. with respect to the Obligations; Waiver of
               -----------------------------------------------------------
Rights.  The Guarantor shall remain obligated hereunder notwithstanding that,
------
without any reservation of

                                       44
<PAGE>

rights against the Guarantor, and without notice to or further assent by the
Guarantor, any demand for payment of any of the Obligations made by the
Guaranteed Parties may be rescinded by such Guaranteed Parties, and any of the
Obligations continued, and the Obligations, or the liability of any other party
upon or for any part thereof, or any collateral security or guarantee therefor
or right of offset with respect thereto, may, from time to time, in whole or in
part, be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by the Guaranteed Parties, and the Operative Documents
and any other documents executed and delivered in connection therewith may be
amended, modified, supplemented or terminated, in whole or in part, as the
Guaranteed Parties may deem advisable from time to time, and any guarantee or
right of offset at any time held by the Guaranteed Parties for the payment of
the Obligations may be sold, exchanged, waived, surrendered or released. The
Guaranteed Parties shall not have any obligation to protect, secure, perfect or
insure any Lien at any time held by them as security for the Obligations or for
this Guarantee or any property subject thereto. When making any demand hereunder
against the Guarantor, the Guaranteed Parties may, but shall be under no
obligation to, make a similar demand on Transferee Investor or any other
guarantor, and any failure by the Guaranteed Parties to make any such demand or
to collect any payments from Transferee Investor or any such other guarantor or
any release of Transferee Investor or such other guarantor shall not relieve the
Guarantor of its obligations or liabilities hereunder, and shall not impair or
affect the rights and remedies, express or implied, or as a matter of law, of
any Guaranteed Parties against the Guarantor. For the purposes hereof "demand"
shall include the commencement and continuance of any legal proceedings.

          5.   Guarantee Absolute and Unconditional.  The Guarantor waives any
               ------------------------------------
and all notice of the creation, renewal, extension or accrual of any of the
Obligations and notice of or proof of reliance of any Guaranteed Party upon this
Guarantee or acceptance of this Guarantee; the Obligations, and any of them,
shall conclusively be deemed to have been created, contracted or incurred, or
renewed, extended, amended or waived, in reliance upon this Guarantee; and all
dealings between Transferee Investor or the Guarantor, on the one hand, and the
Guaranteed Parties, on the other, shall likewise be conclusively presumed to
have been had or consummated in reliance upon this Guarantee. The Guarantor
waives diligence, presentment, protest, demand for payment and notice of default
or nonpayment to or upon Transferee Investor or the Guarantor with respect to
the Obligations. This Guarantee shall be construed as a continuing, absolute and
unconditional guarantee of payment without regard to (a) the validity,
regularity or enforceability of the Participation Agreement or any other
Operative Document, any of the Obligations or any other collateral security
therefor or guarantee or right of offset with respect thereto at any time or
from time to time held by the Guaranteed Parties, (b) any defense, set-off or
counterclaim (other than a defense of payment or performance) which may at any
time be available to or be asserted by Transferee Investor against the
Guaranteed Parties, or (c) any other circumstance whatsoever (with or without
notice to or knowledge of Transferee Investor or the Guarantor) which
constitutes, or might be construed to constitute, an equitable or legal
discharge of Transferee Investor for the Obligations, or of the Guarantor under
this Guarantee, in bankruptcy or in any other instance. When pursuing their
rights and remedies hereunder against the Guarantor, the Guaranteed Parties may,
but shall be under no obligation to, pursue such rights and remedies as they may
have against Transferee Investor or any other Person or against any collateral
security or guarantee for the Obligations or any right of offset with respect
thereto, and any failure by the

                                       45
<PAGE>

Guaranteed Parties to pursue such other rights or remedies or to collect any
payments from Transferee Investor or any such other Person or to realize upon
any such collateral security or guarantee or to exercise any such right of
offset, or any release of Transferee Investor or any such other Person or of any
such collateral security, guarantee or right of offset, shall not relieve the
Guarantor of any liability hereunder, and shall not impair or affect the rights
and remedies, whether express, implied or available as a matter of law, of the
Guaranteed Parties against the Guarantor. This Guarantee shall remain in full
force and effect and be binding in accordance with and to the extent of its
terms upon the Guarantor and its successors and assigns thereof, and shall inure
to the benefit of the Guaranteed Parties, and their respective successors,
endorsees, transferees and assigns, until all the Obligations and the
obligations of the Guarantor under this Guarantee shall have been satisfied by
payment in full.

          6.   Reinstatement.  This Guarantee shall continue to be effective, or
               -------------
be reinstated, as the case may be, if at any time payment, or any part thereof,
of any of the Obligations is rescinded or must otherwise be restored or returned
by the Guaranteed Parties upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of Transferee Investor or upon or as a result of
the appointment of a receiver, intervenor or conservator of, or trustee or
similar officer for, Transferee Investor or any substantial part of its
property, or otherwise, all as though such payments had not been made.

          7.   Representations and Warranties.  The Guarantor represents and
               ------------------------------
warrants to the Guaranteed Parties that:

          (a) the Guarantor is a [corporation] duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation and
has the corporate power and authority and the legal right to own and operate its
property, to lease the property it operates and to conduct the business in which
it is currently engaged,

          (b) the Guarantor has the corporate power and authority and the legal
right to execute and deliver, and to perform its obligations under, this
Guarantee, and has taken all necessary corporate action to authorize its
execution, delivery and performance of this Guarantee;

          (c) this Guarantee constitutes a legal, valid and binding obligation
of the Guarantor enforceable in accordance with its terms, except as affected by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting the enforcement of creditors' rights
generally, general equitable principles and an implied covenant of good faith
and fair dealing;

          (d) the execution, delivery and performance of this Guarantee will not
violate any provision of any Requirement of Law or Contractual Obligation of the
Guarantor and will not result in or require the creation or imposition of any
Lien on any of the properties or revenues of the Guarantor pursuant to any
Requirement of Law or Contractual Obligation of the Guarantor;

          (e) no consent or authorization of, filing with, or other act by or in
respect of, any arbitrator or Governmental Authority and no consent of any other
Person (including, without

                                       46
<PAGE>

limitation, any stockholder or creditor of the Guarantor) is required in
connection with the execution, delivery, performance, validity or enforceability
of this Guarantee; and

          (f) no litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the knowledge of the
Guarantor, threatened by or against the Guarantor or against any of its
properties or revenues with respect to this Guarantee or any of the transactions
contemplated hereby.

          8.   Notices. All notices, requests and demands to or upon the
               -------
Guaranteed Parties or the Guarantor to be effective shall be in writing (or by
telex, fax or similar electronic transfer confirmed in writing) and shall be
deemed to have been duly given or made (a) when delivered by hand or (b) if
given by mail, when deposited in the mails by certified mail, return receipt
requested, or (c) if by telex, fax or similar electronic transfer, when sent and
receipt has been confirmed, addressed as follows:

          (a) if to the Guaranteed Parties, at their addresses or transmission
numbers for notices provided in the Participation Agreement; and

          (b) if to the Guarantor, at its address or transmission number for
notices set forth under its signature below.

          The Guaranteed Parties and the Guarantor may change its address and
transmission numbers for notices by notice in the manner provided in this
Section.

          9.   Severability.  Any provision of this Guarantee which is
               ------------
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.

          10.  Integration This Guarantee represents the agreement of the
               -----------
Guarantor with respect to the subject matter hereof and there are no promises or
representations by the Guaranteed Parties relative to the subject matter hereof
not reflected herein.

          11.  Amendments in Writing: No Waiver: Cumulative Remedies. (a) None
               -----------------------------------------------------
of the terms or provisions of this Guarantee may be waived, amended,
supplemented or otherwise modified except by a written instrument executed by
the Guarantor and the Guaranteed Parties, provided that any provision of this
                                          --------
Guarantee may be waived by the Guaranteed Parties in a letter or agreement
executed by the Guaranteed Parties or by telex or facsimile transmission from
the Guaranteed Parties.

          (b) No Guaranteed Party shall by any act (except by a written
instrument pursuant to paragraph 12(a) hereof), delay, indulgence, omission or
otherwise be deemed to have waived any right or remedy hereunder or to have
acquiesced in any breach of any of the terms and conditions hereof. No failure
to exercise, nor any delay in exercising, on the part of the Guaranteed Parties,
any right, power or privilege hereunder shall operate as a waiver thereof. No
single or partial exercise of any right, power or privilege hereunder shall
preclude any other or

                                       47
<PAGE>

further exercise thereof or the exercise of any other right, power or privilege.
A waiver by the Guaranteed Parties of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which such
Guaranteed Parties would otherwise have on any future occasion.

          (c) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.

          12.  Section Headings.  The section headings used in this Guarantee
               ----------------
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof.

          13.  Successors and Assigns.  This Guarantee shall be binding upon the
               ----------------------
successors and assigns of the Guarantor and shall inure to the benefit of the
Guaranteed Parties and their successors and assigns.

          14.  Governing Law.  This Guarantee shall be governed by the laws of
               -------------
the State of New York.

          IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be
duly executed and delivered by its duly authorized officer as of the day and
year first above written.

                              [INVESTOR PARENT]

                              By:
                                  -----------------------------
                                  Name:
                                  Title:

                              Address for Notices:
                              -------------------

                              --------------------------------

                              --------------------------------
                              Telephone:
                                         ---------------------
                              Facsimile:
                                         ---------------------

                                       48

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