July 23, 2002 Minutes

Eleven of the nineteen members were present representing a quorum (there are two vacancies):

Bryant, Anne

Gumper, Frank - Vice Chair

Buller, Karen

Hess, Kevin - by telephone

Campbell, Anne

Lubin, Joel - Vice Chair

Cornell, Diane

Parrino, Cheryl

Davis, Fr. Bill

Talbott, Dr. Brian

Eichler, Ed - Treasurer

Three members join the meeting in progress:

Coltharp, James

Rivera, Robert

Swanson-Hull, Camie - by telephone

Three members were absent:

Jackson, Jimmy - Secretary

Sanders, Dr. Jay

Lineberry, Isiah

Officers of the Corporation present:

Barash, D. Scott - Assistant Secretary; Vice President & General Counsel

Blackwell, Mel - VP, External Communications & Rural Health Care Division

Carmichael, Mark - Assistant Treasurer; VP, Finance & Financial Operations

Flannery, Irene - VP, High Cost & Low Income Division

Haga, Robert - VP, Strategic Planning & USAC Operations

McDonald, George - VP, Schools & Libraries Division

Others present for the meeting:

Name

Company

Cheng, Anita

FCC

Conn, David

McLeodUSA, Inc.

Faunce, Donna

USAC

French, Laurie

USAC

Gallant, Pam

USAC

Jortner, Wayne

Maine Public Advocate Office

Kaplan, Peter

Funds for Learning

Howard, Cathy

USAC

Lenhardt, Chris

USAC

Majcher, Karen

USAC

Miller, Linda

USAC

Scott, Wayne

USAC

a7.

Miscellaneous.

• Election of Two Directors to the USAC Board of Directors and Appointments of the Directors to Committees of the Board. Mr. Gumper announced that USAC received a letter from FCC Chairman Powell on July 17, 2002, appointing two new members to the USAC Board of Directors to fill the vacancies created by the resignations of Mr. Billy Jack Gregg (formerly the state consumer advocate representative) and Mr. Daniel Gonzalez (formerly the competitive local exchange carrier representative). Mr. Gumper noted that the new Board members are required to serve on certain committees of the Board in accordance with USAC's By-laws. Mr. Gumper asked the Board to take this item up as the first order of business so that the two new Board members could immediately become voting members of the Board.

  On a motion duly made and seconded, the Board adopted the following resolution:

  RESOLVED, That the USAC Board of Directors accepts the recommendation of the Executive Committee, and with the nomination made by the FCC Chairman and in accordance with USAC's corporate By-laws, and due to the resignation of Board member Mr. Billy Jack Gregg, hereby elects Mr. Wayne R. Jortner to the USAC Board of Directors, whose term shall begin immediately and expire on December 31, 2004; and

  RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the Executive Committee, and with the nomination made by the FCC Chairman and in accordance with USAC's corporate By-laws, and due to the resignation of Board member Mr. Daniel Gonzalez, hereby elects Mr. David R. Conn to the USAC Board of Directors, whose term shall begin immediately and expire on December 31, 2002; and

  RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the Executive Committee, and in accordance with USAC's corporate By-laws hereby appoints Mr. Wayne R. Jortner and Mr. David R. Conn to the High Cost & Low Income Committee as the state consumer advocate representative and competitive local exchange carrier representative, respectively; and

  RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the Executive Committee, and in accordance with USAC's corporate By-laws hereby appoints Mr. Wayne R. Jortner to the Rural Health Care Committee as the state consumer advocate representative.

  
  

Mr. Conn and Mr. Jortner joined the meeting as voting Board members at this point. Board member Ms. Swanson-Hull also joined the meeting at this point.

a1.

Approval of the Minutes. On a motion duly made and seconded, the Board approved the minutes as distributed of the meetings of Tuesday, April 23, 2002, and Monday, June 10, 2002.

Board member Mr. Rivera joined the meeting during the discussion of the next item.

a2.

Reports from the Committee Chairs. Each of the Chairs of the programmatic Committees reported on the issues discussed and the action taken at their July 2002 quarterly Committee meetings, respectively: Dr. Talbott - Schools & Libraries Committee; Mr. Eichler - High Cost & Low Income Committee; Mr. Blackwell (on behalf of Dr. Sanders) - Rural Health Care Committee; and Mr. Gumper - Executive Committee. Mr. Blackwell distributed a summary of respondents' comments to the FCC Notice of Proposed Rulemaking (NPRM) released on April 19, 2002, seeking comments on a variety of changes to the Rural Health Care Support Mechanism. See the minutes of each Committee meeting for a full accounting of the discussions and actions taken by the Committees.

a3.

Approval of the Course of Action for Entering into a New Contract for the Rural Health Care and the Schools and Libraries Support Mechanisms Programmatic Support Services - Confidential & Proprietary - Executive Session. In accordance with the approved criteria and procedure for conducting USAC Board and Committee business in Executive Session, Mr. Barash explained that USAC management recommends that this matter be discussed in Executive Session because discussion and public disclosure at this time of the matters discussed in this paper, which relate to USAC's procurement strategy, would compromise USAC's business negotiation strategy to the detriment of the Corporation and the Universal Service Support Mechanisms. Moreover, he said that to the extent that these matters relate to the interpretation of contractual terms and conditions, discussion of these issues in open session would compromise USAC's attorney-client privilege.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, That the USAC Board of Directors determines that discussion of a strategy for contracting for programmatic support services for the Rural Health Care and the Schools and Libraries Support Mechanisms for years after June 30, 2003, shall be conducted in Executive Session.

See Executive Session for a report of the discussion and action taken by the Board concerning this item.

a4.

Approval of Universal Service Contributor Revenue Data Collection Contract - Confidential & Proprietary - Executive Session. In accordance with the approved criteria and procedure for conducting USAC Board and Committee business in Executive Session, Mr. Barash explained that USAC management recommends that this matter be discussed in Executive Session because discussion of this matter, which relates to USAC's procurement strategy and contract negotiations, and public disclosure of the matters discussed in this paper would compromise USAC's negotiation strategy to the detriment of the corporation and the Universal Service Fund. Moreover, he said that certain matters discussed in this document implicate the attorney-client privilege and, therefore, should not be discussed in open session.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, That the USAC Board of Directors determines that discussion of extending its agreement with the National Exchange Carrier Association, Inc., (NECA) to perform the universal service contributor revenue data collection for a one-year term shall be conducted in Executive Session.

See Executive Session for a report of the discussion and action taken concerning this item.

Board member Mr. Coltharp joined the meeting during the discussion of the next item.

a5.

Approval of 4th Quarter 2002 USAC Common and Consolidated Budgets and Revised Annual 2002 Consolidated Budget. Mr. Carmichael reviewed the 4th Quarter 2002 budget and revised annual 2002 consolidated budget. He noted that staff is recommending a decrease in the annual budget of $560,000 due to the elimination of the $900,000 contingency to re-code the High Cost Model and the addition of $340,000 to accommodate increased forms volume for the Rural Health Care support mechanism. Mr. Carmichael also mentioned that costs have increased for outside counsel, but that compensation and benefits expenses that were not incurred in the first and second quarters will be used to offset those costs. A Board member questioned the almost doubled increase in rent for fourth quarter 2002. Ms. Parrino explained that USAC is now at full staff and has outgrown the current office space in Washington, DC. She said that a team of USAC staff has been formed to find a new location and they hope to find something before the end of the year. Ms. Parrino clarified that the increase in rent takes into account increased square footage as well as an estimated increase in the cost per square foot and build-out costs for work that may need to be done to the new location.

On a motion duly made and seconded, the Board adopted the following resolutions:

RESOLVED, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee to approve a 4th Quarter 2002 USAC common budget of $1,519,500; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee to approve a 4th Quarter 2002 USAC consolidated budget of $13,045,900; and

RESOLVED FURTHER, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee to approve a decrease of $560,000 in the annual 2002 consolidated budget due to budget revisions in the High Cost and Rural Health Care Support Mechanisms annual programmatic budgets, resulting in a revised total annual consolidated budget of $47,699,600.

a6.

Approval of 4th Quarter 2002 Revenue Projections and Resolutions for the September 1, 2002, FCC Filing. Mr. Carmichael explained that since the due date for the contribution base is a Sunday this quarter (September 1, 2002), USAC staff will submit the contribution base filing on Friday, August 30, 2002. He said that staff continues to use a rolling four-quarter average to determine the contribution base estimate for Board approval. He also noted that as required by the recent FCC order concerning the Schools and Libraries Support Mechanism, unused Funding Years 1999 and 2000 funds will be used to stabilize the collection requirement for fourth quarter 2002 and first quarter 2003. The following documents were distributed at the meeting: Revised Attachment B reflecting updated numbers; Attachment D, which contains historical trend reports; and a revised resolution reflecting language the USAC Executive Committee recommends adding.

The Board DIRECTED USAC staff going forward to include in Attachment B how the calculation of the quarterly contribution factor is derived.

On a motion duly made and seconded, the Board adopted the following resolution as amended (in italics):

RESOLVED, That the USAC Board of Directors, having reviewed at its meeting on July 23, 2002, a summary of the current status of the September 1, 2002, FCC filing requirements, accepts the recommendation of the USAC Executive Committee to authorize staff to proceed with the required September 1, 2002, filing to the FCC on behalf of USAC using a preliminary estimate of $19,487,555,000 for the contribution base. Staff may make adjustments in accordance with the approved $1.25 billion variance threshold.

a7.

Miscellaneous.

• Corporate Governance. Mr. Gumper explained that in light of the recent highly publicized corporate scandals as well as the fact that there are many new USAC Board members, he and the USAC Leadership Team believe it would be appropriate for the Board to review and discuss corporate governance principles and objectives. Ms. Parrino outlined two main objectives of the discussion. First, to present an overview of USAC's corporate structure and the unique aspects of its governance and to review general corporate governance issues and fiduciary obligations of Board members and officers. Second, Ms. Parrino seeks guidance from the Board on an appropriate level of oversight by the Board over USAC and on the amount and level of detail presented to the Board.

  Ms. Parrino and Mr. Barash reviewed the fiduciary responsibilities of USAC's directors and officers to the corporation. Mr. Barash stated that corporate law generally, and Delaware law in particular, has recognized that corporate directors have certain fiduciary obligations to the corporation they serve. Although these duties are sometimes stated in different ways, they are, in principle and in practice, overlapping, reinforcing, and cumulative, representing an integrated set of responsibilities to the well-being and success of the corporation. The Duty of Care requires a director to participate in the decisions of the Board and to be informed as to data relevant to such decisions: the director should be reasonably informed to participate in decisions and to do so in good faith and with the care of an ordinarily prudent person in similar circumstances. Mr. Barash noted that with the Duty of Care comes a corresponding protection-the Business Judgment Rule, which holds that courts will not interfere with directors' exercise of business judgment as long as it is exercised in good faith and there is no fraud or illegal misconduct at issue. Mr. Barash discussed the Duty of Oversight, noting that although it is really a subset of the Duty of Care, a more recent trend is to impose a specific duty of oversight on directors. He stated his view that we are likely to see that trend become even stronger in light of current events. Mr. Barash also discussed the Duty of Loyalty, which requires directors to exercise their powers in good faith in the best interests of the company-not in the best interests of the individual director or his employer. Moreover, he advised that the Duty of Loyalty requires directors to disclose and avoid conflicts of interest, noting that the USAC Board of Directors has adopted a Statement of Ethical Conduct that specifically addresses conflicts of interest in light of the unique representative nature of USAC's Board. Further, he discussed the Duty of Confidentiality, stating that although this is really a subset of the Duty of Loyalty, corporate law is beginning to recognize a separate Duty of Confidentiality, which means that a director must not disclose information about the corporation's legitimate activities unless they are already known by the public or are of public record.

  Ms. Parrino and Mr. Barash commented on how the unique nature of USAC affects the exercise of those fiduciary duties and the overall governance of the corporation. In addition, they discussed the unique constraints on the USAC Board of Directors. Ms. Parrino noted a few of the many unique constraints on the USAC Board of Directors. She pointed out that USAC does not nominate or select it own directors or the CEO, does not have final control over its investment policies, and does not have final approval of the corporate budget. She stated that ultimately, the USAC Board has an overarching, cumulative set of obligations and is constrained in ways that differ significantly from most boards of directors.

  In light of the request by Mr. Gumper and Ms. Parrino for legal advice concerning the fiduciary obligations of USAC's directors and in accordance with the approved criteria and procedure for conducting USAC Board and Committee business in Executive Session, Mr. Barash recommended that further discussion of this issue involving specific legal advice on corporate governance and fiduciary duties be discussed in Executive Session in order to preserve USAC's attorney-client privilege.

  On a motion duly made and seconded, the Board adopted the following resolution:

  RESOLVED, That the USAC Board of Directors determines that discussion of specific legal advice regarding corporate governance shall be conducted in Executive Session.

  See Executive Session for a report of this discussion.
  

i1.

Assistant Treasurer's Report. Mr. Carmichael reported that as of May 31, 2002, USAC had disbursed $2.014 billion in universal service support. As mentioned in item #a6 above, he reiterated that unused Funding Years 1999 and 2000 Schools and Libraries support mechanism funds will be used to stabilize the collection requirement for fourth quarter 2002 and first quarter 2003, thus the cash balance will decrease. Mr. Eichler, USAC Treasurer, informed the Board that the May quarterly Investment Committee meeting was held in Chicago at LaSalle Bank, which provided an excellent opportunity for him and other USAC staff to meet with USAC's financial services vendor representatives and tour their facilities and operations.

i2.

Report on Accounts Receivable Delinquent Over 30 Days and Collection Efforts. Mr. Carmichael reported that staff has provided a new metric for measuring delinquent accounts in the report: "Days Sales Outstanding" - the number of days it takes to collect outstanding accounts receivable. He noted that USAC's numbers are representative of the economy and market place and match other industry trends. He verified that WorldCom, a substantial contributor to the Universal Service Fund, which may imminently seek federal bankruptcy protection, is current in its payments to USAC, and that currently we have no reason to believe that WorldCom will not continue to meet its universal service obligations. Concerning collection efforts, Mr. Carmichael said that in benchmarking USAC against other industry sectors, USAC is doing extremely well in collecting accounts receivable. USAC staff is working with the FCC on how to move bad debts from USAC's books to the Department of Treasury so that the government can more aggressively pursue collections.

The Board DIRECTED USAC staff to provide additional data on the total amount billed versus total amount owed by industry type, if possible.

i3.

Report on Pending Litigation and Bankruptcy Matters. For information only. No discussion held.

i4.

USAC Internal Audit Status Report on USAC Audits. Mr. Scott reviewed the audits currently in progress and the plans for anticipated audits. He especially noted that a request for proposals has been issued for the 2002 independent financial audit and agreed upon procedures review for which the USAC Executive Committee at its July 18, 2002, meeting authorized the filing of the audit plan with the FCC, and that the Board will be required to meet sometime in September to approve the engagement of an auditor.

Ms. Barash said that USAC staff has confidential updates on an ongoing beneficiary audit investigation and on a pre-decisional audit matter under consideration by the FCC. In accordance with the guidelines regarding Executive Session approved by the USAC Board of Directors, he recommended that because there is an ongoing investigation regarding a beneficiary review, and because of the sensitivity of the potential allegations and the potential for enforcement action, discussion of the matter concerning one beneficiary should be held in Executive Session. Mr. Barash recommended that the audit matter under consideration by the FCC also be discussed in Executive Session because it relates to pre-decisional matters pending before the FCC to which USAC is privy.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, That the USAC Board of Directors determines that discussion of the specific ongoing investigation of a Schools and Libraries Support Mechanism beneficiary and of a pre-decisional audit matter under consideration by the FCC be conducted in Executive Session.

See Executive Session for a report of these discussions.

i5.

Report of Legislative and Media Activity. Mr. Blackwell noted that the Senate Commerce Committee held a hearing in June 2002 on the future of the Universal Service Fund (USF). The comments and questions centered on how the USF should be funded.

i6.

Outreach Plan and Report. Mr. Blackwell reported that since its inception, USAC staff has engaged in a variety of outreach activities for the various support mechanisms. USAC staff determined that it was time to coordinate these efforts and thus a consolidated Outreach Plan was developed. Each division will be responsible for implementing specific portions of the plan, but they are now centrally coordinated to better utilize and track USAC's outreach efforts. Mr. Blackwell said copies of the Outreach Plan are available for any Board member interested in reviewing the document.

i7.

Regulatory Report. For information only. No discussion held.

i8.

Disposition of Administrator Appeals by USAC Staff. For information only. No discussion held.

i9.

Status of Transition to PricewaterhouseCoopers and LaSalle Bank for Financial Support Services for USAC. For information only. No discussion held.

i10.

USAC Timeline and Key Dates. For information only. No discussion held.

i11.

Miscellaneous. None.

i12.

High Cost and Low Income Support Mechanisms Update. For information only. No discussion held.

i13.

Report on the Implementation of the Interstate Common Line Support Mechanism (ICLS). For information only. No discussion held.

i14.

Report on Pending Litigation and Bankruptcy Matters. For information only. No discussion held.

i15.

Review of 4th Quarter 2002 High Cost and Low Income Support Mechanisms Projections and Resolution on the August 2, 2002, FCC Filing. For information only. No discussion held.

i16.

Rural Health Care Support Mechanism Update. For information only. No discussion held.

i17.

Review of 4th Quarter 2002 and Revised Annual 2002 Rural Health Care Programmatic Budgets. For information only. No discussion held.

i18.

Review of 4th Quarter 2002 Rural Health Care Support Mechanism Projections and Resolution on the August 2, 2002, FCC Filing. For information only. No discussion held.

i19.

Schools and Libraries Support Mechanism Update. For information only. No discussion held.

i20.

Review of the 4th Quarter 2002 Schools and Libraries Programmatic Budget. For information only. No discussion held.

i21.

Review of 4th Quarter 2002 Schools and Libraries Support Mechanism Projections and Resolution on the August 2, 2002, FCC Filing. For information only. No discussion held.

Thirteen of the nineteen members were present representing a quorum:

Bryant, Anne

Jortner, Wayne

Campbell, Anne

Lubin, Joel

Coltharp, James

Parrino, Cheryl

Conn, David

Rivera, Robert

Davis, Fr. Bill

Swanson-Hull, Camie - by telephone

Talbott, Dr. Brian

Hess, Kevin

Three members join the meeting in progress:

Buller, Karen

Lineberry, Isiah - by telephone

Eichler, Ed

Three members were absent:

Cornell, Diane

Sanders, Dr. Jay

Jackson, Jimmy

a3.

Approval of the Course of Action for Entering into a New Contract for the Rural Health Care and the Schools and Libraries Support Mechanisms Programmatic Support Services - Confidential & Proprietary - Executive Session. Mr. McDonald and Mr. Blackwell reviewed the details and strategy concerning the contract for programmatic support services for the Rural Health Care and the Schools and Libraries Universal Service Support Mechanisms. Ms. Parrino reported that the USAC Executive Committee discussed this issue so that the Chairs of the programmatic committees would have a sense of the Executive Committee's view of the proposed course of action, but the Executive Committee did not act on this issue. However, both the Rural Health Care and Schools & Libraries Committees recommend the course of action before the Board.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, That the USAC Board of Directors accepts the recommendations of the Rural Health Care and the Schools & Libraries Committees to authorize USAC staff to enter into negotiations concerning a proposed extension of the current contract for programmatic support services for the Rural Health Care and the Schools and Libraries Universal Service Support Mechanisms.

a4.

Approval of Universal Service Contributor Revenue Data Collection Contract - Confidential & Proprietary - Executive Session. Mr. Carmichael discussed the history of the current contract with NECA and the details of the proposed revised contracting and bidding schedule for support services for the universal service contributor revenue data collection.

On a motion duly made and seconded, the Board adopted the following resolution:

RESOLVED, That the USAC Board of Directors accepts the recommendation of the USAC Executive Committee and approves the revised contracting and bidding schedule for support services associated with universal service contributor revenue data collection, and approves extending the current contract or entering into a new contract with the National Exchange Carrier Association, Inc. to perform those services.

a7.

Miscellaneous.

• Corporate Governance. Mr. Parrino and Mr. Barash discussed corporate governance, providing the Board with specific legal advice on the Board members' duties and responsibilities and solicited ideas of how USAC staff can help the Board best perform those duties and responsibilities. Mr. Barash also provided legal advice concerning the requirements of the Statement of Ethical Conduct approved by the Board.

  In addition, Ms. Parrino and Mr. Barash discussed other additional issues. As a counterpoint to the discussion of fiduciary duties held earlier in the meeting, Mr. Barash highlighted Board member rights, noting that in order to exercise the Duties of Care and Oversight in an effective manner, Board members have the right of access to corporate management, the right to access corporate books and records, the right to seek legal or other professional advice concerning a particular matter, the right to bring any matter to the Board for consideration, and the right of a director to act in reliance on information received from regular sources whom the director reasonably regards as trustworthy. Ms. Parrino discussed the role of directors to exercise oversight and control of corporate operations as opposed to managing the day-to-day affairs of the corporation. She solicited Board input on whether the level of information currently being provided to the Board enabled members to exercise appropriate oversight. The Board members expressed satisfaction with the current level of information being provided. Mr. Barash reminded the Board that any member has the right to request more specific information regarding any matter. Finally, Ms. Parrino noted that staff is reviewing the Audit Committee Charter approved by the Executive Committee (in its capacity as the Audit Committee) in July 2001 in light of the hiring of a Director of Internal Audit and recent events involving other corporations.

  
  

i4.

USAC Internal Audit Status Report on USAC Audits. Mr. Barash briefed the Board on the status of an ongoing investigation of a Schools and Libraries Support Mechanism beneficiary. Ms. Parrino informed the Board of an audit matter under consideration by the FCC regarding the support mechanisms.