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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from __________ to __________
Commission file number 33-7841
FiberNet Telecom Group, Inc.
(Name of Small Business Issuer in Its Charter)
Nevada 13-3859938
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
121 Erie Canal Drive, Suite A, Rochester, NY 14626
(Address of Principal Executive Offices) (Zip Code)
(716) 225-0440
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definite proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Registrant's revenues for its most recent fiscal year: $ 0.00
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, was $76,875,000 as of April 6, 1998.
The number of shares outstanding of each of issuer's classes of common
equity, as of December 31, 1997, was 15,000,000 shares of Common Stock,
$.001 par value.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (check one):
Yes X No ___
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PART I
THIS ANNUAL REPORT ON FORM 10-KSB (THE "ANNUAL REPORT") CONTAINS
CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, (THE "EXCHANGE ACT"), INCLUDING
STATEMENTS THAT INDICATE WHAT THE COMPANY "BELIEVES", "EXPECTS" AND
"ANTICIPATES" OR SIMILAR EXPRESSIONS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE OF THIS ANNUAL REPORT. THERE CAN BE NO ASSURANCE THAT THE
FORWARD LOOKING INFORMATION CONTAINED HEREIN WILL IN FACT TRANSPIRE. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ITEM 1. DESCRIPTION OF BUSINESS.
Reorganization
FiberNet Telecom Group, Inc. ("FiberNet Telecom Group," formerly
known as Desert Native Design, Inc.) was incorporated under the laws of the
State of Nevada on July 20, 1995. On November 24, 1997, FiberNet Telecom, Inc.
("FiberNet") merged with and into a wholly-owned subsidiary of Desert Native
Design, Inc. ("DND Sub") pursuant to which FiberNet became a wholly owned
subsidiary of FiberNet Group.
Prior to the merger, Desert Native Design, Inc. had no active
business operations.
BUSINESS OVERVIEW
Introduction
FiberNet Telecom Group, Inc. (the "Company") is a holding company
that conducts substantially all of its business through its direct and indirect
subsidiaries, including FiberNet. FiberNet, the wholly-owned subsidiary of the
Company, is a management company organized to develop new ventures within the
telecommunications industry arising from what management believes is the need
for greater capacity due to the growth of the Internet and data communications
and the favorable regulatory environment created by the Telecommunications Act
of 1996.
FiberNet is an early stage development company dedicated to
delivering integrated telecommunications products and services in tier-one major
metropolitan service areas (MSA's) throughout the United States. To diversify
its revenue stream, FiberNet manages two operating subsidiaries, FiberNet Equal
Access, LLC and Local Fiber, LLC. Both subsidiaries are New York limited
liability companies.
FiberNet Equal Access, LLC ("Equal Access") specializes in designing,
building, and operating intra-building fiber optic transmission networks and
plans to lease digital bandwidth circuits to telecommunications providers.
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Local Fiber, LLC ("Local Fiber") is a Competitive Local Exchange Carrier
(CLEC) which plans to provide competitive local telecommunications service as an
alternative to the local exchange carriers ("the phone company").
FiberNet has one hundred percent (100%) ownership of Equal Access and
ninety percent (90%) ownership of Local Fiber with the other ten percent (10%)
ownership held by MetroMedia Network, Inc. (formerly known as National Fiber
Network, Inc.).
FiberNet has not to date generated any revenues. Successful implementation
of its business plan, as described herein, will depend upon many factors,
including the ability to raise financing.
FIBERNET EQUAL ACCESS, LLC
Equal Access is committed to providing high-bandwidth fully-fiber
intra-building networks. Management believes this commitment is unique in the
telecommunications industry.
Overview. Management believes Equal Access will become the "Premier
Building Transmission Provider" by creating in-building high-speed,
high-capacity fiber optic networks, which it links to existing external fiber
optic networks thus, delivering a high-speed, seamless link between users and
the data and voice information they are sending and receiving. These services
will be leased on a flat rate monthly fee basis, in addition to an installation
charge, at a DS-0, DS-1, and DS-3 circuit level.
Management believes Equal Access' 100% fiber intra-building network,
called a Premise Distribution System (PDS), efficiently supports the increased
flow of information that has outgrown the transmission capabilities of
copper-wire systems. A PDS will connect various types of voice, data, and video
communication devices, switching equipment and information management systems
together, and to external fiber optic networks. Equal Access' PDS provides the
critical links between tenants, the building and carrier networks necessary for
100% fiber optic connectivity and virtual throughput.
Equal Access intends to focus on delivering PDS technology to Class A
(averaging 1,000,000 square feet) commercial office buildings. Management
believes that Equal Access is currently the only company developing,
implementing and managing intra-building networks consisting of 100%
fully-redundant fiber optics.
Over the next 5 years Equal Access expects to construct 370 PDS systems
throughout major metropolitan areas in the United States. Management expects
that this increased demand for PDS in the next few years will result from the
increasing number of carriers competing with Regional Bell Operating Companies
(RBOC) on a national level.
Equal Access Business Strategy. Equal Access' business strategy will focus
on securing exclusive license agreements from building owners/managers in their
buildings. Equal Access requires each building owner/manager to provide a
minimum eight year exclusive licensing agreement. The exclusive portion of the
license agreement provides Equal Access the right and ability to resell and/or
lease intra-building transport capacity to third parties. In exchange for these
agreements each building owner receives a redundant state of the art fiber optic
telecommunications network at no cost as well as a percentage share of the
revenues generated by Equal Access in their building.
Network Interface Equipment Room. Equal Access will build a 1,000 to 1,500
square foot Network Interface Equipment Room in the basement of each building.
This is the collocation facility within a building
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that interconnects the carriers' networks to Equal Access' intra-building
network. Within this space, Equal Access will provide secure caged floor space
with direct fiber connectivity to make carrier utilization easy and consistent.
Benefits. Equal Access' fiber optic voice and data network will benefit
telecommunications service providers (carriers), building tenants and the
property owners.
Carrier Benefits. The PDS will allow carriers to share telecommunications
equipment and fiber routes inside the building, providing significant economies
of scale. Management expects the PDS to virtually eliminate the need for
carriers to go through extensive provisioning and build-outs for each tenant.
The PDS requires no capital investment and carriers pay on an "as-needed" basis
for the services and network. Further, management anticipates carriers will
realize savings from the cost-based, non-discriminatory pricing. In addition,
carriers will not face building access problems. By dealing directly with Equal
Access, management anticipates the carriers' need to negotiate directly with
building owners to be significantly reduced. Lastly, management believes Equal
Access will dramatically improve the carriers' time-to-market, reducing delays
which can typically run up to 120 days. Management believes intra-building fiber
optic connections are faster, better, and cheaper than current copper or hybrid
systems, and offer virtually unlimited expandability.
Building Owner Benefits. Management expects building owners to benefit
tremendously from the PDS. First, the existing telecommunications systems
(copper wires) in their buildings will be upgraded to a state-of-the-art
redundant fiber system without any capital investment. Second, since Equal
Access offers revenue sharing, it may become an additional profit center to the
building. Third, management believes that buildings with PDS will represent a
powerful incentive for attracting and maintaining tenants. Fourth, because the
management of the system is outsourced, the owner will not need to establish an
in-house team of technicians. Fifth, since the PDS is efficient in the space it
utilizes, the owner will not have to sacrifice square footage. Sixth, the PDS is
a complete system rather than multiple carrier systems which can clog up risers
and telecommunications closets. Finally, rather than spending time and effort
each time a tenant requests approval, the owner will only have to approve the
construction plans once. Carriers needing access can then work directly with
Equal Access.
Tenant Benefits. Management believes tenants will benefit from their
connection to multiple carriers via a high capacity fiber optic network. As a
result, tenants will have immediate and competitively priced access to enhanced
high-speed, faultless transmission of voice, data, and fax communications. In
addition, tenants may choose among a variety of different carriers.
Strategic Partners. Equal Access has established strategic alliances and
credibility with major building owners and developers which have been leveraged
to gain long-term building contracts. Equal Access has executed agreements with
two (2) building owners covering three (3) properties in New York City and is in
the process of negotiating with two other building owners covering an additional
four (4) buildings. These building owners also control an additional twenty-nine
(29) properties in New York, which Equal Access expects to complete contracts
with upon the successful completion of the initial buildings. Equal Access
expects to begin construction on the initial buildings in 1998.
Construction Costs. Management estimates the cost, subject to financing,
to complete the installation and development of selected PDS systems in its
phase one plan to be approximately $4 million. An additional $18 million will be
required to complete the additional thirty buildings in its phase two plan. The
capital will be used for the purchase of transmission equipment, fiber and
copper cable, the construction of a network interface equipment room in each
building.
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LOCAL FIBER, LLC
Overview. Management believes Local Fiber will be the first
facilities-based carrier to offer an end-to-end, 100% fiber network in buildings
that it connects to PDS systems installed by its sister subsidiary, Equal
Access. As a result, management believes Local Fiber will become the "Next
Generation CLEC". In Manhattan, the company plans to install a new digital
switching and Synchronized Optical Network (SONET) transmission platform that
interconnects with an existing, 384-mile dark fiber network. Local Fiber
operates out of a 13,000 square foot switching facility at 60 Hudson Street,
which will house its state-of-the-art 5ESS-2000 switch.
Local Fiber's advanced network, and switching architecture allow it to
provide a broad array of services and products:
-Carrier Link Services to Business Customers: Dedicated products, hub
collocation, inter-building transport and carrier access services, including
special access, dedicated access, switched originating access, switched
terminating access.
-Local Link Services: Switched products include Local voice line (POTS),
Centrex, ISDN basic & primary, Direct inward & outward dialing.
-"Feature Group" Options: Voice mail, three-way calling, call-forwarding,
call waiting, distinctive ringing, metered business calling.
-"Extended and long distance service" Services: IntraLATA toll, long
distance toll, 800 and 888 service, calling card service.
Business Strategy. Local Fiber will initially focus on wholesale
application targeted to CLECs as an alternative entry to market. The company
provides switched local telecommunications and long distance services, focusing
on buildings already "on-net" with Equal Access. Over the next five years,
management anticipates generating additional sales by selling to off-net
customers though Bell Atlantic and other RBOCs as Local Fiber expands its
capabilities to include enhanced data and Internet access services to businesses
in key MSAs. These include Los Angeles, Chicago, San Francisco, Philadelphia,
Boston, Detroit, Dallas Washington and Houston.
Benefits. Local Fiber's unique market niche, broad industry experience and
expertise allow it to offer significant benefits to potential customers:
Capacity and Reliability. Management believes Local Fiber's 100%
fiber optic SONET network delivers greater capacity, quality and reliability.
The self-healing fiber architecture consists of diversely routed cables so that
a cut or break will not affect service.
State-of-the-art switch. Local Fiber deploys a highly distributed
switching architecture by using digital communication links connected to the
host switch (Lucent 5ESS-2000). This sophisticated switch enables Local Fiber to
provide a full range of services, including all types of calls (local exchange,
long distance, Centrex services and ISDN) to multiple carriers and end-user
customers. Local Fiber's bundling approach and distributive switching
architecture represent a cost-effective alternative to current local exchange
companies.
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Comprehensive service offerings. Local Fiber will provide advanced
fiber optic technology directly to each floor of the buildings it serves through
its vertical marketing integration strategy with its subsidiary Equal Access,
with comprehensive services such as on-site repairs and maintenance, and
customized solutions.
Bundled local and long distance services: Customers will be provided
with "One Simple Bill" that contains feature rich transport and switch-based
products, as well as long distance services.
State-of-the-Art Network. Through an arrangement with Metromedia, a 10%
owner of Local Fiber, Local Fiber owns the indefeasible right of use of eight
strands of the Metromedia's 48 mile dark fiber network for an initial term of 12
years with a 15 year renewal option at Local Fiber's request, at no cost.
Management expects that this significant cost advantage over competitors will
allow Local Fiber to provide lower costs for their customers. Combined with
Equal Access' intra-building networks, FiberNet is able to provide 100%
end-to-end fiber to customers.
Seamless Interconnection. Local Fiber has executed its first
interconnection and co-carrier agreement with Bell Atlantic, and is currently in
negotiations with other CLECs and long distance carriers in New York City. This
provides seamless interconnection between Local Fiber's network and other
carriers. Local Fiber will negotiate similar agreements in other markets with
the incumbent Regional Bell Operating Company and Local Exchange Carrier.
Fortunately, most state Public Service Commissions have allowed for
interconnection/collocation arrangements and have unbundled services so Local
Fiber may purchase the services and facilities necessary to complete its
network.
Network Operations Center. Both Equal Access and Local Fiber will utilize
the Network Operations Center for remote provisioning and fault management.
The Network Operations Center (NOC) will be a 24-hour, 365 days-per-year,
technology center. The NOC will be responsible for real-time network
surveillance, remote rearrangement of circuits and database maintenance for all
wiring address and assignment records. In addition, all billing, provisioning
and fault management routines will be performed here. The NOC will be
strategically located in a 15,000 square foot facility in Rochester, New York
which will enable Equal Access to take advantage of Rochester's large technical
labor force. In addition, the round the clock remote monitoring will ensure that
all network components in all 10 markets are working at top efficiency and
security, at all times.
The NOC will be equipped with the following state-of-the-art technology:
* Lucent NOC1
- Allows for real-time network surveillance and alarming
* Lucent SNC Interface & Provisioning
- Provides provisioning of all SONET network elements
- Graphical user interface for alarm reporting and status
display
* Metasolv
- electronic order processing
- trouble ticketing
- circuit inventory
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* Macrologic Billing Control
- Financial reporting
- Payment/account information
- Billing parameters (rates/tax)
Market Opportunities. Management believes significant factors such as
industry growth, regulatory changes and the obsolescence of current copper
networks have combined to create excellent opportunity for FiberNet and its
subsidiaries. Management expects the industry to growth substantially over the
next decade.
Competition. Equal Access has a limited number of competitors, including
RBOCs (which own most of the in-building copper networks, but have cables with
limited broadband capabilities. Currently, however, the company's customer base
can choose from a selection of indirect competitive alternatives. Management
believes Equal Access' redundant fiber optic network will be more
technologically advanced compared to existing systems offered by competitors.
Local Fiber is in competition with incumbent LECs, CLECs and IXCs.
However, Local Fiber can better compete due to several advantages:
-FiberNet's end-to-end technology provides customers with fiber
technology that originates at the Local Fiber fiber loop, and connects directly
to the customer premise in buildings equipped with Equal Access' PDS
infrastructure. The result is the unparalleled capacity, quality and reliability
of a 100% fiber network.
-Local Fiber can reach customers at a lower cost than its
competitors. This advantage is predicated on FiberNet's indefeasible right of
use (IRU) agreement with Metromedia, which provides the company with a dark
fiber backbone throughout Manhattan at no cost.
Business Experience. FiberNet is an experienced (CAP) Competitive Access
Provider, deriving much of its expertise in the telecommunications, electronics,
and communications industries from its predecessor companies: FiberNet, Inc. and
FiberNet USA, Inc. (owned primarily by Petrocelli Industries Inc., an investment
company controlled by the Company's Chairman, Santo Petrocelli).
FiberNet, Inc. successfully designed, installed and operated competitive
access networks in three upstate New York markets (Albany, Buffalo, and
Rochester). These networks, covering approximately 500 route miles, were sold to
Metropolitan Fiber Systems (MFS) (later, WorldCom) in 1993. FiberNet USA, Inc.
built additional networks in Cincinnati (OH), Raleigh-Durham (NC), Huntsville
(AL), and St. Louis (MO) and merged with Intermedia Communications in 1995.
Expansion Costs. Local Fiber will require significant purchases of
equipment essential for the growth and operation of its business. Management
estimates Local Fiber will require approximately $9.3 million over the first
three years to purchase a local and long distance switch, electronics equipment,
DACS equipment, a network control center and monitoring equipment, fiber and
copper cable, construction, engineering, and installation.
Subsidiaries. The subsidiary structure of the Company is set forth in the
chart below.
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[CHART]
Federal Regulation. FiberNet intends to capitalize on the sweeping changes
that have dramatically altered the telecommunications industry. The new
regulatory changes have opened new markets and created new opportunities for
telecommunication companies.
The 1996 Telecommunications Act, which was enacted February 1996 (the
"Telcom Act") effected plenary changes in regulation at both the federal and
state levels that affect virtually every segment of the telecommunications
industry. The stated purpose of the Telcom Act is to promote competition in all
areas of telecommunications and to reduce unnecessary regulation in order to
secure lower prices and higher quality services for telecommunication consumers.
The Telcom Act enables FiberNet to: a) connect directly to RBOCs; b) take
advantage of lower, cost-based pricing; c) purchase individual network elements
on an "as-needed" basis; and d) resell network capacity and services on a
wholesale basis to carriers.
The Telcom Act also makes competitive entry into other services or
geographic markets more attractive to RBOCs, other ILECs and other companies,
and likely will increase the level of competition FiberNet faces. More and
diverse kinds of telecom providers will be pursuing customers and selling their
products and offerings to all market segments. However, telecommunications
users, residential and business customers can expect increased choices and
benefit from companies such as FiberNet.
Local Regulation. The Company is also subject to numerous local
regulations, such as building code requirements. These regulations may vary
greatly from state to state and city to city.
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Employees. As of December 31, 1997, the Company employed 8 people, of whom
2 provided operational, engineering and technical services and the balance were
engaged in administration and marketing. Management projects the number of
employees to increase to 35 over the next twelve months. The Company's employees
are not represented by any labor union. The Company considers its employee
relations to be good.
ITEM 2. DESCRIPTION OF PROPERTIES
The principal offices of FiberNet are located in approximately 2,000
square feet of space in Rochester, New York. FiberNet leases this space under an
agreement which expires March 1998, at a current annual base rental of
approximately $25,032, and has an option to renew the lease on a month to month
basis until the NOC is completed. FiberNet leases additional office space to
house the Network Operations Center in another location in Rochester, consisting
of approximately 15,000 square feet of space. FiberNet leases this space under
an agreement which expires in 2005, at a current annual base rental of
approximately $90,750.00. FiberNet is currently negotiating to occupy office
space at 570 Lexington Avenue in New York City.
Local Fiber has entered into an agreement to lease approximately
13,222 square feet of space to serve as the switch control site at 60 Hudson
Street in New York City for a term of ten (10) years and eight months, expiring
July 2008.
ITEM 3. LEGAL PROCEEDINGS
To the knowledge of management, there is no material litigation
pending or threatened against the Company or FiberNet which would have a
material adverse effect on the Company.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK
HOLDER MATTERS
The Company's common stock is currently eligible for quotation on the
NASD Electronic Bulletin Board under the symbol "FTGX". During the last two
years there has been no established public trading market for the Company's
common stock. The Company currently has 140 shareholders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The Company has had no commercial operations to date. Since it inception,
the Company has engaged principally in organizational activities, including
developing a strategic commitments to fund its plan. Accordingly, the Company
has no relevant operating history upon which an evaluation of its performance
and prospects can be made. The Company is subject to unforeseen capital
requirements, failure of market acceptance, failure to establish business
relationships, and competitive disadvantages as against larger and more
established companies.
The Company has generated no revenues to date, and will not generate any
meaningful revenues until after the Company successfully completes the
development and installation of the Equal Access Premise Telecommunication
Distribution Systems as well as the installation of Local Fiber's local and long
distance switch. Equal Access expects to begin construction on its initial six
contracted Local Fiber, the Company's CLEC subsidiary, plans on initially
reselling Bell Atlantic-NYNEX service in Manhattan beginning in June
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1998 to accelerate revenue and access line growth. Local Fiber expects to have
its switch and network operational by the fourth quarter 1998 at which time its
resale customers will be transferred to Local Fiber's facilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has to date financed its development effort through direct
equity investments from its shareholders. The Company has sustained losses in
the amount of $753,623 for the period from August 10, 1994 (date of inception)
of December 31, 1997. The Company had no revenues during this period, and
substantially all of such losses are attributable to the initial start-up costs.
The Company's planned operations will require significant capital to fund
equipment purchases, engineering costs, and installation. Local Fiber will spend
approximately $9 million over the next twelve months to purchase a local and
long distance switch, electronics equipment, DACS equipment, network control
center and monitoring equipment, fiber and copper cable, construction,
engineering, and installation. Equal Access has projected to complete
expenditures. The completion of these twelve buildings in 1998 and has budged
approximately $7 million in capital expenditures. The completion of these twelve
buildings is subject to the execution of additional contracts with building
owner/managers as well as securing additional financing commitments from a third
party lender. The capital will be used for the purchase and installation of
transmission equipment, fiber and copper cable, the construction of network
interface equipment rooms in the basements of each building and network
engineering.
Local Fiber and Equal Access have secured commitments for debt with a
major third party lender. Local Fiber has $9.9 million including capitalized
interest committed while Equal Access has $3.12 million including capitalized
interest committed for Phase I debt. Phase I will provide debt to cover
implementation of the Company's Premise Distribution System in the initial six
buildings. An additional $8.3 million will be reviewed for credit approval under
a separate credit facility in Phase II to complete up to an additional 30
buildings. Conditions precedent to Phase II funding will be successful
implementation of Phase I as contemplated in the Company's business plan.
Initial equity requirements for the businesses as required by its funded
business plan and its lender is $3.5 million, which includes $2.5 million for
Local Fiber, and $1 million for Phase I of Equal Access debt. The equity
requirement increases to $5 million with Equal Access Phase II debt. On November
24, 1997 the Company raised $5.075 million as a part of a one million share
Preferred Stock Private Placement to comply with these equity requirements and
to support working capital shortfalls.
The company expects to accelerate its growth and expand to 10 tier one
markets over the next five years which includes the deployment of switching and
transmission equipment as a CLEC through Local Fiber and the construction of
approximately 370 Premise Distribution Systems under Equal Access. The
combination of debt and equity that the company will have in place is expected
to satisfy cash requirements, under this expanded business plan, for the first
18 months of operation. However, if the Company's expansion occurs more rapidly
than currently anticipated or if operating results are below expectations, the
Company may require additional capital. The Company may decide to raise
additional capital before such time. The Company may secure additional funding
through the sale of public or private debt and/or equity securities. There can
be no assurance, however, that the Company will be successful in raising
sufficient additional capital on terms that would be acceptable.
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ITEM 7. FINANCIAL STATEMENTS
Audited balance sheets as of December 31, 1997 and June 30, 1997 and the
related statements of operations, cash flows and stockholders' equity for the
period from inception (August 10, 1994) to June 30, 1996, for the year ended
June 30, 1997, for the six months ended December 31, 1997 and 1996, and for the
period from inception to December 31, 1997 together with related notes and the
reports of Arthur Andersen LLP and Mendelsohn Kary Bell & Natoli, LLP,
independent auditors, appear on pages F-1 through F-15 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9. MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following tables set forth the directors and executive officers
of the Company as of December 31, 1997. Directors are elected for a period of
one year and thereafter serve until the next annual meeting at which their
successors are duly elected by the stockholders. Officers and other employees
serve at the will of the board of directors.
NAME AGE POSITIONS
- ---- --- ---------
Santo Petrocelli, Sr. 62 Chairman, President, Chief Executive Officer
and Director
Lawrence S. Polan 67 Vice President, Chief Financial Officer,
Secretary-Treasurer and Director
John J. Marchaesi 38 Vice President-Administration and Director
Kenneth Elias 50 Vice President-Sales and Operations
SANTO PETROCELLI, SR. served as Chairman, President, Chief Executive
Officer and a Director of Fibernet Telecom, Inc., and it's wholly owned
subsidiaries FiberNet Equal Access, LLC and Local Fiber LLC., since their
inception. Mr. Petrocelli is the President, Chief Executive Officer and a
Director of Petrocelli Electric Company, and Petrocelli Communications Company.
In addition, he controls Petrocelli Industries, Inc., and SMFS, Inc., investment
company's which have held controlling interests in several communications
ventures including FiberNet Telecom, Inc., FiberNet, Inc. and FiberNet USA, Inc.
Mr. Petrocelli was the former Chairman and Chief Executive Officer of FiberNet
Inc. and FiberNet USA, Inc. prior to their acquisition by MFS, now World Comm
and InterMedia Communications Inc. He has over 40 years experience in the
communications, electrical and telecommunications industry.
LAWRENCE S. POLAN is Vice President, Chief Financial Officer,
Secretary-Treasurer and a Director of FiberNet Telecom, Inc. and its
subsidiaries. Mr. Polan was a former Director of FiberNet, Inc. and FiberNet
USA, Inc. In addition, Mr. Polan is the Chief Financial Officer of Petrocelli
Electric Company and Petrocelli Communications Company. Prior to joining
Petrocelli Communications he was the Chief Financial
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Officer and Controller of Visa Resources, Inc. a New York Exchange Company with
over $250 Million in annual revenue. Mr. Polan holds a bachelors degree from St.
John's University.
JOHN J. MARCHAESI, CPA, is Vice President Administration and a
Director of FiberNet Telecom, Inc., and its subsidiaries. Mr. Marchaesi was the
Controller of FiberNet USA, Inc. Prior to joining FiberNet, he was a Senior
Manager-Internal Audit and Consulting with Associated Communications Corporation
and also the Controller of Cellular One/Albany Telephone Company. He has over
ten years experience in financial management within the telecommunications
industry. He holds an MBA from Rochester Institute of Technology and a Bachelor
of Science in Business Administration from SUNY, Oswego.
KENNETH ELIAS is Vice President of Sales and Marketing. Mr. Elias has
over 29 years in the telecommunications industry. Mr. Elias began his career at
NYNEX in 1969 and during his tenure he has held a variety of executive level
positions where he was responsible for product development, market growth and
sales operations. Mr. Elias has a Bachelor of Science from the Citadel.
There are currently no arrangements or understandings regarding the
length of time each director is to serve in such capacity except as otherwise
described herein.
ITEM 10. EXECUTIVE COMPENSATION
Neither the Company nor FiberNet has paid any significant
compensation to their management since inception. At such time as the entities
become fully operational, the Company and FiberNet expect to enter into
employment agreements with key executive personnel.
FiberNet entered into a one year employment agreement with Mr.
Kenneth Elias as of December 15, 1997. Mr. Elias' employment agreement provides
that he shall receive a base salary of $108,000 and bonuses at the discretion of
the Board of Directors.
THE STOCK PLAN
In November 1997, the Company adopted an employee equity
participation program (the "Stock Plan") covering 1,5000,000 shares of Common
Stock of the Company to attract, retain and reward employees. The Board of
Directors administers the Stock Plan. All employees are eligible to receive
awards under the Stock Plan, at the Board's discretion.
Options granted pursuant to the Stock Plan may be either nonqualified
options and/or incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended.
As of December 31, 1997, the Company had granted options under its
plan to current management and others covering approximately 600,000 shares at
an exercise price of $1.95 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of December 31, 1997 the beneficial
ownership of the Company's Common Stock by each director and nominee for
director of the Company, by each beneficial owner of more than five percent (5%)
of the Company's outstanding Common Stock (stated on a post-split basis), all
current directors of the Company as a group, and all nominees for directors, as
a group:
-12-
<PAGE> 13
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership of
Common Stock Prior to Common Stock After
November 24, 1997(1) Acquisition (2)(6)
------------------------------------------------------------
Percentage of Percentage of
Name of Beneficial Owner Shares Owned Class Shares Owned Class
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jody St. Clair (3)(5) 350,000 10% 350,000 2.7%
Lynn Dixon (3)(4)(5) 2,889,950 82.6% 2,889,950 22%
All current directors and
officers of the Company as a
group (1 person) 350,000 10% 350,000 2.7%
SMFS, Inc. (7)(8) -- -- 6,900,000 46%
LPS Consultants, Inc. (7)(8) -- -- 575,000 3.8%
LTJ Group, Inc.(7)(8) -- -- 4,025,000 26.8%
All proposed directors as a 7,475,000 49.8%
group (3 persons)
</TABLE>
(1) These numbers give effect to the DND Forward Split and are therefore
based on an aggregate of 3,500,000 shares of the Company's Common
Stock outstanding without giving effect to the other transactions
contemplated in the Acquisition.
(2) Based on an aggregate 15,000,000 shares of the Company's Common
Stock outstanding, giving effect to the Acquisition, the DND Forward
Split and related transactions.
(3) Mr. Dixon and Ms. St. Clair own outstanding Series A and Series B
Warrants which entitle the holders thereof to purchase Common Stock
of the Company under certain circumstances. The shares underlying
the warrants are not included in these numbers and Mr. Dixon and Ms.
St. Clair have agreed to cancel their warrants.
(4) This number includes shares held of record by a corporation
controlled by Mr. Dixon.
(5) Mr. Dixon and Ms. St. Clair intend to sell a significant portion of
these shares, at a price expected to be substantially below market,
after the consummation of the acquisition to persons not expected to
be affiliated with the Company or FiberNet, but which may include
purchasers of the Series A Preferred Stock. However, they have not
entered any written agreement in this regard. These shares will
constitute most of the outstanding free-trading stock of the Company
upon completion of the Acquisition.
(6) Upon consummation of the acquisition, the Company has outstanding
1,000,000 shares of Series A Preferred Stock convertible to Common
Stock in certain circumstances. None of the percentages set forth in
the table give effect to the possible conversion of such Preferred
Stock to Common Stock.
-13-
<PAGE> 14
(7) The shares are held of record by Santo Petrocelli, Sr., Lawrence S.
Polan and Joseph A. Tortoretti, respectively.
(8) As of November 24, 1997, the Company issued 80,000 shares of Series
B Voting Preferred Stock, which has 100 votes per share, to the
FiberNet Shareholders. Taking into account the 15,000,000 shares of
Common Stock to be outstanding, the 1,000,000 shares of Series A
Preferred Stock (which has 1 vote per share) and the 80,000 shares
of Series B Preferred Stock, Messrs. Petrocelli, Polan and
Tortoretti have the following voting rights: (a) Santo Petrocelli,
Sr. 11,700,000 (48.75%); (b) Lawrence S. Polan 975,000 votes (4.1%);
and (c) Joseph A. Tortoretti 6,825,000 (28.4%). As a group these
person have 19,450,000 votes out of 24,000,000 votes or 81%.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Santo Petrocelli, Sr., as Chairman, President and Chief Executive
Officer of FiberNet Telecom, Inc., is also President and Chief Executive Officer
of Petrocelli Electric Company, Petrocelli Communications Company, SMFS, Inc.
and Petrocelli Industries Incorporated. In addition, he is a director of
National Abatement Corporation. Petrocelli Industries Incorporated has provided
management, marketing and administrative services to the Company and its
affiliates.
Landtel Telecommunications Group, Inc. has provided engineering
services and network development and will be retained to provide future
consulting work for FiberNet Telecom, Inc. LTJ Group, Inc., a shareholder of the
Company and Landtel Telecommunications Group, Inc. are owned and or controlled
by the same parties.
The Company is obligated for payment of yearly management fees for
services rendered by Landtel Telecommunications Group, Inc. and Petrocelli
Industries Incorporated in the amount of $120,000.
Mr. Lawrence Polan, is a Vice President and Chief Financial Officer
for the FiberNet Telecom, Inc. He is also Vice President and Chief Financial
Officer for Petrocelli Electric Company, Petrocelli Communications Company and
Petrocelli Industries Incorporated. In addition, he controls LPS Consultants,
Inc.
The Company may have continuing relationships with the Petrocelli.
However, management believes that the terms and conditions of such dealings will
be fair and reasonable to the Company and based upon terms that would be no less
beneficial than could be negotiated with unrelated parties.
ITEM 13. EXHIBITS
*2.1 Agreement and Plan of Reorganization, filed November 26, 1997.
*3.1 Amendment to Articles of Incorporation of the Registrant, filed
November 24, 1997.
*4.1 Certificates of Designation creating Series A and Series B Preferred
Stock.
10.1 Limited Liability Company Operating Agreement of FiberNet Equal Access,
LLC.
10.2 Operating Agreement of Local Fiber, LLC.
10.3 License Agreement between National Fiber Network and Local Fiber, LLC
dated June 19, 1996.
-14-
<PAGE> 15
10.4 FiberNet Telecom Group, Inc. Employee Equity Participation Program
21.1 Subsidiaries of FiberNet Telecom Group, Inc.
27.1 Financial Data Schedule
* Incorporated by reference to the exhibit filed with Registrant's current
report on Form 8-K filed November 26, 1997.
-15-
<PAGE> 16
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
FIBERNET TELECOM GROUP, INC.
By: /s/ John J. Marchaesi
------------------------------------
Name: John J. Marchaesi
Title: Sr. Vice President Finance
and Administration
Date: April 13, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Frank Chiaino
------------------------------------
Name: Frank Chiaino(1)
Title: President and Chief Executive Officer
Date: April 13, 1998
By: /s/ Lawrence S. Polan
------------------------------------
Name: Lawrence S. Polan
Title: Vice President
Date: April 13, 1998
- ----------
(1) As of January 1, 1998, Frank Chiaino became President and Chief Executive
Officer of the Company
-16-
<PAGE> 17
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND JUNE 30, 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE> 18
FIBERNET TELECOM GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND JUNE 30, 1997
TABLE OF CONTENTS
Report of Independent Public Accountants................................... 1
Consolidated Balance Sheets................................................ 2
Consolidated Statements of Operations...................................... 3
Consolidated Statements of Stockholders' Equity ........................... 4
Consolidated Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements................................. 6-14
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FiberNet Telecom Group, Inc.:
We have audited the accompanying consolidated balance sheet of FiberNet Telecom
Group, Inc. (a corporation in the development stage - Note 1) and subsidiaries
as of December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the six months then ended and for the
period from inception (August 10, 1994) to December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FiberNet Telecom Group, Inc. and subsidiaries as of December 31, 1997, the
results of their operations and cash flows for the six months then ended and for
the period from inception (August 10, 1994) to December 31,1997, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
March 16, 1998
-1-
<PAGE> 20
MENDELSOHN KARY BELL & NATOLI, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
1633 BROADWAY
NEW YORK, NY 10019
212 246-3220
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
FiberNet Telecom Inc. and Affiliated Entities
(A Development Stage Company)
We have audited the accompanying combined balance sheet of FiberNet Telecom
Inc. and Affiliated Entities (A Development Stage Company) as of June 30, 1997,
and the related combined statements of operations and accumulated deficit,
stockholders' equity and cash flows for the year then ended and for the period
from August 10, 1994 (inception), to June 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FiberNet Telecom Inc. and
Affiliated Entities as of June 30, 1997, and the results of its operations and
its cash flows for the year then ended and from August 10, 1994 (inception), to
June 30, 1997 in conformity with generally accepted accounting principles.
Mendelsohn Kary Bell & Natoli, P.C.
New York, New York
November 29, 1997
<PAGE> 21
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,652 $ 5,146,327
Other current assets 1,067 3,954
----------- -----------
Total current assets 2,719 5,150,281
Plant and equipment, net -- 92,223
Deferred charges 99,800 131,837
----------- -----------
TOTAL ASSETS $ 102,519 $ 5,374,341
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 338,480 $ 490,125
Accounts payable - related party 240,000
----------- -----------
Total current liabilities $ 338,480 $ 730,125
----------- -----------
Minority interest 5,304 (1,142)
Stockholders' Equity
Capital contributed 141,796 --
Common Stock, $0.001 par value, 50,000,000
shares authorized, 15,000,000 shares issued
and outstanding at December 31, 1997
-- 15,000
Series A Convertible Preferred Cumulative
Stock, $0.001 par value, 5,000,000 shares
authorized, 1,000,000 shares issued and
outstanding at December 31, 1997 (Preference
in involuntary liquidation value, $5.125 per
share)
-- 1,000
Series B voting Preferred Stock $0.001 par
value, 80,000 shares issued and outstanding
(Preference in involuntary liquidation value,
$1.00 per share)
-- 80
Capital in excess of par value -- 5,382,901
Deficit accumulated during the development
stage (383,061) (753,623)
----------- -----------
Total stockholders' equity $ (241,265) $ 4,645,358
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 102,519 $ 5,374,341
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-2-
<PAGE> 22
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1994) TO JUNE 30, 1996, FOR THE YEAR
ENDED JUNE 30, 1997, FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, AND
FOR THE PERIOD FROM INCEPTION TO DECEMBER 31,1997
<TABLE>
<CAPTION>
FOR THE PERIOD PERIOD FROM
FROM INCEPTION
INCEPTION (UNAUDITED) SIX MONTHS (AUGUST 10,
(AUGUST 10, SIX MONTHS ENDED ENDED 1994) TO
1994) TO YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31,
JUNE 30, 1996 JUNE 30, 1997 1996 1997 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cost and expenses:
General and administrative $ 9,387 $ 373,674 $ 79,308 $ 299,982 $ 683,043
Other - Related party -- -- -- 120,000 120,000
--------- --------- --------- --------- ---------
Loss from operations (9,387) (373,674) (79,308) (419,982) (803,043)
Interest income -- -- -- 26,180 26,180
--------- --------- --------- --------- ---------
Loss -- -- -- (393,802) (776,863)
Minority interest -- -- -- 23,240 23,240
--------- --------- --------- --------- ---------
Net loss $ (9,387) $(373,674) $ (79,308) $(370,562) $(753,623)
========= ========= ========= ========= =========
Accumulated deficit beginning -- (9,387) (9,387) (383,061)
Accumulated deficit ending (9,387) (383,061) (88,695) (753,623) (753,673)
--------- --------- --------- --------- ---------
Earning per share
Basic and diluted $ (0.001) $ (0.025) $ (0.005) $ (0.027) $ (0.050)
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-3-
<PAGE> 23
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN
PREFERRED STOCK COMMON STOCK EXCESS OF
SHARES AMOUNT SHARES AMOUNT PAR VALUE
--------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at August 10, 1994 -- -- -- -- --
Issuance of 240 shares of common stock for cash,
out of 1,000 shares authorized. August
10,1994, at $.001 per share -- -- 240 -- $ 61,000
Net (loss) for the period from inception to June
30, 1996 -- -- -- --
--------- --------- --------- --------- ----------
Balance at June 30, 1996 -- -- -- -- 61,000
Capital contribution -- -- -- -- 80,796
Net loss for the year ended June 30, 1997 -- -- -- --
--------- --------- --------- --------- ----------
Balance at June 30, 1997 -- -- -- -- 141,796
Capital contribution -- -- -- -- 212,348
Effect of reverse acquisition of DND (See Note
1), issuance of 15,000,000 share common
stock, 0.01 par value. November 24, 1997 -- -- 15,000,000 $ 15,000 (15,000)
Issuance of 1,000,000 shares Series A
Convertible Preferred Cumulative Stock,
$0.001 par value. November 24, 1997 1,000,000 $ 1,000 -- -- 5,074,000
Issuance of 80,000 shares Series B Preferred
Stock, 0.001 par value. November 24, 1997 80,000 80 -- -- (80)
Preferred Stock Dividend accrued during 1997 -- -- -- -- (30,163)
Net loss for the six-months ended December 31,
1997 -- -- -- --
--------- --------- ---------- --------- ----------
Balance at December 31, 1997 1,080,000 $ 1,080 15,000,000 $ 15,000 $5,382,901
========= ========= ========== ========= ==========
<CAPTION>
ACCUMULATED
DEFICIT DURING
THE
DEVELOPMENT
STAGE TOTAL
----------- -----------
<S> <C> <C>
Balance at August 10, 1994 -- --
Issuance of 240 shares of common stock for cash,
out of 1,000 shares authorized. August
10,1994, at $.001 per share -- $ 61,000
Net (loss) for the period from inception to June
30, 1996 $ (9,387) (9,387)
--------- ----------
Balance at June 30, 1996 (9,387) 51,613
Capital contribution -- 80,796
Net loss for the year ended June 30, 1997 (373,674) (373,674)
--------- ----------
Balance at June 30, 1997 (383,061) (241,265)
Capital contribution -- 212,348
Effect of reverse acquisition of DND (See Note
1), issuance of 15,000,000 share common
stock, 0.01 par value. November 24, 1997 -- --
Issuance of 1,000,000 shares Series A
Convertible Preferred Cumulative Stock,
$0.001 par value. November 24, 1997 -- 5,075,000
Issuance of 80,000 shares Series B Preferred
Stock, 0.001 par value. November 24, 1997 --
Preferred Stock Dividend accrued during 1997 -- (30,163)
Net loss for the six-months ended December 31,
1997 (370,562) (370,562)
--------- ----------
Balance at December 31, 1997 $(753,623) $4,645,358
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-4-
<PAGE> 24
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION (UNAUDITED) FROM INCEPTION
(AUGUST 10, SIX MONTHS FOR SIX MONTHS ON (AUGUST 10,
1994) TO JUNE ENDED ENDED 1994) THROUGH
30, 1996 YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31,
JUNE 30, 1997 1996 1997 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $ (9,387) $ (373,674) $ (79,308) $ (370,562) $ (753,623)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation -- -- -- 1,842 1,842
Amortization of deferred expenses -- 56,200 -- -- 56,200
Changes in assets and liabilities: -- -- -- -- --
Accrual of preferred stock dividend -- -- -- (30,163) (30,163)
(Increase) decrease in other assets (56,200) (1,067) 117,169 (34,924) (92,191)
Increase (decrease) in accounts payable 408 239,072 (45,042) 391,645 631,125
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities (65,179) (79,469) (7,181) (42,162) (186,810)
Cash flows from investing activities:
Other assets -- (800) -- -- (800)
Capital expenditures -- -- -- (94,065) (94,065)
----------- ----------- ----------- ----------- -----------
Cash used in investing activities -- (800) -- (94,065) (94,865)
Cash flows from financing activities:
Minority interest -- -- -- (6,446) (6,446)
Net proceeds for the issuance of preferred stock -- -- -- 5,075,000 5,075,000
Capital contributed 66,100 81,000 7,100 212,348 359,448
----------- ----------- ----------- ----------- -----------
Cash provided by financing activities 66,100 81,000 7,100 5,280,902 5,428,002
Net increase (decrease) in cash 921 731 (81) 5,144,675 5,146,327
Cash at beginning of period -- 921 921 1,652 --
----------- ----------- ----------- ----------- -----------
Cash at end of period $ 921 $ 1,652 $ 840 $ 5,146,327 $ 5,146,327
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-5-
<PAGE> 25
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
FiberNet Telecom, Inc. ("FiberNet" or the "Company") was organized
under the laws of the State of Delaware on August 10, 1994. On November
24, 1997, an existing public company, Desert Native Design ("DND") and
its subsidiary ("DND Sub"), acquired FiberNet, pursuant to an Agreement
and Plan of Merger dated that date (the "Merger"). To effect the
Merger, DND effectuated a 3.5 for 1 forward stock split, which entitled
DND shareholders to 3.5 shares of DND stock for every one share held by
them and issued 11,500,000 shares and 80,000 Series B Preferred Stock
in exchange for all of the outstanding shares of FiberNet. Upon
consummation of the Merger, FiberNet became a wholly-owned subsidiary
of DND, which subsequently changed its name to FiberNet Telecom Group,
Inc. For accounting purposes, the acquisition has been treated as a
recapitalization of DND with FiberNet as the acquirer (reverse
acquisition).
The Company is a development stage company and has not realized
revenues. It is an integrated provider of intra-building networks and
competitive local telecommunications services. Through its subsidiary
FiberNet Equal Access, LLC, the Company will build and own high-speed
redundant digital fiber optic transmission networks within major high
rise office buildings and lease bandwidth to carriers to provide
connections to tenants. The Company will provide facilities-based local
telecommunications carrier services through its subsidiary Local Fiber,
LLC, a competitive local exchange carrier (CLEC). FiberNet will enter
the New York city market in 1998 with plans to expand its operations
throughout the top metropolitan markets in the United States. The
developmental nature of the activities is such that inherent risks
exist in the Company's operations. Expenses incurred have primarily
been research and development, administrative and marketing costs.
After services have been successfully introduced into the market,
additional time may be necessary before significant revenues are
realized. During this time, the Company may require additional funds
that may not be available.
The Company has in force and is materially dependant on agreements with
other entities to provide access to networks and other carriers
facilities, access to buildings and experience to obtain permits and
meet regulatory requirements.
-6-
<PAGE> 26
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its majority owned subsidiaries,
FiberNet Telecom Inc., Local Fiber LLC, and FiberNet Equal
Access, LLC. All significant intercompany accounts and
transactions have been eliminated.
b) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumption that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of expenses during the reporting period. Actual
results could differ from those estimates.
c) Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with
an original maturity of three months or less. The carrying
amount approximates fair value because of the short maturity of
the instruments.
d) Deferred Charges
Deferred charges consist primarily of financing costs which
are amortized over the term of the related loan agreement.
e) Plant and Equipment
Plant and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are provided over
the estimated useful lives of the assets using the straight-line
method. The estimated lives are as follows:
Computer software 3 Years
Leasehold improvements 3 Years
Computer equipment 3 Years
Office Equipment 7 Years
Capitalized engineering costs, which are also included in this
account, will be amortized over the term of the related service
contracted, commencing once the Company initiates services.
Maintenance and repairs are charged to expense as incurred.
Long-term improvements are capitalized as additions to plant and
equipment.
-7-
<PAGE> 27
f) Earnings per Share
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard (SFAS) No.
128, "Earnings per Share" which requires companies to present
basic earnings per share and diluted earnings per share, instead
of the primary and fully diluted EPS that was required. In 1997,
the Company adopted SFAS No. 128, "Earnings per Share,"
effective December 15, 1997.
On November 24, 1997, the Company's Board of Directors approved
a three and a half for one stock split of its common stock. All
references in the Financial Statement and notes thereto included
in this Form 10-K report to the number of common shares and per
share amounts reflects the stock split and the effect of SFAS
128.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
DECEMBER 1997
-------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
---------- ---------- ----------
<S> <C> <C> <C>
Net loss $ (370,562) $
Less: Preferred stock dividends (30,163)
---------- ---------- ----------
Basic and diluted earnings per
share
Loss available to common
shareholders $ (400,725) 15,000,000 $ (0.027)
========== ========== ==========
</TABLE>
Since the loss per share decreases, when convertible preferred
shares and outstanding options are included in the computation,
those convertible preferred shares and options are antidilutive
and are ignored in the computation of diluted EPS.
As shown in the statement of operation, EPS is calculated
assuming shares outstanding as of December 31, 1997 have been
outstanding for all periods.
g. The Company follows Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (FAS 109), which requires
the use of the liability method of accounting for deferred
income taxes. Under this method, deferred income taxes represent
the net tax effect of temporary differences between tax carrying
amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.
-8-
<PAGE> 28
Additionally, if it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation
allowance is required to be recognized.
3. PLANT AND EQUIPMENT
Plant and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
----------- ----------
<S> <C> <C>
Computer software $ -- $ 2,661
Leasehold improvement -- 2,984
Computer equipment -- 10,134
Office equipment -- 15,536
Construction in progress -- 26,960
Capitalized engineering costs 35,790
----------- ----------
Accumulated depreciation -- (1,842)
----------- ----------
$ -- $ 92,223
=========== ==========
</TABLE>
4. DEFERRED CHARGES
Deferred charges consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
----------- ----------
<S> <C> <C>
Loan commitment fee
(See Note 5) $ 99,000 $ 129,000
Other 800 2,837
----------- ----------
$ 99,800 $ 131,837
=========== ==========
</TABLE>
-9-
<PAGE> 29
5. COMMITMENTS AND CONTINGENCIES
a) Credit Facilities - Local Fiber, LLC
On June 4, 1997, Local Fiber, LLC obtained a Credit Facility
commitment for project financing associated with its CLEC
operations in New York City, including the purchase and
installation of a Lucent 5ESS switch, electronic and network
construction. The Company will provide wholesale and retail
telecommunications services to telecommunications providers and
business customers. The availability of this Credit Facility is
subject to certain conditions, among which are the condition
that the Company's shareholders commit to fund $2,500,000 of
capital. It is also subject to the Company's ability to obtain
all municipal approvals, regulatory consents and permits as
required by the Federal Communication Commission, as well as
enter into interconnection agreements with at least two major
telecommunications carriers. In addition, the Company shall
obtain letters of intent for services for $83,000 in monthly
recurring revenue from customers. A commitment fee of $99,000
will be due on acceptance of the Credit Facility commitment. In
consideration of closing on the Credit Facility, the lender will
be issued warrants for the purchase of a 5% interest in Local
Fiber, LLC. As of December 31, 1997, no commitment fee has been
paid and no warrants were issued and outstanding.
b) Credit Facilities - FiberNet Equal Access, LLC
On July 28, 1997, FiberNet Equal Access, LLC obtained a Credit
Facility commitment for project financing in connection with the
purchase and installation of multiple high-speed redundant
digital fiber optic transmission networks. These networks will
provide unrestricted bandwidth for telephony, data, Internet,
and multimedia services within targeted high rise office
building initially in New York City. The availability of this
Credit Facility is subject to certain conditions among which are
the condition that the LLC's shareholders commit to fund
$1,000,000 of capital. It is also subject to the Company's
ability to obtain all municipal approvals, regulatory consents
and permits as required by the Federal Communication Commission
of New York. In addition, the Company shall enter into building
agreements with the owners of six buildings. A commitment fee of
$30,000 will be due on acceptance of the Credit Facility
commitment. In consideration of closing on the Credit Facility,
the lender will be issued warrants for the purchase of a 5%
interest in FiberNet Equal Access, LLC. As of December 31, 1997,
no commitment fee has been paid and no warrants were issued. In
addition, the Company has signed contracts with owners of seven
buildings.
-10-
<PAGE> 30
6. LEASE CONTRACT
The Company has a lease agreement for office space ending March 31,
1998. Future minimum rental payments for the three months ended March
31, 1998 will be $6,258.
For the six months ended December 31, 1997, rental expenses were
$8,334.
7. STOCK OPTIONS
On November 24, 1997, the Company established an Employee Equity
Participation Program. This plan provides that all employees are
eligible to receive Incentive Stock Options or Nonstatutory Stock
Options. This plan also provides that the purchase price of the
optioned stock must be fixed at not less than the fair market value of
the common stock as of the time the option is granted. In the case of
an optionee who beneficially owns more than ten percent of the
Company's outstanding shares as of the time the option is granted, the
purchase price of the optioned stock must be fixed at not less than
one-hundred and ten percent of the fair market value. Incentive Stock
Options may not be exercised after ten years after the date they were
granted or after five years in the case of an optionee who beneficially
owns more than ten percent of the Company's outstanding shares of
common stock. Options shall vest and become exercisable by the optionee
at the rate of 20% per year for five years.
The Company accounts for this program under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost
for this program been determined consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C> <C>
Net loss: As reported $370,562
Pro forma $387,225
Basic and diluted EPS As reported $ .027
Pro forma $ .028
</TABLE>
-11-
<PAGE> 31
Transactions during the six months ended December 31, 1997 involving
stock options are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OPTION
OF PRICE PER
SHARES SHARE
------ -----
<S> <C> <C>
Options outstanding at the
beginning of the period -- --
1997 granted 600,000 1.95
-------
Options outstanding December
31, 1997 600,000
-------
Exercisable at December 31, 1997 --
-------
Weighted average fair value of
options granted $1.37
-------
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997: risk-free
interest rates of 5.92%; expected dividend yields of 0%; expected lives
of 7 years and expected volatility of 86.1%.
On January 21, 1998, the Company granted 150,000 shares in a stock
option agreement to an official of the company. The exercise price of
the option was established at $1.95.
8. SUBSIDIARY'S WARRANTS
The Company's subsidiary, FiberNet Equal Access, LLC has issued a
warrant for the purchase of up to 10% of its membership interest.
Tishman, Speyer Properties, L.P. is entitled to acquire a limited
liability membership interest, at the exercise price of $25 per unit,
subject to certain terms and conditions, and with an exercise period of
three years from August 7, 1997.
9. PREFERRED SHARES
(a) Series A Convertible Cumulative Preferred Stock
As of November 24, 1997 the Company issued 1,000,000 shares
out of 5,000,000 shares authorized, at $5.125 per share for
gross proceeds of $5,075,000, net of issuance costs. The
Company or the holders of the outstanding shares may convert
them into common stock, at any time up to
-12-
<PAGE> 32
November 24, 2000. Each share of preferred stock shall be
converted into one share of common stock.
Dividend
The holders shall be entitled to receive, as and if declared by
the Board of Directors, annual cumulative dividends at the rate
of six percent based on a liquidation value of $5.125 per share.
Preferences on Liquidation
In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Company, the holders of shares
of the Series A Preferred Stock then outstanding, shall be
entitled to be paid, out of the assets of the Company available
for distribution to its stockholders, whether from capital,
surplus or earning, before any payment shall be made in respect
of the Company's common stock, an amount equal to $5.125 per
share, plus all accrued and unpaid dividends thereon to the date
fixed for distribution.
As of February 24, 1998, the Company paid the dividend to the
Series A convertible preferred cumulative stock for $75,000 and
converted all of the Series A convertible preferred stock into
common stock. As of December 31, 1997, $30,163 of this dividend
has been accrued in the financial statements.
(b) Series B Voting Preferred Stock
As of November 24, 1997 the Company issued 80,000 shares out of
5,000,000 shares authorized. Each share shall be entitled to
one-hundred votes to be voted at any meeting of shareholders.
In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the corporation, the holders of
shares of the Series B Voting Preferred Stock then outstanding,
shall be entitled to be paid, out of the assets of the Company
available for distribution to its stockholders, whether from
capital, surplus or earning, before any payment shall be made in
respect of the Company 's Common Stock, but after payment to
holders of Series A Preferred Stock, an amount equal to $1 per
share.
10. RELATED PARTY TRANSACTIONS
The Company incurred consulting services from shareholders for
$120,000, for the six-months ended December 31, 1997.
-13-
<PAGE> 33
11. INCOME TAXES
The Company is subject to New York state and local taxes, as well as
federal income taxes. As of December 31, 1997, the Company had
cumulative expenses relating to new business development costs of
approximately $750,000 that are not currently deductible for income
taxes. Full valuation allowances have been recorded for the deferred
tax assets related to this temporary difference.
12. EMPLOYMENT CONTRACTS
The Company has various employment contracts with key executive
employees. The total compensation under these contracts for 1998 and
the future years is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1999 2000
<S> <C> <C> <C>
$583,000 $360,000 $360,000
======== ======== ========
</TABLE>
13. MINORITY INTEREST
The ownership of Local Fiber, LLC is divided into Class A Members
owning 90% and Class B Members owning 10%. The Class A Members have
requested that Class B Members entered into a License Agreement with
the Company, and as an inducement therefore, the Class A Members (pro
rata among themselves) have made an initial capital contribution in the
name and on behalf of Class B Members' name. The 10% ownership of Class
B Member cannot be diluted until Local Fiber has completed a public
offering.
-14-
<PAGE> 1
LIMITED LIABILITY COMPANY
OPERATING AGREEMENT
OF
FIBERNET EQUAL ACCESS, L.L.C.
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS.............................1
1.1 Reference to Statute.......................................1
1.2 Majority...................................................1
ARTICLE II
FORMATION..............................1
2.1 Date Filed.................................................1
2.2 Name.......................................................2
2.3 Purpose....................................................2
2.4 Principal Place of Business................................2
2.5 Agents.....................................................2
2.6 Dissolution Date...........................................2
ARTICLE III
MEMBERS / MANAGERS..........................2
3.1 Management Vested in Members...............................2
3.2 Two Classes of Membership Interest.........................2
3.3 Voting In New Members......................................2
3.4 Books and Records..........................................3
3.5 Inspection of Books and Records............................3
3.6 Liability of Members.......................................3
3.7 Sale or Transfer of Assets.................................3
3.8 Election of Managers; Powers and Liabilities...............3
3.9 Right to Transfer Membership Interest......................5
3.10 Notice of Proposed Transfer................................5
3.11 Withdrawal of Member.......................................5
ARTICLE IV
MEETINGS...............................6
4.1 Annual and Special Meetings................................6
4.2 Notice of Meetings.........................................6
4.3 Quorum.....................................................6
4.4 Vote by Proxy..............................................6
4.5 Consents in Writing........................................7
4.6 Effectiveness of Written Consents..........................7
4.7 Voting Trusts..............................................7
-i-
<PAGE> 3
Page
----
ARTICLE V
MONEY MATTERS............................7
5.1 Capital Contributions......................................7
5.2 Member Capital Accounts....................................7
5.3 Maintenance of Capital Accounts............................8
5.4 Priority of Distributions..................................8
5.5 Unlawful Distributions.....................................8
5.6 Payment of Debts before Distribution.......................9
5.7 Allocation of Profits, Losses, Credits and Distributions...9
5.8 Tax Allocations: Section 704(c) of the Internal Revenue
Code .....................................................10
5.9 No Right to Interest or Return of Capital Contribution....10
5.10 Tax Returns...............................................10
5.11 Internal Revenue Code Elections...........................10
5.12 Prohibition on Subchapter K Exclusion.....................11
5.13 Designation of Tax Matters Partner........................11
ARTICLE VI
DISSOLUTION............................11
6.1 Events Causing Dissolution................................11
6.2 Winding up the Affairs of the Company.....................12
6.3 Distribution of Assets Upon Dissolution...................12
6.4 Filing of Certificate of Dissolution......................12
6.5 Effect on Capital Accounts................................12
6.6 Return of Capital Contribution............................13
ARTICLE VII
GENERAL CONSTRUCTION........................13
7.1 Genders...................................................13
7.2 Waiver of Rights and Remedies.............................13
7.3 Entire Agreement..........................................13
7.4 Notice....................................................13
SCHEDULE A: Membership Interests in FiberNet Equal Access, L.L.C.
SCHEDULE B: Management of FiberNet Equal Access, L.L.C.
-ii-
<PAGE> 4
OPERATING AGREEMENT
This Operating Agreement, dated as of December 16, 1996, by and between
the undersigned members, is hereby adopted as the written operating agreement
("Operating Agreement") of FiberNet Equal Access, L.L.C. ("Company").
WHEREAS, this agreement does not contain any provisions inconsistent with
the Articles of Organization of the Company, and
WHEREAS, the members wish to set forth provisions relating to the business
of the Company, the conduct of its affairs and the rights, powers, preferences,
limitations or responsibilities of its members, managers, employees or agents,
as the case may be,
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the undersigned agree as follows:
ARTICLE I
DEFINITIONS
1.1 Reference to Statute. Words and phrases set forth within this
Operating Agreement which relate to the business of the Company or the conduct
of its affairs or the rights, powers, preferences, limitations or
responsibilities of its members, managers, employees or agents, as the case may
be, or to any matter which the Company is required to do or has done under
mandate of law or the fulfillment of this Operating Agreement, which are not
defined in this Operating Agreement, shall be defined as they have been defined
in Section 102 of the New York Limited Liability Company Law ("NYLLC Law") or in
other applicable statutes or rulings.
1.2 Majority means, with respect to a class of Membership Interest, a
majority of the interest in that class. A "Two-Thirds Majority" of a class means
at least two-thirds of the interest in that class.
ARTICLE II
FORMATION
2.1 Date Filed. The undersigned have authorized the formation of the
Company by an organizer who prepared, executed and filed with the New York
Secretary of State, the Articles of Organization pursuant to the NYLLC Law, on
the 16th day of December, 1997.
<PAGE> 5
2.2 Name. The name of the Company is FiberNet Equal Access, L.L.C.
2.3 Purpose. The Company is formed for the business of conducting and
developing premises telecommunications systems and any other lawful business
purpose and shall have all the powers set forth in Sections 202(a) - 202(q) of
the NYLLC Law.
2.4 Principal Place of Business. The principal place of business of the
Company shall be located in the County of New York, New York.
2.5 Agents. The Secretary of State of New York is designated as agent of
the Company upon whom process against it may be served, and the post office
address to which the Secretary of State shall mail a copy of such process
against the Company served upon the Secretary of State is: Florence C.
Petrocelli, Esq., 217 Broadway. Suite 404, New York, New York 10007.
2.6 Dissolution Date. The Company shall dissolve on December 31, 2016,
unless sooner dissolved pursuant to this Agreement or pursuant to the provisions
of the NYLLC Law.
ARTICLE III
MEMBERS / MANAGERS
3.1 Management Vested in Members. Unless specifically set forth otherwise
in the Articles of Organization or by amendment thereto, management of the
Company shall be vested in the members of the Company ("Members"), who shall be
subject to all of the rights, duties, privileges and liabilities of managers, as
set forth in the NYLLC Law. The names and addresses of such Members and the
interests held by them are set forth in Schedule A to this Operating Agreement.
3.2 One Class of Membership Interest. There shall be one class of interest
in the Company ("Membership Interest").
3.3 Voting In New Members. The vote of a Majority of the Membership
Interest shall be required to admit a person as a new Member and issue such
person a Membership Interest in the Company. Such new Member shall not be
entitled to any retroactive allocation of income or losses, or taxable
deductions heretofore incurred by the Company.
3.4 Books and Records. The Company shall keep books and records pursuant
to Section 1102 of the NYLLC Law, either in written form or in other than
written form if easily converted into such written form within a reasonable
time. Such books and records
-2-
<PAGE> 6
shall be maintained on a cash basis pursuant to this Operating Agreement and the
accounting year of the Company shall end on December 31.
3.5 Inspection of Books and Records. Each Member may inspect and copy, at
his or her own expense, for any purpose reasonably related to such Member's
interest as a Member, the Articles of Organization, the Operating Agreement,
minutes of any meeting of Members and all tax returns or financial statements of
the Company for the three years immediately preceding such inspection, and other
information regarding the affairs of the Company as is just and reasonable.
3.6 Liability of Members. No Member shall be personally liable for any
debts, obligations or liabilities of the Company or of any other Member, solely
by reason of being a Member of the Company, whether such debt arose in contract,
tort or otherwise. However, such Member shall be personally liable for the
payment of his or her capital contribution, as required by Section 5.1, or for
any other matter which may be set forth in this Operating Agreement. A Member
shall have the option to waive such limitation of liability pursuant to Section
609 of the NYLLC Law and may be legally liable pursuant to other applicable law
in his or her capacity as a Member.
3.7 Sale or Transfer of Assets. The vote of a Two-Thirds Majority of the
Membership Interest shall be required to approve the sale, exchange, lease,
mortgage, pledge or other transfer or disposition of all or substantially all of
the assets of the Company.
3.8 Election of Managers; Powers and Liabilities. The management of the
Company shall be vested in one or more Members acting in the capacity of
managers ("Managers"), in accordance with the NYLLC Law, the Articles of
Organization and the Operating Agreement. The initial Managers and the offices
held by them shall be as set forth in Schedule B to this Operating Agreement.
(a) The names and addresses of the Managers are set forth in the
books and records of the Company. The salary of the Managers shall be
fixed by the vote or written consent of a Majority of the Membership
Interest. Such salary as Manager shall be separate and distinct from any
distributions made to the Manager as a Member.
(b) Managers shall be elected by vote or written consent of a
Majority of the Voting Interest. The number of Managers may be amended by
vote or written consent of a Two-Thirds Majority of the Membership
Interest.
-3-
<PAGE> 7
(c) A Manager shall hold office until the next annual meeting of
Members or until his or her earlier resignation or removal. Any Manager
may resign at any time by the giving of written notice thereof to the
Company, provided, however, that there is no violation of any provision of
the Operating Agreement or any provision of a contractual agreement
between the Company and the Manager. The Manager may be removed with or
without cause by a vote of a Majority of the Membership Interest. The
removal or resignation of a Manager who is a Member does not affect in any
way such Manager's rights, duties, privileges and obligations as a Member,
nor does it constitute withdrawal as a Member.
(d) Any vacancy occurring in the number of Managers may be filled by
vote or written consent of a Majority of the Membership Interest. Such
newly elected Manager shall be elected to serve the unexpired term of the
predecessor Manager. If the number of Managers is increased by amendment
to this Operating Agreement, then the additional Managers shall be elected
by vote or written consent of a Majority of the Membership Interest.
(e) The Managers shall have the power and authority on behalf of the
Company to do all things as set forth in Sections 202(a) - 202(q) of the
NYLLC Law.
(f) No Member, by reason of being a Member, is an agent of the
Company for the purpose of its business unless (i) the Member is a Manager
or (ii) authority has been delegated to such Member by the Manager or by
some other provision of this Operating Agreement.
(g) Each Manager shall perform his or her duties as a Manager in
good faith and with that degree of care which a reasonable and prudent
person in a like position would use under similar circumstances. Each
Manager's liability to the Company or to its Members for damages for any
breach of duty in such capacity is eliminated, except if there is a final
judgment or adjudication adverse to the Manager that established that his
or her acts or omissions were in bad faith or involved intentional
misconduct or a knowing violation of law or that the Manager personally
gained in fact a financial profit or other advantage to which he or shewas
not legally entitled or with respect to a distribution subject to Section
508(a) of the NYLLC Law.
(h) No Manager shall be required to manage the Company as his or her
sole business interest but may, without liability to the Company or its
Members, be involved in the management of other entities and activities
which do not adversely
-4-
<PAGE> 8
affect the capacity of the Manager to exercise his or her obligations to
the Company; nor shall the Company or its Members have any right to
participate in such other business interests or in income or profits
therefrom.
3.9 Right to Transfer Membership Interest. Except as set forth in this
Operating Agreement, no Member shall have the unconditional right to give, sell,
assign, pledge, hypothecate, exchange or otherwise transfer ("Transfer") to
another, all or any part of his or her Membership Interest in the Company. Prior
to a Member securing the right to Transfer all or part of the Member's
Membership Interest in the Company to another, such Member must secure the
consent by vote or in writing of a Majority of the Membership Interest. Nothing
herein shall be deemed to prevent a Member from granting to the person receiving
the Transfer the right to become a Member upon condition that Section 604 of the
NYLLC Law is satisfied.
3.10 Notice of Proposed Transfer. The Member who desires to Transfer a
Membership Interest shall give written notification of the proposed Transfer to
the Managers of the Member's intention to sell his or her Membership Interest.
Each other Member shall have the right of first refusal to purchase all of such
Membership Interest upon such terms and conditions as were set forth in the
notification of the proposed Transfer. Nothing herein shall be deemed to prevent
all of the remaining Members, if they so desire, from accepting the terms of the
notification of proposed Transfer, in writing, on behalf of all of such
remaining Members. The failure to respond to the Member seeking to Transfer a
Membership Interest within 30 days shall result in the termination of the right
of first refusal. Should one or more Members desire to exercise the right of
first refusal on the terms set forth in the written notification of Transfer,
then the time, place and date of closing as designated by the Members purchasing
such Membership Interest shall be within 90 days from the date of written
consent to exercise the right of first refusal.
3.11 Withdrawal of Member. A Member may withdraw as a Member of the
Company with the vote or written consent of a Two-Thirds Majority of the
Membership Interest. If such consent is not given, a Member may withdraw upon
not less than six months prior written notice to the Company, provided such
withdrawal does not breach this Operating Agreement, the NYLLC Law or any other
contractual obligation between such proposed withdrawing Member and the Company
or its other Members. Should such breach occur, then the withdrawing Member may
be liable for damages as a result thereof.
-5-
<PAGE> 9
ARTICLE IV
MEETINGS
4.1 Annual and Special Meetings. The Company shall hold its annual meeting
of Members at such time as shall be determined by vote or written consent of a
Majority of the Membership Interest, either within the State of New York or at
such other place as determined by a vote or written consent of a Majority of the
Membership Interest for the purpose of transacting such business as may come
before such meeting. Special Meetings may be called for any purpose by a Manager
or any Member or group of Members holding not less than ten percent of the
Membership Interest.
4.2 Notice of Meetings. Whenever it is anticipated that Members will be
required or permitted to take any action by vote at a meeting, written notice
shall be given stating the place, date and hour of the meeting, the purpose of
such meeting, and under whose direction such meeting has been called. Such
notice of meeting shall be given personally or by first-class mail, not less
than ten nor more than fifty days before the date of the meeting. Such notice of
meeting need not be given to any Member who submits a signed waiver of notice,
in person or by proxy, whether before or after the meeting.
4.3 Quorum. Persons representing a Majority of the Voting Interest,
appearing in person or by proxy, shall constitute a quorum at a meeting of
Members for the transaction of any business. The Members present, despite not
being a quorum, may adjourn the meeting. No notice of adjourned meeting is
necessary if the time and place of the adjourned meeting is announced at the
meeting at which the adjournment is taken. At a meeting in which a quorum is
initially present, such quorum is not broken by the subsequent withdrawal of any
Member, despite the fact that such withdrawal results in less than a quorum
being present and all votes taken are binding upon the Members of the Company.
All acts at a meeting of Members at which a quorum is present, shall be the act
of all the Members and be binding upon them, except when such vote requires a
greater proportion or number of Membership Interests pursuant to the NYLLC Law,
or the Articles of Organization or this Agreement.
4.4 Vote by Proxy. A Member may vote in person by proxy executed in
writing by a Member. Every proxy so executed shall be revocable at the will of
the Member. Such proxy shall automatically be revoked if, prior to its use, the
death or incompetence of the Member occurred, and notice of such death or
adjudication of incompetence is received by the proxy holder. A proxy is
presumed to be revoked, whether or not it is stated to be irrevocable, if the
Member who executed such proxy sells his or her Membership Interest prior to the
date such proxy is scheduled to be exercised.
-6-
<PAGE> 10
4.5 Consents in Writing. Whenever the Members of the Company are required
or permitted to take any action by vote, such action may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by Members who hold
the Voting Interest having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all of the
Members entitled to vote therein were present and voted and shall be delivered
to the office of the Company, its principal place of business or a Manager,
employee or agent of the Company. Delivery made to the office of the Company
shall be by hand or by certified or registered mail, return receipt requested.
4.6 Effectiveness of Written Consents. Every written consent shall bear
the date of signature of each Member who signs the consent, and no written
consent shall be effective to take the action referred to therein unless, within
60 days of the earliest dated consent delivered in the manner required by this
paragraph to the Company, written consents signed by a sufficient number of
Members to take the action are delivered to the office of the Company, its
principal place of business or a Manager, employee or agent of the Company
having custody of the records of the Company. Delivery made to such office,
principal place of business or Manager, employee or agent shall be by hand or by
certified or registered mail, return receipt requested.
4.7 Voting Trusts. Two or more Members may enter into a binding agreement,
in writing and executed by the Members seeking to be bound, which provides that
the Membership Interests held by them shall be voted in accordance with such
agreement or pursuant to any lawful procedure agreed upon by them.
ARTICLE V
MONEY MATTERS
5.1 Capital Contributions. Each Member of the Company shall contribute the
amount set forth under his or her name as set forth in the books and records of
the Company as the sole capital contribution to be made by such Member. Such
contribution may be in cash, property or services rendered, or a promissory note
or other obligation to contribute cash or property or to render services.
5.2 Member Capital Accounts. An account denominated as a Member Capital
Account shall be maintained for each Member in accordance with the capital
account maintenance rules set forth in Section 1.704-1(b)(2)(iv) of the Treasury
Regulations. Without limiting the generality of the foregoing, (a) each Member
Capital Account shall be increased by the amount of any money contributed by
such Member to the Company, the fair market value of property contributed by
such Member to the Company (net of
-7-
<PAGE> 11
liabilities secured by such contributed property that the Company is considered
to assume or take subject to under Section 752 of the Internal Revenue Code of
1986, as amended (the "Internal Revenue Code")), allocations to such Member of
the net profits and any other allocations to such Member of income pursuant to
the Internal Revenue Code, and (b) each Member Capital Account shall be
decreased by the amount of any money distributed to such Member by the Company,
the fair market value of property distributed to such Member by the Company (net
of liabilities secured by such distributed property that the distributee Member
is considered to assume or take subject to under Section 752 of the Internal
Revenue Code), allocations to such Member of net losses and other allocations to
such Member pursuant to the Internal Revenue Code. Each Member Capital Account
shall be appropriately adjusted for income, gain, loss and deduction as required
by Section 1.704-1(b)(2)(iv)(g) of the Treasury Regulations (relating to
allocations and adjustments resulting from the reflection of property on the
books of the Company at book value, or a revaluation thereof, rather than at
such property's adjusted tax basis). Upon sale or Transfer by a Member of his or
her Membership Interest, such Member's Member Capital Account shall thereupon
become the Member Capital Account of the new Member to whom such Membership
Interest was sold or transferred in accordance with Section 1.704(b)(2)(iv) of
the Treasury Regulations.
5.3 Maintenance of Capital Accounts. No Member shall be responsible or
liable to any other Member for the failure to maintain a positive balance in his
or her Member Capital Account, nor is a Member required to restore all or any
part of a deficit balance in such Member Capital Account. However, the foregoing
provisions and the other provisions of this Operating Agreement relating to the
maintenance of Member Capital Accounts are intended to comply with Section
1.704-1(b) of the Treasury Regulations, and shall be interpreted and applied in
a manner consistent with such Treasury Regulation. In this regard, in the event
that the tax matters partner (as defined in Section 5.13 of this Operating
Agreement) shall determine that it is prudent to modify the manner in which the
Member Capital Accounts, or any debits or credits thereto, are computed in order
to comply with such Treasury Regulations, the tax matters partner may make such
modification in its sole and absolute discretion.
5.4 Priority of Distributions. Each Member shall have equal rights or
obligations, as the case may be, whether for the return of the Capital
Contributions made to this Company, for net profits or net losses, or for any
distribution set forth in law or in the Operating Agreement. However, any loan
or indebtedness owed to a Member by this Company shall have priority in payment
over other distributions.
5.5 Unlawful Distributions. Any Member who has received a distribution
from the Company based upon the value of his or her Capital Contribution and who
had no knowledge that such distribution violated Section 508(a) of the NYLLC Law
shall
-8-
<PAGE> 12
have no liability to the Company or to its creditors for such distribution.
However, if such Member knew or should have known that such distribution was, at
the time of such distribution, contrary to such statute, then such member shall
be liable to the Company for the amount of such distribution.
5.6 Payment of Debts before Distribution. No Member shall receive from the
Company any part or portion of his or her Capital Contribution until all
liabilities and debts of the Company have been paid and there remain sufficient
assets in the Company to pay them, without placing the solvency of the Company
in a reasonably disabling position. A statement from the Company's accountant to
this effect shall be placed in the books and records of the Company.
5.7 Allocation of Profits, Losses, Credits and Distributions. The profits
and losses of the Company and any distributions made by the Company to the
Members in any Fiscal Year shall be allocated among the Members in accordance
with, and in proportion to, the respective number of Membership Interests held
by each Member. All distributions to a Member shall be offset by any amounts
owing to the Company by such Member. No distributions shall be made which render
the Company insolvent.
Except to the extent otherwise provided in Section 1.704-1(b)(4)(ii)
of the Treasury Regulations, (i) any tax credits for any Fiscal Year shall be
allocated among the Members in accordance with, and in proportion to, each
Member's allocable share of taxable net income in the fiscal year such tax
credit arises, and (ii) any tax credit recapture for any Fiscal Year shall be
allocated to those Members who received the tax credits to which such recapture
relates.
Notwithstanding the foregoing, all allocations of income, gain, loss
and deduction are intended to have substantial economic effect within the
meaning of Section 1.704-1(b)(2)(ii)(b)(2) of the Treasury Regulations.
Accordingly, the tax matters partner shall have the authority to cause any item
of income, gain, loss or deduction to be allocated in such a manner as to comply
with the substantial economic effect and capital account maintenance rules set
forth under Section 704 of the Internal Revenue Code and the Treasury
Regulations promulgated thereunder. In this regard, each Member shall be
specially allocated items of Company income and gain in the amounts necessary to
comply with Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations ("qualified
income offset"), Section 1.704-2(f) of the Treasury Regulations ("minimum gain
chargeback") and Section 1.704-2(i)(4) of the Treasury Regulations ("partner
minimum gain chargeback"). The previous sentence is intended to comply with the
qualified income offset, minimum gain chargeback and partner minimum gain
chargeback requirements in Sections 1.704-1(b)(2)(ii)(d), 1.704-2(f) and
1.704-2(i)(4) of the Treasury Regulations, respectively, and shall be
interpreted consistently therewith.
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<PAGE> 13
5.8 Tax Allocations: Section 704(c) of the Internal Revenue Code. In
accordance with Section 704(c) of the Internal Revenue Code and the Treasury
Regulations thereunder and Section 1.704-1(b)(4)(i) of the Treasury Regulations,
income, gain, loss and deduction (as computed for tax purposes) with respect to
any property contributed to the capital of the Company or otherwise revalued on
the books of the Company shall, solely for tax purposes, be allocated among the
Members to take into account any variation between the adjusted basis of such
property to the Company for Federal income tax purposes and its fair market
value as determined at the time of the contribution or revaluation. In addition,
if any gain (as computed for tax purposes) on the sale or other disposition of
Company property shall constitute recapture of depreciation under Sections 291,
1245 or 1250 of the Internal Revenue Code or any similar provision, such gain
shall (to the extent possible) be divided among the Members in proportion to the
depreciation deductions previously claimed by them (or their predecessor in
interest) giving rise to such recapture (except to the extent otherwise required
under applicable Treasury Regulations); provided, however, that this sentence
shall not affect the amount of gain otherwise allocable to a Member.
Any elections or other decisions relating to such allocations
(including, under Section 1.704-3 of the Treasury Regulations, whether to use
the traditional method, the traditional method with curative allocations or the
remedial method) shall be made by the tax matters partner in any manner that
reasonably reflects the purpose and intention of this Operating Agreement
5.9 No Right to Interest or Return of Capital Contribution. No Member
shall be entitled to interest on his or her Capital Contribution, nor is such
member entitled, as a matter of right, to a return, in part or in whole, of his
or her Capital Contribution, notwithstanding anything to the contrary herein.
5.10 Tax Returns. All necessary federal and state tax returns for the
Company shall be prepared and filed. Each member shall furnish any information
in his or her possession that may be necessary and pertinent to the preparation
of such returns.
5.11 Internal Revenue Code Elections. The Company shall:
(a) Adopt the calendar year as its fiscal year.
(b) Adopt the cash basis as its method of accounting and keep its
books and records on such basis.
(c) Upon the written request of any member, elect to adjust the
basis of the property of the Company pursuant to Section 754 of the
Internal Revenue
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<PAGE> 14
Code if a distribution as described in Section 734 of the Internal Revenue
Code occurs or if a sale or transfer of a Membership Interest described in
Section 743 of the Internal Revenue Code occurs.
(d) To the extent permitted by applicable law, elect to amortize the
organizational expenses of the Company and the start-up costs of the
Company under Sections 709(b) and 195 of the Internal Revenue Code,
respectively, ratably over a period of 60 months.
(e) Make any other election permitted by law that the tax matters
partner deems appropriate and in the best interest of the Members.
5.12 Prohibition on Subchapter K Exclusion. Neither the Company nor any
Member may make an election for the Company to be excluded from the application
of Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code or any
similar provisions of applicable state law, and no provisions of this agreement
shall be interpreted to authorize any such election.
5.13 Designation of Tax Matters Partner. One Member or one Manager, as the
case may be, shall be designated as "tax matters partner" of the Company
pursuant to Section 6231(a)(7) of the Internal Revenue Code. Any Member or
Manager so designated shall take all actions as may be necessary to cause each
other Member to become a "notice partner" within the meaning of Section 6223 of
the Internal Revenue Code. The Members hereby designate SMFS, Inc. as the
Company's initial tax matters partner.
ARTICLE VI
DISSOLUTION
6.1 Events Causing Dissolution. The Company shall be dissolved and its
affairs wound up upon the first to occur of the following:
(a) The latest date on which the Company is to dissolve, if any, as
set forth in the Articles of Organization, or by a judicial decree
pursuant to Section 702 of the NYLLC Law.
(b) The vote or written consent of a Two-Thirds Majority of the
Membership Interest.
(c) The bankruptcy, death, dissolution, expulsion, incapacity or
withdrawal of any Member or the occurrence of any other event that
terminates
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<PAGE> 15
the continued membership of any Member, unless, within six months after
such event, the Company is continued either by vote or written consent of
a Majority of the Membership Interest.
6.2 Winding up the Affairs of the Company. Upon dissolution of the
Company, the Members or Managers may, in the name of and on behalf of the
Company, prosecute and defend suits, whether civil, criminal or administrative,
settle and close the Company's business, dispose of and convey the Company's
property, discharge the Company's liabilities and distribute to the Members any
remaining assets, all without affecting the liability of each and every Member.
6.3 Distribution of Assets Upon Dissolution. Upon dissolution, the assets
of the Company shall be distributed as follows:
(a) To creditors, including Members who are creditors, to the extent
permitted by law, in satisfaction of liabilities of the Company, whether
by payment or by establishment of adequate reserves, other than
liabilities for distributions to members under Section 507 or Section 509
of the NYLLC Law.
(b) To Members and former Members in satisfaction of liabilities for
distribution under Section 507 or Section 509 of the NYLLC Law.
(c) To Members in proportion to, and to the extent of, the positive
balance in each Member's Member Capital Account, after giving effect to
all contributions, distributions and allocations for all periods.
Liquidating distributions must be made by the later of (i) the end of the Fiscal
Year in which the liquidation occurs, or (ii) 90 days after the date of
liquidation
6.4 Filing of Certificate of Dissolution. Within 90 days following the
dissolution and the commencement of winding up the affairs of the Company, or at
any other time that there are no Members, Articles of Dissolution shall be filed
with the Secretary of State of New York. Upon such filing of Articles of
Dissolution with the Secretary of State of New York, the Articles of
Organization shall be deemed to be cancelled.
6.5 Effect on Capital Accounts. Upon liquidation of the Company within the
meaning of Section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations, if any
Member has a deficit Member Capital Account (after giving effect to all
contributions, distributions, allocation and other adjustments for all Fiscal
Years, including the Fiscal Year in which such liquidation occurs) the Member
shall have no obligation to make any Capital
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<PAGE> 16
Contribution, and the negative balance of any Member Capital Account shall not
be considered a debt owed by the Member to the Company or to any other person
for any purpose.
6.6 Return of Capital Contribution. If not otherwise provided by this
Agreement and if permitted by applicable law, upon dissolution, each Member
shall receive a return of his or her Capital Contribution solely from the assets
of the Company. If, after payment or discharge of the debts and liabilities of
this Company, such assets are insufficient to return any Capital Contribution of
any Member, such Member shall have no recourse against any other Member.
ARTICLE VII
GENERAL CONSTRUCTION
7.1 Genders. When the masculine and feminine genders are used in this
Agreement and when required by the context, the same shall include the neuter
gender.
7.2 Waiver of Rights and Remedies. No failure of a Member to exercise, and
no delay by a Member in exercising, any right or remedy under this Operating
Agreement shall constitute a waiver of such right or remedy. No waiver by a
Member of any such right or remedy under this Agreement shall be effective
unless made in writing duly executed by all Members and specifically referring
to each such right or remedy being waived.
7.3 Entire Agreement. This Operating Agreement contains the entire
agreement among the Members with respect to the operation of the Company, and
supersedes each and every course of conduct previously pursued or consented to
and each and every oral agreement and representation previously made by the
Members with respect thereto, whether or not relied or acted upon. No amendment
of this Agreement shall be effective unless made in writing duly executed by all
Members and specifically referring to each provision of this Operating Agreement
being amended. No course of conduct or performance subsequently pursued or
acquiesced in, and no oral agreement or representation subsequently made by, the
Members, whether or not relied or acted upon, shall amend this Operating
Agreement or impair or otherwise affect any Member's obligations, rights or
remedies pursuant to this Operating Agreement.
7.4 Notice. Any notice, demand or other communication required or
permitted to be given pursuant to this Operating Agreement or under the NYLLC
Law shall have been sufficiently given for all purposes, if given pursuant to
the provisions of this Operating Agreement or as set forth in the NYLLC Law, as
the case may be.
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<PAGE> 17
IN WITNESS WHEREOF, the persons signing this Operating Agreement below
conclusively evidence their agreement to the terms and conditions of this
Operating Agreement by so signing here.
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<PAGE> 18
SCHEDULE A
Membership Interests in FiberNet Equal Access, L.L.C.
The Members of FiberNet Equal Access L.L.C. as of December 16, 1996
are as follows:
Name Membership Interests
---- --------------------
SMFS, Inc. 65%
Landtel Telecommunications Group, Inc. 35%
LPS, Inc. 5%
<PAGE> 19
SCHEDULE B
Managers of FiberNet Equal Access L.L.C.
The Managers of FiberNet Equal Access L.L.C. as of December 16, 1996
are as follows:
Santo Petrocelli - President
Lawrence Polan - Vice President
<PAGE> 1
OPERATING AGREEMENT
OF
LOCAL FIBER, L.L.C.
Dated as of June 19, 1996
A LIMITED LIABILITY COMPANY
ORGANIZED UNDER THE LAWS OF
THE STATE OF NEW YORK
<PAGE> 2
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
LOCAL FIBER, L.L.C
This Limited Liability Company Operating Agreement of Local Fiber, L.L.C.,
a limited liability company organized pursuant to the New York Limited Liability
Company Law, is entered into and shall be effective as of the Effective Date, by
and among the Company and the persons executing this Agreement.
ARTICLE 1
DEFINITIONS
For purposes of this Agreement (as defined below), unless the context
clearly indicates otherwise, the following terms shall have the following
meanings:
1.1 Act. The New York Limited Liability Company Law and all amendments to
the Act.
1.2 Additional Contribution. An additional Capital Contribution payable by
the Members to the Company pursuant to Article 9.
1.3 Affiliate. Any Person that, directly or indirectly, through one or
more intermediaries, controls or is under common control with or is controlled
by another Person.
1.4 Agreement. This Limited Liability Company Operating Agreement
including all schedules and amendments adopted in accordance with the Agreement
and the Act.
1.5 Articles. The Articles of Organization of the Company, as amended from
time to time, and filed with the Department of State of the State of New York.
1.6 Assignee. A transferee of a Membership Interest who has not been
admitted as a Substitute Member.
1.7 Business Day. Any day other than Saturday, Sunday or any legal holiday
observed in the State of New York.
1.8 Capital Account. The account maintained for a Member or Assignee
determined in accordance with Article 9.
1.9 Capital Contribution. Any contribution of Property or services made by
or on behalf of a Member or Assignee.
1.10 Class A Member. A Person executing this Agreement as a Class A Member
or a Substitute Member succeeding to the interest of a Class A Member pursuant
to the terms of this Agreement.
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<PAGE> 3
1.11 Class B Member. A Person executing this Agreement as a Class B Member
or a Substitute Member succeeding to the interest of a Class B Member pursuant
to the terms of this Agreement.
1.12 Code. The Internal Revenue Code of 1986, as amended from time to time
or corresponding provisions of subsequent superseding Federal revenue Laws.
1.13 Commitment. The Capital Contributions that a Member is obligated to
make, including a Member's Initial Capital Contribution and any Additional
Contribution of a Member.
1.14 Company. The company named at the beginning of this Agreement, a
limited liability company formed under the laws of the State of New York, and
any successor thereto.
1.15 Control. Person A controls Person B if (a) A holds 50% or more of the
outstanding voting securities of Person B, (b) A has the right to 50% or more of
the profits of B, (c) A has the right, in the event of the dissolution of B, to
50% or more of the assets of B or (d) A has the contractual power to designate
50% or more of the directors (or individuals exercising similar functions) of B.
1.16 Default Interest Rate. The prime rate published by the Wall Street
Journal for the last Business Day on which a Commitment is payable.
1.17 Delinquent Member. A Member who has failed to meet the Commitment of
that Member.
1.18 Dissociation. Any action or event which causes a Person to cease to
be a Member as described in Article 15 hereof.
1.19 Dissolution Event. Any event which results in the dissolution of the
Company under Article 16.
1.20 Distribution. A transfer of Property to a Member on account of a
Membership Interest as described in Article 11.
1.21 Effective Date. The date of filing of the Articles of Organization or
such other date as set forth in the Articles of Organization.
1.22 Fiscal Year. The calendar year, unless otherwise changed by the
Management Board.
1.23 Initial Capital Contribution. The Capital Contribution agreed to be
made by each Class A Member as described on Schedule A and the Capital
Contribution of the Class B Member as described on Schedule B.
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<PAGE> 4
1.24 Management Right. The right of a Member to participate in the
management of the Company, to vote on any matter, and to grant or to withhold
consent or approval of actions of the Company.
1.25 Member. A person executing this agreement either as a Class A Member
or Class B Member.
1.26 Membership Interest. The rights of a Member in the Company, including
the right to Distributions (liquidating or otherwise) and allocations of the
profits, losses, gains, deductions, and credits of the Company, and, to the
extent permitted by this Agreement, to possess and exercise Management Rights.
1.27 Organization. A Person other than a natural person, including without
limitation corporations (both non-profit and other corporations), partnerships
(both limited and general), joint ventures, limited liability companies,
business trusts and unincorporated associations, but the term does not include
joint tenancies and tenancies by the entirety.
1.28 Percentage Interest. With respect to any Member, the percentage
interest set forth opposite such Member's name on Schedule A hereto, as such
Schedule may be amended from time to time in accordance with the terms hereof.
1.29 Person. An individual, trust, estate, or any Organization.
1.30 Principal Office. The Principal Office of the Company set forth in
Section 2.6.
1.31 Property. Any property, real or personal, tangible or intangible,
including money, and any legal or equitable interest in such property, but
excluding services and promises to perform services in the future.
1.32 Qualified Public Offering. Qualified Public Offering shall mean an
underwritten public offering or offerings of the Company's securities under one
or more effective registration statements under the Securities Act which results
in aggregate cash proceeds being received by the Company of at least $5,000,000
exclusive of underwriting discounts as a result of which such securities are
listed or admitted to trading on a securities exchange or quoted by NASDAQ.
1.33 Schedule A. Schedule A to this Agreement setting forth the name,
address, Percentage Interest and Initial Capital Contribution of each Class A
Member and Class B Member.
1.34 Substitute Member. An Assignee who has been admitted to all of the
rights of membership pursuant to Section 13.3 of the Agreement.
1.35 Tax Regulations. The Federal income tax regulations promulgated by
the United States Treasury Department under the Code as such Tax Regulations may
be
4
<PAGE> 5
amended from time to time. All references herein to a specific section of the
Tax Regulations shall be deemed also to refer to any corresponding provision of
succeeding Tax Regulations.
1.36 Term. The term of this Agreement as set forth in Section 2.4.
ARTICLE 2
FORMATION
2.1 Organization. The Members hereby organize the Company, a New York
limited liability company, pursuant to the provisions of the Act.
2.2 Agreement For and in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Members executing the Agreement
hereby agree to the terms and conditions of the Agreement, as it may from time
to time be amended in accordance herewith. It is the express intention of the
Members that the Agreement shall be the sole source of agreement of the parties,
and, except to the extent a provision of the Agreement expressly incorporates
federal income tax rules by reference to sections of the Code or Tax Regulations
or is expressly prohibited or ineffective under the Act, the Agreement shall
govern, even when inconsistent with, or different than, the provisions of the
Act or any other law or rule. To the extent any provision of the Agreement is
prohibited or ineffective under the Act, the Agreement shall be deemed to be
amended to the least extent necessary in order to make the Agreement effective
under the Act. In the event the Act is subsequently amended or interpreted in
such a way to make any provision of the Agreement that was formerly invalid
valid, such provision shall be considered to be valid from the effective date of
such interpretation or amendment.
2.3 Name. The name of the Company is the name set forth at the beginning
of this Operating Agreement, and all business of the Company shall be conducted
under that name.
2.4 Term. The Company shall be dissolved and its affairs wound up in
accordance with the Act and the Agreement after a period of twenty years
beginning on the Effective Date and ending on December 20, 2016 (the
"Term"),unless such Term shall be extended by amendment to the Agreement and the
Articles, or unless the Company shall be sooner dissolved and its affairs wound
up in accordance with the Act or the Agreement.
2.5 Registered Agent and Office. The registered agent for the service of
process and the registered office shall be that Person and location reflected in
the Articles. The Members, may, from time to time, change the registered agent
or office through appropriate filings with the Department of State of New York.
In the event the registered agent ceases to act as such for any reason or the
registered office shall change, the Members shall promptly designate a
replacement registered agent or file a notice of change of address as the case
may be.
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<PAGE> 6
2.6 Principal Office. The Principal Office of the Company shall be located
at: New York.
2.7 Publication. Within 120 days after the Effective Date, the Members
shall cause a notice containing the substance of the Articles, in the form
required by the Act, to be published once in each week for six successive weeks
in two newspapers of the county in which the Principal Office is located.
ARTICLE 3
PURPOSE; NATURE OF BUSINESS
The business purpose of the Company is to engage in the provision of
switched local telecommunications and switched data communication services
throughout New York City and New Jersey. The Company shall provision local
telephone exchange networks utilizing modern switching system technology, which
will enable the Company to offer various services which may include Intralata
and Interlata long distance service, wireless services, wholesale service
including terminating access and 1 + access, switching, basic telephone,
Centrex, frame relay, ATM, direct inward dialing, direct outward dialing, Lan
Interconnection, Ethernet, Token Ring, FDD1, and switching for PCS companies,
provided however, that the Company shall not directly or indirectly, sublease,
condo, sublicense or wholesale to any third party dark fiber. The term "dark
fiber" means fiber optic cable that is not connected to electronic transmission
systems.
The Company shall have the authority to do all things necessary or
convenient to accomplish its purpose and operate its Business as described in
this Article 3.
The Members shall cause the Company to be qualified, formed, reformed or
registered under assumed or fictitious name statutes or similar laws in any
jurisdiction, if such qualification, formation, reformation or registration is
necessary or appropriate in order to protect the limited liability of the
Members or to permit the Company lawfully to transact business.
ARTICLE 4
ACCOUNTING AND RECORDS
4.1 Financial and Tax Reporting. The Company shall prepare its financial
statements in accordance with generally accepted accounting principles as from
time to time in effect and shall prepare its income tax information returns
using such methods of accounting as the Management Board deems necessary or
appropriate under the Code and Tax Regulations.
4.2 Records to be Maintained. The Company shall maintain the following
records at the Principal Office:
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<PAGE> 7
(a) a current list of the full name, set forth in alphabetical order, and
last known mailing address of each Member. together with the information set
forth on Schedule A relating to each Member's Initial Capital Contribution and
Percentage Interest:
(b) a copy of the Articles and all amendments thereto, together with
executed copies of any powers of attorney pursuant to which the Articles or any
such amendment has been executed;
(c) a copy of the Company's federal, state and local income or information
tax returns and reports for the three most recent Fiscal Years;
(d) a copy of this Agreement including all amendments hereto; and
(e) the Company's books and records, including financial statements of the
Company, which shall be open to inspections by the Members or their agents at
reasonable times.
4.3 Reports to Members. The Company shall provide reports, including a
balance sheet, statement of profit and loss and changes in Members' accounts,
and a statement of cash flows, at least quarterly to the Members at such time
and in such manner as the Management Board may determine reasonable provided
such information shall be provided not later than 30 days after the end of each
quarter and 90 days after the end of each Fiscal Year.
4.4 Tax Returns and Reports. The Company shall prepare and deliver to each
Member within 60 days after the expiration of each Fiscal Year, and at the
expense of the Company, all information returns and reports required by the Code
and Tax Regulations, and all Company information necessary for the preparation
of the Members' respective federal income tax returns reflecting each Member's
distributive share of Company items.
4.5 Certified Public Accountant of the Company. The initial firm of
certified public accountants which shall advise the Company as to its accounting
and fiscal matters shall be Mendelsohn, Kary, Bell & Natoli, P.C. The Management
Board, in its sole discretion, shall have the right to remove such firm or any
successor to such firm, and to select another firm if, the Management Board
deems it to be in the best interest of the Company.
ARTICLE 5
NAMES AND ADDRESSES OF MEMBERS
The names and addresses of the Class A Members and Class B Members are as
stated on Schedule A hereto.
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<PAGE> 8
ARTICLE 6
RIGHTS AND DUTIES OF MEMBERS
6.1 Representations and Warranties; Breach.
(a) Each Member hereby severally represents and warrants to the Company
and to each other Member as follows:
(i) Authorization. If such Member is an Organization, that it is duly
organized, validly existing and in good standing under the law of its state of
organization and has full organizational power and authority to execute and
deliver this Agreement and to perform its obligations hereunder and all
organizational actions necessary for the due authorization, execution, delivery
and performance by that Member of this Agreement have been duly taken;
(ii) Compliance With Other Instruments; Enforceability. Such Member's
execution, delivery and performance of this Agreement do not conflict with any
other agreement or arrangement to which such Member is a party or by which such
Member is bound. This Agreement has been duly authorized by such Member and,
upon execution and delivery thereof, will constitute the legal, valid and
binding obligation of such Member, enforceable against such Member in accordance
with its terms;
(iii) Purchase Entirely for Own Account. Such Member is acquiring its or
his Membership Interest for such Member's own account for investment purposes
only and not with a view to or for the resale, distribution, subdivision or
fractionalization thereof and has no contract, understanding, undertaking,
agreement or arrangement of any kind with any Person to sell, transfer or pledge
to any Person its or his interest or any part thereof nor does such Member have
any plans to enter into any such agreement;
(iv) Investment Experience. By reason of such Member's business or
financial experience, such Member has the capacity to protect such Member's
interests in connection with the transactions contemplated hereunder, is able to
bear the risks of an investment in the Company, and at the present time could
afford a complete loss of such investment;
(v) Disclosure of Information. Such Member is aware of the Company's
business affairs and financial condition and has acquired sufficient information
about the Company, its present and prospective business to reach an informed and
knowledgeable decision to acquire an interest in the Company; and
(vi) Federal and State Securities Laws. The Member acknowledges that the
Membership Interests have not been registered under the Securities Act of 1933,
as amended (the "1933 Act"), or any state securities laws, inasmuch as they are
being acquired in a transaction not involving a public offering and, under such
laws, may not be resold or transferred by the Member without appropriate
registration or the
8
<PAGE> 9
availability of an exemption from such requirements; in this connection, the
Member represents that it is familiar with Regulation D under the 1933 Act, as
presently in effect, and understands the resale limitations imposed by the 1933
Act and the regulations promulgated thereunder.
6.2 Management Rights. The property, business and affairs of the Company
shall be managed by a management board (the "Management Board"), consisting of
each Member, acting exclusively in such Member's capacity as a Member of the
Company, to the extent that any such Member determines to participate as a
member of the Management Board. Each such Member shall designate a
representative to the Management Board by filing with the Secretary of the
Company a certificate certifying that the Member has taken all necessary
corporate action to appoint and authorize the named representative to serve as
the Member's Management Board representative. The presence in person or by
telephone conference of a majority of the Members shall constitute a quorum for
action at any meeting of the Management Board. Each Class A Member of the
Management Board shall have two votes on each matter within the jurisdiction of
the Management Board and each Class B Member shall have one vote on each matter
within the jurisdiction of the Management Board, and Management Board action
shall be taken by majority vote at a Management Board meeting at which a quorum
is present.
Management Board representatives may be removed with or without cause by
the Member who appointed him/her, or for cause by a vote of the Management
Board, provided that a representative to be removed for cause shall be given
reasonable notice of the reasons for the proposed removal and an opportunity to
be heard before a removal vote is taken. Cause for removal includes, but is not
limited to, repeated failure to attend meetings, conflicts of interest and
repeated failure to fulfill obligations hereunder. Any vacancy created by
removal of a representative as provided herein shall be filled by the Member who
originally appointed the representative so removed.
Each representative on the Management Board shall perform his duties in
good faith, in a manner he reasonably believes to be in the best interests of
the Company, and with such care as an ordinarily prudent person in a like
position would use under similar circumstances. A representative shall not be
liable to the Company or to any Member for any loss or damage sustained by the
Company or any Member, unless the loss or damage shall have been the result of
fraud or willful misconduct.
The Management Board shall have the authority to enter into contracts on
behalf of the Company with any related party, including, without limitation any
Member, any Affiliate of any Member, or any corporation or partnership in which
any Member and/or any Affiliate of any Member may have an interest as
shareholder or partner, or any corporation of which such Member may be an
officer or director, provided that the terms of such contracts are reasonable
and fair to the Company.
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<PAGE> 10
6.3 Meetings.
(a) Generally; Regular Meetings. The Management Board may hold meetings,
both regular and special, either within or without the State of New York. The
meetings may be held at such time and place as shall be specified in a notice
given as hereinafter provided for special meetings of the Management Board, or
as shall be specified in a written waiver signed by all of the Management Board
representatives. Regular meetings of the Management Board may be held without
notice at such time and at such place as shall from time to time be determined
by the Management Board.
(b) Special Meetings. Special meetings of the Management Board may be
called by the President on two days' notice to each Management Board
representative by mail or 24 hours' notice to each Management Board
representative either personally or by telecopier; special meetings shall be
called by the President or Secretary in like manner and on like notice on the
written request of two Management Board Members.
(c) Action without Meeting. Any action required or permitted to be taken
at any meeting of the Management Board may be taken without a meeting, without
prior notice and without a vote, if the requisite number of Management Board
representatives required for such action consent thereto in a writing setting
forth the action taken and executed and dated by each such Management Board
representative, and the writing or writings are filed with the minutes of
proceedings of the Management Board's meetings; provided, that prompt notice of
the taking of any action without a meeting by less than unanimous written
consent shall be given to those Management Board representatives who have not
consented thereto in writing but who would have been entitled to vote thereon
had such action been taken at a meeting.
(d) Telephonic Meetings. Management Board representatives may participate
in a meeting by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
6.4 Amendment of Agreement The Management Board shall have the duty and
authority to amend this Agreement as and to the extent necessary to reflect any
and all changes or corrections necessary or appropriate as a result of any
action taken by the Management Board in accordance with the terms of this
Agreement.
6.5 Indemnification. A Member shall indemnify the Company for any costs or
damages incurred by the Company as a result of any unauthorized action by such
Member acting as a Member.
6.6 Member's Standard of Care. Each Member shall discharge such Member's
duties to the Company and to the other Members in good faith and with that
degree
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of care that an ordinarily prudent person in a like position would use under
similar circumstances.
6.7 Reliance on Records and Books of Account.
(a) In discharging his or its duties, a Member (or any representative of a
Member performing services for the Company) shall be fully protected in relying
in good faith upon the records required to be maintained under Article 4 hereof
and upon such information, opinions, reports or statements, including financial
statements and other financial data, in each case presented or prepared by (i)
one or more agents or employees of the Company, (ii) counsel, public accountants
or other Persons as to matters that the Member believes to be within such
Person's professional or expert competence, or (iii) a class of Members or
Persons duly designated in accordance with this Agreement, as to matters within
its designated authority, which class the Member believes to merit confidence,
so long as in so relying such Member shall be acting in good faith, but such
Member shall not be considered to be acting in good faith if such Member has
knowledge concerning the matter in question that would cause such reliance to be
unwarranted.
(b) The records and other information upon which a Member may rely include
information, opinions, reports or statements as to the value and amount of the
assets, liabilities, profits or losses of the Company or any other facts
pertinent to the existence and amount of assets from which Distributions to
Members might properly be paid.
6.8 Liability of Member for Management Duties. A Member (or any
representative of a Member performing services for the Company) who so performs
such Member's duties in accordance with this Article 6 shall have no liability
by reason of having exercised such management powers and responsibilities.
ARTICLE 7
NOTICES
7.1 Delivery of Notices. Whenever, under the provisions of the Act, the
Articles or this Agreement, notice is required to be given to any Member or
representative to the Management Board, it shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, addressed to
such Member at his address as it is set forth on Schedule A or Schedule B or
representative at such address as maintained in the records of the Company, with
postage thereon prepaid, and such notice shall be deemed to be given at the time
when the same shall be given to a company, the business of which includes the
provision of courier delivery services. Notice to Members or to a representative
may also be given by telecopier. Any Member or representative may require
notices to be sent to a different address by giving notice to the other Members
and the Company in accordance with this Section 7.1.
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7.2 Waiver of Notice. Whenever any notice is required to be given under
the provisions of the Act, the Articles or this Agreement, a waiver thereof in
writing, signed by the Person or Persons entitled to said notice, whether before
or after the time stated therein, shall be deemed equivalent thereto.
ARTICLE 8
OFFICERS
8.1 Required Officers. The officers of the Company shall be elected by the
Management Board and shall include a President, a Secretary and a Treasurer. The
Management Board may also elect one or more Vice Presidents, Assistant
Secretaries and Assistant Treasurers. Any number of offices may be held by the
same person, unless this Agreement otherwise provides.
8.2 Compensation of Officers. The compensation of all officers, employees
and agents of the Company shall be fixed by the Management Board provided that
compensation of any single employee shall not exceed $150,000 annually without
unanimous vote of the Management Board.
8.3 Term of Office. The officers of the Company shall hold office until
their successors are chosen and qualified, or until their earlier death,
resignation or removal. Any officer elected or appointed by the Management Board
as provided herein may be removed at any time, and the vacancy created by such
removal filled, by the Management Board.
8.4 Duties of President. The President shall be the chief executive
officer of the Company and shall preside at all meetings of the Management
Board. He shall have general and active management of the day to day business
and affairs of the Company and shall see that all orders and resolutions of the
Management Board are carried into effect.
8.5 Duties of Vice President. In the absence of the President or in the
event of his inability or refusal to act, the Vice President (or in the event
there be more than one Vice President, the Vice Presidents in the order
designated by the Management Board, or in the absence of any designation, then
in the order of their election), if any, shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President. The Vice Presidents shall perform such
other duties and have such other powers as the Members may from time to time
prescribe.
8.6 Duties of Secretary. The Secretary shall attend all meetings of the
Management Board and record all the proceedings of the meetings of the
Management Board in a book to be kept for that purpose. The Secretary shall
give, or cause to be given, notice of all meetings of the Management Board and
special meetings of the Management Board, and shall perform such other duties as
may be prescribed by the Management Board, the Members. or the President.
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8.7 Duties of Assistant Secretary. The Assistant Secretary, or, if there
be more than one, the Assistant Secretaries in the order determined by the
Management Board as provided herein (or if there be no such determination, then
in the order of their election) shall, in the absence of the Secretary or in the
event of his or her inability or refusal to act, perform the duties and exercise
the powers of the Secretary and shall perform such other duties and have such
other powers as the Management Board, the Members, President or the Secretary
may from time to time prescribe.
8.8 Duties of Treasurer. The Treasurer shall be the Chief Financial
Officer of the Company and shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Company and shall deposit all moneys and
other valuable effects in the name and to the credit of the Company in such
depositories as may be designated by the Management Board. The Treasurer shall
disburse the funds of the Company as may be ordered by the Management Board,
taking proper vouchers for such disbursements, and shall render to the President
and the Management Board, at its regular meetings, or when the Members so
require, an account of all his transactions as Treasurer and of the financial
condition of the Company. If required by the Members or the Management Board,
the Treasurer shall give the Company a bond (which shall be renewed every six
years) in such sum and with such surety or sureties as shall be satisfactory to
the Members or the Management Board for the faithful performance of the duties
of his office and for the restoration to the Company, in case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his control
belonging to the Company.
8.9 Duties of Assistant Treasurer. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Management Board as provided herein (or if there be no such determination, then
in the order of their election) shall, in the absence of the Treasurer or in the
event of his inability or refusal to act, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties and have such other
powers as the Management Board or the Members may from time to time prescribe.
ARTICLE 9
CONTRIBUTIONS AND CAPITAL ACCOUNTS
9.1 Admission to Company. The effective date of admission of a Member to
the Company shall be the date on which it makes its Initial Capital Contribution
to the Company and executes this Agreement or on which it becomes a Substitute
Member pursuant to Section 13 hereof.
9.2 Initial Capital Contributions of the Members. On the date of this
Agreement, (i) each Class A Member shall make the Initial Capital Contribution
set forth opposite such Class A Member's name on Schedule A hereto in exchange
for its Membership Interest and (ii) in connection with the transactions
contemplated
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hereby, the Class A Members have requested that National Fiber Network, Inc.
("NFN") enter into a License Agreement with the Company in the form annexed
hereto as Exhibit 1 (the "License Agreement"), and as an inducement therefor,
the Class A Members (pro rata among themselves) are making an Initial Capital
Contribution in the name and on behalf of NFN in the amount set forth opposite
NFN's name on Schedule A hereto in exchange the Membership Interest herein being
granted to NFN.
9.3 No Further Contributions or Loans. The liability of the Members to the
Company is limited to their Initial Capital Contributions as specified in
Schedule A hereto, as it may be amended from time to time in accordance with the
terms of this Agreement. No additional Capital Contributions, or other funds,
whether by way of contribution of capital, loan or otherwise, shall be required
of any Member except by unanimous agreement of the Members, and except that the
Class A Members shall use their reasonable efforts to provide such additional
financing for the Company as may be reasonably necessary to permit the Company
to implement its business plans. No interest shall accrue on any Capital
Contribution and no Member shall have the right to withdraw or be repaid any
Capital Contribution except as provided in this Agreement.
9.4 Additional Members. Additional Persons may be admitted to the Company
as Members from time to time and Interests may be created and issued to those
Persons and to existing Members in the sole discretion of the Management Board,
subject to the provisions and restrictions contained herein.
9.5 Dilution. Notwithstanding the provisions of Section 9.3 and 9.4, until
such time as the Company shall have completed a Qualified Public Offering, the
Percentage Interest of the Class B Member shall not be diluted, adjusted or
otherwise modified by any action undertaken by the Company, including the
addition of any new Members or the contribution of additional capital by the
Class A Members; provided, however, that nothing contained in this Section 9.5
shall prohibit the consummation of any public offering of securities of the
Company which the Management Board may, at any time, determine to undertake.
9.6 Rights in the Event of Breach or Violation of License Agreement. In
the event of the breach or violation of the License Agreement by NFN, the
Management Board shall give written notice of such breach or violation to NFN,
and NFN shall have ten business days within which to cure any such breach or
violation to the reasonable satisfaction of the Management Board; provided,
however, that in the event such breach or violation can not, in the good faith
determination of NFN (as evidenced by a resolution of its board of directors),
be cured by NFN within such ten business day period, NFN shall immediately and
diligently attempt to cure such breach or violation and shall use its best
efforts to effect such cure, to the reasonable satisfaction of the Management
Board, in any event within sixty business days after receipt of the foregoing
written notice. In the event that NFN shall fail to cure such breach or
violation within such ten business day period or sixty business day, as the case
may be, then, in such event, the Management Board
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may take such action as it deems appropriate, including, but not limited to, (a)
seeking any remedies available under the Act or applicable law, (b) enforcing
the License Agreement in a court of appropriate jurisdiction in the State in
which the Principal Office is located or the State of NFN's address as reflected
in this Agreement or (c) requiring NFN to forfeit its Percentage Interest and
capital account, which Percentage Interest and capital account shall be
transferred to the other Members according to their respective pro rata shares;
provided, however, that in the event the Management Board shall determine to
require such forfeiture, such remedy shall be the Company's sole and exclusive
remedy with respect to any such breach or violation. Each Member expressly
agrees to the jurisdiction of such courts but only for purposes of such
enforcement.
9.7 Capital Account. The Company shall maintain a separate capital account
(a "Capital Account") for each Member in accordance with the Tax Regulations
promulgated pursuant to Section 704(b) of the Code. Without limiting the
foregoing, a Member's initial Capital Account shall be increased (without
duplication) by (i) the amount of any cash contributions made by or on behalf of
such Member to the Company, (ii) the agreed value of any property contributed by
or on behalf of such Member to the Company (net of any liabilities secured by
such property that the Company is considered to assume or take subject to under
Code Section 752), and (iii) the amount of all profits allocated to such Member
pursuant to Section 10.1; and a Member's Capital Account shall be decreased by
(x) the amount of any losses allocated to such Member pursuant to Section 10.1
and (y) all amounts distributed by the Company to such Member with respect to
its Membership Interest (including the agreed fair market value of any property
distributed in kind, net of all liabilities secured by such property that such
Member is considered to assume or take subject to under Code Section 752). Upon
the occurrence of any event specified in Treasury Regulation Section
1.704-1(b)(2)(iv)(f), the Management Board shall have the right to revalue the
Capital Accounts of the Members in accordance with Treasury Regulations Section
1.704-1(b)(2)(iv)(f) (a "Revaluation"). In the event of a Revaluation, the
Management Board shall, subject to the provisions of Section 9.5, apply the
allocation provisions of this Agreement in a manner consistent with the terms
thereof and the provisions of Code Sections 704(b) and 704(c) and the Treasury
Regulations promulgated thereunder.
9.8 Withdrawal; Successors. A Member shall not be entitled to withdraw any
part of its Capital Account or to receive any distribution from the Company,
except as specifically provided in the Agreement. In the event that any
Membership Interest in the Company is transferred in accordance with the
provisions hereof, the transferee of such interest shall succeed to that portion
of the transferor's Capital Account attributable to such Membership Interest.
9.9 Interest. No Member shall be entitled to interest on such Member's
Capital Contribution or on any profits retained by the Company.
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9.10 Investment of Capital Contributions. The Capital Contributions of the
Members shall be invested in demand, money market or time deposits, obligations,
securities, investments or other instruments constituting cash equivalents,
until such time as such funds shall be used for Company purposes. Such
investments shall be made for the benefit of the Company.
9.11 No Personal Liability. Members shall not have any personal liability
for the repayment of any Capital Contributions of any Member.
ARTICLE 10
ALLOCATIONS
10.1 Allocations of Profits and Losses. Subject to the next sentence, in
each Fiscal Year, any items of income, expense, gain or loss as determined for
Capital Account maintenance purposes shall be allocated among the Members in
proportion to the Percentage Interest of each Member. Special allocations of
specific items of income, gain, loss, or deduction may be required for any
Fiscal Year as follows: (i) items of income and gain shall be allocated between
the Members at such time and in such amounts as necessary to satisfy the
"minimum gain chargeback" requirements of the Treasury Regulations promulgated
under Code Section 704(b) (the "704(b) Regulations"); (ii) nonrecourse
deductions attributable to a "partner nonrecourse liability" of the Company (as
defined in the 704(b) Regulations) shall be allocated among the Members that
bear the economic risk of loss for such partner nonrecourse liability in
accordance with the ratios in which such Members share such economic risk of
loss and in a manner consistent with the requirements of the 704(b) Regulations;
(iii) items of income, gain, loss and deduction shall be allocated to the extent
required to satisfy the "qualified income offset" provisions of the 704(b)
Regulations and (iv) in the event of a sale or other disposition of all or
substantially all of the assets of the Company resulting in, or in connection
with, the liquidation of the Company, or any merger or consolidation of the
Company with and into another person, and in which the Company is not the
surviving entity, the Class B Member shall be specially allocated items of
income and gain in an amount equal to the "Catch-up Amount," which for this
purpose shall be the product of (i) the excess, if any, of $2,300,000 over the
amount of Capital Contributions made by the Class A Members to the Company
through the date of such sale, other disposition, merger or consolidation, as
the case may be, and (ii) the Percentage Interest of the Class B Member;
provided, however, that (1) to the extent there are insufficient items of income
and gain to support an allocation to the Class B Member of the entire Catch-up
Amount, the Class A Members shall, as a group, be required to make a payment to
the Class B Member in the amount of any such shortfall, which payment shall be
treated for tax purposes as additional compensation to the Class B Member and
(2) the provisions of this clause (iv) shall not be applicable in connection
with any sale, other disposition, merger or consolidation, as the case may be,
undertaken by the Company in connection with an IPO (as defined) as contemplated
by Article 18 until such time as any such IPO shall be consummated (or
immediately prior thereto). In the event that the Class A Members or any of
their respective affiliates shall, at any time, loan money to the Company,
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then, in such event, the Class A Members and their respective affiliates hereby
agree to forego interest on the amount of the excess, if any, of $2,300,000 over
the amount of Capital Contributions theretofore made by the Class A Members or
such affiliates to the Company through the date of such loan or loans; provided
that, in any event, any loan by any of the Class A Members or their affiliates
shall be on terms which are no less favorable to the Company than could be
obtained by the Company from an unaffiliated third party.
10.2 Income Tax Allocations. For income tax purposes only, each item of
income gain, loss and deduction of the Company shall be allocated among the
Members in the same manner as its correlative item of "book" income, expense,
gain or loss is allocated pursuant to Section 10.1 provided that any taxable
income, gain, loss and expense attributable to contributed or revalued property
shall be allocated among the Members so as to take into account any variation
between the adjusted tax basis of the property to the Company and its fair
market value at the time of contribution or revaluation in accordance with
Section 704(c) of the Code or the principles thereof, and any such allocations
shall be made with reference to book income, gain, loss and expense.
10.3 Authority to Modify Allocations. In the event that the Management
Board determines, after consultation with competent tax counsel, that the
allocations otherwise required pursuant to this Article 10 do not properly
reflect the economic arrangement of the Members or do not comply with the
requirements of Code Section 704(b) or (c), the Management Board shall be
authorized to modify such allocations as appropriate to more properly reflect
the economic arrangement of the Members or to comply with Code Section 704(b) or
(c). In the event that any Member shall object to such modification such member
shall have the right to dispute the allocation by arbitration in accordance with
Article 17 of this Agreement. Any allocation pursuant to this Section 10.3 shall
be deemed to be a complete substitute for any allocation otherwise provided for
in the foregoing provisions of this Article 10, and shall be so designed so as
to produce, as nearly as legally permissible, comparable economic consequences
to the affected Members. No amendment of this Agreement shall be required for
such allocation.
ARTICLE 11
DISTRIBUTIONS PRIOR TO LIQUIDATION
11.1 Distributions. Except as provided in Article 13 hereof in connection
with the dissolution and liquidation of the Company, the Company may make
distributions to the Members, in accordance with their Percentage Interests, out
of available net cash flow at such times and in such amounts as the Management
Board may determine in its sole and absolute discretion; provided, however, that
for each taxable year, the Management Board shall distribute cash in an amount
sufficient for each Member to pay any tax liability imposed on such Member's
allocable share of the Company's taxable income (which tax liability shall be
computed by the Management Board based on a hypothetical rate of 40%).
Notwithstanding the foregoing, cash or other distributions of property of the
Company available for distribution upon the dissolution and liquidation of the
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Company (including cash received upon the sale or other disposition of the
assets in anticipation of liquidation), shall be distributed as provided in
accordance with the provisions of Article 13 hereof.
11.2 Distributions in Kind. All Distributions shall be made in cash or
cash equivalents unless the Members shall have approved a Distribution of assets
in kind.
ARTICLE 12
TAXES
12.1 Partnership Tax Status. The Members expect and intend that the
Company shall be treated as a partnership for all federal income tax purposes
and each Member individually, and the Members collectively, agree (i) that they
will not on any federal, state, local or other tax return take, and shall not
otherwise assert a position inconsistent with such expectation and intent or
(ii) do any act or thing which could cause the Company to be treated as other
than a partnership for federal income tax purposes.
12.2 Tax Matters Member. SMFS, Inc. shall be the Tax Matters Member of the
Company pursuant to Section 6231(a)(7) of the Code. SMFS, Inc. shall not resign
as the Tax Matters Member unless, on the effective date of such resignation, the
Management Board has designated another Member as Tax Matters Member and such
Member has given its consent in writing to its appointment as Tax Matters
Member. The Tax Matters Member shall receive no additional compensation from the
Company for its services in that capacity, but all expenses incurred by the Tax
Matters Member in such capacity shall be borne by the Company. The Tax Matters
Member is authorized to employ such accountants, attorneys and agents as it, in
its sole discretion, determines is necessary to or useful in the performance of
its duties. In addition, such Member shall serve in a similar capacity with
respect to any similar tax related or other election provided by state or local
laws.
12.3 Elections. All elections of the Company for federal, state and local
income and other tax purposes, and all material decisions with respect to the
calculation of its taxable income and other applicable tax matters, shall be
determined by the Management Board.
12.4 Allocations upon Transfers of Membership Interests. If, during any
Fiscal Year, a Member (the "Transferring Member") transfers all or any part of
such Transferring Member's Membership Interest to another Person, which transfer
is permitted by the terms of this Agreement, items of income and loss shall be
allocated between the Transferring Member and the transferee in accordance with
their respective holdings of such Membership Interest during the Fiscal Year
using any method permitted by Section 706 of the Code as selected by the
Management Board.
12.5 Withholding Taxes. In the event that the Company is obligated to
withhold and pay any taxes with respect to any Member, any tax required to be
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withheld may be withheld from any distribution otherwise payable to such Member,
or in lieu thereof upon remittance to the appropriate tax authority may be
charged to that Member's Capital Account as if the amount of such tax had been
distributed to such Member.
ARTICLE 13
TRANSFER OF MEMBERSHIP INTEREST
13.1 Compliance with Securities Laws. No Membership Interest has been
registered under the 1933 Act or under any applicable State securities laws. A
Member may not transfer (a transfer, for purposes of this Agreement, shall be
deemed to include. but not be limited to, any sale, transfer, assignment,
pledge, creation of a security interest or other disposition) all or any part of
such Member's Membership Interest, except upon compliance with the applicable
Federal and state securities laws. The Members shall have no obligation to
register any Member's Membership Interest under the 1933 Act or under any
applicable State securities laws, or to make any exemption therefrom available
to any Member.
13.2 Transfer of Membership Interest and Admission of Substitute Member.
Subject to the provisions of Section 13.7 below, a Membership Interest of any
Member may not be transferred in whole or in part, and a transferee shall not
have a right to become a Member unless the following terms and conditions have
been satisfied:
(a) All of the Class A Members shall have consented in writing to the
transfer and substitution of the Class B Membership Interest, which consent may
not be arbitrarily withheld by any such Member; and all of the Class A Members
(other than the transferring Member) shall have consented in writing to the
transfer and substitution of a Class A Membership Interest, which consent may be
given or withheld by any such Member for any reason or no reason in its sole
discretion; provided that in the case the non-transferring Class A Members do
not represent at least a majority of the non-transferring Members, a transferee
shall not have a right to become a Member without the consent of not less than a
majority of the non-transferring Members, which consent may be given or withheld
for no reason or any reason in their sole discretion. For this purpose, (x)
majority shall mean any of a majority of the capital interests in the Company, a
majority of the profits interests in the Company, and a majority determined on a
per capita basis, and (y) any Member that is an Affiliate of the transferring
Class A Member shall be disregarded;
(b) The transferee shall have assumed in writing the obligations, if any,
of the transferor to the Company, including the obligation to fulfill the pro
rata portion of the transferor's then existing or subsequently arising
Commitment allocable to the transferred Membership Interest or portion thereof;
and
(c) The transferor and the transferee shall have complied with such other
requirements as the non-transferring Members may reasonably impose, including
the conditions that the transferee:
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(i) adopt and approve in writing all the terms and provisions of the
Agreement then in effect;
(ii) pay such fees as may be reasonable to pay the costs of the Company in
effecting such substitution; and
(iii) obtain an opinion of counsel (which counsel and opinion shall be
satisfactory to the Management Board) that the transfer will not cause a
termination of the Company for tax purposes.
13.3 Status of Transferee. A transferee of all or part of a Membership
Interest who is not a Substitute Member shall be entitled only to receive that
share of profits, losses and Distributions, and the return of Capital
Contribution, to which the transferor would otherwise be entitled with respect
to the Membership Interest transferred, and shall not have the rights of a
Member of the Company under the Act or this Agreement including without
limitation the right to obtain any information on account of the Company's
transactions, to inspect the Company's books or to vote with the Members on, or
to grant or withhold consents or approvals of, any matter. The Company shall,
however, if a transferee and transferor jointly advise the Company in writing of
a transfer of all or part of a Membership Interest, furnish the transferee with
pertinent tax information at the end of each fiscal year.
13.4 Dissolution, Termination, or Bankruptcy of a Member. Upon the
dissolution, termination, or adjudication of bankruptcy of a Member (the
"Incompetent Member"), such Member's successors, administrators, or other legal
representatives shall have all the rights of the Incompetent Member for the
purpose of administering such Member's property; provided, however, such
successors, administrators, or other legal representatives shall not have the
right to become a Substitute Member in the place of their predecessor in
interest unless all of the other Members shall so consent as provided in Section
13.3 hereof.
13.5 Dispositions not in Compliance with this Article Void. Any attempted
transfer of a Membership Interest, or any part thereof, not in compliance with
this Article shall be void ab initio and ineffectual and shall not bind the
Company.
13.6 Right of First Refusal Upon Proposed Transfer. Notwithstanding any
provision herein to the contrary, (i) no Class A Member (the "Transferor") shall
transfer its Membership Interest unless such Transferor first gives the other
Class A Members and the Company prior written notice, the rights of first
refusal granted hereunder are not exercised, and all other conditions of this
Section 13.7 are met; and (ii) the Class B Member shall not transfer its
Membership Interest unless it shall first give notice to the Class A Members and
the Company, the rights of first refusal granted hereunder are not exercised,
and all other conditions of this Section 13.7 are met (any written notice given
pursuant to clause (i) or (ii) being hereafter deemed an "Original Notice").
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(a) The Original Notice shall state the name, business and residential
address of the proposed transferee (who shall be an unaffiliated, bona fide
third party) and shall have attached any documentation related to the proposed
sale, including the proposed sale price. The Original Notice shall include the
names and addresses of the following: if the proposed transferee is (i) a
corporation, the record and beneficial stockholders and the officers and
directors of such corporation; (ii) a partnership, any limited partners and
general partners of such partnership; (iii) a trust, the trustee and
beneficiaries; and (iv) a limited liability company, the members of such limited
liability company.
(b) Within ten (10) days after receipt of the Original Notice, the Class A
Members other than the Transferor (if the Transferor is a Class A Member) may
elect to purchase the Membership Interest of the Transferor. The percentage
interest of the Membership Interest a Member may purchase shall be determined by
multiplying the Membership Interest by a fraction, the numerator of which is the
percentage of Membership Interest owned by the Member and the denominator of
which is the percentage of Membership Interests owned by all of the Members
other than the Transferor; unless all of the other Members agree to purchase the
offered Membership Interest in different proportions.
(c) If the other Class A Members do not elect to purchase all of the
offered Membership Interest by the end of the period described in Subsection (b)
above, then not later than three (3) days after the end of such period the
Company shall give the purchasing Members a second written notice. The second
notice shall state the names of each of the Class A Members who elected to
purchase, the percentage of Membership Interest that each of them elected to
purchase and the percentage of Membership Interest that was not elected to be
purchased within such period. Within ten (10) days after the date of the second
notice, the purchasing Members may elect to purchase any or all of the remaining
percentage of Membership Interest allocated in the manner described in
Subsection (b) above.
(d) Each of the purchasing Members shall evidence the election to purchase
by written notice to the Transferor and the Company, specifying the percentage
of Membership Interest to be purchased, and shall effect such purchase on the
same terms and conditions as agreed to with the proposed transferee and
reflected in the Original Notice.
(e) If the other Members do not elect to purchase all of the offered
Membership Interest within twenty-five (25) days after the date of the Original
Notice, then the Transferor may transfer, all, or a portion, of its Membership
Interest to the transferee on the terms and conditions set forth in the Original
Notice provided the transferee executes a counterpart of this Agreement agreeing
to be bound hereunder. After seventy-five (75) days from the date of the
Original Notice, if the Membership Interest shall have not been transferred, all
restrictions contained in this Agreement again shall apply to the Membership
Interest, and any subsequent transfer of the Membership Interest shall be made
only in compliance with this Agreement.
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(f) Commencing on the third anniversary date of the this Agreement and
continuing for a period of 24 months thereafter, the Class B Members shall have
the right to put its Membership Interest to the Company for the Fair Market
Value of such interest as determined in accordance with this Article 13. The
purchase price for the Membership Interest of the Class B Member shall be paid
in eighteen consecutive and equal monthly installments commencing 30 days
following the determination of the Fair Market Value of such interest as
provided herein, each such installment to bear interest at the prime rate of
Citibank as reported as of the first day of each such month.
(g) As used herein, "Fair Market Value" shall mean the fair market value
of the assets of the Company, including cash, property and goodwill, determined
on a going concern basis, minus the sum of all liabilities of the Company
reflected on the Company's most recent monthly financial statements exclusive of
delinquent trade liabilities as determined by appraisal. If the selling and
purchasing Members cannot agree upon the Fair Market Value of the Membership
Interests within twenty (20) days of the notice of election to purchase, the
selling or purchasing Members or the Company may refer the matter to appraisal
in accordance with the following:
(i) The parties shall endeavor in good faith to agree, within ten
(10) days of the last day of the twenty (20) day period, upon a sole
appraiser to conduct the appraisal. Such appraiser shall conduct an
appraisal of the Fair Market Value of the Membership Interest within
thirty (30) days of his/her selection, which appraisal shall be
binding on the parties.
(ii) If the parties cannot agree upon a sole appraiser within ten
(10) days of the last day of the 20-day period referred to above,
the Selling and Purchasing Member (or Purchasing Members. acting as
a group) will each select an appraiser and the two appraisers will
select a third appraiser. The three appraisers shall be known as the
"Appraisal Panel". If either the selling or purchasing Member fail
to elect an appraiser within the aforementioned ten (10) day period,
the appraiser selected by the other party shall perform the
appraisal within thirty (30) days and said appraisal shall be
binding upon all of the parties.
(iii) Each appraiser will be qualified by education, experience or
training to render a decision in the matters submitted.
(iv) If an Appraisal Panel is selected, within thirty (30) days of
the selection of the third appraiser, each of the Selling Member's
appraiser and the Purchasing Members' appraiser having conducted
such investigation as they deem necessary regarding the valuation of
the Company, will submit the Fair Market Value which it believes is
accurate (the "Submitted Valuation"), to the third appraiser.
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<PAGE> 23
(v) Within sixty (60) days after the third appraiser has received
the Submitted Valuations (or immediately if the Submitted Valuations
are within 10% of the Submitted Valuation which is greater), such
appraiser will render a decision determining the Fair Market Value,
as follows: if the Submitted Valuations are within ten percent (10%)
of the Submitted Valuation which is the greater of the two, then the
Fair Market Value shall be the average of the Submitted Valuations.
If the Submitted Valuations diverge by more than ten percent (10%)
of the Submitted Valuation which is the greater of the two, then the
third appraiser shall determine the Fair Market Value by selecting
one of the Submitted Valuations. The appraiser's decision shall be
binding on the parties.
All such valuations shall be determined in accordance with generally
accepted accounting principles and any dispute as to the meaning of
the phrase "generally accepted accounting principles" or its
application in any circumstances or to any state of facts shall be
referred to and conclusively determined by the Company's auditors.
The Company shall pay for any appraisal conducted hereunder.
ARTICLE 14
INDEMNIFICATION AND LIMITATION OF LIABILITY
14.1 Liability of Members.
(a) No Member (or representative of any Member) shall be liable for any
debts, obligations or liabilities of the Company or of other Members, whether
arising in tort, contract or otherwise, solely by reason of being a Member,
manager or agent or acting in such capacity or participating (as an employee,
consultant, contractor or otherwise) in the conduct of the business of the
Company.
(b) No Member (or representative of any Member) who exercises management
powers and responsibilities in respect of the Company shall be personally liable
for damages for any breach of duty in such capacity; provided, however, that the
provisions of this Section 14.1(b) shall not apply to the liability of any
Member (i) if a judgment or other final adjudication adverse to such Member
establishes (1) that such Member's acts or omissions were committed in bad faith
or involved intentional misconduct or a knowing violation of the law, (2) that
such Member personally gained in fact a financial profit or other advantage to
which such Member was not legally entitled, or (3) that with respect to a
distribution the subject of Section 508(a) of the Act, such Member's acts were
not performed in accordance with Section 409 of the Act, or (ii) for any act or
omission prior to the adoption of the provisions of this Section 14. l(b).
14.2 Indemnification. The Company shall indemnify and hold harmless, and
advance expenses to, any Member, or any testator or intestate of such Member (an
"Indemnitee"), from and against any and all claims and demands whatsoever;
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<PAGE> 24
provided, however, that the Company shall not indemnify any Indemnitee, if a
judgment or other final adjudication adverse to such Indemnitee establishes (a)
that such Indemnitee's acts were committed in bad faith or were the result of
active and deliberate dishonest and material to the cause of action so
adjudicated or (b) that such Indemnitee personally gained in fact a financial
profit or other advantage to which such Indemnitee was not legally entitled. The
satisfaction of any indemnification and any holding harmless shall be from and
limited to Company Property and the other Members shall not have any personal
liability on account thereof.
ARTICLE 15
DISSOCIATION OF A MEMBER
15.1 Dissociation. A Person shall cease to be a Member upon the happening
of any of the following events:
(a) the withdrawal, retirement or expulsion of a Member;
(b) the bankruptcy of a Member;
(c) in the case of a Member that is a separate Organization other than a
corporation, the dissolution and commencement of winding up of such separate
Organization;
(d) in the case of a Member that is a corporation, the filing of a
certificate of dissolution, or its equivalent, for such corporation or the
revocation of its charter;
(e) the entry of a decree of judicial dissolution under Section 702 of the
Act.
15.2 Rights of Dissociating Member. In the event any Member dissociates in
accordance with Section 15.1 of this Agreement prior to the expiration of the
term of this Agreement:
(a) if the Dissociation causes a dissolution and winding up of the Company
under Article 16 of this Agreement, the Member shall be entitled to participate
in the winding up of the Company to the same extent as any other Member except
that, if such Dissociation results from a withdrawal of a Member in violation of
this Agreement, any Distributions to which such Member would have been entitled
shall be reduced by that portion of the damages, if any, sustained by the
Company as a result of the Dissolution Event and winding up that is chargeable
to the Capital Accounts of the other Members;
(b) if the Dissociation does not cause a dissolution and winding up of the
Company under Article 16 of this Agreement, the Company shall pay to the Member,
within six months of such Dissociation, an amount to be determined in accordance
with Section 15.2(c) hereof, to be paid over a period not to exceed five
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<PAGE> 25
years together with interest at the minimum rate necessary to avoid the
imputation of interest under the Code.
(c) The amount to be paid to a Dissociating Member for such Member's
Membership Interest shall be the Fair Market Value of such Member's interest in
the Company as of the date of withdrawal determined in accordance with Section
13(f)
ARTICLE 16
DISSOLUTION AND WINDING UP
16.1 Dissolution. The Company shall be dissolved and its affairs wound up,
upon the first to occur of any of the following events (each of which shall
constitute a Dissolution Event):
(a) the expiration of the Term of the Agreement, unless the Company is
continued with the consent of all of the Members:
(b) the unanimous written consent of all of the Members;
(c) the Dissociation of any Member, unless at the time of such
Dissociation there are at least two remaining Members and the Company is
continued with the consent of all of the remaining Members within 90 days after
such Dissociation;
(d) the failure of the Management Board to agree upon an annual budget for
presentation to the Members; and
(e) when there is but one Member.
16.2 Effect of Dissolution. Upon dissolution, the Company shall not be
terminated and shall continue until the winding up of the affairs of the Company
is completed and a certificate of dissolution has been issued by the Secretary
of State of the State of New York.
16.3 Distribution of Assets on Dissolution. Upon the winding up of the
Company, the Members acting together or such Person(s) designated by all of the
Members shall take full account of the assets and liabilities of the Company,
shall liquidate the assets (unless the Management Board determines that a
distribution of any Company Property in-kind would be more advantageous to the
Members than the sale thereof) as promptly as is consistent with obtaining the
fair value thereof, and shall apply and distribute the proceeds therefrom in the
following order:
(a) first, to creditors, including Members who are creditors, to the
extent permitted by law, in satisfaction of liabilities of the Company, whether
by payment or by establishment of adequate reserves ("Reserves"), other than
liabilities for distributions to Members and former Members described in Section
16.3(b) hereof; provided, that such Reserves may be paid over by the Members to
an escrow agent or trustee selected by the Members to be disbursed by such
escrow agent or trustee
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<PAGE> 26
in payment of any of the aforementioned obligations or contingencies and, if any
balance remains at the expiration of such period as the Members shall deem
advisable, shall be distributed by such escrow agent or trustee in the manner
hereinafter provided;
(b) second, to Members and former Members in satisfaction of liabilities
for distributions to such Members and former Members (i) pursuant to Article 11
and (ii) upon withdrawal of such Members of former Members; and
(c) then, to the Members in accordance with positive Capital Account
balances taking into account all Capital Account adjustments for the Company's
taxable year in which the liquidation occurs. Liquidation proceeds shall be paid
within 60 days of the end of the Company's taxable year in which the liquidation
occurs. Such Distributions shall be in cash or Property (which need not be
distributed proportionately) or partly in both, as determined by the Members.
If at the time of liquidation the Management Board shall determine that an
immediate sale of some or all Company Property would cause undue loss to the
Members, the Management Board may, in order to avoid such loss, defer
liquidation.
16.4 Winding Up and Filing Articles of Dissolution. Upon the commencement
of the winding up of the Company, articles of dissolution shall be delivered by
the Company to the Secretary of State of New York for filing. The articles of
dissolution shall set forth the information required by the Act. The winding up
of the Company shall be completed when all debts. liabilities, and obligations
of the Company have been paid and discharged or reasonably adequate provision
therefor has been made, and all of the remaining Property of the Company has
been distributed to the Members.
ARTICLE 17
ARBITRATION
Any and all disputes arising out of or relating to this Agreement shall be
settled through final and binding arbitration before a panel of three
arbitrators selected by the American Arbitration Association (the "AAA") in
accordance with the Commercial Arbitration Rules of the AAA. The choice of
arbitrators by the AAA shall be binding on the Members. The arbitration shall be
held in such place in the New York City metropolitan area as may be agreed upon
by the arbitrators, and shall be conducted in accordance with the Commercial
Arbitration Rules then existing of the American Arbitration Association. The
arbitrators shall have the authority to order or award all appropriate equitable
and legal relief. Judgment upon the written award rendered by the arbitrators,
which award shall describe the substantive and legal basis for the decision
reached by the arbitrators, may be entered in any court having jurisdiction
thereof. All costs and expenses incurred in connection with any such arbitration
proceeding shall be borne by the party against which the decision is rendered,
or, if no decision is rendered or if such decision is a compromise. shall be
borne equally by the parties hereto.
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<PAGE> 27
ARTICLE 18
ACTIONS TAKEN TO EFFECT A PUBLIC OFFERING
In the event that the Management Board, in its sole and absolute
discretion, determines to undertake an initial public offering ("IPO") of the
Company's securities, and, in connection therewith, believes, in good faith,
that it is necessary or advisable to reconstitute or reorganize the Company in
the form of a corporation for purposes of effecting such IPO, then, in such
event, the Management Board shall be entitled, and is hereby fully authorized
and empowered, subject to the provisions of Section 9.5, to cause a transfer or
conveyance of all or substantially all of the assets of the Company to, or
otherwise to cause a merger or consolidation of the Company with and into, a
newly formed corporation ("Newco"), and each Member by such Member's admission
as a Member irrevocably and unconditionally agrees and consents (without the
necessity for any additional corporate or Member action) to the foregoing (the
time at which any such transfer, conveyance, merger or consolidation is
consummated or becomes effective being hereafter referred to as the
"Incorporation Time"). In connection therewith, each Member by such Member's
admission as a Member irrevocably and unconditionally agrees (without the
necessity for any additional corporate or Member action) to take any and all
action reasonably necessary or advisable, in the good faith determination of the
Management Board, to effect the intent of the foregoing, including, without
limitation (but subject to the extent applicable Section 9.5), transferring,
exchanging or otherwise disposing of its Membership Interests to Newco in
consideration of capital stock in Newco representing an equivalent ownership
interest in Newco (in the event of any such transfer, exchange or other
disposition of Interests to Newco, the form of capital stock to be received by
each of the Members shall be identical in all respects). The members of the
Management Board at the Incorporation Time shall be the initial directors of
Newco.
ARTICLE 19
MISCELLANEOUS
19.1 Headings. All Article and section headings in the Agreement are for
convenience of reference only and are not intended to qualify the meaning of any
Article or section.
19.2 Entire Agreement. This Agreement together with the schedules and
appendices attached hereto constitutes the entire agreement between the parties
and supersedes any prior agreement or understanding between them respecting the
subject matter of this Agreement.
19.3 Binding Agreement. The Agreement shall be binding upon, and inure to
the benefit of, the parties hereto, their successors, heirs, legatees, assigns,
legal representatives, executors and administrators, except as otherwise
provided herein.
19.4 Saving Clause. If any provision of this Agreement, or the application
of such provision to any Person or circumstance, shall be held invalid, the
remainder of this Agreement, or the application of such provision to Persons or
circumstances other than those as to which it is held invalid, shall not be
affected thereby. If the operation of any provision of this Agreement would
contravene the provisions of the Act, such provision shall be void and
ineffectual.
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<PAGE> 28
19.5 Counterparts. The Agreement may be executed in several counterparts,
and all so executed shall constitute one agreement, binding on all the parties
hereto, even though all parties are not signatory to the original or the same
counterpart. Any counterpart of either the Agreement shall for all purposes be
deemed a fully executed instrument.
19.6 Amendment. This Agreement may be amended only with the consent of the
holders of a majority of the Percentage Interests; provided, however, that no
such amendment which materially and adversely affects the method of maintaining
the Capital Accounts of any Member shall be effective against such Member if
such Member has not consented thereto.
19.7 Further Assurances. The parties agree to execute and deliver any
further instruments or documents and perform any additional acts which are or
may become necessary to effectuate and carry on the Company created by this
Agreement.
19.8 Governing Law. The Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard for the
principles of conflict of laws thereof.
19.9 No Membership Intended for Non-tax Purposes. The Members have formed
the Company under the Act, and expressly do not intend hereby to form a
partnership for non-tax purposes, either general or limited, under the New York
Partnership Law. The Members do not intend to be partners one to another, or
partners as to any third party. To the extent any Member, by word or action,
represents to another person that any Member is a partner or that the Company is
a partnership, the Member making such wrongful representation shall be liable to
any other Members who incur personal liability by reason of such wrongful
representation.
19.10 No Rights of Creditors and Third Parties under Agreement. The
Agreement is entered into among the Company and the Members for the exclusive
benefit of the Company, its Members, and their successors and assignees. The
Agreement is expressly not intended for the benefit of any creditor of the
Company or any other Person. Except and only to the extent provided by
applicable statute, no such creditor or any third party shall have any rights
under the Agreement or any agreement between the Company and any Member with
respect to any Capital Contribution or otherwise.
19.11 Authority to Execute Documents. During the term of the Company and
(to the extent a Management Board remains) during any additional period
authorized in accordance with this Agreement to dissolve, liquidate and wind up
the affairs of the Company, each of the Members hereby irrevocably designates
and appoints the Management Board, and any successors of such Management Board,
and any duly appointed agent of such Management Board, with full power of
substitution, to be each such Member's true and lawful attorney-in-fact with the
power from time to time in the name, place, and stead of the Member to do any
ministerial act necessary to qualify the Company to do business under the laws
of any jurisdiction in which it is necessary to file any instrument in writing
in connection with such qualification, and to make, execute, swear to and
acknowledge, amend, file, record, deliver and publish in conformance with the
provisions of this Agreement (i) the Articles of Organization, (ii) a
counterpart of
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<PAGE> 29
this Agreement or of any amendment hereto for the purpose of filing or recording
such counterpart in any jurisdiction in which the Company may own property or
transact business, (iii) all certificates and other instruments necessary to
qualify or continue the Company as a limited liability company in New York or in
any jurisdiction where the Company may own property or be doing business, (iv)
any fictitious or assumed name certificate required or permitted to be filed by
or on behalf of the Company, (v) any other instrument that is now or may
hereafter be required by law to be filed for or on behalf of the Company, (vi)
any other instruments or documents that the Management Board deems necessary to
conduct the operation of the Company; provided, that, such instrument or
document is not inconsistent with the terms of this Agreement in effect at that
time, (vii) any amendment to this Agreement pursuant to Section 19.6 hereof and
(viii) a certificate or other instrument evidencing the dissolution or
termination of the Company when such shall be appropriate in each jurisdiction
in which the Company shall own property or do business.
19.12 General Interpretive Principles. For purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Agreement include the plural as well as the
singular, and the use of any gender herein shall be deemed to include the other
gender;
(b) accounting terms not otherwise defined herein have the meanings given
to them in the United States in accordance with generally accepted accounting
principles;
(c) references herein to "Sections","paragraphs", and other subdivisions
without reference to a document are to designate Sections, paragraphs and other
subdivisions of this Agreement;
(d) a reference to a paragraph without further reference to a Section is a
reference to such paragraph as contained in the same Section in which the
reference appears, and this rule shall also apply to other subdivisions;
(e) the words "herein", "hereof", "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular provision;
and
(f) the term "include" or "including" shall mean without limitation by
reason of enumeration.
[Remainder of Page Intentionally Left Blank]
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<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have executed this Operating
Agreement as of the Effective Date.
Class A Members
SMFS, INC.
By: /s/ [Illegible]
------------------------------
LTJ GROUP INC.
By: /s/ [Illegible]
------------------------------
LPS CONSULTANTS, INC.
By: /s/ [Illegible]
------------------------------
Class B Member
NATIONAL FIBER NETWORK INC.
By: /s/ [Illegible]
------------------------------
<PAGE> 31
SCHEDULE A
CLASS A MEMBERS
Initial
Capital Percentage
Name and Address Contribution Interest
- ---------------- ------------ ----------
SMFS Inc. _____________ _____%
_______________________ _____________
_______________________ _____________
LTJ Group Inc. _____________ _____%
_______________________ _____________
_______________________ _____________
LPS Consultants, Inc. _____________ _____%
_______________________ _____________
_______________________ _____________
Total $90,000 90%
----- ===
Tax Matters Member SMFS, Inc.
CLASS B MEMBERS
NFN, Inc. $10,000 10%
===
31
<PAGE> 1
SCHEDULE B
LICENSE
National Fiber Network Inc. ("NFN")
60 Hudson Street
New York, New York 10013
June 19, 1996
NFN hereby grants to Local Fiber L.L.C. (the "Company"), for the exclusive
use of the Company and its customers ("Right of Usage") a minimum of four (4)
and a maximum of eight (8) strands of dark fiber which strands shall loop the
NFN existing fiber optic cable network in New York City and New Jersey (the "NFN
Network") which network is depicted on the map attached hereto as Exhibit A.
The grant and the continuation of the Right of Usage shall be subject to
the following:
(a) The Right of Usage shall terminate upon (i) the Dissolution of
the Company; (ii) the filing by the Company (or consent by answer or
otherwise) to the filing against it of a petition for relief or
reorganization or arrangement or any other petition in bankruptcy or
insolvency under the laws of any jurisdiction; (iii) the Company shall
consent to the appointment of a custodian, receiver, trustee or shall
become insolvent or (iv) the failure of the Class A Members of the Company
to arrange aggregate financing for the Company, whether in the form of
equity or debt, in an amount not less than $2,000,000 as of December 31,
1997.
(b) NFN shall not be required to incur any cost or expense arising
out of or in connection with the Company's Right of Usage (except for the
franchise and related fees which NFN would have been required to incur
notwithstanding this agreement) including but not limited to (i) fees or
charges imposed under that certain franchise agreement dated December 20,
1993 between NFN and the City of New York (the "Franchise") for or in
connection with the Company's Right of Usage or the granting of such Right
of Usage; (ii) the cost and expense of connecting or interfacing the NFN
Network with network facilities, fiber, or equipment owned or leased by
the Company (collectively the "Company Facilities"); (iii) taxes or other
charges (with the exception of income, property or other similar taxes for
which NFN is responsible) imposed or levied which are based upon or
related to the Company's use of the NFN Network. The Company shall
promptly reimburse NFN for any such fees, charges, cost or expense it may
incur
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<PAGE> 2
and shall indemnify and hold NFN harmless for any damage or expense it may incur
as a result of any work, labor or service performed on the NFN Network by or
under the direction of the Company.
(c) The Company shall not perform any work, labor or service upon the NFN
Network without the prior written approval and consent of NFN. All splices
required to connect the NFN Network to the Company Facilities shall be performed
solely by NFN (and the costs thereof charged to the Company), or at its
discretion, by the Company subject to supervision by NFN personnel.
(d) The following shall apply with respect to all buildings, locations or
facilities (collectively, "Locations") which shall grant the Company access for
fiber optic cable by way of easement, right of way, license or otherwise
(collectively, "Right of Way").
(i) The Company at its sole cost and expense (including expense for
easements and permits) shall construct and install a connection (referred
to herein as the "Stubout Connection") which shall consist of (x) the
installation of fiber optic cable (consisting of a maximum of 16 fibers)
from a splice point on the NFN Network designated by NFN (which splice
point shall be the closest location on the Network to the designated
building), to the manhole in closest proximity to the Location (the "Zero
Manhole"); and (y) the installation and construction of one 4" duct with
two 2" inner ducts from the Zero Manhole directly to a termination point
within the Location which is commonly referred to as the point of entry
which shall be determined by the owner or manager of the subject Location
("Termination Point").
(ii) All right, title and interest to the Stubout Connections constructed
by the Company shall vest in NFN provided that the Company shall have a
perpetual license for the exclusive use of one 2" inner duct (the "Company
Duct") within such Stubout Connection. The Company shall earn a credit in
an amount equal to 10% of the cost of construction, which credit shall be
applied in accordance with the provisions of subparagraph "(h)" below. The
Company may install up to eight fibers in the Company Duct from the Zero
Manhole to the Termination Point provided that at the time of such
installation, the Company (without charge) shall also install eight fibers
on behalf of NFN in the remaining 2" inner duct which shall be reserved
for the exclusive use of NFN.
(iii) The Company shall use its reasonable efforts to provide that any
Right of Way granted to the Company shall afford the same rights to NFN;
provided, however, that the Company shall not be required to afford to NFN
any greater rights of access or entry to any property than are granted to
the Company,
2
<PAGE> 3
whether or not additional rights of access or entry are granted to any
affiliate of the Company, and provided, further, that the actual use by
NFN of any such Right of Way may be subject to the ultimate discretion of
the owner of such property.
(iv) Upon completion of the construction and installation of the Stubout
Connection, the Company shall deliver to NFN a set of shop drawings with
respect to such installation and a certification of an itemized statement
of costs incurred with respect to such construction and installation.
(e) On the Commencement Date, (i) the Right of Usage shall be limited to
four strands of dark fiber on the NFN Network and shall be increased to eight
strands of dark fiber (the additional four strands of dark fiber being referred
to as "Additional Strands") at such time as the Company shall obtain access to
twenty Locations and (ii) NFN shall reserve for, and shall designate and assign
to, the Company such Additional Strands for the Company's exclusive use.
(f) In the event the Company requires fiber capacity on the NFN Network in
excess of the number of fibers provided under the Right of Usage, NFN shall
provide additional fiber capacity to the Company at a monthly rate which is
equivalent to the lowest monthly lease rate then charged to any NFN customer
utilizing fiber capacity on such network.
(g) The Company shall not directly or indirectly sublease, condo,
sublicense or wholesale to any third party fiber optic capacity on the NFN
Network unless such fiber optic capacity is distributed through the Company's
transmission system.
(h) The term of this license shall commence on July 1, 1996 (the
"Commencement Date") and shall end on December 20, 2008 (the "Initial Term").
The Company shall have the option to extend the term of this license (the
"Extended Term") for an additional 15 years or for the remaining term of the
Franchise and any extensions thereof (whichever period shall be less), which
option shall be exercised by notice to NFN at lease six months, but not more
than 12 months, prior to the end of the Initial Term. Lease payments for the
Extended Term shall be payable, in a lump sum payment (the "Lump Sum Payment
Option") equal to the credit provided for in subparagraph "(d)(ii)" hereof.
(i) Neither NFN nor the Company shall be considered in breach of this
Agreement or liable for any expense, loss or damage resulting form delay or
prevention of performance caused by any act attributable to an occurrence of an
event of Force Majeure. Neither party shall, however, be relieved of liability
for failure of performance
3
<PAGE> 4
performance due to a claimed Force Majeure hereunder if such failure is due to
causes arising out of its own negligence or to removable or remediable causes
that it fails to remove or remedy with reasonable dispatch.
The term "Force Majeure" shall mean any cause beyond the control of the
party affected which by exercise of due foresight such party could not
reasonably have been expected to avoid and, which by exercise of due diligence,
such party shall be unable to overcome during the period while such party shall
continue to exercise such due diligence, including, but not limited to, failures
of facilities, changes in laws except tax laws, rules, regulations, etc., flood,
earthquake, storm except for weather conditions normal to the area, fire,
lightening, epidemic, war, riot, civil disturbance, sabotage, inability due to
the previously mentioned conditions to obtain material, fuel or supplies in
adequate quantities, or restraint by court order or public authority. Nothing
contained herein, however, shall be construed to require either party to prevent
or settle and strike (other than a strike by employees of a contractor) against
its will.
Any party affected by an event of Force Majeure (the "Affected Party")
shall notify such other party (the "Other Party") promptly of any occurrence or
condition which in the Affected Party's opinion warrants an extension of time.
Such notice must be submitted to the Other Party within five days or such sooner
date as is practicable after such delay is known to the Affected Party, or
shall, in the exercise of reasonable diligence, become known. Such notice shall
specify in detail the anticipated length of delay, the cause of the delay, and a
timetable by which any remedial measures shall be implemented. Failure to
provide such notice within such period shall constitute a waiver by the Affected
Party of any request for extension applicable to any period prior to the date
such notice is actually received by the Other Party. The Other Party shall
acknowledge receipt of the Affected Party's notice within ten (10) days of its
receipt advising of its acceptance or rejection or further consideration. If the
Other Party reasonably requires further information in order to consider the
request, the Affected Party shall supply such information within ten (10) days
and, if the Affected Party fails to provide such information, the Affected
Party's original notice shall be deemed not to have been given.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this License
Agreement as of June 19, 1996
LOCAL FIBER, LLC
By: /s/ [ILLEGIBLE]
------------------------------
Vice Pres.
NATIONAL FIBER NETWORK, INC.
By: /s/ [ILLEGIBLE]
------------------------------
<PAGE> 1
FiberNet Telecom Group, Inc.
Employee Equity Participation Program
Plan Summary
This Plan is designed to advance the Company's interests by encouraging
employees to acquire a proprietary interest in the Company. It provides that an
aggregate of 1,500,000 of the aggregate outstanding shares (the "Shares") of
common stock of the Company (the "Common Stock") may be optioned to Employees.
Options granted under this Plan may be either Incentive Stock Options, which
qualify for favorable federal income tax treatment or Nonstatutory Stock
Options. All Employees are eligible to receive Incentive Stock Options or
Nonstatutory Stock Options, but the Administrator is entitled to select the
individuals to whom such options actually will be granted and to determine
whether the options will be Incentive Stock Options or Nonstatutory Stock
Options.
To meet the statutory requirements for Incentive Stock Options under
Internal Revenue Code Section 422, this Plan provides that the purchase price of
the optioned stock must be fixed at no less than the fair market value of the
Common Stock as of the time the Option is granted (or in the case of an Optionee
who beneficially owns more than Ten Percent (10%) of the Company's outstanding
shares of Common Stock, no less than One Hundred Ten Percent (110%) of the fair
market value of the Common Stock as of the time the Option is granted). To the
extent that the aggregate fair market value of the Common Stock with respect to
which Incentive Stock Options are exercisable by an Optionee for the first time
in any one (1) calendar year exceeds One Hundred Thousand Dollars ($100,000),
options for such shares of Common Stock shall not be considered Incentive Stock
Options. Incentive Stock Options granted under this Plan are nontransferable
(other than by will or the laws of descent and distribution) and Incentive Stock
Options may not be exercised more than ten (10) years (five (5) years in the
case of an Optionee who beneficially owns more than Ten Percent (10%) of the
Company's outstanding shares of the Common Stock) after the date they are
granted.
The Company will receive no cash consideration for granting Options under
this Plan. However, when an Option is exercised, the holder is required to pay
the Option Price for the number of shares of the Common Stock to be issued under
the exercised Option.
This Plan will be administered by the Administrator and will terminate
five (5) years after the earlier of the date it is adopted by the Board of
Directors or the date it is approved by the Company's stockholders, unless
earlier terminated by the Administrator.
1. Definitions
As used herein, the following terms have the meanings hereinafter set
forth unless the context clearly indicates to the contrary:
<PAGE> 2
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Administrator" means the Board or the Committee, whichever shall be
administering this Plan from time to time in the discretion of the Board, as
described in Section 3 of this Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the committee appointed by the Board in accordance
with Section 3 of this Plan.
(f) "Common Stock" means the common stock of the Company.
(g) "Company" means FiberNet Telecom Group, Inc., a Nevada corporation.
(h) "Disinterested Person" shall have the meaning assigned to this phrase
in Rule 16b-3 of the Securities and Exchange Commission adopted under the
Exchange Act.
(i) "Employee" means an individual who is employed (within the meaning of
Section 3401 of the Code and the regulations thereunder) by the Company or a
Subsidiary.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(k) "Fair Market Value" of Shares shall mean (i) if the Shares are not
publicly traded on the day in question, the fair market value of the Shares on
the day in question as determined and set forth in writing by the Administrator
(who, in making such determination, shall make a good faith effort to establish
the true fair market value of the Shares as of such date using such methods as
the Administrator may deem appropriate and taking into consideration any
requirements set forth in the Code or the regulations thereunder and whose
determination shall be conclusive and binding on all Optionees) or (ii) if the
Shares are publicly traded on the day in question, the closing price of the
Shares on the day in question. The closing price shall be the last reported sale
price on the New York Stock Exchange or, if the Shares are not listed or
admitted to trading on such Exchange, on the principal national securities
exchange on which the Shares are listed or admitted to trading or, if not listed
or admitted to trading on any national securities exchange, the average of the
highest closing bid and asked prices as reported by NASDAQ's National Market
System.
(l) "Incentive Stock Option" means an Option for Shares which qualifies
for treatment pursuant to Section 422 of the Code.
(m) "Incentive Stock Option Agreement" means the agreement described in
Section 6.1 hereof between the Company and any Optionee under which the Optionee
may purchase Shares hereunder.
<PAGE> 3
(n) "Nonstatutory Stock Option" shall mean an option not described in
Section 422(b), 423(b) or 424(c)(3)(B) of the Code.
(o) "Nonstatutory Stock Option Agreement" means the agreement described in
Section 6.1 hereof between the Company and any Optionee under which the Optionee
may purchase Shares.
(p) "Option" means an option to purchase a Share pursuant to the
provisions of this Plan.
(q) "Optionee" means an officer or Employee to whom an Option has been
granted hereunder.
(r) "Option Price" means the price per share of the Shares subject to each
Option as provided in Section 6.3 hereof.
(s) "Option Term" means the period of time during which an Option may be
exercised.
(t) "Outstanding Stock" shall have the meaning assigned to it in Section
4.2(b) hereof.
(u) "Plan" means this FiberNet Telecom Group, Inc. Employee Equity
Participation Program, the terms of which are set forth herein.
(v) "Share" or "Shares" means shares of Common Stock.
(w) "Total and Permanent Disability" means the inability of an Employee or
officer to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which (i) can be expected to result
in death or which has lasted or can be expected to last for a continuous period
of not less than twelve (12) months and (ii) the Administrator, based upon
medical evidence, has expressly determined is a Total and Permanent Disability.
2. The Plan
2.1 Name. This Plan shall be known as the "FiberNet Telecom Group, Inc.
Employee Equity Participation Program".
2.2 Purpose. The purpose of this Plan is to advance the interests of the
Company and its stockholders by affording Employees of the Company an
opportunity to acquire or increase their proprietary interest in the Company by
the grant to such individuals of Options under the terms set forth herein. By
encouraging such individuals to acquire or increase their proprietary interest
in the Company, the Company seeks to attract, motivate and retain those highly
competent individuals upon whose judgment, initiative, leadership, and continued
efforts the success of the Company in large measure depends.
<PAGE> 4
2.3 Intention. It is intended that the Options issued under this Plan may
qualify as Incentive Stock Options and the terms of this Plan shall be
interpreted in accordance with such intention if they are issued in accordance
with the rules set forth herein applicable to Incentive Stock Options.
3. Administration
3.1 Administration. This Plan shall be administered, in the discretion of
the Board from time to time, by the Board or by the Committee, acting as the
Administrator. The Committee shall be appointed by the Board, in a manner
consistent with the Company's By-Laws, and shall consist of not less than two
(2) members of the Board. The Board may from time to time remove members from,
or add members to, the Committee. Vacancies on the Committee, however caused,
shall be filled by the Board. The Board may appoint one (1) of the members of
the Committee as Chairman. The Administrator shall hold meetings at such times
and places as it may determine. Acts of a majority of the Administrator at which
a quorum is present, or acts reduced to or approved in writing by the unanimous
consent of the members of the Administrator, shall be the valid acts of the
Administrator.
3.2 Duties. Subject to Section 3.4 hereof, the Administrator shall from
time to time at its discretion select the Employees who are to be granted
Options, determine the number of Shares subject to Options to be granted to each
Optionee and designate such Options either as Incentive Stock Options or
Nonstatutory Stock Options. The interpretation and construction by the
Administrator of any provisions of this Plan or of any Option granted thereunder
shall be final. No member of the Administrator shall be liable for any action or
determination made in good faith with respect to this Plan or any Option granted
hereunder.
3.3 Registered Shares. If any Shares are registered under Section 12 of
the Exchange Act, then notwithstanding the first or second sentence of Section
3.2 hereof, after such registration the grant of any Option under this Plan to
any person who shall be an officer or director (as defined in Section 16 of the
Exchange Act) of the Company at the time of such grant shall only be made either
(i) with the approval of the Board if all of its members are Disinterested
Persons or (ii) with the approval of the Committee if all of the members of the
Committee are Disinterested Persons.
3.4 Program Parameters. In exercising his discretion to select the
Employees who are to be granted Options, as set forth in Section 3.4 hereof, the
Administrator may take into account the following factors:
(a) Personnel level, including, without limitation, designation of
an Employee as Chief Financial Officer, Vice President of Sales and Marketing or
as Vice President of Operations; and
(b) Other factors, including, without limitation (i) total base
salary during the Employee's tenure with the Company, (ii) discretionary signing
bonuses awarded to the Employee at the inception of employment, (iii)
<PAGE> 5
discretionary annual bonuses awarded to the Employee for significant
contributions to the Company.
4. Participation
4.1 Eligibility. The Optionees shall be such persons as the Administrator
may select from among the Employees (who may be officers) of the Company or of a
Subsidiary subject to the terms and conditions of Section 4.2 below.
4.2 Ten-Percent Stockholders. An Optionee who beneficially owns more than
ten percent (10%) of the total combined voting power of all classes of
Outstanding Stock of the Company shall not be eligible to receive an Incentive
Stock Option unless (i) the Option Price of the Shares subject to such Option is
at least one hundred ten percent (110%) of the Fair Market Value of such Shares
on the date of grant and (ii) such Option by its terms is not exercisable after
the expiration of five (5) years from the date of grant.
(a) For purposes of this Section 4.2, in determining stock
ownership, an Optionee's beneficial ownership of any class of Outstanding Stock
of the Company shall be determined as provided in Rule 16a-1(a) of the
Securities and Exchange Commission adopted under the Exchange Act, and in any
event (i) such Optionee shall be considered as owning the stock owned, directly
or indirectly, by or for his or her brothers and sisters, spouse, ancestors and
lineal descendants, (ii) stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be considered as being owned
proportionately by or for its shareholders, partners or beneficiaries and (iii)
stock with respect to which such Optionee holds an Option shall not be counted.
(b) For purposes of this Section 4.2, "Outstanding Stock" shall
include all Shares actually issued and outstanding immediately after the grant
of the Option to the Optionee. "Outstanding Stock" shall not include Shares
authorized for issue under outstanding Options held by the Optionee or by any
other person.
5. Shares Subject to Plan
5.1 Shares Available for Options. Subject to adjustment pursuant to the
provisions of Section 5.2 hereof, the total number of Shares which may be issued
upon the exercise of all Options shall not exceed 1,500,000 of the aggregate
outstanding Shares. Such Shares may be either authorized and unissued Shares or
issued Shares which have been reacquired by the Company. If any Option shall
expire or terminate for any reason without having been exercised in full, new
Options may be granted covering Shares originally set aside for the exercise of
such expired or terminated Option.
5.2 Adjustments.
(a) Subject to any required action by the Board and/or stockholders,
the number of Shares covered by this Plan as provided in Section
<PAGE> 6
5.1 hereof, the number of Shares covered by each outstanding Option and the
Option Price thereof shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from a subdivision or
consolidation of Shares or the payment of a stock dividend (but only if paid in
Shares), a stock split or any other increase or decrease in the number of issued
Shares effected without receipt of consideration by the Company.
(b) Subject to any required action by the Board and/or stockholders,
if the Company shall merge with another corporation and the Company is the
surviving corporation in such merger and under the terms of such merger the
Shares outstanding immediately prior to the merger remain outstanding and
unchanged, each outstanding Option shall continue to apply to the Shares subject
thereto and shall also pertain and apply to any additional securities and other
property, if any, to which a holder of the number of Shares subject to the
Option would have been entitled as a result of the merger.
(c) To the extent that the foregoing adjustments relate to
securities of the Company, such adjustments shall be made by the Administrator,
whose determination shall be conclusive and binding on all persons. In computing
any adjustment under this Section 5.2, any fractional Share which might
otherwise become subject to an Option shall be eliminated.
6. Options
6.1 Option Grant and Agreement. Each Option grant shall be evidenced by a
written Incentive Stock Option Agreement or Nonstatutory Stock Option Agreement
dated as of the date of grant and executed by the Company and the Optionee,
which Agreement shall set forth the number of Options granted, the Option Price,
the Option Term and such other terms and conditions as may be determined
appropriate by the Administrator; provided that such terms and conditions are
consistent with this Plan. The Incentive Stock Option Agreement and Nonstatutory
Stock Option Agreement shall incorporate this Plan by reference and provide that
any inconsistencies or disputes shall be resolved in favor of this Plan
language.
6.2 Option Conditions. Each Incentive Stock Option shall be subject to the
following conditions, which conditions shall be stated within the applicable
Incentive Stock Option Agreement. Any Option which does not comply with these
provisions shall not be considered an Incentive Stock Option and shall not be
considered as issued under this Plan unless it is a Nonstatutory Stock Option:
(a) To the extent that the aggregate Fair Market Value of Shares
(determined as of the time an Option is granted) exercisable for the first time
by an Optionee during any calendar year under this Plan and all similar plans
maintained by the Company exceeds One Hundred Thousand Dollars ($100,000),
options for such Shares shall be treated as options that are not Incentive Stock
Options. For purposes of this provision, Incentive Stock Options shall be taken
into account in the order in which they were granted.
<PAGE> 7
(b) Incentive Stock Options granted to an Optionee may be exercised
in any Order, so that an Optionee may exercise an Incentive Stock Option if
another Incentive Stock Option, granted to him at an earlier time, remains
outstanding.
(c) No Incentive Stock Option may be assigned or transferred by an
Optionee other than by will or by the laws of descent and distribution. During
the lifetime of an Optionee, the Incentive Stock Option may be exercised only by
the Optionee. Transfer of an Incentive Stock Option by will or by the laws of
descent and distribution shall not be effective to bind the Company unless the
Company shall have been furnished with written notice thereof and an
authenticated copy of the will or such other evidence as the Board may deem
necessary to establish the validity of the transfer and the acceptance by the
transferee of the terms and conditions of such Option.
6.3 Option Price. The Option Price shall be determined by the
Administrator, subject to any limitations imposed by this Plan, but shall not be
less than the Fair Market Value of Shares on the date the Option is granted and,
in the case of an Incentive Stock Option granted to an Optionee described in
Section 4.2 hereof, the Option Price shall not be less than One Hundred Ten
Percent (110%) of the Fair Market Value on the date of grant.
6.4 Option Term. The Option Term shall be determined by the Administrator,
subject to any limitations imposed by this Plan, but with respect to Incentive
Stock Options shall not be more than ten (10) years from the date such Option is
granted and, in the case of an Option granted to an Optionee described in
Section 4.2 hereof, shall not be more than [five (5)] years from the date such
Option is granted. Options may be subject to earlier termination as provided in
this Plan.
6.5 Limitations on Exercise of Options. Notwithstanding anything contained
in this Plan to the contrary:
(a) Options may not be exercised until this Plan has been ratified
by the stockholders as provided in Section 9.5 hereof.
(b) Options shall be exercised in full or in such equal or unequal
installments as the Administrator shall determine; provided that if an Optionee
does not purchase all of the Shares which the Optionee is entitled to purchase
on a certain date or within an established installment period, the Optionee's
right to purchase any unpurchased Shares shall continue during the Option Term
(taking into account any early termination of such Option Term which may be
provided for under this Plan).
(c) If any Shares are registered under Section 12 of the Exchange
Act, all Options granted thereafter to an officer or director (as defined in
Section 16 of the Exchange Act) of the Company shall be subject to the
limitation that such Options shall not be exercised within six (6) months from
the date of grant.
<PAGE> 8
(d) Except as otherwise provided in such Incentive Stock Option
Agreement or Nonstatutory Stock Option Agreement, as applicable, the Options
shall vest and become exercisable by the Optionee at the rate of Twenty Percent
(20%) per year for five (5) years, according to the following schedule:
(i) Commencing on the date one (1) year after the date of the grant
of the Option, the Option may be exercised to the extent of Twenty Percent
(20%) of the Shares subject to the Option.
(ii) Commencing on the date two (2) years after the date of the
grant of the Option, the Option may be exercised to the extent of Forty
Percent (40%) of the Shares subject to the Option.
(iii) Commencing on the date three (3) years after the date of the
grant of the Option, the Option may be exercised to the extent of Sixty
Percent (60%) of the Shares subject to the Option.
(iv) Commencing on the date four (4) years after the date of the
grant of the Option, the Option may be exercised to the extent of Eighty
Percent (80%) of the Shares subject to the Option.
(v) Commencing on the date five (5) years after the date of the
grant of the Option, the entire Option may be exercised to the extent it
has not previously been exercised.
6.6. Method of Exercising Options; Withholding Tax.
(a) Options shall be exercised by a written notice, delivered to the
Company at its principal office in New York, New York, specifying the number of
Shares to be purchased and tendering payment in full for such Shares. Payment
may be tendered in cash or by certified, bank cashier's or teller's check or by
Shares (valued at Fair Market Value as of the date of tender), or some
combination of the foregoing. In the event all or part of the Option Price is
paid in Shares, any excess of the value of such Shares over the Option Price
will be returned to the Optionee as follows: (i) any whole Share remaining in
excess of the Option Price will be returned in kind, and may be represented by
one or more share certificates; and (ii) any partial Shares remaining in excess
of the Option Price will be returned in cash.
(b) In the event the Company determines that it is required to
withhold state or Federal income tax as a result of the exercise of an Option,
as a condition to the exercise thereof, the Optionee may be required to make
arrangements satisfactory to the Company to enable it to satisfy such
withholding requirements. Payment of such withholding requirements may be made,
in the discretion of the Administrator, (i) in cash, (ii) by delivery of Shares
registered in the name of the Optionee, (iii) by the Company not issuing such
number of Shares subject to the Option as have a Fair Market Value at the time
of exercise equal to the amount to be withheld or (iv) any combination of (i),
(ii) and (iii) above. If (A) any Shares are registered under Section 12 of the
Exchange Act, (B) the Optionee is an officer or director (as defined in Section
16 of the Exchange Act) of the Company subject to Section 16(b) of the Exchange
Act and
<PAGE> 9
(C) such payment is made with Shares acquired by the Optionee upon the exercise
which gives rise to such withholding, an election under the preceding sentence
(1) must be irrevocable and with respect to all Shares covered by the Option
subject to the election, provided that such election may be changed through
another irrevocable election that takes effect at least six (6) months after the
prior election or (2) may be made during the period beginning on the third
business day following the date of release of quarterly and annual summary
statements of sales and earnings as provided by Rule 16b-3(e)(3) of the
Securities and Exchange Commission and ending on the [twelfth (12th)] business
day following such date and only if such period occurs before the date the
Company requires payment of the withholding tax. The election need not be made
during the [ten (10)] day window period if counsel to the Company determines
that compliance with such requirement is unnecessary.
6.7 Rights in the Event of Sale, Merger or Other Reorganization. Except as
expressly provided in Section 5.2 hereof and this Section 6.7, the Optionee
shall have no rights by reason of any subdivision or consolidation of shares of
stock of any class, the payment of any stock dividend or any other increase or
decrease in the number of shares of stock of any class or by reason of any
dissolution, liquidation, merger or consolidation or spin-off of assets or stock
of another corporation, and any issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, including,
without limitation, pursuant to an initial public offering, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number or
Option Price of Shares subject to an Option. The grant of an Option pursuant to
this Plan shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure, to merge or consolidate or to dissolve, liquidate, sell or
transfer all or any part of its business or assets. In any such event (other
than a merger of the type described in Section 5.2(b) hereof), all rights of the
Optionee with respect to the unexercised portion of any Option shall wholly and
completely terminate and all Options shall be canceled at the time of any
merger, consolidation, sale or transfer of assets, liquidation or dissolution,
except to the extent that any agreement or undertaking of any party to any such
merger, consolidation, or sale or transfer of assets, or any plan pursuant to
which such liquidation or dissolution is effected, shall make specific provision
with respect to the Plan and the rights of Optionees with respect to Options
granted thereunder. Notwithstanding the foregoing, the holder of any such Option
or right theretofore granted and still outstanding shall have the right
immediately prior to the effective date of such merger, consolidation, sale or
transfer of assets, liquidation or dissolution to exercise such Option in whole
or in part (without regard to any installment provision as set forth in Section
6.5(d) that may have been made a part of the terms and conditions of such Option
or right). In no event, however, may any Incentive Stock Option which becomes
exercisable pursuant to this Section 6.7 be exercised, in whole or in part,
later than the date preceding the tenth anniversary date of the grant thereof.
6.8. Rights in the Event of Death. If an Optionee's employment or service
with the Company is terminated on account of death, the person or persons who
shall have acquired the right, by will or by the laws of descent and
distribution, to exercise the Optionee's Options shall continue to have (subject
to Sections 6.2 and 6.5 above) the right, for a period which shall not exceed
the
<PAGE> 10
earlier of the remaining Option Term (taking into account any earlier
termination date provided by this Plan) or one (1) year from the date of such
Optionee's death, to exercise any Options which such Optionee would have been
entitled to exercise on the date of such Optionee's death. At the expiration of
such one (1) year period, or such earlier time as may be applicable, any such
Options which remain unexercised shall expire. In no event may any Options be
exercised that could not have been exercised by an Optionee on the date of such
Optionee's death.
6.9. Rights in the Event of Total and Permanent Disability. If an
Optionee's employment or service with the Company is terminated on account of
Total and Permanent Disability, the Optionee shall have (subject to Sections 6.2
and 6.5 above) the right, for a period which shall not exceed the earlier of the
remaining Option Term (taking into account any earlier termination date provided
by this Plan) or one (1) year from the date of such Optionee's Total and
Permanent Disability, to exercise any Options which such Optionee would have
been entitled to exercise on the date of such Optionee's Total and Permanent
Disability. At the expiration of such one (1) year period, or such earlier time
as may be applicable, any such Options which remain unexercised shall expire. In
no event may any Options be exercised that could not have been exercised by an
Optionee on the date of such Optionee's Total and Permanent Disability.
6.10. Rights in the Event of Termination of Service or Employment. In the
event that an Optionee's service or employment with the Company terminates,
other than by reason of death or Total and Permanent Disability or termination
for cause, the Optionee shall have (subject to Sections 6.2 and 6.5 above) the
right, for a period which shall not exceed the earlier of the remaining Option
Term (taking into account any earlier termination date provided by this Plan) or
three (3) months from such termination of service or employment, to exercise any
Options which such Optionee would have been entitled to exercise on the date of
such Optionee's termination. At the expiration of such three (3) month period,
or such earlier time as may be applicable, any such Options which remain
unexercised shall expire. In no event may any Options be exercised that could
not have been exercised by an Optionee on the date of such Optionee's
termination of service or employment. Notwithstanding the foregoing, if an
Optionee's service or employment is terminated for cause, the Company may notify
the Optionee that any Options not exercised prior to such termination are
canceled. For purposes hereof, a termination of service or employment for cause
shall include, but not be limited to, dismissal as a result of (i) Optionee's
conviction of any crime or offense involving money or other property of the
Company or its subsidiaries or affiliates or which constitutes a felony in the
jurisdiction involved (ii) Optionee's gross negligence, gross incompetence or
willful misconduct in the performance of his or her duties or (iii) Optionee's
willful failure or refusal to perform his or her duties.
7. Shares Issued Pursuant to an Option
7.1 Issuance of Certificates. The Company shall not be required to issue
or deliver any certificate for Shares purchased upon the exercise of any Option,
or any portion thereof, prior to fulfillment of all of the following applicable
conditions:
<PAGE> 11
(a) The admission of such Shares to listing on all stock exchanges
or markets on which the Shares are then listed to the extent such admission is
necessary.
(b) The completion of any registration or other qualification of
such Shares under any federal or state securities laws or under the rulings or
regulations of the Securities and Exchange Commission or any other governmental
regulatory body, which the Board shall in its sole discretion deem necessary or
advisable, or the determination by the Board in its sole discretion that no such
registration or qualification is required.
(c) The obtaining of any approval or other clearance from any
federal or state governmental agency which the Board shall, in its sole
discretion, determine to be necessary or advisable.
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Board from time to time may establish for reasons
of administrative convenience.
7.2. Compliance with Securities and Other Laws. In no event shall the
Company be required to sell, issue or deliver Shares pursuant to Options if in
the opinion of the Board the issuance thereof would constitute a violation by
either the Optionee or the Company of any provision of any law or regulation of
any governmental authority or any securities exchange. As a condition of any
sale or issuance of Shares pursuant to Options, the Company may place legends on
the Shares, issue stop-transfer orders and require such agreements or
undertakings from the Optionee as the Company may deem necessary or advisable to
assure compliance with any such law or regulation, including if the Company or
its counsel deems it appropriate, representations from the Optionee that the
Optionee is acquiring the Shares solely for investment and not with a view to
distribution and that no distribution of the Shares acquired by the Optionee
will be made unless registered pursuant to applicable federal and state
securities laws or unless, in the opinion of counsel to the Company, such
registration is unnecessary.
7.3. Rights of First Refusal.
(a) The Optionee shall not transfer any Shares, now or hereafter
owned by any such Optionee, whether for consideration or otherwise, except in
accordance with the provisions of this Agreement and the Act.
(b) Upon receipt by an Optionee of a bona fide offer to purchase
Shares held by such Optionee, which such Optionee wishes to accept, such
Optionee shall promptly offer in writing to sell such Shares to the Company,
upon terms and conditions which are no less favorable to the Company than those
contained in the bona fide offer and shall attach a copy of the bona fide offer
to the reoffer. The reoffer may be accepted by the Company, at any time by
written notice to the Optionee within thirty (30) days next following the
Company's receipt of such reoffer.
<PAGE> 12
(c) The aggregate purchase price to be paid for the Shares purchased
in accordance with the terms and provisions of this Section 7.3(c) by the
Company shall be paid in cash, marketable securities or a promissory note.
(d) The purchase price for the Shares shall be payable by the
Company within thirty (30) days after the reoffer is accepted pursuant to
Section 7.3(b) hereof. In any case, at the closing of the sale to the Company,
the Optionee shall deliver to the Company against payment therefor, certificates
or instruments representing the Shares being purchased, duly endorsed for
transfer to the Company. In the event such closing has not occurred within such
thirty (30) day period, the reoffer shall be deemed to have expired without such
reoffer being accepted in full.
(e) Upon the expiration of the reoffer without such reoffer being
accepted in full in accordance herewith, the Optionee shall be free to accept
the bona fide offer; provided that:
(i) The transferee shall, prior to such acquisition, agree in
writing with the Company and the Optionee to hold such Shares subject to
and in accordance with all of the terms, provisions and conditions
contained in this Agreement to the same extent as if such transferee
originally executed this Agreement, and shall make such representations
and warranties as are customarily made in connection with private
placement transactions in the United States and as the Company may
reasonably require regarding such transferee's investment intent.
(ii) The conclusion of the transaction contemplated by the bona fide
offer shall have been effected within thirty (30) days after the
expiration of the reoffer, and if not so effected within such thirty (30)
day period, then the bona fide offer shall be deemed to have terminated at
the end of such period and the Optionee shall be required to comply with
the terms of this Section 7.3 in respect of such proposed transfer or any
other transfer of Shares.
(iii) The Optionee shall not be relieved of any of his or her
obligations hereunder arising prior to such transfer to the extent any
such obligations are not discharged by the transferee, but the Optionee
shall be relieved of any obligation under this Agreement arising
subsequent to such transfer.
7.4. Further Assurances. At any time and from time to time, upon written
request of the Company, each Optionee shall promptly and duly execute and
deliver such further instruments and documents and take such further action as
the Company may reasonably request for the purpose of obtaining or preserving
the full benefits of this Agreement and the rights and powers herein granted.
8. Termination, Amendment and Modification of Plan
8.1. Board Termination, Amendment and Modification of Plan. The Board may
at any time amend, modify or terminate this Plan; provided that no
<PAGE> 13
such action of the Board, without approval of the stockholders of the Company
(in the same manner as provided in Section 9.5 hereof), may:
(a) Materially increase the benefits accruing to Optionees under
this Plan.
(b) Materially increase the number of Shares which may be issued
under this Plan.
(c) Materially modify the requirements as to eligibility for
participation in this Plan.
(d) Change the Option Price with respect to any outstanding Option
other than to change the manner of determining the Fair Market Value of the
Shares to conform with any then applicable provisions of the Code or regulations
or rulings thereunder.
(e) Materially amend this Section 8.1 to defeat its purpose.
(f) Upon the registration of the Shares under Section 12 of the
Exchange Act, modify this Plan such that it fails to meet the requirements of
Rule 16b-3 of the Securities and Exchange Commission for the exemption of the
acquisition, cancellation, expiration or surrender of Options, from the
operation of Section 16(b) of the Exchange Act.
8.2. Plan Termination. Unless terminated earlier as provided in Section
8.1 hereof, this Plan shall terminate five years from the date it is adopted by
the Board or, if earlier, [five] years from the date it is approved by
stockholders of the Company, and no Option shall be granted under this Plan
after such date.
8.3. Effect of Termination, Amendment or Modification of Plan.
Notwithstanding Sections 8.1 and 8.2 hereof, no termination, amendment or
modification of this Plan shall in any manner affect any Option theretofore
granted under this Plan without the consent of the Optionee or a person who
shall have acquired the right to exercise the Option by will or the laws of
descent and distribution.
9. Miscellaneous
9.1. No Employment Rights. Nothing in this Plan or in any Option granted
hereunder or in any Incentive Stock Option Agreement or Nonstatutory Stock
Option Agreement relating thereto shall confer upon any individual the right to
continue in the service or employ of the Company.
9.2. Binding Effect. This Plan shall be binding upon the successors and
assigns of the Company and upon persons who acquire the right to exercise
Options issued hereunder by will or through the laws of descent and
distribution.
9.3. Singular, Plural, Gender. Whenever used herein, except where the
context clearly indicates to the contrary, nouns in the singular shall include
the plural, and the masculine pronoun shall include the feminine gender.
<PAGE> 14
9.4. Headings. Headings of the Sections hereof are inserted for
convenience and reference and constitute no part of this Plan.
9.5. Effective Date; Ratification by Stockholders. This Plan shall become
effective upon its adoption by the Board but is subject to the ratification and
approval by the affirmative vote of the holders of a majority of the Company's
outstanding shares of voting capital stock within [twelve (12)] months following
such adoption. If this Plan is not so approved by the stockholders this Plan
shall become null and void and of no force or effect. Any Options granted
pursuant to this Plan may not be exercised until this Plan shall have been
ratified and approved by the stockholders pursuant to this Section 9.5.
9.6. Rights as Stockholder. An Optionee shall have no rights as a
stockholder with respect to any Shares subject to such Option prior to the
purchase of such Shares by exercise of such Option as provided herein.
9.7. Applicable Law. This Plan and the Options granted hereunder shall be
interpreted, administered and otherwise subject to the laws of the State of New
York (disregarding choice-of-law provisions), except to the extent that the
General Corporation Law of the State of Nevada shall govern.
9.7. Application of Funds. The proceeds received by the Company from the
sale of Shares pursuant to the exercise of an Option will be used for general
corporate purposes.
9.8. Information to Optionees. The Company shall provide each Optionee on
an annual or other periodic basis financial and other information regarding the
Company. The Company may provide this information to each Optionee in any
manner reasonably calculated to insure receipt of the information by each
Optionee.
FIBERNET TELECOM GROUP, INC.
(formerly Desert Native Designs, Inc.)
By: /s/ Judy St. Clair
----------------------------------
Judy St. Clair
November 24, 1997
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES
OF
FIBERNET TELECOM GROUP, INC.
1. FiberNet Telecom, Inc. (Delaware corporation)
2. Local Fiber, LLC (New York limited liability company)
3. FiberNet Equal Access, LLC (New York limited liability company)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SIX
MONTH FINANCIAL STATEMENT AS OF DECEMBER 31, 1997 AND YEAR END FINANCIAL
STATEMENT AS OF JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> JUN-30-1997 DEC-31-1997
<PERIOD-START> JUN-30-1996 JUN-30-1997
<PERIOD-END> JUN-30-1997 DEC-31-1997
<CASH> 1,652 5,146,327
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,719 5,150,281
<PP&E> 0 94,065
<DEPRECIATION> 0 1,842
<TOTAL-ASSETS> 102,519 5,374,341
<CURRENT-LIABILITIES> 338,480 730,125
<BONDS> 0 0
0 0
0 0
<COMMON> 0 15,000
<OTHER-SE> 141,796 5,383,981
<TOTAL-LIABILITY-AND-EQUITY> 102,519 5,374,341
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 373,674 419,982
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 (26,180)
<INCOME-PRETAX> (373,674) (393,802)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (373,674) (393,802)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (373,674) (370,562)
<EPS-PRIMARY> (0.025) (0.027)
<EPS-DILUTED> (0.025) (0.027)
</TABLE>
