<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1997.
REGISTRATION NO. 333-33653
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
METROMEDIA FIBER NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 11-3168327
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
110 East 42nd Street
Suite 1502
New York, NY 10017
(212) 687-9177
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
STEPHEN A. GAROFALO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
METROMEDIA FIBER NETWORK, INC.
110 EAST 42ND STREET
SUITE 1502
NEW YORK, NY 10017
(212) 687-9177
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES M. DUBIN, ESQ. JOHN W. WHITE, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON CRAVATH, SWAINE & MOORE
1285 AVENUE OF THE AMERICAS WORLDWIDE PLAZA
NEW YORK, NEW YORK 10019-6064 825 EIGHTH AVENUE
(212) 373-3000 NEW YORK, NEW YORK 10019-7475
(212) 474-1000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE (1)(2) REGISTRATION FEE(3)
<S> <C> <C>
Class A Common Stock, par value $.01 per share.............. $115,000,000 $34,848.48
</TABLE>
(1) Includes shares which may be purchased by the Underwriters solely to cover
over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee.
(3) Calculated pursuant to Rule 457(o). The registration fee was wired to the
Securities and Exchange Commission in connection with the initial filing.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus to be used in
connection with the U.S. Offering and the International Offering, respectively,
as described herein and collectively comprising the Offerings. The Prospectus to
be used in connection with the U.S. Offering (the "U.S. Prospectus") is set
forth in full following this Explanatory Note. The Prospectus to be used in
connection with the International Offering is identical to the U.S. Prospectus
except that the outside front cover, the back cover and the section entitled
"Underwriting" are replaced with alternative versions included herein following
the U.S. Prospectus.
<PAGE>
SUBJECT TO COMPLETION
DATED OCTOBER 7, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[LOGO]
PROSPECTUS
6,600,000 SHARES
METROMEDIA FIBER NETWORK, INC.
CLASS A COMMON STOCK
($.01 PAR VALUE)
All of the shares of Class A Common Stock, par value $.01 per share (the "Class
A Common Stock") offered hereby are being sold by Metromedia Fiber Network, Inc.
("MFN" or the "Company"). Of the 6,600,000 shares of Class A Common Stock
offered hereby, 5,610,000 shares of Class A Common Stock are being offered by
the U.S. Underwriters (as defined herein) in the United States and Canada (the
"U.S. Offering") and 990,000 shares of Class A Common Stock are being offered by
the International Underwriters (as defined herein) in a concurrent international
offering outside the United States and Canada (the "International Offering" and,
together with the U.S. Offering, the "Offerings"), subject to transfers between
the U.S. Underwriters and the International Underwriters (collectively, the
"Underwriters"). The initial public offering price and the aggregate
underwriting discount per share will be identical for the Offerings. See
"Underwriting." The closing of the U.S. Offering and the International Offering
are conditioned upon each other. Each share of Class A Common Stock entitles its
holder to one vote, whereas each share of the Company's Class B Common Stock,
par value $.01 per share (the "Class B Common Stock"), entitles its holder to
ten votes per share. In addition, holders of the Class B Common Stock vote as a
separate class to elect at least 75% of the members of the Company's Board of
Directors. Metromedia Company and its partners beneficially own all of the
outstanding shares of Class B Common Stock.
Prior to the Offerings, there has been no public market for the Class A Common
Stock. It is currently anticipated that the initial public offering price will
be between $14.00 and $16.00 per share of Class A Common Stock. See
"Underwriting" for information relating to the factors considered in determining
the initial public offering price. The Class A Common Stock has been approved
for quotation and trading on the Nasdaq National Market under the symbol "MFNX".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
Per Share......................... $ $ $
<S> <C> <C> <C>
Total(2).......................... $ $ $
</TABLE>
(1) Before deducting offering expenses payable by the Company, estimated at
$1,000,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 990,000 additional shares of Class A Common Stock at the
Price to Public, less the Underwriting Discount, solely to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Class A Common Stock are offered subject to receipt and acceptance
by the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the shares of Class A Common Stock
offered hereby will be made at the office of Salomon Brothers Inc, Seven World
Trade Center, New York, New York, or through the facilities of The Depository
Trust Company, on or about , 1997.
SALOMON BROTHERS INC
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
DEUTSCHE MORGAN GRENFELL
The date of this Prospectus is , 1997.
<PAGE>
[MAPS OF METROMEDIA FIBER NETWORK, INC'S
EXISTING AND PLANNED FIBER OPTIC NETWORKS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF CLASS A COMMON
STOCK FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION
IN THE CLASS A COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING OR STABILIZING THE
PRICE OF THE CLASS A COMMON STOCK, PASSIVE MARKET MAKING AND THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION, INCLUDING THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES THERETO, AND OTHER FINANCIAL DATA APPEARING
ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT
REQUIRES OTHERWISE, THE TERMS "COMPANY" AND "MFN" REFER TO METROMEDIA FIBER
NETWORK, INC. AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED, ALL INFORMATION
INCLUDED IN THIS PROSPECTUS (I) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION
WILL NOT BE EXERCISED, (II) HAS BEEN ADJUSTED TO REFLECT THE RECLASSIFICATION OF
THE COMPANY'S COMMON STOCK, PAR VALUE $.01 PER SHARE (THE "OLD COMMON STOCK"),
PURSUANT TO WHICH EACH SHARE OF OLD COMMON STOCK WILL BECOME ONE SHARE OF CLASS
A COMMON STOCK (THE "COMMON STOCK RECLASSIFICATION"), (III) HAS BEEN ADJUSTED TO
REFLECT THE RECLASSIFICATION AND EXCHANGE OF EACH SHARE OF THE COMPANY'S SERIES
B CONVERTIBLE PREFERRED STOCK, PAR VALUE $.01 PER SHARE (THE "SERIES B PREFERRED
STOCK") FOR 507 SHARES OF CLASS B COMMON STOCK (THE "SERIES B RECLASSIFICATION"
AND TOGETHER WITH THE COMMON STOCK RECLASSIFICATION, THE "RECLASSIFICATIONS")
AND (IV) HAS BEEN ADJUSTED TO GIVE EFFECT TO A REVERSE STOCK SPLIT OF THE
COMPANY'S OLD COMMON STOCK, PURSUANT TO WHICH EACH SHARE OF OLD COMMON STOCK
BECAME .507 SHARES OF OLD COMMON STOCK (THE "REVERSE STOCK SPLIT"). THE CLASS A
COMMON STOCK AND THE CLASS B COMMON STOCK ARE COLLECTIVELY REFERRED TO AS THE
"COMMON STOCK." SEE THE "GLOSSARY" APPEARING ELSEWHERE HEREIN FOR DEFINITIONS OF
CERTAIN TECHNICAL TERMS USED IN THIS PROSPECTUS.
THE COMPANY
GENERAL
The Company is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to carrier and
corporate/government customers. The Company is expanding its existing network to
encompass approximately 229,000 fiber miles or 643 route miles, concentrated in
the northeastern United States, a market which the Company believes is
characterized by significant demand for and limited supply of fiber optic
capacity. The fiber infrastructure leased by MFN to its customers provides
high-bandwidth capacity for customers that seek to establish secure
communications networks for the transmission of large amounts of voice, data and
video. For example, a pair of MFN fiber optic strands can transmit up to 8.6
gigabits of data per second or the equivalent of approximately 129,000
simultaneous voice conversations.
The Company tailors the amount of fiber capacity leased to the needs of its
customers. Certain customers that lease fiber optic capacity from the Company
connect their own transmission equipment to the leased fiber, thereby obtaining
a fixed-cost, secure communications alternative to the metered communications
services offered by traditional providers. Other customers that require lesser
amounts of transmission capacity will have the option to lease such broadband
capacity on the Company's network, whereby the Company effectively divides a
single strand of fiber into multiple smaller communications channels. The
Company believes that it will have installation, operating and maintenance cost
advantages per fiber mile relative to its competitors because MFN installs as
many as 432 fibers per route mile as compared to a generally lower number of
fibers in existing competitive networks.
The Company was formed in 1993 and currently operates a 54 route mile fiber
optic communications network in the New York/New Jersey metropolitan area (the
"NY Network"), consisting of 7,188 fiber miles, approximately two-thirds of
which are currently available for lease. Within the next two years the Company
plans to complete an expansion of the NY Network to increase its coverage within
the New York/New Jersey metropolitan area. In addition, the Company intends to
construct intra-city fiber networks in Washington, D.C., Chicago and
Philadelphia and an inter-city fiber optic route between New York City and
Washington, D.C. The Company currently intends to expand its network in order to
connect the NY Network with other major domestic metropolitan areas, in part
through the exchange of fiber capacity with other carriers, and to extend its
network to link the NY Network to London, England, thereby providing a valuable
connection between two of the world's most important financial centers. See
"Business -- Build-out of Networks," and "Risk Factors -- Risks Associated with
Growth Strategy; Management of Expansion." The Company's NY Network supports a
self-healing SONET architecture that minimizes the risk of downtime in the event
of a fiber cut and provides MFN's customers with high
3
<PAGE>
security and reliability. It is expected that the Company's other intra-city
networks will also support a self-healing SONET architecture. Most of the
Company's fiber is installed inside high density polyethylene conduit to protect
the cable and, where practicable, MFN installs additional unused conduits to
accommodate future network expansion.
MFN is focused on providing its broadband communications infrastructure to
two main customer groups: communications carriers and corporate/government
customers located in selected Tier I markets. Carrier customers targeted by the
Company include a broad range of communications companies such as incumbent
local exchange carriers ("ILECs"), competitive local exchange carriers
("CLECs"), long distance companies/interexchange carriers ("IXCs"), paging,
cellular and PCS companies, cable companies, and Internet service providers
("ISPs"). These carrier customers typically would lease fiber optic capacity
with which they would develop their own communications networks as a low-cost
alternative to building their own infrastructure or purchasing metered services
from ILECs or CLECs. The Company's corporate and government customers would
typically lease fiber optic infrastructure and other broadband services on a
point-to-point basis for high-bandwidth, secure voice and data networks. The
Company believes that it will be well-positioned to penetrate the corporate and
government markets since it plans to continue to install most of its fiber in
Tier I markets. See "Business -- Customers."
MFN intends to capitalize on the increasing demand for high-bandwidth
communications services and the limited supply of transmission capacity. Based
on management experience and industry reports, the Company believes that demand
for the broadband communications infrastructure afforded by its network will
continue to increase as a result of the following factors: (i) the rapid growth
of communications traffic, such as data traffic which industry research
indicates is growing by 35% annually; (ii) the large number of new carriers
which will require significant transmission capabilities in all sectors of the
communications industry, due in large part to industry deregulation facilitated
by the Telecommunications Act of 1996 (the "1996 Act"); (iii) the fact that the
RBOCs will likely need to upgrade to fiber optic networks with infrastructure
similar to the Company's; and (iv) the advent of new communications services
requiring large amounts of transmission capacity, such as intranet and video
services. According to an industry report, the total 1995 market for
communications services in the United States was approximately $183 billion and
is expected to grow to approximately $291 billion by the year 2001. In addition,
the Company believes there will be increased demand for its infrastructure due
to its ability to offer fixed-cost pricing which is generally more economical
for high volume users than traditional usage-based pricing.
On April 30, 1997, Metromedia Company, a partnership owned and controlled by
John W. Kluge and Stuart Subotnick ("Metromedia"), and certain of its affiliates
made a substantial equity investment in the Company (the "Metromedia
Investment"). Metromedia and its partners own all of the outstanding shares of
Class B Common Stock which is entitled to 10 votes per share and to vote
separately to elect at least 75% of the members of the Company's Board of
Directors (the "Board"). As a result, Metromedia and its partners own and
control approximately 26% of the common equity of the Company (on a fully
diluted basis, without giving effect to the Offerings) and approximately 76% of
the outstanding voting power (on a fully diluted basis, without giving effect to
the Offerings). Metromedia and its predecessor have successfully invested in and
operated numerous businesses in the communications industry, including cellular,
paging, long distance and media companies. In connection with the Metromedia
Investment, John W. Kluge and Stuart Subotnick, who bring considerable
management and corporate governance experience to the Company, joined MFN's
Board of Directors. See "Certain Relationships and Related Transactions." In
addition, David Rockefeller has agreed to join the Board shortly after
consummation of the Offerings. Mr. Rockefeller will bring considerable
management and investing experience to the Company.
BUSINESS STRATEGY
The Company's objective is to become the preferred facilities-based provider
of broadband communications infrastructure to communications carriers,
corporations and government agencies, primarily in the northeastern United
States. The following are the key elements of MFN's strategy to achieve this
objective:
4
<PAGE>
ESTABLISH THE COMPANY AS THE PREFERRED CARRIERS' CARRIER OF BROADBAND
COMMUNICATIONS INFRASTRUCTURE.
MFN leases broadband communications infrastructure on a fixed-cost basis to
various communications carriers, thus enabling them to compete in markets which
were previously difficult to penetrate due to limited and/or costly access to
high-bandwidth communications infrastructure. Specifically, the Company plans to
lease local transmission capacity within its target Tier I markets thereby
enabling its carrier customers to bypass the ILECs and CLECs. The Company
believes that it is currently the only provider of local transmission
infrastructure on a fixed-cost basis. Additionally, the Company plans to lease
capacity on its high-bandwidth, long-haul Inter-City Network (as defined herein)
to provide seamless connectivity between its various Intra-City Networks (as
defined herein). The Company's fixed-cost, long-term contracts allow its carrier
customers to access certain Tier I markets without incurring the high capital
expenditures and long lead times usually associated with building their own
networks. Carriers may be more likely to lease capacity from MFN rather than
from a competitor since MFN currently has no plans to offer communications
infrastructure services on a metered basis, choosing instead to position itself
as a non-competing provider of infrastructure alternatives for IXCs, ILECs,
CLECs, etc. See "Business -- Customers."
POSITION THE COMPANY AS THE PREFERRED PROVIDER OF BROADBAND COMMUNICATIONS
INFRASTRUCTURE TO CORPORATE AND GOVERNMENT CUSTOMERS.
The Company's fiber optic network is expected to serve Tier I markets in
which there are a large number of corporations and government agencies that the
Company believes have significant demand for communications capacity which has
not been satisfied. These customers typically lease broadband communications
infrastructure from the Company on a point-to-point basis, creating secure
networks for voice, video or data communications. Customers with significant
transmission needs or who require a high degree of security are potential
candidates for leasing MFN's fiber. Customers seeking lesser amounts of
broadband transmission capacity will have the option of leasing smaller amounts
of capacity from the Company. By providing leased capacity on a fixed-cost
rather than a metered basis, MFN's network, as currently planned, will be more
economical for MFN's corporate and government customers, while also providing
enhanced reliability and security. See "Business -- Customers."
STRENGTHEN MFN'S COMPETITIVE POSITION BY EXPANDING THE MFN NETWORK.
The Company seeks to enhance its attractiveness as a communications provider
by enlarging its network according to a three-part plan: (i) expanding the NY
Network to increase coverage of the New York/New Jersey metropolitan area to
approximately 61,000 fiber miles covering 179 route miles, (ii) constructing
fiber optic intra-city telecommunications networks in Washington, D.C., Chicago
and Philadelphia (the "Intra-City Networks") and (iii) constructing a fiber
optic backbone between New York City and Washington, D.C. (the "Inter-City
Network") to link certain of its Intra-City Networks. Once completed, MFN's
domestic fiber optic network infrastructure, as currently planned, will consist
of approximately 229,000 fiber miles covering 643 route miles (the "MFN
Network").
UTILIZE STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF THE MFN NETWORK.
Another part of MFN's strategy is to enter into agreements with other
communications companies to expand the reach of the MFN Network. In October
1997, the Company entered into an agreement with a subsidiary of Racal
Electronics Plc ("Racal"), a United Kingdom manufacturer of electronics and
other equipment and provider of telecommunications services in the UK, to
establish a 50/50 joint venture (the "MFN/Racal Joint Venture"). The MFN/Racal
Joint Venture would link the Company's network to London by acquiring
transatlantic fiber optic cable rights linking points of presence in the US and
the UK. The MFN/Racal Joint Venture would enable the Company to offer its
customers seamless broadband connectivity between New York and London. The
foregoing remains subject to the timely completion and execution of long-form
definitive documentation and of various ancillary agreements between the Company
and certain affiliates of Racal for the provision of services and facilities to
the MFN/Racal Joint Venture. No assurance can be made that the Company will
complete the documentation or agreements on satisfactory terms or at all. The
Company believes that its presence in Tier I markets will continue to
5
<PAGE>
provide similar partnering opportunities. The Company will continue to evaluate
opportunities, including potential fiber swaps, along specific additional routes
in order to speed the build-out of the MFN Network and reduce costs.
CREATE A LOW COST POSITION.
The Company believes it will be able to establish a low cost position
relative to its competitors primarily for the following reasons: (i) the Company
currently installs trunks of up to 432 fibers per route mile, which the Company
believes is substantially more fiber than many of its competitors install,
thereby reducing the per fiber mile cost to construct and operate the MFN
Network, (ii) the Company owns a newly-constructed network with advanced fiber
optic technology which offers operating and maintenance cost advantages, (iii)
the Company believes that certain of its rights-of-way and franchises are
valuable assets that will be costly and difficult for others to procure in the
future and (iv) MFN, where practicable, installs spare conduit which will allow
for expanded fiber optic capacity at a cost significantly below the cost of new
construction. The Company's low cost position will allow it to remain price
competitive with other providers of fiber optic infrastructure and to lease its
fiber infrastructure at a price which customers will find more attractive than
the cost of constructing their own networks.
INSTALL A TECHNOLOGICALLY ADVANCED NETWORK.
The Company believes that the advanced technical characteristics of its
network will allow it to provide high levels of reliability, security and
capacity that its target customers typically demand. The NY Network is, and
future extensions of the Intra-City Networks will be, capable of supporting a
SONET ring architecture, which prevents interruption in service to its clients
by instantaneously rerouting traffic in the event of a fiber cut. The Company
will also continuously monitor and maintain high quality control of its network
on a 24-hour basis through its network operations center. The Company's network
is capable of using the highest commercially available capacity transmission
(OC-192) and thereby can support advanced, capacity-intensive data applications
such as Frame Relay, ATM, multimedia and Internet-related applications.
BUILD ON MANAGEMENT EXPERIENCE AND METROMEDIA RELATIONSHIP.
The Company's management team and Board of Directors include individuals
with communications industry expertise and extensive experience in network
design, construction, operations and sales. MFN's Chief Executive Officer and
founder, Stephen A. Garofalo, has approximately 25 years of experience in the
cable installation business, having managed the installation of over one half
billion dollars in electrical and communications cable in New York City. In
April 1997, the Company hired Howard Finkelstein as President and Chief
Operating Officer. From 1984 to 1993, Mr. Finkelstein served as President of
Metromedia Communications Corporation, Metromedia's long distance telephone
enterprise, until its merger with WorldCom, Inc. in 1993. In his most recent
position, Mr. Finkelstein was the Chief Operating Officer and an Executive Vice
President of Metromedia International Telecommunications, Inc., an international
telecommunications and media company. He has also served in various capacities
at Metromedia and its affiliated companies over a period of 16 years. The
Company also expects to benefit from the communications industry expertise and
corporate governance experience of John W. Kluge, Stuart Subotnick and David
Rockefeller. As the owner of all of the Class B Common Stock, Metromedia and its
general partners will control the Board and all stockholder decisions and, in
general, determine the outcome of any corporate transaction or other matter
submitted to the stockholders for approval. See "Risk Factors--Control by and
Reliance Upon Metromedia Company" and "Certain Relationships and Related
Transactions."
MFN is a Delaware corporation and the principal executive offices of the
Company are located at 110 East 42nd Street, Suite 1502, New York, New York
10017. The Company's telephone number at such address is (212) 687-9177.
6
<PAGE>
<TABLE>
<CAPTION>
THE OFFERINGS
<S> <C>
Common Stock offered hereby:
U.S. Offering...................... 5,610,000 shares of Class A Common Stock
International Offering............. 990,000 shares of Class A Common Stock
---------------------------------------------------
6,600,000 shares of Class A Common Stock
Total (1)........................
Common Stock outstanding after the
Offerings (1)(2)
20,464,778 shares
Class A Common Stock...............
4,221,159 shares
Class B Common Stock...............
24,685,937 shares of Common Stock
Total............................
The net proceeds of the Offerings, estimated to be
Use of Proceeds........................ approximately $91.1 million (approximately $104.9
million if the Underwriters' over-allotment option
is exercised in full), will be used by the Company
for capital expenditures associated with the
build-out of the Company's network, the development
and introduction of new services and general
corporate and working capital purposes. See "Use of
Proceeds."
The holders of Class A Common Stock generally have
Voting Rights.......................... rights identical to holders of Class B Common
Stock, except that holders of Class A Common Stock
are entitled to one vote per share and holders of
Class B Common Stock are entitled to ten votes per
share on all matters submitted to a vote of the
Company's stockholders. Holders of Class A Common
Stock and Class B Common Stock will vote as a
single class on most matters except that holders of
Class B Common Stock will vote as a separate class
to elect at least 75% of the members of the Board
of Directors.
MFNX
Nasdaq National Market symbol..........
</TABLE>
- ------------------------
(1) Does not include up to an aggregate of 990,000 shares of Class A Common
Stock subject to an over-allotment option granted to the Underwriters. See
"Underwriting."
(2) Based on the number of shares outstanding as of October 7, 1997 after giving
effect to (i) the Reverse Stock Split, (ii) the Reclassifications and (iii)
the assumed exercise of all outstanding options and warrants to acquire
4,260,511 shares of Class A Common Stock at a weighted average exercise
price of $3.10. Excludes options to acquire shares of Class A Common Stock
to be granted under the 1997 Incentive Stock Plan (as defined herein).
RISK FACTORS
See "Risk Factors" beginning on page 9 for a discussion of certain factors
that should be considered by potential investors.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial data presented below as of and for the
periods ended December 31, 1994, 1995 and 1996 have been derived from the
Consolidated Financial Statements of the Company, and the notes related thereto,
included elsewhere in this Prospectus. The Financial Statements of the Company
for the year ended December 31, 1994 have been audited by Richard A. Eisner &
Company, LLP, independent auditors, the Consolidated Financial Statements of the
Company for the year ended December 31, 1995 have been audited by M.R. Weiser &
Co. LLP, Certified Public Accountants, and the Consolidated Financial Statements
of the Company as of and for the year ended December 31, 1996 have been audited
by Ernst & Young LLP, independent auditors. The summary financial data for the
period ended December 31, 1993, have been derived from the unaudited financial
statements of the Company which, in the opinion of management, include all
adjustments necessary for a fair presentation of the financial condition and
results of operations for the Company for such period. The summary consolidated
financial data and balance sheet data as of and for the six months ended June
30, 1997 and the summary consolidated financial data as of and for the six
months ended June 30, 1996 have been derived from the unaudited Consolidated
Financial Statements of the Company, and the notes related thereto, included
elsewhere in this Prospectus, which, in the opinion of management, include all
adjustments necessary for a fair presentation of the financial condition and
results of operations of the Company for such periods. The results of operations
for interim periods are not necessarily indicative of a full year's operations.
The following information should be read in conjunction with "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the Consolidated Financial Statements of the Company
and the notes related thereto, and the other financial data appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 8, 1993
(DATE OF YEAR ENDED SIX MONTHS
INCEPTION) TO DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ------------------------------------- ------------------------
1993 1994 1995 1996 1996 1997
-------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.............................. $ -- $ -- $ 56,149 $ 236,082 $ 82,035 $ 541,886
Expenses:
Cost of sales...................... -- -- -- 698,793 265,029 1,081,677
Selling, general and
administrative................... 188,000 874,000 3,886,568 2,070,345 1,276,853 2,186,291
Depreciation and amortization...... -- -- 161,576 612,530 292,319 372,935
Consulting and employment
incentives(a).................... -- -- -- 3,652,101 3,651,442 13,419,900
-------------- ----------- ----------- ----------- ----------- -----------
Loss from operations................. 188,000 874,000 3,991,995 6,797,687 5,403,608 16,518,917
Interest expense, net................ -- -- 327,106 3,561,010 1,807,956 475,252
-------------- ----------- ----------- ----------- ----------- -----------
Net loss............................. $ 188,000 $ 874,000 $ 4,319,101 $10,358,697 $ 7,211,564 $16,994,169
-------------- ----------- ----------- ----------- ----------- -----------
-------------- ----------- ----------- ----------- ----------- -----------
Net loss applicable to common
stockholders per share............. $ 0.04 $ 0.10 $ 0.48 $ 0.87 $ 0.66 $ 1.36
-------------- ----------- ----------- ----------- ----------- -----------
-------------- ----------- ----------- ----------- ----------- -----------
Number of shares of Common Stock
assumed outstanding(b)............. 4,408,237 8,721,210 9,094,472 11,851,801 10,993,990 12,599,295
-------------- ----------- ----------- ----------- ----------- -----------
-------------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF
JULY 31, 1997
--------------------
<S> <C>
OPERATING DATA:
Route miles of fiber installed................................................................ 54
Fiber miles of fiber installed................................................................ 7,188
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(C)
----------- ----------------
BALANCE SHEET DATA:
Current assets.................................................................... $23,509,306 $ 114,579,306
Working capital................................................................... 21,027,781 112,097,781
Property and equipment, net....................................................... 7,354,768 7,354,768
Total assets...................................................................... 31,651,111 122,721,111
Long-term debt.................................................................... -- --
Total liabilities................................................................. 12,608,260 12,608,260
Stockholders' equity.............................................................. 19,042,851 110,112,851
</TABLE>
- ------------------------
(a) Represents value of common stock, warrants and options issued to consultants
and officers to provide services to the Company.
(b) Based upon the weighted average shares outstanding; see Note 1 to "Notes to
Consolidated Financial Statements."
(c) Adjusted to give effect to the Offerings and the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
8
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995 (the "Reform Act")),
including statements regarding, among other items, (i) the Company's growth
strategy, (ii) the Company's intention to expand its fiber optic network to
other markets and (iii) the Company's intention to market its network to new
customers. These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, certain of
which are beyond the Company's control. Actual results could differ materially
from these forward-looking statements as a result of the facts described in
"Prospectus Summary," "Risk Factors" and "Business" including, among others, (i)
changes in the competitive marketplace, including the introduction of new
technologies or strategic and/or pricing changes by the Company's competitors
and (ii) changes in the economy. Other factors which may materially affect
actual results include, among others, the following: general economic and
business conditions; industry capacity; uncertainty regarding changes in
customer preferences; demographic changes; competition; changes in methods of
marketing and technology; changes in political, social and economic conditions;
and regulatory factors and various other factors beyond the Company's control.
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. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this Prospectus will
in fact transpire. The "safe-harbor" protections of the Reform Act are not
available to initial public offerings, including the Offerings.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE
IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SHARES OF CLASS A
COMMON STOCK OFFERED HEREBY.
LIMITED HISTORY OF OPERATIONS; NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS; EXPECTED FUTURE NET LOSSES AND NEGATIVE CASH FLOW FROM OPERATIONS
The Company was formed in April 1993 and has a limited operating history,
with a limited number of customers as of June 30, 1997. Accordingly, prospective
investors have limited historical financial information upon which to base an
evaluation of the Company's performance and an investment in shares of Class A
Common Stock. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development.
Since inception, the Company has not generated significant revenue, has
incurred substantial net losses and has never generated positive cash flow from
operations. The Company had net losses of $10.4 million, $4.3 million, $0.9
million, and $0.2 million for the periods ended December 31, 1996, 1995, 1994,
and 1993 and a net loss of $17.0 million for the six months ended June 30, 1997.
There can be no assurance that the Company will be able to achieve or sustain
profitability or positive cash flow in the future.
The Company believes that losses will continue while the Company
concentrates on the development and construction of additional fiber optic
networks and until its networks have established a sufficient revenue-generating
customer base. Accordingly, the Company expects to continue experiencing net
operating losses and negative cash flows for the foreseeable future. The Company
will also incur losses during the initial start-up phases of the services that
it may provide. There can be no assurance that an adequate revenue base will be
established or that these services will generate profitability or positive cash
flow. Continued losses and negative cash flow may prevent the Company from
pursuing its strategies for growth.
9
<PAGE>
RISKS ASSOCIATED WITH GROWTH STRATEGY; MANAGEMENT OF EXPANSION
The future of the Company depends, to a large extent, on its ability to
implement its business strategy and proposed expansion, without which the
Company would be unable to create the new business and revenue opportunities
described in this Prospectus. The proposed expansion (including the development
of the Intra-City Networks, the Inter-City Network and the proposed expansion to
additional areas including the United Kingdom) requires that the Company obtain
access to markets, design fiber network backbone routes, install facilities,
acquire rights-of-way and building access, obtain required governmental
authorizations and permits and continue to implement and improve its
operational, financial and accounting systems, all in a timely manner at
reasonable costs and on conditions acceptable to the Company. Successful
implementation will depend on numerous factors beyond the Company's control,
including economic, competitive and other conditions and uncertainties, the
ability to obtain licenses, franchises and rights-of-way on reasonable terms and
conditions and hire and retain qualified management personnel. In addition,
construction of future networks entails significant risks, including
management's ability to effectively control and manage such projects, shortages
of materials or skilled labor, unforeseen engineering, environmental or
geological problems, work stoppages, weather interference, floods and
unanticipated cost increases. No assurance can be given that the budgeted costs
of the Company's current and future projects will not be exceeded or that any
such projects will commence operations within the contemplated schedules, if at
all. The failure to obtain necessary licenses, permits and authorizations could
prevent or delay the completion of construction of all or part of such networks
or increase completion costs. Moreover, no assurance can be given that the
Company will be successful in implementing its business strategy and in managing
expansion effectively, on time or at all.
The Company will need to expand its marketing efforts and staff to handle
future marketing and sales requirements. Failure to obtain significant,
widespread commercial and public acceptance of its networks and access to
sufficient buildings in a market could jeopardize the Company's viability in
that market. There can be no assurance that the Company will be able to secure
customers for the commercial use of its proposed networks or access to such
buildings in each market.
The Company's ability to implement its business plan is, to a significant
degree, dependent upon the Company's ability to secure a market for its leased
fiber capacity and obtain and maintain contractual and other relationships with
communications carriers and corporate and government customers. The practice of
leasing dark fiber is not widespread and there can be no assurance that such a
market will develop or that the Company will be able to enter into contracts,
comply with the terms of such contracts or maintain relationships with
communications carriers and corporate and government customers, that any such
contracts or relationships will be on economically favorable terms or that such
communications carriers and corporate and government customers will not choose
to compete against, rather than cooperate with, the Company. The Company's
inability to enter into contracts, comply with the terms of such contracts or
maintain relationships with these constituencies would materially and adversely
affect the Company's business, financial condition and results of operations.
The Company cannot predict whether providing services to governments will
evolve into a significant market. Existing rights-of-way are typically
controlled by governments and are often used to create leverage in "shared
resources projects" whereby the government obtains communications capacity in
exchange for providing a private communications carrier access to government
controlled rights-of-way for fiber installation. In addition, governments often
build their own communications infrastructure because they already control the
necessary rights-of-way. Accordingly, there can be no assurance that the market
for government customers will develop to any significant extent.
A number of the Company's current contracts to supply leased fiber capacity
permit the lessee to terminate such contracts and/or provide for liquidated
damages if the Company does not supply such fiber capacity by a specified time.
Certain of these contracts are currently terminable on this basis. The
10
<PAGE>
termination of any such contracts could adversely affect the Company's business,
financial condition and results of operations.
The Company may expand the range of services that it offers. Such plans may
include assisting customers with the integration of their leased dark fiber with
appropriate electronic and optronic equipment by facilitating the involvement of
third party suppliers, vendors and contractors. There can be no assurance that a
market will develop for new services offered by the Company, that the Company's
implementation of the services will be technically or economically feasible,
that the Company will be able to successfully develop or market them or that the
Company will be able to operate and maintain its new services profitably.
NEED FOR ADDITIONAL FINANCING
The net proceeds from the Offerings will not be sufficient to enable the
Company to complete the build-out of its planned fiber optic network and meet
its long-term business strategies. The completion of the Company's planned fiber
optic communications networks will require substantial capital investment. The
Company's ability to arrange financing and the cost of such financing are
dependent upon numerous factors, including general economic and capital market
conditions, conditions in the communications market, regulatory developments,
credit availability from banks or other lenders, investor confidence in the
industry and the Company, the success of the Company's fiber optic
communications networks, and provisions of tax and securities laws that are
conducive to raising capital. There can be no assurance that financing for the
expansion of the Company's fiber optic communications networks will be available
to the Company on acceptable terms in the future or that, if the form of any
such future financing is through the issuance and sale of equity securities,
investors in the Offerings will not be diluted.
COMPETITIVE INDUSTRY
The Company faces substantial competition from ILECs, which currently
dominate their local telecommunications markets, and CLECs, most of which have
greater financial, research and development and other resources than the
Company. In addition to ILECs and CLECs, potential competitors capable of
offering services similar to those offered by the Company include IXCs, other
facilities-based communications service providers, cable television companies,
electric utilities, microwave carriers, satellite carriers, wireless telephone
system operators and large end-users with private networks. There can be no
assurance that such entities will not compete with the Company. See "Business--
Competition."
Various communications carriers already own fiber optic cables as part of
their telecommunications networks. Accordingly, any of these carriers, some of
which already have franchise agreements with the City of New York and
substantially greater resources and more experience than the Company, could
compete directly with the Company in the market for leasing fiber capacity,
provided that these competitors are willing to offer this capacity to all their
customers. The Company's franchise agreement with the City of New York is not
exclusive. Potential competitors with greater resources and more experience than
the Company could enter into franchise agreements with the City of New York and
compete directly with the Company. The Company's Inter-City Network will also
face competition from other communications companies, including Qwest
Communications International Inc. ("Qwest"), that are in the process of
constructing extensive inter-city networks.
In addition, some communications carriers and local cable companies have
extensive networks in place that could be upgraded to fiber optic cable, as well
as numerous personnel and substantial resources to undertake the requisite
construction to so equip their networks. To the extent that communications
carriers and local cable companies decide to equip their networks with fiber
optic cable, they are potential significant competitors of the Company.
11
<PAGE>
There is no reason to believe that other companies will not choose to
compete with the Company in any market, inside or outside of New York City, by
leasing fiber capacity (including dark fiber) to the Company's targeted
customers. Any such additional competition could materially adversely affect the
Company's business, financial condition and results of operations.
EXTENSIVE REGULATION
Existing and future governmental regulations will greatly influence the
viability of the Company. However, the Company cannot predict the future
regulatory status of its business.
FEDERAL
Federal telecommunications law directly shapes the market in which the
Company competes. Consequently, undesirable regulatory changes could adversely
affect the Company's business, financial conditions and results of operations.
Federal telecommunications law imposes special legal requirements on "common
carriers" who engage in "interstate or foreign communication by wire or radio."
The Company believes that the leasing of dark fiber facilities does not
constitute engaging in "communication by wire or radio" and therefore is not
subject to these legal requirements. In any event, the Company does not intend
to offer its dark fiber facilities as a common carrier. Common carriers are
those who offer services directly to the public, or to all potential users on an
indiscriminate basis subject to standardized rates, terms or conditions. The
Company does not intend to offer its dark fiber services in this manner, but
instead intends to enter into individualized negotiations on a selective basis
with prospective lessees of its dark fiber facilities to determine whether and
on what terms to serve each potential lessee. The Company therefore does not
believe that its dark fiber offerings are subject to the common carrier
provisions of the Federal Communications Commission ("FCC") or to the common
carrier provisions of the Communications Act of 1934, as amended (the
"Communications Act").
Federal telecommunications law also imposes special legal requirements on
"telecommunications carriers." The law essentially defines "telecommunications
carriers" as those offering certain telecommunication services "directly to the
public" or to all potential users. The Company therefore believes that a Company
has to be a common carrier in order to be considered a telecommunications
carrier. For the reasons stated above, the Company believes that it is neither a
common carrier nor a telecommunications carrier with respect to its dark fiber
service. Nevertheless, the law is not entirely clear as to, and the FCC has not
definitively addressed whether, the term "telecommunications carriers" is meant
to encompass only common carriers, and therefore whether a provider of dark
fiber facilities on an individualized basis, like the Company, is a
"telecommunications carrier." The FCC has been petitioned by certain railroad,
power and telecommunications associations, none of which are affiliated with the
Company, to clarify the status of dark fiber providers in this respect, and if
the agency decides that such companies are telecommunications carriers, then the
Company would be subject to certain additional regulatory requirements. These
requirements may have a material adverse effect on the Company.
If the Company's offering of dark fiber facilities were deemed to constitute
a "telecommunications service," then its revenues from such leases to end users
(but not to other telecommunication carriers) would become subject to assessment
for the FCC's Universal Service Fund, a fund that was established by the FCC
pursuant to the Communications Act to assist in ensuring the universal
availability of basic telecommunications services at affordable prices. Such
assessments could create a liability equal to a percentage of these gross
revenues (the Company anticipates that the rate of assessment will be
approximately 4.5% of gross interstate end-user revenues for the year 1998, and
may be higher in subsequent years).
12
<PAGE>
With respect to its offering of telecommunications transmission services,
however, the Company will likely operate as a common carrier and therefore will
be subject to the regulatory requirements applicable to common carriers and to
telecommunications carriers. For example, the Company will be required, with
respect to its transmission services, to (1) provide such services
indiscriminately upon any reasonable request; (2) charge rates and adopt
practices, classifications and regulations that are just and reasonable; and (3)
avoid unreasonable discrimination in charges, practices, regulations, facilities
and services. The Company may also be required to file tariffs setting forth the
rates for its services. Under current FCC policies, these regulatory
requirements should not impose any substantial burdens on the Company. The FCC
has recently determined, for example, that providers of "access" services (that
is, intracity transmission services used to originate and/or terminate
interstate and foreign communications) need not file tariffs and may offer such
services to customers on a private, contractual basis. Although the FCC's
policies may be subject to change in the future due to regulatory, judicial, or
legislative actions, and such changes could have a material adverse effect on
the Company, the Company does not believe that regulation of its services at the
federal level will have any detrimental effect on its competitiveness.
ILECs, CLECs and IXCs are subject to various federal telecommunications
laws. Accordingly, federal telecommunications law may affect the Company's
business by virtue of the inter-relationships that exist among the Company and
many of these regulated telecommunications entities. For example, the FCC
recently issued an order requiring, among other things, that common line access
fees charged to IXCs, which previously amounted to more than what was necessary
to recover the costs of providing access, shift from being usage driven to a
fixed flat cost-based structure. While it is not possible to predict the precise
effect the access charge changes will have on the Company's business or
financial condition, the reforms will reduce access charges paid by IXCs, likely
eliminating one of the principal disincentives for use of ILEC facilities by
IXCs, which could have a material adverse effect on the use of the Company's
fiber optic telecommunications networks by IXCs.
The FCC has responsibility under the 1996 Act's interconnection provisions
to determine what elements of an ILEC's network must be provided to competitors
on an unbundled basis. The FCC has decided not to declare dark fiber an
unbundled network element under these provisions. This decision is currently
subject to petitions for reconsideration before the FCC. An FCC decision to
alter this decision on reconsideration could decrease the demand for dark fiber
provided by the Company. In addition, the FCC has announced that state
commissions may decide to add network elements to the FCC's list of elements
that are required to be unbundled by all carriers throughout the country.
STATE
In arbitrating interconnection agreements under the 1996 Act between ILECs
and their potential competitors, some state commissions have considered whether
dark fiber should be considered an unbundled network element. For example, the
New York Public Service Commission determined that it would not require NYNEX
Corporation ("NYNEX") to provide dark fiber as an unbundled network element.
State commissions, including those in Florida, Maryland, North Carolina, and
Virginia, also have either refused to require the ILECs to offer dark fiber to
competitors, or have stated that the issue would be addressed at a later time.
On the other hand, state commissions in Illinois, Massachusetts, Arizona,
Georgia, Minnesota, Ohio, Oregon and Tennessee have found dark fiber to be a
network element and required the ILECs to offer it on an unbundled basis to
CLECs. There can be no assurance that these requirements, and the associated
pricing methodologies, where applicable, will not reduce the demand for dark
fiber provided by the Company.
Each state (and the District of Columbia, which is treated as a state for
the purpose of regulation of telecommunications services) has its own statutory
scheme for regulating providers of certain telecommunications-related services
as "common carriers," as "public utilities," or under similar rubrics. The
Company believes that the offering of dark fiber facilities is not subject to
this type of regulation in Illinois,
13
<PAGE>
New York, Pennsylvania, or the District of Columbia. However, the Company's
offering of transmission services (as distinct from dark fiber capacity) likely
will be subject to regulation in each of these jurisdictions to the extent that
these services are offered for intrastate use. Even though many of the Company's
facilities will be physically intrastate, the Company anticipates that most
customers will use its facilities and services for the purpose of originating
and/or terminating interstate and foreign communications. Under current FCC
policies, any dedicated transmission service or facility that is used more than
10% of the time for the purpose of interstate or foreign communication is
subject to FCC jurisdiction to the exclusion of any state regulation.
Regulation of the telecommunications industry is changing rapidly, and the
regulatory environment varies substantially from state to state. At present, the
Company does not anticipate that the regulatory requirements to which it will be
subject in Illinois, New York, Pennsylvania, and the District of Columbia will
have any material adverse effect on its operations, although the Company will
incur certain costs to comply with regulatory requirements such as the filing of
tariffs, submission of periodic financial and operational reports to regulators,
and payment of regulatory fees and assessments. In some jurisdictions, the
Company's pricing flexibility for intrastate services may be limited because of
regulation, although the Company's direct competitors will be subject to similar
restrictions. However, there can be no assurance that future regulatory,
judicial, or legislative action will not have a material adverse effect on the
Company.
LOCAL
In addition to federal and state laws, local governments exercise legal
authority that may impact the Company's business. For example, local
governments, such as the City of New York, typically retain the ability to
license public rights-of-way, subject to the limitation that local governments
may not prohibit persons from providing telecommunications services. Local
authorities affect the timing and costs associated with the Company's use of
public rights-of-way. These regulations may have an adverse effect on the
Company's business.
INTERNATIONAL
Various regulatory requirements and limitations also will influence the
Company's business as it attempts to enter international markets.
Although the Company has not fully determined its international business
strategy, the Company is currently negotiating an agreement with a foreign firm
that contemplates jointly acquiring and selling international, facilities-based
telecommunications capacity between the U.S. and the United Kingdom. Depending
on the Company's specific business plan in this arrangement, it is possible that
the Company will become a U.S. international common carrier subject to U.S.
regulation under Title II of the Communications Act. Under current FCC rules,
international carriers that do not exercise market power and that are not
affiliated with dominant foreign carriers are subject to relatively relaxed U.S.
regulation as nondominant international carriers. As a common carrier, the
Company would be subject to, among other policies, the common carrier
obligations of nondiscrimination. In addition, FCC rules prohibit U.S. carriers
from bargaining for special concessions from foreign partners. The Company would
also be required, under Sections 214 and 203 of the Communications Act,
respectively, to obtain authority and file an international service tariff
containing rates, terms and conditions prior to initiating service. As a
nondominant carrier, the Company would be eligible to seek "global" authority to
operate as facilities-based and/or resale carrier in an application subject to
the FCC's streamlined processing rules. International carriers are also subject
to certain annual fees and filing requirements including the requirement to file
contracts with other carriers including foreign carrier agreements, and reports
setting forth international circuit, traffic and revenue data service. Failure
to obtain an appropriate U.S. license for international service or the
revocation of a license could have a material adverse effect on the future
operations of the Company.
14
<PAGE>
If the Company operates as an international common carrier, it will also be
required to comply with FCC's rules regarding the International Settlements
Policy (the "ISP") which defines the permissible boundaries for U.S. carriers
and their foreign correspondents to settle the cost of terminating each other's
traffic over their respective networks. The ISP is designed to eliminate a
foreign carrier's opportunity to discriminate among different U.S. carriers by
bargaining for accounting rates or other terms that benefit the foreign carrier
but is inconsistent with the U.S. public interest. The ISP generally provides
that U.S. carriers may only enter into foreign carrier agreements for the
exchange of traffic that contain the same accounting rate and settlement rate
(typically one-half of the accounting rate) offered to all other U.S. carriers.
The ISP also requries U.S. carriers to adhere to the principle of proportionate
return so that competing U.S. carriers have comparable opportunities to receive
the return traffic that reduces the marginal cost of providing international
service.
The FCC continues to refine its international service rules to promote
competition, reflect and encourage liberalization in foreign countries, and
reduce accounting rates toward cost. Indeed, the FCC recently established
reduced "benchmark" rates for the amounts U.S. carriers will be allowed to pay
to foreign carriers for terminating U.S.-originated traffic. Effective January
1, 1998, U.S. carriers will have one year to ensure that the rate paid to
terminate traffic, e.g., in the U.K., does not exceed $.15/minute. Different
rates would apply in different countries depending on the countries' wealth.
In addition, in connection with the proposed transaction between MCI
Communications and British Telecom and in other decisions, the FCC has
recognized the advent of competition in the U.K. market by designating the U.K.
as a country that offers "equivalent opportunities" for the resale of
international private line services and "effectively competitive opportunities."
Those decisions have relaxed or eliminated regulatory limitations on certain
U.S. carrier services between the U.S. and the U.K. and permitted U.K. carriers
to enter the U.S. market through affiliations with U.S. carriers. In addition,
the FCC has determined that it would permit U.S. carriers to enter into
"flexible" international termination arrangements where such arrangements
promote competition and has proposed to amend its rules to reflect the U.S.
participation in the World Trade Organization ("WTO") Agreement on Basic
Telecommunications Services in which 69 countries agreed to eliminate barriers
to competition in their markets for basic telecommunications service. Under the
proposed amendments, the FCC would, among other things, relax or eliminate
current rules that restrict or impose more stringent regulation on U.S. carriers
with affiliations with carriers from WTO-member countries.
Regulation of the international telecommunications industry is changing
rapidly. The Company is unable to predict how the FCC will resolve the various
pending international policy issues and the effect of such resolutions on the
Company.
The Company's international services would also be subject to regulation in
the United Kingdom. U.K. regulation, as well as policies and regulations on the
European Union level, would impose separate licensing, service and other
conditions on the Company's international service operations, and these
requirements may have a material adverse impact on the Company.
RISK OF CANCELLATION OR NON-RENEWAL OF FRANCHISES, LICENSES OR PERMITS
The Company operates its NY Network based on a franchise agreement entered
into between the Company and the City of New York on December 20, 1993 (the "NYC
Franchise Agreement"). Both the City of New York and the Company have the right,
at any time after December 2000, upon six months notice, to renegotiate certain
terms of the NYC Franchise Agreement, including the annual franchise fee payable
by the Company, based on changes in technological, regulatory or market
conditions which may occur after the effective date of the NYC Franchise
Agreement. In the event either party calls for renegotiation, both the City of
New York and the Company are required to negotiate any such changes in good
faith. In the event an agreement cannot be reached upon any such renegotiation,
the NYC Franchise Agreement will be subject to early termination on a date which
would be one half of the
15
<PAGE>
number of days between the date of the notice to renegotiate and January 1,
2009. Termination of the NYC Franchise Agreement would have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Business--Franchise, License and Related Agreements--New York City
Franchise Agreement." The Company will also need to obtain additional
franchises, licenses and permits for its planned Intra-City Networks and
Inter-City Network. There can be no assurance that the Company will be able to
maintain its existing franchises, licenses or permits or to obtain and maintain
the other franchises, licenses or permits needed to implement its strategy on
acceptable terms.
NEED TO OBTAIN AND MAINTAIN RIGHTS-OF-WAY
The Company must obtain additional rights-of-way and other permits from
railroads, utilities, state highway authorities, local governments and transit
authorities to install underground conduit for the expansion of the NY Network
and the Company's planned Intra-City Networks and Inter-City Network. There can
be no assurance that the Company will be successful in obtaining and maintaining
such right-of-way agreements or obtaining such agreements on acceptable terms.
Some of these agreements may be short-term or revocable at will, and there can
be no assurance that the Company will have continued access to existing
rights-of-way after their expiration or termination. If any of these agreements
were terminated or could not be renewed and the Company were forced to remove
its fiber optic cable from under the streets or abandon its networks, such
termination would have a material adverse effect on the Company's business,
results of operations and financial condition.
More specifically, the Company's NY Network relies upon, and its planned
expansions into Long Island and Westchester County will rely upon, right-of-way
agreements between the Company and NYNEX and its subsidiary, Empire City Subway
Company (Ltd.) ("ECS"). The current agreements are subject to termination at any
time without cause upon three months' notice. In case of termination, the
Company may be required to remove its fiber optic cable from the conduits or
poles of NYNEX. Such termination would have a material adverse effect on the
Company's business, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE
The communications industry is subject to rapid and significant changes in
technology that could materially affect the continued use of fiber optic cable.
The effect of technological changes on the business of the Company cannot be
predicted, and there can be no assurance that technological changes in the
communications industry will not have a material adverse effect on the Company's
business, results of operations and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
There are certain risks inherent in doing business on an international
level, including regulatory limitations restricting or prohibiting the provision
of the Company's services, unexpected changes in regulatory requirements,
tariffs, customs, duties and other trade barriers, difficulties in staffing and
managing foreign operations, longer payment cycles, problems in collecting
accounts receivable, political risks, fluctuations in currency exchange rates,
technology export and import restrictions or prohibitions, delays from customs
brokers or government agencies, and potentially adverse tax consequences
resulting from operating in multiple jurisdictions with different tax laws.
Furthermore, international rates charged to customers are likely to decrease in
the future for a variety of reasons, including increased competition between
existing carriers, new entrants into geographic markets in which the Company
operates or intends to operate and additional strategic alliances or joint
ventures among large international carriers that facilitate targeted pricing and
cost reductions. See "--Extensive Regulation-- International" and
"Business--Regulation."
16
<PAGE>
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
The Company may, in the future, acquire or engage in efforts to acquire
customer bases and businesses from, make investments in, or enter into strategic
alliances with, companies which have customer bases, switching capabilities or
existing networks in the Company's current markets or in areas into which the
Company intends to expand the MFN Network. Although the Company is currently
evaluating several potential strategic opportunities, it does not have any
present definitive commitment or agreement with respect to any material
acquisition, investment, strategic alliance or related effort. Any future
acquisitions, investments, strategic alliances or related efforts will be
accompanied by the risks such as the difficulty of identifying appropriate
acquisition candidates, the difficulty of assimilating the operations of the
respective entities, the potential disruption of the Company's ongoing business,
the inability of management to capitalize on the opportunities presented by
acquisitions, investments, strategic alliances or related efforts, the failure
to successfully incorporate licensed or acquired technology and rights into the
Company's services, the inability to maintain uniform standards, controls,
procedures and policies and the impairment of relationships with employees and
customers as a result of changes in management. There can be no assurance that
the Company would be successful in overcoming these risks or any other problems
encountered with such acquisitions, investments, strategic alliances or related
efforts. See "--Risks Associated with Growth Strategy; Management of Expansion"
and "Business--Business Strategy--Utilize Strategic Relationships to Expand the
Reach of the MFN Network."
PRICING PRESSURES AND INDUSTRY CAPACITY
The long distance transmission industry has generally been characterized as
having overcapacity and declining prices since shortly after the AT&T
divestiture in 1984. Although the Company believes that, in the last several
years, increasing demand has resulted in a shortage of capacity and slowed the
decline in prices, the Company anticipates that prices for its services
specifically, and long distance services in general, will continue to decline
over the next several years due primarily to (i) price competition as various
network providers continue to install networks that might compete with the MFN
Network, (ii) recent technological advances that permit substantial increases in
the transmission capacity of both new and existing fiber and (iii) strategic
alliances or similar transactions, such as long distance capacity purchasing
alliances among certain RBOCs, that increase the parties' purchasing power. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RELIANCE ON KEY PERSONNEL; CONCENTRATION OF VOTING POWER BY PRINCIPAL
STOCKHOLDERS; ANTI-TAKEOVER EFFECTS OF TWO CLASSES OF STOCK
The Company's business is managed by a small number of key management and
operating personnel, the loss of certain of whom could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company believes that its future success will depend in large part on its
ability to attract and retain highly skilled and qualified personnel and to
expand, train and manage its employee base. None of the Company's key
executives, other than Stephen A. Garofalo, Chief Executive Officer, Secretary
and Chairman of the Board, and Howard Finkelstein, President and Chief Operating
Officer, is presently a party to an employment or non-competition agreement with
the Company. See "Management--Employment Agreements."
The holders of Class A Common Stock are entitled to one vote per share.
Holders of Class B Common Stock are entitled to ten votes per share and vote as
a separate class to elect at least 75% of the members of the Board of Directors.
Each share of Class B Common Stock is convertible at any time into one share of
Class A Common Stock, and with limited exceptions converts automatically upon
any transfer thereof. Stephen A. Garofalo currently controls approximately 57%
of the outstanding shares of Class A Common Stock. Metromedia and certain of its
affiliates currently own 100% of the Class B
17
<PAGE>
Common Stock, and represent approximately 76% of the Company's total voting
power (on a fully diluted basis, without giving effect to the Offerings).
Accordingly, Metromedia will be able to control the Board of Directors and all
shareholders decisions and, in general, to determine (without the consent of the
Company's other stockholders) the outcome of any corporate transaction or other
matter submitted to the stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of the Company's assets.
In addition, Metromedia has the power to prevent or cause a change in control of
the Company. See "Description of Capital Stock," "Principal Shareholders" and
"Certain Relationships and Related Transactions."
CONTROL BY AND RELIANCE UPON METROMEDIA COMPANY
Metromedia and its general partners currently own all of the Class B Common
Stock, each entitled to 10 votes per share, representing approximately 76% of
the Company's total voting power (on a fully diluted basis, without giving
effect to the Offerings). In addition, since holders of Class B Common Stock are
entitled to vote as a separate class to elect at least 75% of the members of the
Board, Metromedia will be able to control the Board and all stockholder
decisions and, in general, to determine (without the consent of the Company's
other stockholders) the outcome of any corporate transaction or other matter
submitted to the stockholders for approval, including mergers, consolidations
and the sale of all or substantially all of the Company's assets. Metromedia
also has the power to prevent or cause a change in control of the Company. In
addition, over the past year, Metromedia has made available to the Company
approximately $8.0 million in debt financing and has consummated the Metromedia
Investment. There can be no assurance that Metromedia will provide any
additional financing to the Company. See "--Reliance on Key Personnel;
Concentration of Voting Power by Principal Stockholders; Anti-takeover Effects
of Two Classes of Stock," "Description of Capital Stock," "Principal
Shareholders" and "Certain Relationships and Related Transactions."
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK
PRICE
Prior to the Offerings, there has been no public market for the Class A
Common Stock. The initial public offering price of the Class A Common Stock will
be determined by negotiations among the Company and the Representatives of the
Underwriters (each as defined herein), and may bear no relationship to the price
at which the Class A Common Stock will trade after completion of the Offerings.
The Class A Common Stock has been approved for listing, subject to notice of
issuance, on the Nasdaq National Market; however, there can be no assurance that
an active trading market will develop or be maintained for the Class A Common
Stock following the Offerings or that the Class A Common Stock will trade in the
public market at or above the initial public offering price. For factors
considered in determining the initial public offering price, see "Underwriting."
After completion of the Offerings, the market price of the Class A Common Stock
will be subject to fluctuations in response to various factors and events,
including the liquidity of the market for the Class A Common Stock, variations
in the Company's quarterly operating results, regulatory or other changes, both
domestic and international, affecting the communications industry generally or
the Company specifically, announcements of business developments by the Company
or its competitors, changes in operating results and changes in general market
conditions. See "--Limited History of Operations; Negative Losses and Negative
Cash Flow from Operations; Expected Future Net Losses and Negative Cash Flow
from Operations", "--Extensive Regulation", "--Risk of Cancellation or
Non-Renewal of Franchises, Licenses or Permits" and "-- Competitive Industry."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE EFFECT ON STOCK PRICE;
REGISTRATION RIGHTS
Sales of a substantial number of shares of Class A Common Stock in the
public market, or the perception that such sales may occur could adversely
effect prevailing market prices for the Class A Common Stock and the ability of
the Company to raise capital in the future. Upon completion of the
18
<PAGE>
Offerings, the Company will have outstanding 16,204,267 shares of Class A Common
Stock and 4,221,159 shares of Class B Common Stock (which are convertible into
Class A Common Stock on a one-for-one basis). Of such shares, the 6,600,000
shares of Class A Common Stock being sold in the Offerings (together with any
shares sold upon exercise of the Underwriters' over-allotment option) will be
immediately eligible for sale in the public market without restriction, except
for shares purchased by or issued to any affiliate (an "Affiliate") of the
Company (within the meaning of the Securities Act of 1933, as amended (the
"Securities Act")). For so long as any stockholder remains an Affiliate of the
Company, any shares of Class A Common Stock held by such person will only be
available for public sale if such shares are registered under the Securities Act
or sold in accordance with an applicable exemption from registration, such as
Rule 144 ("Rule 144") of the Securities Act, and any sales by an Affiliate under
Rule 144 would be subject to the volume and other limitations under such rule.
1,781,444 shares of Class A Common Stock which are "restricted securities", as
that term is defined in Rule 144, owned by persons who are neither Affiliates of
the Company nor subject to lock-up agreements with the Underwriters are
currently eligible for sale under Rule 144. All of the shares of Class B Common
Stock are currently owned by persons who are affiliates of the Company and, in
addition, are subject to lock-up agreements with the Underwriters. Shares of
Class A Common Stock converted from shares of Class B Common Stock will be
eligible for sale under Rule 144 beginning on April 30, 1998 (subject to certain
volume limitations and other restrictions prescribed by Rule 144). Upon the
expiration or waiver of certain lock-up agreements with the Underwriters,
approximately 5,306,689 additional shares of Class A Common Stock will be
immediately eligible for sale in the public market pursuant to Rule 144 (subject
to certain volume limitations and other restrictions prescribed by Rule 144).
Pursuant to lock-up agreements with the Underwriters, the Company and executive
officers and directors of the Company have agreed not to offer, sell, contract
to sell or otherwise dispose of, directly or indirectly, any shares of Class A
Common Stock or any securities of the Company that are substantially similar to
the Class A Common Stock, including but not limited to any securities that are
convertible into or exchangeable for, or that represent the right to receive,
Class A Common Stock or any such substantially similar securities (other than
pursuant to employee or director stock or stock option plans existing on the
date of this Prospectus) for a period of 180 days after the date of this
Prospectus without the prior written consent of Salomon Brothers Inc, except for
the shares of Class A Common Stock offered in connection with the Offerings.
4,260,511 shares of Class A Common Stock are issuable upon the exercise of
outstanding options and warrants. In addition, the Company has entered into
various registration rights agreements which grant certain stockholders "demand"
and "piggyback" registration rights which may result in the Company being
obligated to cause (as early as 90 days after consummation of the Offerings) the
registration of up to 1,703,520 shares of Class A Common Stock and up to 322,452
shares of Class A Common Stock underlying currently outstanding warrants. One
party that is entitled to demand registration rights for 264,870 shares of Class
A Common Stock has indicated to the Company they intend to immediately exercise
such rights upon consummation of the Offerings. See "Certain Relationships and
Related Transactions," "Description of Capital Stock" and "Shares Eligible for
Future Sale." No prediction can be made as to the effect, if any, that sales of
shares of Class A Common Stock or the availability of such shares for sale will
have on the market prices prevailing from time to time. Nevertheless, the
possibility that substantial amounts of Class A Common Stock (including those
shares into which the Class B Common Stock is convertible) may be sold in the
public market may adversely affect prevailing market prices for the Class A
Common Stock and impair the company's ability to raise equity capital in the
future.
LITIGATIONS AGAINST THE COMPANY
The Company, Stephen A. Garofalo, Metromedia, Peter Sahagen, Peter
Silverman, and Silverman, Collura, Chernis & Balzano, P.C. are currently
defendants in an action brought by Howard Katz, Realprop Capital Corp. and
Evelyn Katz in the United States District Court for the Southern District of New
York (the "Katz Litigation"). On May 28, 1997, the plaintiffs filed an amended
complaint and on September 15,
19
<PAGE>
1997, the plaintiffs filed a second amended complaint. The complaint, as
amended, alleges causes of action for, among other things, common law fraud,
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder, breach of fiduciary duty and negligent
misrepresentation for alleged misrepresentations and omissions made in
connection with the repurchase of the Katz Securities (as defined below under
"Certain Relationships and Related Transactions"). The complaint, as amended,
also contains allegations of corporate waste against the Company and Mr.
Garofalo. Plaintiffs seek, among other things, compensatory damages of not less
than $12 million, punitive damages in the amount of $100 million and, in the
alternative, rescission of the purchase by the Company of 264,631 shares of
Class A Common Stock and 207,883 warrants to acquire shares of Class A Common
Stock. The defendants have until October 31, 1997 to answer, move to dismiss or
otherwise respond to the amended complaint. While the Company currently intends
to vigorously defend itself against these allegations based on its belief that
MFN acted appropriately in connection with the matters at issue in this
litigation, no assurance can be made that the Company will not determine that
the advantages of entering into a settlement outweigh the risks and expense of
protracted litigation or that ultimately the Company will be successful in its
defense of the allegations. If the Company is unsuccessful in its defense of the
allegations, an award of the magnitude being sought by the plaintiffs in the
Katz Litigation could have a material adverse effect on the Company's financial
condition or results of operations. See "Business--Legal Proceedings."
On or about October 20, 1997, Vento & Company of New York, LLC ("VCNY")
commenced an action against the Company, Stephen A. Garofalo, Peter Silverman,
the law firm of Silverman, Collura, Chernis & Balzano, P.C., Peter Sahagen,
Sahagen Consulting Group of Florida (collectively, the "Sahagen Defendants") and
Robert Kramer, Birdie Capital Corp, Lawrence Black, Sterling Capital LLC,
Penrush Limited, Needham Capital Group, Arthur Asch, Michael Asch and Ronald
Kuzan (the "Kramer Defendants"), in the United States Disctrict Court for the
Southern District of New York (No. 97 CIV 7751) (the "VCNY Litigation"). The
complaint alleges causes of action for, among other things, violation of Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, fraud and fraudulent concealment, breach of fiduciary duty and
negligent misrepresentation and omission made in connection with respect to the
sale by VCNY of 1,368,900 shares of Class A Common Stock to Peter Sahagen and
the Kramer Defendants on January 13, 1997 (the "VCNY Sale"). See "Certain
Relationships and Related Transactions" and "Description of Capital
Stock--Registration Rights." The complaint also alleges a cause of action for
declaratory judgment asserting that certain "piggyback" registration rights are
applicable to shares of the Company's Class A Common Stock which VCNY owns (or
which may be rescinded to VCNY pursuant to its requested remedies). The
complaint further requests a declaratory judgment that a stockholders agreement
between the Company, Stephen Garofalo and VCNY be declared operative, which
agreement indirectly required VCNY, through designated directors, to approve
significant transactions, and, accordingly, the Metromedia Loan and the
Metromedia Investment should be rescinded and Mr. Vento should be reappointed as
Chief Executive Officer of the Company. The Company believes, among other
things, that the stockholders agreement to which Mr. Vento was a party had
terminated and as a result Mr. Vento had no such rights to approve the
Metromedia Investment or the Metromedia Loan or to remain as Chief Executive
Officer of the Company. Plaintiff seeks, among other things, (i) rescission of
the VCNY Sale, or alternatively, damages in an amount not presently
ascertainable, but believed to be in the excess of $36 million, together with
interest thereon, (ii) punitive damages in the amount of $50 million, and (iii)
the declaratory judgments discussed above. The Company intends to vigorously
defend itself against these allegations based on its belief that MFN acted
appropriately in connection with the matters at issue in this litigation. No
assurance can be made, though, that the Company will not determine that the
advantages of entering into a settlement outweigh the risk and expense of
protracted litigation or that ultimately the Company will be successful in its
defense of the allegations. If the Company is unsuccessful in its defense of the
allegations, an award of the magnitude being sought by the plaintiffs in the
VCNY Litigation would have a material adverse
20
<PAGE>
effect on the Company's financial condition or results of operation. See
"Business--Legal Proceedings."
LIMITED NATURE OF COMPANY'S CURRENT SERVICES
The Company is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure, and it is not
currently engaged in the transmission of voice, data or video services and does
not provide switched voice and data services. Accordingly, at the present time,
the Company, unlike other telecommunications companies, receives no revenues
from providing such services, and instead derives substantially all of its
revenues from the leasing of fiber optic capacity to its customers, many of whom
transmit voice, data and/or video information or provide switched voice and data
services. While the Company may in the future decide to provide such services,
the limited nature of the Company's current services could limit potential
revenues and result in the Company having lower revenues than competitors which
provide a wider array of services. See "Business--Customers" and
"Business--Competition."
ABSENCE OF DIVIDENDS
The Company anticipates that all of its earnings in the foreseeable future
will be retained to finance the continued growth and expansion of its business
and has no current intention to pay cash dividends on its Class A Common Stock.
See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Class A Common Stock in the Offerings will experience
immediate and substantial dilution of $9.62 per share in the net tangible book
value per share of outstanding Class A Common Stock. See "Dilution."
21
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offerings are estimated to be approximately $91.1
million (approximately $104.9 million if the Underwriters' over-allotment option
is exercised in full) after deducting estimated expenses of the Offerings
payable by the Company. Such net proceeds will be used primarily for capital
expenditures associated with the build-out of the MFN Network, the development
and introduction of new services and for general corporate and working capital
purposes. See "Business."
There can be no assurance that the Company's actual application of the
proceeds will not vary substantially from the Company's current plans. Moreover,
the Company will need additional capital to (i) finance the completion of its
planned network, (ii) fund working capital needs and future debt service
obligations, (iii) take advantage of unanticipated opportunities, including more
rapid international expansion, acquisitions of businesses, investments in, or
strategic alliances with, companies that are complementary to the Company's
current operations, (iv) develop or expand into new services or (v) otherwise
respond to unanticipated competitive pressures. See "Risk Factors--Competitive
Industry," "--Risks Associated with Acquisitions, Investments and Strategic
Alliances" and "Business--Business Strategy."
Pending application of the net proceeds of the Offerings, the Company
expects that it will place such net proceeds in interest-bearing bank accounts
or invest such proceeds in United States government securities or other
short-term, interest bearing, investment grade securities. The Company is not
currently, and does not expect as a result of the Offerings to become, subject
to the registration requirements of the Investment Company Act of 1940.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Class A
Common Stock and does not expect to do so in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will be
retained to finance the expansion and continued development of its business. Any
future determination with respect to the payment of dividends will be within the
sole discretion of the Company's Board and will depend upon, among other things,
the Company's earnings, capital requirements, the terms of then existing
indebtedness, applicable requirements of the Delaware General Corporation Law
(the "DGCL"), general economic conditions and such other factors considered
relevant by the Company's Board. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
22
<PAGE>
DILUTION
As of June 30, 1997, the net tangible book value of the Company was
approximately $19 million, or $1.38 per share of outstanding Common Stock
(taking into account the Reverse Stock Split and the Reclassifications). Net
tangible book value per share of Common Stock represents the total amount of
tangible assets of the Company, less the total amount of liabilities of the
Company, divided by the number of shares of Common Stock outstanding. After
giving effect to Reverse Stock Split, Reclassifications and the sale by the
Company of the 6,600,000 shares of Class A Common Stock offered hereby at an
assumed initial offering price of $15.00 per share (the midpoint of the range of
prices set forth on the cover page of this Prospectus) and assuming no exercise
of the Underwriters' over-allotment option and the application of the net
proceeds therefrom (after deducting estimated offering expenses payable by the
Company and estimated underwriting discounts and commissions), the pro forma net
tangible book value of the Company as of June 30, 1997 would have been
approximately $110 million, or $5.38 per share of Common Stock, representing an
immediate increase in net tangible book value of approximately $4.00 per share
of Common Stock to existing stockholders and an immediate dilution in net
tangible book value of approximately $9.62 per share to new investors purchasing
shares of Class A Common Stock in the Offerings. The following table illustrates
this per share dilution to the new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1)............. $ 15.00
Net tangible book value per share of Common Stock at June 30,
1997 (adjusted for the Reverse Stock Split and the
Reclassifications but excluding the Offerings)............... 1.38
Increase in net tangible book value per share of Common Stock
attributable to net proceeds of the Offerings................ 4.00
Pro forma net tangible book value per share of Common Stock
after giving effect to the Offerings......................... 5.38
-------------
Dilution per share to new investors of Class A Common Stock in
the Offerings................................................ $ 9.62
-------------
-------------
</TABLE>
- ------------------------
(1) Before deduction of underwriting discounts and offering expenses.
The following table sets forth, on a pro forma basis as of June 30, 1997,
and after giving effect to the Reclassifications and the Reverse Stock Split,
the number of shares of Class A Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share of
Common Stock paid by existing stockholders and to be paid by new investors,
assuming that shares purchased in the Offerings are sold at $15.00 per share
(the midpoint of the range of prices set forth on the cover page of this
Prospectus) before deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company:
<TABLE>
<CAPTION>
AVERAGE
PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE
------------------------ --------------------------- -----------
<S> <C> <C> <C> <C> <C>
NUMBER PERCENT AMOUNT PERCENT
------------- --------- ---------------- ---------
Existing Stockholders......................... 13,825,426 67.7% $ 38,781,023 28.1% $ 2.80
New Investors................................. 6,600,000 32.3 99,000,000 71.9 $ 15.00
------------- --------- ---------------- ---------
Total....................................... 20,425,426 100.0% $ 137,781,023 100.0%
------------- --------- ---------------- ---------
------------- --------- ---------------- ---------
</TABLE>
The above tables assume no exercise of any outstanding options or warrants.
As of the date hereof, options and warrants to purchase 4,260,511 shares of
Class A Common Stock, exercisable at prices ranging from $1.97 to $9.00 per
share, have been issued and are outstanding. To the extent options and warrants
are exercised, there will be further dilution to new investors. See
"Management--Executive Compensation" and "Capitalization."
23
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the Company's actual capitalization as
of June 30, 1997 after giving effect, retroactively, to the Reverse Stock Split
and (ii) the capitalization of the Company at such date, as adjusted, after
giving effect to the Reclassifications, the Reverse Stock Split and the issuance
of shares of Class A Common Stock offered hereby. This table should be read in
conjunction with the Consolidated Financial Statements of the Company, including
the notes thereto, and the other financial data included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
-------------- ----------------
Cash and cash equivalents....................................................... $ 22,893,466 $ 113,963,466
-------------- ----------------
-------------- ----------------
Stockholders' equity (deficit):
Class A Common Stock, par value $.01 per share; 180,000,000 shares authorized;
no shares issued and outstanding actual; 16,204,267 as adjusted............. $ -- $ 162,043
Class B Common Stock, par value $.01 per share; 20,000,000 shares authorized;
no shares issued and outstanding actual; 4,221,159 as adjusted.............. -- 42,212
Preferred Stock, par value $.01 per share, 2,000,000 shares authorized;
8,403.325 shares of Series B Preferred Stock issued and outstanding actual;
none as adjusted............................................................ 84 --
Common Stock, par value $.01 per share; 60,000,000 shares authorized;
9,564,940 shares of Old Common Stock issued and outstanding actual; none as
adjusted.................................................................... 95,649 --
Additional paid-in capital.................................................... 52,904,837 143,866,315
Accumulated deficit........................................................... (33,957,719) (33,957,719)
-------------- ----------------
Total stockholders' equity................................................ 19,042,851 110,112,851
-------------- ----------------
Total capitalization.................................................... $ 19,042,851 $ 110,112,851
-------------- ----------------
-------------- ----------------
</TABLE>
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data presented below as of and for the
years ended December 31, 1994, 1995 and 1996 have been derived from the
Consolidated Financial Statements of the Company and the notes related thereto
included elsewhere in this Prospectus. The Financial Statements of the Company
for the year ended December 31, 1994 have been audited by Richard A. Eisner &
Company, LLP, independent auditors, the Consolidated Financial Statements of the
Company as of and for the year ended December 31, 1995 have been audited by M.R.
Weiser & Co. LLP, Certified Public Accountants, and the Consolidated Financial
Statements of the Company as of and for the year ended December 31, 1996 have
been audited by Ernst & Young LLP, independent auditors. The selected financial
data as of and for the period ended December 31, 1993, have been derived from
the unaudited financial statements of the Company which, in the opinion of
management, include all adjustments necessary for a fair presentation of the
financial condition and results of operations for the Company for such period.
The selected consolidated financial data and balance sheet data as of and for
the six months ended June 30, 1997 and the summary consolidated financial data
as of and for the six months ended June 30, 1996 have been derived from the
unaudited Consolidated Financial Statements of the Company, and the notes
related thereto, included elsewhere in this Prospectus, which, in the opinion of
management, include all adjustments necessary for a fair presentation of the
financial condition and results of operations of the Company for such periods.
The results of operations for interim periods are not necessarily indicative of
a full year's operations. The following information should be read in
conjunction with "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and the Consolidated
Financial Statements of the Company and the notes thereto, and other financial
data appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 8, 1993 SIX MONTHS
(DATE OF YEAR ENDED DECEMBER 31, ENDED JUNE 30,
INCEPTION) TO --------------------------------------- -------------------------
DECEMBER 31, 1993 1994 1995 1996 1996 1997
------------------ --------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................... $ -- $ -- $ 56,149 $ 236,082 $ 82,035 $ 541,886
Expenses:
Cost of sales............ -- -- -- 698,793 265,029 1,081,677
Selling, general and
administrative......... 188,000 874,000 3,886,568 2,070,345 1,276,853 2,186,291
Depreciation and
amortization........... -- -- 161,576 612,530 292,319 372,935
Consulting and employment
incentives(a).......... -- -- -- 3,652,101 3,651,442 13,419,900
---------- --------- -------------- ------------ ----------- ------------
Loss from operations....... 188,000 874,000 3,991,995 6,797,687 5,403,608 16,518,917
Interest expense, net...... -- -- 327,106 3,561,010 1,807,956 475,252
---------- --------- -------------- ------------ ----------- ------------
Net loss................... $ 188,000 $ 874,000 $ 4,319,101 $ 10,358,697 $ 7,211,564 $ 16,994,169
---------- --------- -------------- ------------ ----------- ------------
---------- --------- -------------- ------------ ----------- ------------
Net loss applicable to
common stockholders per
share.................... $ 0.04 $ 0.10 $ 0.48 $ 0.87 $ 0.66 $ 1.36
---------- --------- -------------- ------------ ----------- ------------
---------- --------- -------------- ------------ ----------- ------------
Number of shares of common
stock assumed
outstanding(b)........... 4,408,237 8,721,210 9,094,472 11,851,801 10,993,990 12,599,295
---------- --------- -------------- ------------ ----------- ------------
---------- --------- -------------- ------------ ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
AS OF
JULY 31, 1997
---------------------
<S> <C>
OPERATING DATA:
Route miles of fiber installed............................................................... 54
Fiber miles of fiber installed............................................................... 7,188
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(C)
----------- ---------------
BALANCE SHEET DATA:
Current assets..................................................................... $23,509,306 $ 114,579,306
Working capital.................................................................... 21,027,781 112,097,781
Property and equipment, net........................................................ 7,354,768 7,354,768
Total assets....................................................................... 31,651,111 122,721,111
Long-term debt..................................................................... -- --
Total liabilities.................................................................. 12,608,260 12,608,260
Stockholders' equity............................................................... 19,042,851 110,112,851
</TABLE>
- ------------------------
(a) Represents value of common stock, warrants and options issued to consultants
and officers to provide services to the Company.
(b) Based upon the weighted average shares outstanding; see Note 1 to "Notes to
Consolidated Financial Statements."
(c) Adjusted to give effect to the Offerings and the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMPANY, INCLUDING THE NOTES RELATED THERETO, AND THE OTHER FINANCIAL
DATA APPEARING ELSEWHERE IN THIS PROSPECTUS.
STATEMENT ON FORWARD-LOOKING INFORMATION
CERTAIN INFORMATION INCLUDED HEREIN CONTAINS STATEMENTS THAT CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE REFORM ACT. SUCH FORWARD
LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER
FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE
COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: GENERAL ECONOMIC AND BUSINESS
CONDITIONS; INDUSTRY CAPACITY; UNCERTAINTY REGARDING AND CHANGES IN CUSTOMER
PREFERENCES; DEMOGRAPHIC CHANGES; COMPETITION; CHANGES IN METHODS OF MARKETING
AND TECHNOLOGY; CHANGES IN POLITICAL, SOCIAL AND ECONOMIC CONDITIONS AND
REGULATORY FACTORS AND VARIOUS OTHER FACTORS BEYOND THE COMPANY'S CONTROL. THE
"SAFE-HARBOR" PROTECTIONS OF THE REFORM ACT ARE NOT AVAILABLE TO INITIAL PUBLIC
OFFERINGS, INCLUDING THE OFFERINGS.
GENERAL
The Company is a facilities-based provider of technologically advanced,
high-bandwidth fiber optic communications infrastructure to carrier and
corporate/government customers, primarily in the form of leased fiber optic
cables and circuits. The Company currently derives all of its revenues in
connection with leasing dark fiber on the NY Network. Fees paid to the Company
by communications carriers and corporate and government customers are on an
unmetered basis. The costs associated with the initial development and
construction of the NY Network include engineering, installation, conduit, fiber
cable and easement costs. A substantial portion of these costs are incurred
before the realization of revenues and result in negative cash flow. The
Company's other operating expenses consist of selling, general and
administrative expenses ("SG&A"), as well as depreciation and amortization. The
franchise fees were included in Cost of Sales for the year ended December 31,
1996, while for the years ended December 31, 1994 and 1995 such fees were
classified as SG&A. The franchise fee payable to the City of New York is
currently 6% of Gross Revenues, and for 1998 and thereafter for the remainder of
the term of the franchise, the fee will be 5% of Gross Revenues. See
"Business--Franchise, License and Related Agreements--New York City Franchise
Agreement". "Gross Revenues" is defined in the NYC Franchise Agreement as all
revenues received directly or indirectly by the Company or any affiliate of the
Company from or in connection with telecommunications services which originate
in, terminate in, or transit New York City. Revenues that are generated from
transmissions which transit New York City, but also include transmission through
other areas, are to be pro-rated. The minimum franchise fee payable to the City
of New York is $200,000 per annum.
The Company's proposed business strategy includes the expansion of the NY
Network, construction of intra-city networks in Washington, D.C., Chicago and
Philadelphia and construction of an inter-city network between New York City and
Washington, D.C. Revenues will continue to be derived from fixed unmetered
charges for the provision of fiber optic capacity. If the Company does not
complete certain construction by a specified time, some of these contracts may
be terminated. There can be no assurance that the Company will complete the
expansion of the NY Network in a timely manner or that certain contracts will
not be terminated. The Company anticipates that as its expansion progresses
revenues derived from carrier customers as opposed to corporate and government
customers will constitute an increasing percentage of the Company's revenue base
due to the larger volume of capacity typically required by carriers. The
expansion of the NY Network and the construction of additional networks will
require additional expenditures. Expenses for the planned expansion consist of
engineering, installation, conduit, fiber cable and easement costs. These
expenses will result in negative cash flow until an adequate customer base is
established. Once its networks are completed and such a
27
<PAGE>
customer base is established, the Company expects that incremental revenues can
be added with relatively low additional expense, due to the predominantly fixed
nature of the Company's costs.
To date, the Company has signed certain of its customers to long term leases
which require an upfront payment rather than recurring monthly payments over the
term of a lease. The Company intends to continue this practice in the future to
the extent that it is economically practical. If the Company continues to sign
up new leases on these terms, the incoming cash flows from such upfront payments
in the early years, when the use of capital is greatest, may be greater than the
revenue recognized on an accrual basis. The Company also intends to attempt to
have customers fund a portion of the Company's construction expenses. To the
extent this occurs in future leases, incoming cash flows in the early years may
be greater than the revenue recognized on an accrual basis and the opposite will
be true in the later years of such leases.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Total revenues increased to $541,886 for the six months ended
June 30, 1997 from $82,035 for the six months ended June 30, 1996, representing
an increase of $459,851. Approximately one half of this increase was derived
from lease revenue recognition with the remainder resulting from one-time
non-lease revenues. The increase in lease revenues resulted from an increase in
the customer base.
COST OF SALES. Cost of sales increased to $1,081,677 for the six months
ended June 30, 1997 from $265,029 for the six months ended June 30, 1996,
representing an increase of $816,648. The increase was primarily due to costs
associated with one time non-lease revenue recognition during the period.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A increased to $2,186,291 for the
six months ended June 30, 1997 from $1,276,853 for the six months ended June 30,
1996, an increase of $909,438. This increase is primarily a result of increased
headcount due to the staffing of the organization to accomodate the anticipated
growth of the Company. Legal expenses also increased as a result of the
increased business activity within the organization.
CONSULTING AND EMPLOYMENT INCENTIVES. Consulting and employment incentives
increased to $13,419,900 for the six months ended June 30, 1997 from $3,651,442
for the six months ended June 30, 1996, reflecting an increase of $9,768,458.
This increase is due to the increase in issuance of equity instruments to key
employees of the Company during the period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$372,935 for the six months ended June 30, 1997 from $292,319 for the six months
ended June 30, 1996, representing an increase of $80,616. The increase in
depreciation and amortization relates to the increased size of the Company's
fiber optic network versus the prior year.
INTEREST INCOME. Interest income of $204,175 was recorded for the six
months ended June 30, 1997. Interest income in 1997 was derived from the
short-term investment of the Company's excess cash. In 1996, there was no excess
cash available for investing and no interest income.
INTEREST EXPENSE (INCLUDING FINANCING COSTS). Interest expense (including
financing costs) decreased to $679,427 for the six months ended June 30, 1997
from $1,807,956 for the six months ended June 30, 1996, representing a decrease
of $1,128,529. The decrease was primarily due to the repayment of debt from the
proceeds of the Metromedia Investment in April 1997. The Company incurred higher
financing costs for the six months ended June 30, 1996 due to efforts to fund
the expanded operations of the Company.
NET LOSS. Net loss increased to $16,994,169 for the six months ended June
30, 1997 from $7,211,564 for the six months ended June 30, 1996, representing an
increase of $9,782,605. The increase in the loss is the result of the factors
discussed above, primarily the increase in consulting and employment incentives.
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<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company was in its early development stage and did not generate its
first revenues until the last three months of 1995 when customers began using
the Company's facilities.
REVENUES. Total revenues increased to $236,082 for the year ended December
31, 1996 from $56,149 for the year ended December 31, 1995, representing an
increase of $179,933. The increase in revenue is due primarily to an increase in
the number of customers.
COST OF SALES. Cost of sales was $698,793 for the year ended December 31,
1996. There were no cost of sales recorded for the year ended December 31, 1995.
The increase was primarily attributable to the inclusion of franchise and
easement fees in cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A decreased to $2,070,345 for the
year ended December 31, 1996 from $3,886,568 for the year ended December 31,
1995, representing a decrease of $1,816,223.
CONSULTING AND EMPLOYMENT INCENTIVES. Consulting and employment incentives
were $3,652,101 for the year ended December 31, 1996 versus none in 1995,
reflecting the Company's issuance of equity instruments for consulting services.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$612,530 for the year ended December 31, 1996 from $161,576 for the year ended
December 31, 1995, representing an increase of $450,954. Certain components of
depreciation and amortization are recognized by the Company upon commencement of
service to customers, which did not occur until late 1995. As a result,
depreciation and amortization in 1996 was larger than it was in 1995 due to the
inclusion of a full year of depreciation and amortization.
INTEREST EXPENSE (INCLUDING FINANCING COSTS). Interest Expense (including
financing costs) increased to $3,561,010 for the year ended December 31, 1996
from $327,106 for the year ended December 31, 1995, representing an increase of
$3,233,904. This increase was a result of additional debt incurred in 1996 to
finance construction of the NY Network and to fund the operations of the
Company.
NET LOSS. Net Loss increased to $10,358,697 for the year ended December 31,
1996 from $4,319,101 for the year ended December 31, 1995, representing an
increase of $6,039,596. The increase in net loss is attributable to the factors
discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Total revenues were $56,149 for the year ended December 31, 1995.
The Company did not recognize any revenues for the year ended December 31, 1994.
COST OF SALES. There were no costs of sales incurred for the years ended
December 31, 1995 and December 31, 1994. Any franchise fees and easement costs
were recognized in SG&A during these periods.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A increased to $3,886,568 for the
year ended December 31, 1995 from $874,000 for the year ended December 31, 1994,
representing an increase of $3,012,568. This increase is primarily the result of
increased sales, marketing and administrative expenses associated with the
Company's start up phase.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $161,576
for the year ended December 31, 1995 and began to be recognized upon
commencement of service to customers in late 1995.
INTEREST EXPENSE. Interest Expense was $327,106 for the year ended December
31, 1995 primarily due to debt incurred to finance the construction of the NY
Network.
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<PAGE>
NET LOSS. Net Loss increased to $4,319,101 for the year ended December 31,
1995 from $874,000 for the year ended December 31, 1994, representing an
increase of $3,445,101. The increase in net loss is attributable to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since its organization in 1993, the Company has funded capital expenditures,
debt service and cash used in operations through a combination of private
placements of debt and equity securities and stockholder advances. The Company's
operations generated insufficient cash flows in 1993 through 1996 to enable it
to meet its capital expenditures, debt service and other cash needs. At December
31, 1996 and 1995, the Company had working capital deficits of approximately
$12.9 million and $11.5 million respectively. The working capital deficiencies
occurred because, prior to the financings by Metromedia, the Company had
insufficient permanent financing to fund its capital expenditures and losses
during its start-up phase.
Cash provided by operating activities was $833,019 during the six months
ended June 30, 1997 and cash used in operating activities was $3,848,863 during
the six months ended June 30, 1996. The increase in cash flow from operating
activities resulted primarily from advanced payments of $8,868,768 from
customers. Cash used in operating activities during the year ended December 31,
1996 was $2,745,590 as compared to $1,290,817 for the year ended December 31,
1995. Capital expenditures for fiber optic transmission network and related
equipment and other property amounted to $1,069,463, $135,883 and $813,377 for
the year ended December 31, 1996 and the six months ended June 30, 1996 and
1997, respectively. Net cash provided by financing activities was $4,273,464,
$3,984,851 and $22,409,500 for the year ended December 31, 1996 and the six
months ended June 30, 1996 and 1997, respectively. These amounts represent the
proceeds from the sale of securities of the Company net of the repayment of
certain of the Company's indebtedness.
On April 30, 1997, the Company issued and sold to Metromedia and certain of
its affiliates equity interests, substantially all of which will be reclassified
as Class B Common Stock, for a gross sale price of $32.5 million, the proceeds
of which were used to repay indebtedness and repurchase certain equity
securities. See "Capitalization" and "Certain Relationships and Related
Transactions--Recent Transactions."
The Company anticipates that it will continue to incur net operating losses
as it expands the NY Network, constructs additional networks and markets its
services to an expanding customer base. Cash provided by operations will not be
sufficient to fund the expansion and development of networks as currently
planned and as a result the Company intends to use cash on hand and the net
proceeds of the Offerings to fund this expansion and development. Accordingly,
the Company expects to continue experiencing net operating losses and negative
cash flows for the foreseeable future.
The build-out of the NY Network, the construction of additional networks and
the marketing of the Company's services will require substantial capital. Such
capital expenditures for years ended, 1994, 1995 and 1996 were $1,829,000,
$3,709,928 and $974,107 respectively. The Company currently estimates that, in
building out the MFN Network, its capital expenditure requirements for the
period from June 30, 1997 through the end of 1998 are expected to be
approximately $140.0 million and it estimates the total cost to complete the
construction of the MFN Network to be approximately $220.0 million. Management
believes that cash on hand together with the net proceeds from the Offerings
contemplated hereby and internally generated funds, will be sufficient to fund
the Company's capital requirements over the next 15 months. In addition,
management intends to use such sources to finance the completion of the MFN
Network, as currently planned. The Company may also consider from time-to-time
the private or public sale of additional equity or debt securities of the
Company depending upon market conditions. There can be no assurance that the
Company will be able to successfully consummate any such financing on acceptable
terms.
30
<PAGE>
BUSINESS
THE COMPANY
GENERAL
The Company is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to carrier and
corporate/government customers. The Company is expanding its existing network to
encompass approximately 229,000 fiber miles, or 643 route miles, concentrated in
the northeastern United States, a market which the Company believes is
characterized by significant demand for and limited supply of fiber optic
capacity. The fiber infrastructure leased by MFN to its customers provides
high-bandwidth capacity for customers that seek to establish secure
communications networks for the transmission of large amounts of voice, data and
video. For example, a pair of MFN fiber optic strands can transmit up to 8.6
gigabits of data per second or the equivalent of approximately 129,000
simultaneous voice conversations.
The Company tailors the amounts of capacity leased to the needs of its
customers. Certain customers that lease fiber optic capacity from the Company
connect their own transmission equipment to the leased fiber, thereby obtaining
a fixed-cost, secure telecommunications alternative to the metered
communications services offered by traditional providers. Other customers that
require lesser amounts of transmission capacity will have the option to lease
such broadband capacity on the Company's network, whereby the Company
effectively divides a single strand of fiber into multiple smaller
communications channels. The Company believes that it will have installation,
operating, and maintenance cost advantages per fiber mile relative to its
competitors because MFN installs its network with as many as 432 fibers per
route mile as compared to a generally lower number of fibers in existing
competitive networks.
The Company was formed in 1993 and currently operates a 54 route mile fiber
optic communications network in the New York/New Jersey metropolitan area (the
"NY Network"), consisting of 7,188 fiber miles, approximately two-thirds of
which are currently available for lease. Within the next two years the Company
plans to complete an expansion of the NY Network to increase its coverage within
the New York/New Jersey metropolitan area. In addition, the Company intends to
construct intra-city fiber optic networks in Washington, D.C., Chicago and
Philadelphia and an inter-city fiber optic route between New York City and
Washington, D.C. The Company currently intends to expand its network in order to
connect the NY Network with other major domestic metropolitan areas, in part
through the exchange of fiber capacity with other carriers, and to extend its
network to link the NY Network to London, England, thereby providing a valuable
connection between two of the world's most important financial centers. See
"Build-out of Networks," and "Risk Factors -- Risks Associated with Growth
Strategy." The Company's NY Network supports a self-healing SONET architecture
that minimizes the risk of downtime in the event of a fiber cut and provides
MFN's customers with high security and reliability. It is expected that the
Company's other Intra-City Networks will also support a self-healing SONET
architecture. Most of the Company's fiber is installed inside high density
polyethylene conduit to protect the cable and, where practicable, MFN installs
additional unused conduits to accommodate future network expansion.
MFN is focused on providing its broadband communications infrastructure to
two main customer groups: communications carriers and corporate/government
customers located in selected Tier I markets. Carrier customers targeted by the
Company include a broad range of communications companies such as incumbent
local exchange carriers ("ILECs"), competitive local exchange carriers
("CLECs"), long distance companies/interexchange carriers ("IXCs"), paging,
cellular and PCS companies, cable companies, and Internet service providers
("ISPs"). These carrier customers typically would lease fiber optic capacity
with which they would develop their own communications networks as a low-cost
alternative to building their own infrastructure or purchasing metered services
from ILECs or CLECs. The Company's corporate and government customers would
typically lease fiber optic infrastructure and other broadband services on a
point-to-point basis for high-bandwidth, secure voice and data networks.
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The Company believes that it will be well-positioned to penetrate the corporate
and government markets since it plans to continue to install most of its fiber
in Tier I markets. See "Business -- Customers."
On April 30, 1997, Metromedia and certain of its affiliates made a
substantial equity investment in the Company. Metromedia and its partners own
all of the outstanding shares of Class B Common Stock which is entitled to 10
votes per share and to vote separately to elect at least 75% of the members of
the Board. As a result, Metromedia and its partners own and control
approximately 26% of the common equity of the Company (on a fully diluted basis
without giving effect to the Offerings) and approximately 76% of the outstanding
voting power (on a fully diluted basis without giving effect to the Offerings).
Metromedia and its predecessor have successfully invested in and operated
numerous businesses in the communications industry, including cellular, paging,
long distance and media companies. In connection with the Metromedia Investment,
John W. Kluge and Stuart Subotnick who bring considerable management and
corporate governance experience to the Company, joined MFN's Board. See "Certain
Relationships and Related Transactions." In addition, David Rockefeller has
agreed to serve on the Board shortly after consummation of the Offerings. Mr.
Rockefeller brings considerable management and investment experience to the
Company.
INCREASING DEMAND FOR HIGH-BANDWIDTH CAPACITY
MFN intends to capitalize on the increasing demand for high-bandwidth
communications services and the limited supply of transmission capacity. Based
on management experience and industry reports, the Company believes that demand
for the broadband communications infrastructure afforded by its network will
continue to increase as a result of the following factors:
- RAPID GROWTH OF COMMUNICATIONS TRAFFIC. Industry research indicates that
data traffic is growing by 35% annually with demand for data services
outpacing that for voice by 20 times. The Internet, for example, has been
growing at a compound annual rate of more than 100% per year for the past
decade and it is anticipated to reach 20 million host computers connected
to the Internet by the end of 1997. Business connectivity, in particular,
is expected to grow at a rate of 65% annually to reach almost $6.4 billion
by the end of 2000. With an advanced fiber optic network, the Company
believes that it is well-positioned to take advantage of this rapid
growth.
- CAPACITY REQUIRED BY NEW ENTRANTS. Competition and deregulation are
bringing new entrants into the telecommunications market. The 1996 Act
allows the RBOCs to enter the long distance business and enables other
entities, including entities affiliated with power utilities and ventures
between ILECs and cable television companies, to provide an expanded range
of telecommunications services. The Company believes that the opening of
various telecommunications markets will lead to an increase in demand for
fiber optic cable and circuits as more communications carriers elect to
compete. As a carriers' carrier, MFN believes that carrier customers
typically would lease fiber optic capacity with which they would develop
their own communications networks as a low-cost alternative to building
their own infrastructure or purchasing metered services from ILECs or
CLECs. The Company believes that its fiber optic communications network
will provide a cost effective alternative for market entrants in a number
of communications industry segments, including ILECs, CLECs, IXCs,
wireless companies and ISPs.
- EXPECTED UPGRADES TO OLDER COMMUNICATIONS NETWORKS. Approximately 92% of
the RBOCs' networks currently are comprised of copper cable. The RBOCs
will likely need to replace or upgrade their networks to remain
competitive and satisfy their customers' increasing demand for
high-bandwidth capacity in the coming years. The Company believes that the
RBOCs will seek cost-effective and expedient solutions when faced with the
decision to buy or build fiber optic capacity which could result in
increased demand for the Company's infrastructure.
- ACCOMMODATION OF OTHER NEW APPLICATIONS. The Company believes that
additional network transmission capacity and faster response times will be
required to accommodate the needs of
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<PAGE>
multimedia (voice, data and video) and other potential high-bandwidth
applications, including the deployment of corporate intranets and the use
of telecommunications infrastructure for providing cable television and
other entertainment services. Because applications such as intranet and
Frame Relay can use as much as OC-48 to OC-192 each, the Company believes
that there will be significant demand for its high-bandwidth
communications infrastructure.
According to an industry report, the total 1995 market for communications
services in the United States was approximately $183 billion and is expected to
grow to approximately $291 billion by the year 2001. In addition, the Company
believes there will be increased demand for its infrastructure due to its
ability to offer fixed-cost pricing which is generally more economical for high
volume users than traditional usage-based pricing.
BUSINESS STRATEGY
The Company's objective is to become the preferred facilities-based provider of
broadband communications infrastructure to communications carriers, corporations
and government agencies, primarily in the northeastern United States. The
following are the key elements of MFN's strategy to achieve this objective:
ESTABLISH THE COMPANY AS THE PREFERRED CARRIERS' CARRIER OF BROADBAND
COMMUNICATIONS INFRASTRUCTURE.
MFN leases broadband communications infrastructure on a fixed-cost basis to
various communications carriers, thus enabling them to compete in markets which
were previously difficult to penetrate due to limited and/or costly access to
high-bandwidth communications infrastructure. Specifically, the Company plans to
lease local transmission capacity within its target Tier I markets thereby
enabling its carrier customers to bypass the ILECs and CLECs. The Company
believes that it is currently the only provider providing local transmission
infrastructure on a fixed-cost basis. Additionally, the Company plans to lease
capacity on its high-bandwidth, long-haul Inter-City Network to provide seamless
connectivity between its various Intra-City Networks. The Company's fixed-cost,
long-term contracts allow its carrier customers to access certain Tier I markets
without incurring the high capital expenditures and long lead times usually
associated with building their own networks. Carriers may be more likely to
lease capacity from MFN rather than from a competitor since MFN currently has no
plans to offer communications infrastructure services on a metered basis,
choosing instead to position itself as a non-competing provider of
infrastructure alternatives for IXCs, ILECs, CLECs, etc. See "Customers."
POSITION THE COMPANY AS THE PREFERRED PROVIDER OF BROADBAND COMMUNICATIONS
INFRASTRUCTURE TO CORPORATE AND GOVERNMENT CUSTOMERS.
The Company's fiber optic network is expected to serve Tier I markets in
which there are a large number of corporations and government agencies that the
Company believes have significant demand for communications capacity which has
not been satisfied. These customers typically lease broadband communications
infrastructure from the Company on a point-to-point basis, creating secure
networks for voice, video or data communications. Customers with significant
transmission needs or who require a high degree of security are potential
candidates for leasing MFN's fiber. Customers seeking lesser amounts of
broadband transmission capacity will have the option of leasing smaller amounts
of capacity from the Company. By providing leased capacity on a fixed-cost
rather than a metered basis, MFN's network, as currently planned, will be more
economical for MFN's corporate and government customers, while also providing
enhanced reliability and security. See "Customers."
STRENGTHEN MFN'S COMPETITIVE POSITION BY EXPANDING THE MFN NETWORK.
The Company seeks to enhance its attractiveness as a communications provider
by enlarging its network according to a three-part plan: (i) expanding the NY
Network to increase coverage of the New York/New Jersey metropolitan area to
approximately 61,000 fiber miles covering 179 route miles,
33
<PAGE>
(ii) constructing fiber optic intra-city telecommunications networks in
Washington, D.C., Chicago and Philadelphia and (iii) constructing a fiber optic
backbone between New York City and Washington, D.C. to link certain of its
Intra-city Networks. Once completed, MFN's domestic fiber optic network
infrastructure, as currently planned, will consist of approximately 229,000
fiber miles covering 643 route miles.
UTILIZE STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF THE MFN NETWORK.
Another part of MFN's strategy is to enter into agreements with other
communications companies to expand the reach of the MFN Network. In October
1997, the Company entered into an agreement with a subsidiary of Racal to
establish the MFN/Racal Joint Venture. The MFN/Racal Joint Venture would link
the Company's network to London by acquiring transatlantic fiber optic cable
rights linking points of presence in the US and UK. The MFN/Racal Joint Venture
would enable the Company to offer its customers seamless broadband connectivity
between New York and London. The foregoing remains subject to the timely
completion and execution of long-form definitive documentation and of various
ancillary agreements between the Company and certain affiliates of Racal for the
provision of services and facilities to the MFN/Racal Joint Venture. No
assurance can be made that the Company will complete the documentation or
agreements on satisfactory terms or at all. The Company believes that its
presence in Tier I markets will continue to provide similar partnering
opportunities. The Company will continue to evaluate opportunities, including
potential fiber swaps, along specific additional routes in order to speed the
build-out of the MFN Network and reduce costs.
CREATE A LOW COST POSITION.
The Company believes it will be able to establish a low cost position
relative to its competitors primarily for the following reasons: (i) the Company
currently installs trunks of up to 432 fibers per route mile, which the Company
believes is significantly more fiber than many of its competitors install,
thereby reducing the per fiber mile cost to construct and operate the MFN
Network, (ii) the Company owns a newly-constructed network with advanced fiber
optic technology which offers operating and maintenance cost advantages, (iii)
the Company believes that certain of its rights-of-way and franchises are
valuable assets that will be costly and difficult for others to procure in the
future and (iv) MFN, where practicable, installs spare conduit which will allow
for expanded fiber optic capacity at a cost significantly below the cost of new
construction. The Company's low cost position will allow it to remain price
competitive with other providers of fiber optic infrastructure and to lease its
fiber infrastructure at a price which customers will find more attractive than
the cost of constructing their own networks.
INSTALL A TECHNOLOGICALLY ADVANCED NETWORK.
The Company believes that the advanced technical characteristics of its
network will allow it to provide high levels of reliability, security and
capacity that its target customers typically demand. The NY Network is, and
future extensions of the Intra-City Networks will be, capable of supporting a
SONET ring architecture, which prevents interruption in service to its clients
by instantaneously rerouting traffic in the event of a fiber cut. The Company
will also continuously monitor and maintain high quality control of its network
on a 24-hour basis through its network operations center. The Company's network
is capable of using the highest commercially available capacity transmission
(OC-192) and thereby can handle advanced, capacity-intensive data applications
such as Frame Relay, ATM, multimedia and Internet-related applications.
BUILD ON MANAGEMENT EXPERIENCE AND METROMEDIA RELATIONSHIP.
The Company's management team and Board include individuals with
communications industry expertise and extensive experience in network design,
construction, operations and sales. MFN's Chief Executive Officer, Stephen A.
Garofalo, has approximately 25 years of experience in the cable installation
business, having managed the installation of over one half billion dollars in
electrical and communications cable in New York City. In April 1997, the Company
hired Howard Finkelstein as President and Chief
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Operating Officer. From 1984 to 1993, Mr. Finkelstein served as President of
Metromedia Communications Corporation, Metromedia's long distance telephone
enterprise, until its merger with WorldCom, Inc. in 1993. In his most recent
position, Mr. Finkelstein was the Chief Operating Officer and an Executive Vice
President of Metromedia International Telecommunications, Inc. He has also
served in various capacities at Metromedia and its affiliated companies over a
period of 16 years. The Company also expects to benefit from the communications
industry expertise and corporate governance experience of John W. Kluge, Stuart
Subotnick and David Rockefeller.
As the owner of all of the Class B Common Stock, Metromedia and its general
partners will control the Board and all stockholder decisions and, in general,
determine the outcome of any corporate transaction or other matter submitted to
the stockholders for approval. See "Risk Factors--Control by and Reliance Upon
Metromedia Company" and "Certain Relationships and Related Transactions."
BUILD-OUT OF NETWORKS
Since its founding in 1993 the Company has concentrated solely on developing
and constructing its NY Network. The Company has developed a plan for the
expansion of the NY Network and the construction of new fiber optic Intra-City
Networks and an Inter-City Network and is pursuing the acquisition of necessary
licenses, franchises and rights-of-way. See "Risk Factors--Risks Associated with
Growth Strategy; Management of Expansion." In constructing its fiber optic
networks, the Company seeks to create strategic alliances with the engineering
and construction management firms that have been engaged to develop routes,
easements and manage deployment plans. All firms with whom the Company is allied
in this regard have deployed local loop network infrastructure for RBOCs as well
as for CLECs. Though much of the actual construction will be outsourced to
various construction firms, the Company maintains strict oversight of the design
and implementation of its fiber optic communications networks. The Company
utilizes only advanced commercially available fiber. Although the Company has
ordered a substantial portion of its fiber optic cable from Lucent Technologies,
Inc., it believes that it could obtain advanced fiber from other suppliers on
acceptable terms.
NY NETWORK. The NY Network currently consists of a 54 route mile fiber
optic communications network in the New York/New Jersey metropolitan area
consisting of 7,188 fiber miles, approximately two-thirds of which are currently
available for lease. As currently planned, the expansion of the NY Network will
add 125 route miles with each additional route-mile consisting of up to 432
fibers for an additional 54,000 fiber miles. Upon its completion, the entire NY
Network will utilize a SONET capable fiber ring focused in Manhattan and
extending east to Brookhaven, Long Island, north to White Plains, Westchester
County, west to Jersey City, New Jersey, and south to Brooklyn, New York. The
expanded NY Network is expected to pass more than 800 buildings in New York City
and to pass through 31 RBOC central offices, which are believed to connect to
over 15 million people and over 400,000 businesses. On September 19, 1997, the
Company entered into a twenty-year fiber swap arrangement with an engineering
and telecommunications infrastructure construction company which provides the
Company with access to approximately 7,760 fiber miles (or 38.8 route miles) in
the New York/New Jersey metropolitan area in return for the Company providing
access to 21.92 route miles on its NY Network. The agreement also gives the
Company the right to acquire a twenty-year indefeasible right to use an
additional 7,756 fiber miles and duct for MFN to place its own fibers in the New
York/New Jersey metropolitan area in return for certain monthly payments.
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INTRA-CITY NETWORKS. Subject to the receipt of the necessary franchises,
licenses and rights-of-way, the Company plans to construct additional fiber
optic communications networks in Washington, D.C., Chicago, and Philadelphia. No
assurance can be given that the necessary franchises, licenses and rights-of-way
will be obtained or consummated or will provide all of the rights needed to
implement the Company's strategy on acceptable terms. The following table sets
forth the Company's estimates of route miles and fiber miles for each of the
proposed Intra-City Networks. The Company anticipates it will use existing cash
balances and the proceeds from the Offerings, amounts received from long-term
lease arrangements from customers and additional debt or equity financings to
finance the construction of these proposed networks.
<TABLE>
<CAPTION>
PROPOSED PROPOSED
CURRENTLY PROPOSED CITIES ROUTE MILES MINIMUM FIBER MILES
- ---------------------------------------------------------- ------------- ---------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
Chicago........................................ 50 21,600
Washington, D.C................................ 120 25,920
Philadelphia................................... 30 6,480
--- -------
Total.......................................... 200 54,000
</TABLE>
INTER-CITY NETWORK. Subject to the receipt of the necessary franchises,
licenses and rights-of-way, the Company plans to construct and operate its
Inter-City Network between New York City and Washington, D.C., covering
approximately 114,000 fiber miles (or 264 route miles). The Company has
completed or is in the process of negotiating for the acquisition of
rights-of-way with respect to existing conduit alternatives, as well as
construction easements with major rail and civil authorities along the route. No
assurance can be given that the necessary franchises, licenses and rights-of-way
needed to implement the Company's strategy on acceptable terms will be obtained.
RIGHTS-OF-WAY. When the Company decides to build a fiber optic
communications network, its corporate development staff seeks to obtain the
necessary city authorizations. In some cities, a construction permit is all that
is required. In other cities, a license agreement or franchise is also required.
Such licenses and franchises are generally for a term of limited duration. Where
possible, rights-of-way are leased under multi-year agreements with renewal
options and are generally non-exclusive. The Company strives to obtain
rights-of-way that afford it the opportunity to expand its communications
networks as business develops. See "Risk Factors--Need to Obtain and Maintain
Rights-of-Way."
The Company plans to lease underground conduit and pole space and other
rights-of-way from entities such as ILECs, utilities, railroads, IXCs, state
highway authorities, local governments and transit authorities.
The following is a summary of the status of MFN's efforts to secure
rights-of-way:
- NEW YORK CITY: The NYC Franchise Agreement grants MFN the right, until
December 2008, to install, operate, repair, maintain, remove and replace
cable, wire, fiber or other transmission media that may be used in lieu of
cable, wire or fiber on, over and under the inalienable property of New
York City in order to provide telecommunications services which originate
and/or terminate in or transit New York City. The Conduit Occupancy
Agreement (as defined herein) between the Company and NYNEX, together with
easements granted to the Company by ECS, authorize the installation of the
Company's fiber optic communications network in NYNEX's conduit system and
the conduit system associated with the ECS, respectively. See "Franchise,
License and Related Agreements--New York City Franchise Agreement,"
"--Conduit Occupancy Agreement", "Risk Factors--Risk of Cancellation or
Non-Renewal of Franchises, Licenses or Permits," and "--Need to Obtain and
Maintain Rights-of-Way."
- CHICAGO: MFN is negotiating easements and rights-of-way for Chicago with
two entities. MFN is also investigating procuring the required franchises,
licenses, permits and other agreements
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needed to complete its Chicago network. No assurance can be given that
these agreements will be consummated or will provide all of the
rights-of-way needed by MFN in Chicago.
- WASHINGTON, D.C.: The Company has obtained rights-of-way for a portion of
the Washington, D.C. Intra-City Network and is investigating obtaining the
necessary licenses and permits for this network.
- PHILADELPHIA: MFN has negotiated with the City of Philadelphia for
permission, subject to certain conditions, to construct, maintain and
operate, replace and remove a telecommunications system in, under and
across the public rights-of-way and city streets and/or to place such
telecommunications system within the existing facilities owned by Bell
Atlantic Corporation, PECO Energy Company, Southeastern Pennsylvania
Transportation Authority, Consolidated Rail Corporation or any other
entity holding a grant pursuant to City ordinances. An appropriate
ordinance was passed by the Philadelphia city council in June 1997 and the
Company expects to enter into formal licenses and other agreements
shortly.
In developing the Inter-City Network, MFN is negotiating with certain rail
transportation providers, public utilities, RBOCs and others to accomplish the
Company's goal of providing its customers with a flexible network architecture.
No assurance can be given that these agreements will be consummated or that the
rights-of-way needed by MFN will be obtained throughout the intended route of
the Inter-City Network.
ADVANCED TECHNOLOGY
The MFN Network consists of fiber optic communication paths which allow for
high speed, high quality transmission of voice, data and video communications.
Fiber optic systems use laser-generated light to transmit voice, data and video
in digital formats through ultra-thin strands of glass. Fiber optic systems are
generally characterized by large circuit capacity, good sound quality,
resistance to external signal interference and direct interface to digital
switching equipment or digital microwave systems. The Company plans to install
backbone fiber optic cables containing up to 432 fiber optic strands, which have
significantly greater bandwidth than traditional analog copper cables. Using
current electronic transmitting devices, a single pair of glass fibers used by
the Company's network can transmit up to 8.6 gigabits of data per second or the
equivalent of approximately 129,000 simultaneous voice conversations, which is
substantially more than traditional analog copper cable installed in many
current communications networks. The Company believes that continuing
developments in compression technology and multiplexing equipment will increase
the capacity of each fiber optic strand, thereby providing more bandwidth
carrying capacity at relatively low incremental costs. See "Risk Factors--Rapid
Technological Change."
The Company offers end-to-end fiber optic capacity utilizing SONET capable
ring architecture, which has the ability to route customer traffic in either
direction around its ring design thereby assuring that fiber cuts do not
interrupt service to customers on the NY Network and its planned Intra-City
Networks. Currently, a state-of-the-art network operating system continuously
monitors and maintains quality control of the NY Network on a 24-hour basis and
alerts the Company of any degradation or loss of fiber capacity, pinpoints the
location of such degradation and enables the Company to repair or replace
impaired fiber without any loss of service. In addition, the monitoring system
automatically reroutes traffic in the event of a catastrophic break in the
system, enabling the Company to ensure that its customers obtain continuous
service.
FRANCHISE, LICENSE AND RELATED AGREEMENTS
NEW YORK CITY FRANCHISE AGREEMENT. The Company has entered into a 15 year
non-exclusive franchise agreement with New York City, which expires in December
2008, to install, operate, repair, maintain, remove and replace cable, wire,
fiber or other transmission medium that may be used in lieu of
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cable, wire or fiber on, over and under the inalienable property of New York
City in order to provide telecommunications services which originate and/or
terminate in or transit New York City. The NYC Franchise Agreement provides that
the Company may submit a written petition to New York City to renew the term of
the franchise at least 12 months (but not more than 18 months) before the
expiration of the 15 year term. However, New York City has no obligation to
renew the NYC Franchise Agreement. The City of New York has granted only seven
franchises to date. However, the Company is not aware of any limit on the number
of franchises that the City of New York may grant and believes that the City of
New York has begun the process that will result in the awarding of additional
licenses. See "Risk Factors -- Risk of Cancellation or Non-Renewal of
Franchises, Licenses or Permits."
The NYC Franchise Agreement requires the Company to provide New York City
with certain telecommunications infrastructure and to complete construction of
its initial network as described in the NYC Franchise Agreement by November
1997. The Company believes it is on schedule to complete such construction.
Both New York City and the Company have the right, at any time after
December 20, 2000, upon six months notice, to renegotiate certain terms of the
NYC Franchise Agreement, including the annual compensation payable by the
Company to New York City, based on changes in technological, regulatory or
market conditions which may occur after the effective date of the NYC Franchise
Agreement. In the event either party calls for renegotiation, both New York City
and the Company are required to negotiate any such changes in good faith. In the
event an agreement cannot be reached upon any such renegotiation, the NYC
Franchise Agreement will be subject to early termination on a date which would
be one half of the number of days between the date of the notice to renegotiate
and January 1, 2009.
The Company was required to pay the City of New York an annual franchise fee
at a rate of 10% of Gross Revenues per year for 1995 and 1996, currently pays 6%
of Gross Revenues in 1997 and will pay 5% of Gross Revenues for each remaining
year of the franchise. "Gross Revenues" is defined in the NYC Franchise
Agreement as all revenues received directly or indirectly by the Company or any
affiliate of the Company from or in connection with telecommunications services
which originate in, terminate in, or transit New York City. Revenues that are
generated from transmissions which transit New York City, but also include
transmission through other areas, are to be pro-rated. The minimum franchise fee
payable to the City of New York is $200,000 per annum.
The NYC Franchise Agreement requires that the consent of the City of New
York be obtained in connection with the acquisition of 5% or more of the shares
of the Company by any person other than Mr. Garofalo, Metromedia, Mr.
Finkelstein or Peter Sahagen or any other 5% stockholder on the date of the
consummation of the Offerings. Accordingly, following consummation of the
Offerings, the City of New York would need to consent to the acquisition by any
person of more than 5% of the Class A Common Stock.
CONDUIT OCCUPANCY AGREEMENT. The Company entered into a non-exclusive
conduit occupancy agreement (the "Conduit Occupancy Agreement") with NYNEX in
May 1993, authorizing the Company to install its cable facilities in NYNEX's
conduit system in New York. The Company is required to pay NYNEX certain rates
and charges pursuant to the terms of the agreement.
The Conduit Occupancy Agreement, which had an initial term of 12 months but
was to continue indefinitely if not affirmatively terminated by either party, is
terminable without cause by either party upon three months' written notice.
Under certain circumstances, a petition may be brought to the Public Services
Commission requesting that it decide a dispute arising over termination prior to
the termination of the Conduit Occupancy Agreement.
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SERVICES
Market research contained in an industry report estimates today's worldwide
internetworking market at approximately $27 billion. Recognizing the significant
growth in this area as a result of the ongoing expansion of corporate enterprise
networks and the proliferation of the Internet, MFN plans to use its fiber optic
infrastructure as a platform to expand into the business of providing SONET-
based and ATM-based broadband communications services aimed at the carrier
market and high end corporate/ government users.
MFN has reserved sufficient dark fiber capacity to provide the
infrastructure which will allow the Company to offer the following services at
competitive rates:
- OC-3 through OC-192 resilient SONET networks
- High capacity ATM-based intranet services
- ATM-based Frame Relay transmission capacities
SALES AND MARKETING
The Company's sales and marketing strategy includes (i) positioning itself
as the communications carriers' carrier of choice, (ii) focusing on high dollar
volume corporate and government customers and (iii) emphasizing the cost
advantages which will allow the Company to lease its fiber optic infrastructure
at fixed prices which represent potentially significant savings for its large
volume carrier and corporate customers relative to their present build or buy
alternatives. The Company also believes that communications carriers and
corporate and government customers will be attracted to the Company's dark fiber
product and its unmetered pricing structure. The Company intends to focus its
sales and marketing efforts on carrier customers. However, the Company is
currently in the process of hiring additional sales professionals to focus on
both customer groups. As MFN constructs fiber optic networks in new cities,
local sales professionals are expected to be hired to target regional corporate
and government customers, while New York City based sales professionals will
seek out the Company's carrier customers.
CUSTOMERS
The Company currently has contracts with approximately 14 customers.
CARRIERS. The Company expects that communications carriers will account for
a majority of its business. The Company currently targets the major carriers,
such as resellers, data services, RBOCs, IXCs, CLECs, ISPs, wireless providers,
and major information service providers. The Company believes it can compete
effectively with other providers due to its rapid deployment, pricing,
reliability, customer service and capacity of the MFN Network. The Company
traditionally leases dark fiber to communications carriers, providing them with
point-to-point and IXC POP-to-end user non-switched access which connects their
customers to the Company's network, enabling IXCs to eliminate or reduce costly
access charges.
The Company has entered into contracts with several communications carriers,
including providers of wireless and cellular services and a CLEC, as described
below. In addition, the Company is currently in the process of negotiating
agreements with certain other major communications carriers and will continue to
target such carriers in the future. However, there can be no assurance that such
agreements will be consummated or will be on terms as favorable to the Company
as are the existing agreements.
On June 3, 1997, the Company entered into an agreement with a CLEC that
provides certain exclusive long-term rights to the NY Network. The agreement
calls for MFN to provide the customer with capacity over a significant portion
of MFN's network at specified locations for twenty years (the "Term"), with an
additional ten year option exercisable by the customer. In addition, the
agreement permits the carrier to use additional fiber miles for additional
charges and requires, under certain circumstances, the
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Company to construct and maintain extensions of up to two miles from the
then-existing network. As compensation through the Term, the Company is to
receive $11.0 million ($5.0 million of which has been received by the Company)
in scheduled upfront payments, a monthly recurring charge per terminated fiber
strand terminating at certain additional locations, and an additional fiber
charge per mile of additional fiber made available for the customer. Charges for
the term of the option period are to be determined at market rates.
In April 1996, the Company entered into an agreement with U.S. One
Communications ("U.S. One"), an IXC, pursuant to which it leases portions of its
fiber optic network to U.S. One for an initial term lasting until December 20,
2008. U.S. One has the option to renew the agreement for an additional term of
up to 13 years. Lease payments consisted of prepayments of $3.6 million. Lease
payments for the additional term are payable only if U.S. One elects to renew
the agreement, either monthly at a rate per fiber mile equal to the lowest lease
rate charged by the Company to any lessee or in a lump sum payment equal to the
present value of the lease payments, up to a maximum of $8.8 million plus a
certain percentage based upon the consumer price index. The lump sum payment to
be made by U.S. One is subject to adjustment if the Company has not completed
the build-out of a portion of its network. U.S. One is currently a
debtor-in-possession under the U.S. Bankruptcy Code and accordingly no assurance
can be given that U.S. One, or its bankruptcy trustee, will assume the agreement
with the Company, utilize the Company's network or make any additional payments
to the Company.
CORPORATE/GOVERNMENT CUSTOMERS. The Company expects that its corporate and
government customers, including members of the international financial and
commercial community, will primarily be entities with multiple locations and
high volume communications requirements. The Company expects to provide these
customers with dedicated point-to-point communications that have the capacity to
carry a wide range of communications services (E.G., high speed intranet
access). The Company offers its high-bandwidth services to such customers at
prices that are lower than those currently offered by regulated CLECs and ILECs.
However, the Company's customers currently provide their own transmission or
switching equipment.
The Company believes it can effectively compete for corporate and government
customers based upon price, non-metered usage, reliability and solutions
tailored to the customers' needs. In addition, the Company's NY Network
utilizes, and the Intra-City Networks will utilize, SONET technology and offer
reliability which the Company believes is generally superior to that provided by
the ILECs.
The Company currently has dark fiber infrastructure leasing arrangements
with a variety of financial services firms, including investment and commercial
banks, securities and accounting firms and a financial exchange, although
installation of the dark fiber to be leased pursuant to certain of the contracts
has not yet been completed by the Company. Accordingly, some of such contracts
are currently terminable and the terms of certain contracts will not commence
until the relevant dark fiber has been installed by the Company and accepted by
the relevant customers. There can be no assurance that the Company will complete
the installation in a timely manner. See "Risk Factors--Risks Associated with
Growth Strategy; Management of Expansion."
COMPETITION
Fiber optic systems are currently under construction both locally and
nationally. In New York City, for example, seven franchisees have been granted
the right to install and operate a telecommunications network within the city.
Development of fiber optic networks is also continuing on a national scale; for
example, one provider of fiber is currently in the midst of constructing a
cross-continental long distance fiber optic network from Los Angeles to New York
and another, Qwest, is constructing a fiber-based national backbone network
which will connect 115 metropolitan areas and span approximately 16,000 miles.
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The construction of these networks enables their owners to lease access to
their networks to other communications carriers or large corporate or government
customers seeking high bandwidth capacity, without these customers having to
incur costly expenditures associated with building networks of their own.
Alternatively, some network owners may choose to use their infrastructure to
provide switched voice and data services, competing directly with ILECs and
IXCs. Currently, MFN does not provide such services or plan to provide such
services. See "Risk Factors--Limited Nature of Company's Current Services."
In New York City and the cities where MFN plans to deploy fiber optic
communications networks, the Company faces significant competition from the
ILECs, which currently dominate their local communications markets. The Company
also faces competition from CLECs and other potential competitors in New York
City and will face competition in the cities in which the Company plans to build
its networks. Many of the Company's competitors have financial, management and
other resources substantially greater than those of the Company, as well as
other competitive advantages over the Company, including established reputations
in the communications market.
Various communications carriers already own fiber optic cables as part of
their communications networks. Accordingly, each of these carriers could, and
some do, compete directly with the Company in the market for leasing fiber
capacity. In addition, although CLECs generally provide a wider array of
services to their customers than the Company presently provides to its
customers, CLECs nevertheless represent an alternative means by which a
potential customer of the Company could obtain direct access to an IXC POP or
other site of the customer's choosing. Thus, CLECs could compete with the
Company.
Some communications carriers and local cable companies have extensive
networks in place that could be upgraded to fiber optic cable, as well as
numerous personnel and substantial resources to undertake the requisite
construction to so equip their networks. To the extent that communications
carriers and local cable companies decide to equip their networks with fiber
optic cable, they are potential direct competitors of the Company provided that
these competitors are willing to offer this capacity to all of their customers.
See "Risk Factors--Competitive Industry."
The Company believes that as competition in the local exchange market
develops, a fundamental division between the needs of corporate, governmental
and institutional end users and residential end users will drive the creation of
differentiated communications services and service providers. The Company
believes that the IXCs, ISPs, wireless carriers and corporate and government
customers on which it focuses will have distinct requirements, including maximum
reliability, consistent high quality transmissions, capacity for high-speed data
transmissions, diverse routing and responsive customer service. The Company
believes that it will be able to satisfy the needs of such customers.
PROPERTIES
The NY Network and its component assets are the principal properties
currently owned by the Company. The Company owns substantially all of the
communications equipment required for its business. The Company's installed
fiber optic cable is laid under the various rights-of-way held by the Company.
See "--Build-out of Networks--Rights-of-Way". Other fixed assets are located at
various leased locations in geographic areas served by the Company.
The Company's executive, administrative and sales offices are located at its
principal office in New York, New York. MFN leases this space (6,446 square
feet) at 110 East 42nd Street under two agreements that expire in April and June
1998, respectively. The Company leases additional space at 60 Hudson Street, New
York, New York from Hudson Telegraph Associates. See "Certain Relationships and
Related Transactions."
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REGULATION
On February 8, 1996, the 1996 Act, the most comprehensive reform of the
nation's telecommunications laws since the Communications Act, was enacted. The
1996 Act has resulted in substantial changes in the marketplace for
communications services that should be largely favorable to the Company.
FEDERAL
The 1996 Act imposes a number of access and interconnection requirements on
all local exchange providers, including CLECs, with additional requirements
imposed on ILECs. The 1996 Act provides a detailed list of items which are
subject to these interconnection requirements, as well as a detailed set of
duties for all affected carriers. All LECs, including CLECs, have a duty to (i)
not unreasonably limit the resale of their services, (ii) provide number
portability if technically feasible, (iii) provide dialing parity to competing
providers, and nondiscriminatory access to telephone numbers, directory
assistance, operator services and directory listings, (iv) provide access to
poles, ducts, conduits and rights-of-way and (v) establish reciprocal
compensation arrangements for the transport and termination of
telecommunications. In addition to those general duties of all LECs, ILECs have
additional duties to (i) interconnect at any technically feasible point and
provide service equal in quality to that provided to their customers or the ILEC
itself, (ii) provide unbundled access to network elements at any technically
feasible point at just, reasonable and nondiscriminatory rates, terms and
conditions, (iii) offer retail services at wholesale prices for the use of
telecommunication carriers, (iv) provide reasonable public notice of changes in
the network or the information necessary to use the network or which affect
interoperability and (v) provide for physical collocation. "Physical
collocation" is an offering by an ILEC that enables another telecommunications
carrier to enter the ILEC's premises to install, maintain and repair its own
equipment that is necessary for interconnection or access to the ILEC's network
elements. An ILEC must allocate reasonable amounts of space to carriers on a
first-come first-served basis. If space limitations or practical or technical
reasons prohibit physical collocation, an ILEC must offer "virtual collocation,"
by which the other carrier may specify ILEC equipment to be dedicated to its use
and electronically monitor and control communications terminating in such
equipment.
The FCC adopted pricing and other guidelines to implement the
interconnection provisions of the 1996 Act, but the 8th Circuit Court of Appeals
recently vacated most of the FCC's guidelines. The responsibility for setting
pricing and other guidelines with respect to interconnection has thus been left
up to the individual state public service commissions. It is expected that
varying pricing and guidelines will emerge from state to state, and some of
these guidelines may eventually have an indirect adverse effect on the Company's
business.
Federal telecommunications law directly shapes the market in which the
Company competes. Consequently, undesirable regulatory changes could adversely
affect the Company's business, financial conditions and results of operations.
Federal telecommunications law imposes special legal requirements on "common
carriers" who engage in "interstate or foreign communication by wire or radio."
The Company believes that the leasing of dark fiber facilities does not
constitute engaging in "communication by wire or radio" and therefore is not
subject to these legal requirements. In any event, the Company does not intend
to offer its dark fiber facilities as a common carrier. Common carriers are
those who offer services directly to the public, or to all potential users on an
indiscriminate basis subject to standardized rates, terms or conditions. The
Company does not intend to offer its dark fiber services in this manner, but
instead intends to enter into individualized negotiations on a selective basis
with prospective lessees of its dark fiber facilities to determine whether and
on what terms to serve each potential lessee. The Company therefore does not
believe that its dark fiber offerings are subject to the common carrier
provisions of the FCC or to the common carrier provisions of the Communications
Act.
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Federal telecommunications law also imposes special legal requirements on
"telecommunications carriers." The law essentially defines "telecommunications
carriers" as those offering certain telecommunication services "directly to the
public" or to all potential users. The Company therefore believes that a company
has to be a common carrier in order to be considered a telecommunications
carrier. For the reasons stated above, the Company believes that it is neither a
common carrier nor a telecommunications carrier with respect to its dark fiber
service. Nevertheless, the law is not entirely clear as to, and the FCC has not
definitively addressed whether, the term "telecommunications carriers" is meant
to encompass only common carriers, and therefore whether a provider of dark
fiber facilities on an individualized basis, like the Company, is a
"telecommunications carrier." The FCC has been petitioned by certain railroad,
power and telecommunications associations, none of which are affiliated with the
Company, to clarify the status of dark fiber providers in this respect, and if
the agency decides that such companies are telecommunications carriers, then the
Company would be subject to certain additional regulatory requirements. These
requirements may have a material adverse effect on the Company.
If the Company's offering of dark fiber facilities were deemed to constitute
a "telecommunications service," then its revenues from such leases to end users
(but not to other telecommunication carriers) would become subject to assessment
for the FCC's Universal Service Fund, a fund that was established by the FCC
pursuant to the Telecom Act to assist in ensuring the universal availability of
basic telecommunications services at affordable prices. Such assessments could
create a liability equal to a percentage of these gross revenues although the
FCC has not announced what the assessment will be (the Company anticipates that
the rate of assessment will be approximately 4.5% of gross interstate end-user
revenues for the year 1998, and may be higher in subsequent years). The Company
also may be liable for assessments by state commissions for state universal
service programs.
With respect to its offering of telecommunications transmission services,
however, the Company will likely operate as a common carrier and therefore will
be subject to the regulatory requirements applicable to common carriers and to
telecommunications carriers. For example, the Company will be required, with
respect to its transmission services, to (1) provide such services
indiscriminately upon any reasonable request; (2) charge rates and adopt
practices, classifications and regulations that are just and reasonable; and (3)
avoid unreasonable discrimination in charges, practices, regulations, facilities
and services. The Company may also be required to file tariffs setting forth the
rates for its services. Under current FCC policies, these regulatory
requirements should not impose any substantial burdens on the Company. The FCC
has recently determined, for example, that providers of "access" services
(intracity transmission services used to originate and/or terminate interstate
and foreign communications) need not file tariffs and may offer such services to
customers on a private, contractual basis. Although the FCC's policies may be
subject to change in the future due to regulatory, judicial, or legislative
actions, and such changes could have a material adverse effect on the Company,
the Company does not believe that regulation of its services at the federal
level will have any detrimental effect on its competitiveness. The Company's
revenues from transmission services will be subject to FCC Universal Service
Fund assessments as described above, to the extent that these services are
purchased by end users; since the revenues of the Company's competitors will be
subject to comparable assessments; however, this should not reduce the Company's
competitiveness.
ILECs, CLECs and IXCs are subject to various federal telecommunications
laws. Accordingly, federal telecommunications law may affect the Company's
business by virtue of the inter-relationships that exist among the Company and
many of these regulated telecommunications entities. For example, the FCC
recently issued an order requiring, among other things, that common line access
fees charged to IXCs, which previously amounted to more than what was necessary
to recover the costs of providing access, shift from being usage driven to a
fixed flat cost-based structure. While it is not possible to predict the precise
effect the access charge changes will have on the Company's business or
financial condition, the reforms will reduce access charges paid by IXCs, likely
eliminating one of the principal
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<PAGE>
disincentives for use of ILEC facilities by IXCs, which could have a material
adverse effect on the use of the Company's fiber optic telecommunications
networks by IXCs.
The FCC has responsibility under the 1996 Act's interconnection provisions
to determine what elements of an ILEC's network must be provided to competitors
on an unbundled basis. The FCC has decided not to declare dark fiber an
unbundled network element under these provisions. This decision is currently
subject to petitions for reconsideration before the FCC. An FCC decision to
alter this decision on reconsideration could decrease the demand for dark fiber
provided by the Company. In addition, the FCC has announced that state
commissions may decide to add network elements to the FCC's list of elements
that are required to be unbundled by all carriers throughout the country.
STATE
The 1996 Act prohibits state and local governments from enforcing any law,
rule or legal requirement that prohibits or has the effect of prohibiting any
person from providing any interstate or intrastate telecommunications service.
Notwithstanding the prohibition contained in the 1996 Act, states regulate
telecommunications services, including through certification of providers of
intrastate services, regulation of intrastate rates and service offerings, and
other regulations. Nonetheless, this provision of the 1996 Act should enable the
Company and customers of the Company to provide telecommunications services in
states that previously prohibited competitive entry.
States retain jurisdiction under the 1996 Act to adopt regulations necessary
to preserve universal service, protect public safety and welfare, ensure the
continued quality of communications services and safeguard the rights of
consumers. States are also responsible for mediating and arbitrating CLEC-ILEC
interconnection arrangements if voluntary agreements are not reached.
Accordingly, the degree of state involvement in local telecommunications
services may be substantial.
In arbitrating interconnection agreements under the 1996 Act between ILECs
and their potential competitors, some state commissions have considered whether
dark fiber should be considered an unbundled network element. For example, the
New York Public Service Commission determined that it would not require NYNEX to
provide dark fiber as an unbundled network element. State commissions, including
those in Florida, Maryland, North Carolina, and Virginia, also have either
refused to require the ILECs to offer dark fiber to competitors, or have stated
that the issue would be addressed at a later time. On the other hand, state
commissions in Illinois, Massachusetts, Arizona, Georgia, Minnesota, Ohio,
Oregon and Tennessee have found dark fiber to be a network element and required
the ILECs to offer it on an unbundled basis to CLECs. There can be no assurance
that these requirements, and the associated pricing methodologies, where
applicable, will not reduce the demand for dark fiber provided by the Company.
Each state (and the District of Columbia, which is treated as a state for
the purpose of regulation of telecommunications services) has its own statutory
scheme for regulating providers of certain telecommunications-related services
as "common carriers," as "public utilities," or under similar rubrics. The
Company believes that the offering of dark fiber facilities is not subject to
this type of regulation in Illinois, New York, Pennsylvania, or the District of
Columbia. However, the Company's offering of transmission services (as distinct
from dark fiber capacity) likely will be subject to regulation in each of these
jurisdictions to the extent that these services are offered for intra-state use.
Even though many of the Company's facilities will be physically intra-state, the
Company anticipates that most customers will use its facilities and services for
the purpose of originating and/or terminating inter-state and foreign
communications. Under current FCC policies, any dedicated transmission service
or facility that is used more than 10% of the time for the purpose of
inter-state or foreign communication is subject to FCC jurisdiction to the
exclusion of any state regulation.
Regulation of the telecommunications industry is changing rapidly, and the
regulatory environment varies substantially from state to state. At present, the
Company does not anticipate that the regulatory
44
<PAGE>
requirements to which it will be subject in Illinois, New York, Pennsylvania,
and the District of Columbia will have any material adverse effect on its
operations, although the Company will incur certain costs to comply with
regulatory requirements such as the filing of tariffs, submission of periodic
financial and operational reports to regulators, and payment of regulatory fees
and assessments. In some jurisdictions, the Company's pricing flexibility for
intra-state services may be limited because of regulation, although the
Company's direct competitors will be subject to similar restrictions. However,
there can be no assurance that future regulatory, judicial, or legislative
action will not have a material adverse effect on the Company.
In response to the 1996 Act, NYNEX "unbundled" its local loop in October
1996. As a result, carriers such as the Company will be permitted to access
NYNEX's existing wiring infrastructure in buildings on an economical basis,
which the Company believes enhances the strategic value of the NY Network to
potential customers. By virtue of the unbundling, NYNEX must make a significant
portion of its in-house apartment wiring available for $2 per month per
apartment. The availability of an unbundled local loop will enable new carriers
to enter the residential voice market on a competitive basis with NYNEX.
LOCAL
In addition to federal and state laws, local governments exercise legal
authority that may impact the Company's business. For example, local
governments, such as the City of New York, typically retain the ability to
license public rights-of-way, subject to the limitation that local governments
may not prohibit persons from providing telecommunications services. Local
authorities affect the timing and costs associated with the Company's use of
public rights-of-way. These regulations may have an adverse effect on the
Company's business.
INTERNATIONAL
Various regulatory requirements and limitations also will influence the
Company's business as it attempts to enter international markets.
Although the Company has not fully determined its international business
strategy, the Company is currently negotiating an agreement with a foreign firm
that contemplates jointly acquiring and selling international, facilities-based
telecommunications capacity between the U.S. and the United Kingdom. Depending
on the Company's specific business plan in this arrangement, it is possible that
the Company will become a U.S. international common carrier subject to U.S.
regulation under Title II of the Communications Act. Under current FCC rules,
international carriers that do not exercise market power and that are not
affiliated with dominant foreign carriers are subject to relatively relaxed U.S.
regulation as nondominant international carriers. As a common carrier, the
Company would be subject to among other policies, the common carrier obligations
of nondiscrimination. In addition, FCC rules prohibit U.S. carriers from
bargaining for special concessions from foreign partners. The Company would also
be required, under Sections 214 and 203 of the Communications Act, respectively,
to obtain authority and file an international service tariff containing rates,
terms and conditions prior to initiating service. As a nondominant carrier, the
Company would be eligible to seek "global" authority to operate as facilities-
based and/or resale carrier in an application subject to the FCC's streamlined
processing rules. International carriers are also subject to certain annual fees
and filing requirements, including the requirement to file contracts with other
carriers including foreign carrier agreements, and reports setting forth
international circuit, traffic and revenue data service. Failure to obtain an
appropriate U.S. license for international service or the revocation of a
license could have a material adverse effect on the future operations of the
Company.
If the Company operates as an international common carrier, it will also be
required to comply with FCC's rules regarding the ISP which defines the
permissible boundaries for U.S. carriers and their
45
<PAGE>
foreign correspondents to settle the cost of terminating each other's traffic
over their respective networks. The ISP is designed to eliminate a foreign
carrier's opportunity to discriminate among different U.S. carriers by
bargaining for accounting rates or other terms that benefit the foreign carrier
but is inconsistent with the U.S. public interest. The ISP generally provides
that U.S. carriers may only enter into foreign carrier agreements for the
exchange of traffic that contain the same accounting rate and settlement rate
(typically one-half of the accounting rate) offered to all other U.S. carriers.
The ISP also requires U.S. carriers to adhere to the principle of proportionate
return so that competing U.S. carriers have comparable opportunities to receive
the return traffic that reduces the marginal cost of providing international
service.
The FCC continues to refine its international service rules to promote
competition, reflect and encourage liberalization in foreign countries, and
reduce accounting rates toward cost. Indeed, the FCC recently established
reduced "benchmark" rates for the amounts U.S. carriers will be allowed to pay
to foreign carriers for terminating U.S.-originated traffic. Effective January
1, 1998, U.S. carriers will have one year to ensure that the rate paid to
terminate traffic, e.g., in the U.K., does not exceed $.15/minute. Different
rates would apply in different countries depending on the countries' wealth.
In addition, in connection with the proposed transaction between MCI
Communications and British Telecom and in other decisions, the FCC has
recognized the advent of competition in the U.K. market by designating the U.K.
as a country that offers "equivalent opportunities" for the resale of
international private line services and "effectively competitive opportunities."
Those decisions have relaxed or eliminated regulatory limitations on certain
U.S. carrier services between the U.S. and the U.K. and permitted U.K. carriers
to enter the U.S. market through affiliations with U.S. carriers. In addition,
the FCC has determined that it would permit U.S. carriers to enter into
"flexible" international termination arrangements where such arrangements
promote competition and has proposed to amend its rules to reflect the U.S.
participation in the WTO Agreement on Basic Telecommunications Services in which
69 countries agreed to eliminate barriers to competition in their markets for
basic telecommunications service. Under the proposed amendments, the FCC would,
among other things, relax or eliminate current rules that restrict or impose
more stringent regulation on U.S. carriers with affiliations with carriers from
WTO-member countries.
Regulation of the international telecommunications industry is changing
rapidly. The Company is unable to predict how the FCC will resolve the various
pending international policy issues and the effect of such resolutions on the
Company.
The Company's international services would also be subject to regulation in
the United Kingdom. U.K. regulation, as well as policies and regulations on the
European Union level, would impose separate licensing, service and other
conditions on the Company's international service operations, and these
requirements may have a material adverse impact on the Company.
EMPLOYEES
As of September 30, 1997, the Company employed 31 people. The Company's
employees are not represented by any labor union. The Company considers its
relationship with employees to be good.
LEGAL PROCEEDINGS
On or about April 18, 1997, Howard Katz, Realprop Capital Corp. and Evelyn
Katz commenced an action against the Company, Stephen A. Garofalo, Peter Sahagen
and Peter Silverman in the United States District Court for the Southern
District of New York captioned KATZ, ET AL. v. NATIONAL FIBER NETWORK, INC., ET
AL., No. 97 Civ. 2764 (JGK). (National Fiber Network, Inc. is the former name of
the Company). On May 28, 1997, the plaintiffs filed an amended complaint and on
September 15, 1997, the plaintiffs filed a second amended complaint, which,
among other things, added Metromedia and Silverman, Collura, Chernis & Balzano,
P.C. as defendants. The amended complaint alleges causes of action for, among
other things, common law fraud, violations of Section 10(b) of the Securities
Exchange Act of 1934 and
46
<PAGE>
Rule 10b-5 promulgated thereunder, breach of fiduciary duty and negligent
misrepresentation for alleged misrepresentations and omissions made in
connection with the repurchase of the Katz Securities (as defined below under
"Certain Relationships and Related Transactions"). The amended complaint also
contains allegations of corporate waste against the Company and Mr. Garofalo.
Plaintiffs seek, among other things, compensatory damages of not less than $12
million, punitive damages in the amount of $100 million and, in the alternative,
rescission of the purchase by the Company of 264,631 shares of Class A Common
Stock and 207,883 warrants to acquire shares of Class A Common Stock. The
defendants have until October 31, 1997 to answer the amended complaint or to
move to dismiss the amended complaint. The Company intends to vigorously defend
itself against these allegations based on its belief that MFN acted
appropriately in connection with the matters at issue in this litigation. No
assurance can be made though, that the Company will not determine that the
advantages of entering into a settlement outweigh the risks and expense of
protracted litigation or that ultimately the Company will be successful in its
defense of the allegations. If the Company is unsuccessful in its defense of the
allegations, an award of the magnitude being sought by the plaintiffs in the
Katz Litigation would have a material adverse effect on the Company's financial
condition or results of operations. See "Risk Factors--Litigation Against the
Company."
On or about October 20, 1997, VCNY commenced an action against the Company,
Stephen A. Garofalo, Peter Silverman, the law firm of Silverman, Collura,
Chernis & Balzano, P.C., the Sahagen Defendants and the Kramer Defendants in the
United States District Court for the Southern District of New York (No. 97 CIV
7751) (the "VCNY Litigation"). The complaint alleges causes of action for, among
other things, violation of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder, fraud and fraudulent concealment, breach
of fiduciary duty and negligent misrepresentation and omission made in
connection with respect to the VCNY Sales. See "Certain Relationships and
Related Transactions" and "Description of Capital Stock--Registration Rights."
The complaint also alleges a cause of action for declaratory judgment asserting
that certain "piggyback" registration rights are applicable to shares of the
Company's Class A Common Stock which VCNY owns (or which may be rescinded to
VCNY pursuant to its requested remedies). The complaint further requests a
declaratory judgment that a stockholders agreement between the Company, Stephen
Garofalo and VCNY be declared operative, which agreement indirectly required
VCNY, through designated directors, to approve significant transactions, and,
accordingly, the Metromedia Loan and the Metromedia Investment should be
rescinded and Mr. Vento should be reappointed as Chief Executive Officer of the
Company. The Company believes, among other things, that the stockholders
agreement to which Mr. Vento was a party had terminated and as a result Mr.
Vento had no such rights to approve the Metromedia Investment or the Metromedia
Loan or to remain as Chief Executive Officer of the Company. Plaintiff seeks,
among other things, (i) rescission of the VCNY Sale, or alternatively, damages
in an amount not presently ascertainable, but believed to be in the excess of
$36 million, together with interest thereon, (ii) punitive damages in the amount
of $50 million, and (iii) the declaratory judgments discussed above. The Company
intends to vigorously defend itself against these allegations based on its
belief that MFN acted appropriately in connection with the matters at issue in
this litigation. No assurance can be made, though, that the Company will not
determine that the advantages of entering into a settlement outweigh the risk
and expense of protracted litigation or that ultimately the Company will be
successful in its defense of the allegations. If the Company is unsuccessful in
its defense of the allegations, an award of the magnitude being sought by the
plaintiffs in the VCNY Litigation would have a material adverse effect on the
Company's financial condition or results of operations. See "Risk
Factors--Litigation Against the Company."
In addition, the Company is subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, the
Company believes that none of such current claims, or proceedings, individually
or in the aggregate, including the Katz Litigation, will have a material adverse
effect on the Company's financial condition or results of operations, although
there can be no assurances in this regard.
47
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE OFFICE OR POSITION HELD
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Stephen A. Garofalo.................................. 46 Chairman of the Board and Chief Executive Officer
Howard M. Finkelstein................................ 44 President, Chief Operating Officer and Director
Stephen W. Ellis..................................... 47 Chief Financial Officer
Vincent A. Galluccio................................. 51 Senior Vice President--Business Development and
Director
Louis J. Gambino..................................... 45 Vice President--Network Operations
John S. Mahon........................................ 51 Vice President--Network Engineering
John McLeod.......................................... 39 Vice President--Marketing
Nicholas M. Tanzi.................................... 38 Vice President--Sales
James Urbelis........................................ 45 Vice President--Easements and Construction
Silvia Kessel........................................ 47 Director
John W. Kluge........................................ 83 Director
David Rockefeller.................................... 82 Director (Nominee)
Stuart Subotnick..................................... 55 Director
Arnold L. Wadler..................................... 54 Secretary and Director
Leonard White........................................ 58 Director (Nominee)
</TABLE>
Each director is elected to serve until a successor is elected and qualified
or, if earlier, until the director's death, resignation or removal. Officers,
subject to the terms of their respective employment agreements, serve at the
pleasure of the Board. See "Management--Employment Agreements."
Set forth below is the background of each of the Company's executive
officers and directors.
STEPHEN A. GAROFALO founded the Company in April 1993, and has been serving
as Chairman of the Board since the Company's inception and as Chief Executive
Officer since October 1996 and served as President from 1993 to 1996 and as
Secretary from 1993 to 1997. From 1979 to 1993 Mr. Garofalo served as president
and chief executive officer of F. Garofalo Electric Co., Inc. See "Certain
Relationships and Related Transactions."
HOWARD M. FINKELSTEIN has been President, Chief Operating Officer and a
Director of the Company since April 1997. Prior to joining the Company, Mr.
Finkelstein was employed by various affiliates of Metromedia for 16 years. His
most recent position was as Executive Vice President and Chief Operating Officer
of Metromedia International Telecommunications, Inc. From 1984 to 1993, Mr.
Finkelstein served as President of Metromedia Communications Corporation, a
national long distance telecommunications carrier. In addition, Mr. Finkelstein
served as Executive Vice President and Chief Operating Officer of Metromedia
Restaurant Group from 1993 to 1995. Mr. Finkelstein is a Director of Multimedia
Medical Systems, Incorporated, a privately held company.
STEPHEN W. ELLIS has been Chief Financial Officer since June, 1997. From
1992 until joining the Company, Mr. Ellis served as an executive officer of Data
Broadcasting Corporation, a financial market data distributor, first through
1995 as Chief Financial Officer followed by President through 1997 of its broker
dealer subsidiary DBC Securities, Inc. From 1988 to 1992, Mr. Ellis served as
Vice President-- Operations at Citibank and its then-subsidiary, Quotron
Systems, Inc., also a market data vendor. Prior to
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joining Citibank, Mr. Ellis, who is a certified public accountant, was Vice
President--Operations at Merrill Lynch & Company and Vice President--Controller
for First Interstate Bank, Ltd.
VINCENT A. GALLUCCIO has been a Director of the Company since February 1997
and has served as a Senior Vice President since December 1995. From January 1992
to October 1994, Mr. Galluccio was employed by British Telecommunications Plc.
as a global sales manager for network outsourcing operations. Prior to joining
British Telecommunications plc, Mr. Galluccio spent 25 years with International
Business Machines Corporation in various sales, marketing and business
development positions and was involved in both domestic and world trade
assignments.
LOUIS J. GAMBINO has been Vice President--Network Operations since November,
1996. From 1995 to 1996 he was Vice President-Domestic Operations at
International Exchange Networks, Ltd., a an international private line and
switched voice carrier. From 1990 to 1995, Mr. Gambino served as Vice
President-Operations of Metropolitan Fiber Systems of New York, a CLEC.
JOHN S. MAHON has been the Company's Vice President--Network Engineering
since 1994. Prior to joining the Company, Mr. Mahon was employed by NYNEX
(formerly known as New York Telephone Company) from 1965 to 1994 as staff
director for engineering design, construction and maintenance of all
telecommunications infrastructure in New York City.
JOHN MCLEOD has been Vice President--Marketing since June 1997. From October
1995 to June 1997, he served as Vice President--Venture Support at Metromedia
International Telecommunications, Inc. From January 1994 to October 1995, Mr.
McLeod was Vice President--Field Support at Metromedia Restaurant Group. From
September 1986 to January 1994, he was employed at Metromedia Communications
Corporation where his last position was Vice President and General
Manager--National Customer Service Center.
NICHOLAS M. TANZI has been Vice President--Sales since August 1997. From
March 1995 to July 1997, he served as Vice President, Enterprise Networks
Division at Fujitsu Business Communications Systems. From April 1993 to February
1995, Mr. Tanzi was Director of Sales, Eastern Region at Asante Technologies
Inc. Mr. Tanzi was employed in various capacities from November 1979 through
October 1993 at Digital Equipment Corporation.
JAMES URBELIS has been Vice President--Easements and Construction since
1994. Mr. Urbelis was formerly employed by F. Garofalo Electric Co., Inc. as
construction manager from 1968 to 1994. Prior to that time he was a civilian
employee of the Army Corps of Engineers engaged in civil works projects.
SILVIA KESSEL has served as a Director of the Company since July 1997. Ms.
Kessel has served as Chief Financial Officer and Treasurer of MIG since 1995 and
Executive Vice President of MIG since 1996. In addition, Ms. Kessel served as
Executive Vice President of Orion Pictures Corporation ("Orion") from January
1993 through July 1997, Senior Vice President of Metromedia since 1994 and
President of Kluge & Company since January 1994. Prior to that time, Ms. Kessel
served as Senior Vice President and a Director of Orion from June 1991 to
November 1992 and Managing Director of Kluge & Company from April 1990 to
January 1994. Ms. Kessel is a member of the Board of Directors of RDM Sports
Group Inc., a diversified sporting goods company ("RDM") and of MIG.
JOHN W. KLUGE has been a Director of the Company since July 1997. Mr. Kluge
has been the President and Chairman of Metromedia and its
predecessor-in-interest, Metromedia, Inc. ("Ml") for over five years. Mr. Kluge
has been the Chairman of the Board of Metromedia International Group, Inc.
("MIG") since 1995. In addition, Mr. Kluge has been Chairman of the Board and a
Director of Orion Pictures Corporation from 1992 until July 1997. He also serves
as a Director of Conair Corporation and Occidental Petroleum Corporation.
DAVID ROCKEFELLER is, as of the effective date of this Prospectus, a nominee
to be a Director of the Company. He currently serves as Chairman of The Chase
Manhattan Bank's International Advisory
49
<PAGE>
Committee, as Chairman of Rockefeller Center Properties, Inc. (since 1995) and
as a Director of Rockefeller & Co., Inc. (since 1994), a privately owned
investment management firm. From 1961 to 1981, Mr. Rockefeller served as
Chairman of The Chase Manhattan Corporation and The Chase Manhattan Bank, N.A.
From 1981 to 1995, he served as Chairman of Rockefeller Group, Inc.
STUART SUBOTNICK has been a Director of the Company since July 1997. Mr.
Subotnick has been the Vice Chairman of the Board of MIG since 1995 and
President and Chief Executive Officer of MIG since December 1996. In addition,
Mr. Subotnick served as Vice Chairman of the Board of Orion from 1992 until July
1997. Mr. Subotnick has served as Executive Vice President of Metromedia and MIG
for over five years. Mr. Subotnick is also a Director of Carnival Cruise Lines,
Inc. and RDM.
ARNOLD L. WADLER is, as of the effective date of this Prospectus, Secretary
of the Company and has served as a Director of the Company since July 1997. Mr.
Wadler has served as Executive Vice President, General Counsel and Secretary of
MIG since August 29, 1996 and, from November 1, 1995 until that date, as Senior
Vice President, General Counsel and Secretary of MIG. In addition, Mr. Wadler
serves as a director of MIG and has served as a Director of Orion from 1991
until July 1997 and as Senior Vice President, Secretary and General Counsel of
Metromedia for over five years.
LEONARD WHITE is, as of the effective date of this Prospectus, a nominee to
be a Director of the Company. Mr. White served as President and Chief Executive
Officer of Orion Pictures Corporation from 1992 until 1997 and as President and
Chief Executive Officer of Orion Home Entertainment Corporation from 1987 to
1992. Mr. White is also a Director of MIG. Mr. White serves as a director of MIG
and American Film Technologies, Inc.
BOARD; ELECTION OF DIRECTORS; AGREEMENTS REGARDING BOARD POSITIONS
Approximately twenty-five percent (25%) of the members of the Board of
Directors of the Company are elected by a majority of the votes cast by holders
of Class A Common Stock, voting as a separate class, at the annual meeting of
shareholders and hold office until their successors have been duly elected and
qualified or until their death, resignation or removal. Holders of Class B
Common Stock will vote as a separate class to elect at least seventy-five
percent (75%) of the Board. Directors may be removed, with or without cause,
only by the holders of the class of Common Stock or series of Preferred Stock
that, as of the date such removal is effected, would be entitled to elect such
director at the next annual meeting of stockholders. Vacancies in a directorship
may be filled only by (a) the remaining directors elected by holders of each
class of Common Stock or series of Preferred Stock that (x) elected such
director and (y) as of the date such vacancy is filled, would be entitled to
elect such director at the next annual meeting of the stockholders or (b) if
there are no such remaining directors, then by the vote of the holders of the
class or classes of Common Stock or series of Preferred Stock, that, as of the
date such vacancy is filled, would be entitled to elect such director at the
next annual meeting of stockholders, voting as a separate class at a meeting,
special or otherwise, of the holders of Common Stock of such class or series of
Preferred Stock. In addition, within 90 days of the consummation of the
Offerings, the Board will elect Mr. Rockefeller and Mr. White, two outside
directors, to its Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee or an Audit Committee
during 1996. Mr. Garofalo determined officers' compensation during 1996.
COMMITTEES OF THE BOARD
Within 90 days of the consummation of the Offerings, the Board will
establish a Compensation Committee and an Audit Committee. The Compensation
Committee will make recommendations concerning the salaries and incentive
compensation of employees of and consultants to the Company. The
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<PAGE>
Audit Committee will be responsible for reviewing the results and scope of
audits and other services provided by the Company's independent auditors.
Concurrent with the Offerings, the Board will establish two additional
committees, the Class A Nominating Committee and the Class B Nominating
Committee. The Class A Nominating Committee will make recommendations as to
individuals to serve as directors who are to be elected by the Class A Common
Stock stockholders. The Class B Nominating Committee will make recommendations
as to individuals to serve as directors who are to be elected by the Class B
Common Stock stockholders. The Class A Nominating Committee will be comprised of
members of the Board who have been elected by the Class A Common Stock
stockholders and the Class B Nominating Committee will be comprised of members
of the Board who have been elected by the Class B Common Stock stockholders.
EXECUTIVE COMPENSATION
The following table sets forth in summary form all compensation for all
services rendered in all capacities to the Company for the year ended December
31, 1996 of the Chief Executive Officer of the Company and the other four most
highly compensated executive officers of the Company (collectively with the
Chief Executive Officer, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
-------------------------------------- COMPENSATION
SALARY --------------------- ALL OTHER
NAME/PRINCIPAL POSITION YEAR $ BONUS OPTIONS/SARS COMPENSATION
- --------------------------------------------------- --------- ---------- ------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Stephen A. Garofalo
Chairman, Chief Executive Officer and
Secretary........................................ 1996 225,960 -- -- --
Vincent A. Galluccio
Senior Vice President............................ 1996 127,087 -- -- --
James Urbelis
Vice President-Easements and
Construction..................................... 1996 111,030 -- -- --
Gerald Vento
Former Chief Executive Officer................... 1996 14,243 -- -- 112,500(a)
Peter Sahagen(b)
Former Acting Vice
Chairman--Finance................................ 1996 29,800 -- -- 94,349
</TABLE>
- ------------------------
(a) This payment represents the amount of a settlement agreement between Mr.
Vento and the Company. See "Certain Relationships and Related Transactions."
(b) Mr. Sahagen joined the Company during 1996 and amounts disclosed for Mr.
Sahagen represent compensation paid after that date. The amount of $94,349
represents consulting fees paid by the Company to Sahagen Consulting Group.
In addition, Mr. Sahagen received $250,000 in April 1997 for services
rendered in connection with the Metromedia Investment. See "Certain
Relationships and Related Transactions."
Subsequent to the year ended December 31, 1996, the Company granted to
Messrs. Galluccio, Mahon and Urbelis options to purchase up to 197,730, 136,890
and 136,890 shares of Class A Common Stock, respectively. All the options have
an exercise price of $1.97 per share, are exercisable immediately and have a
term of up to 10 years subject to certain conditions. In addition, pursuant to
Mr. Garofalo's employment agreement he was granted options to purchase 380,250
shares of Class A
51
<PAGE>
Common Stock at an exercise price of $1.97 per share, which options are
immediately exercisable and expire 10 years from the grant of the stock option.
The Company is required to register the shares of Class A Common Stock
underlying the options under the Securities Act on Form S-8 upon the
consummation of the Offerings. In addition, pursuant to Mr. Finkelstein's
employment agreement, as amended, he was granted options to purchase 1,521,000
shares of Class A Common Stock at an exercise price of $1.97 per share, which
options are immediately exercisable and expire 10 years from their grant. The
Company is required to register such shares of Class A Common Stock on Form S-8
under the Securities Act upon the consummation of the Offerings.
COMPENSATION OF DIRECTORS
Directors who are officers, employees or affiliates of the Company receive
no compensation for their services as directors. Each director of the Company
who is not also an officer, employee or affiliate of the Company (an "outside
director") will be entitled to receive annual directors' fees of $20,000, plus
$1,200 for each Board meeting attended ($500 if attended telephonically) and
$500 for each committee meeting. Outside directors are eligible to participate
in the 1997 Incentive Stock Plan (as defined below) pursuant to which options to
purchase 5,000 shares of Class A Common Stock will be granted to each outside
director immediately upon such director's initial election and qualification for
the Board. Options to purchase 5,000 of Class A Common Stock will be granted
annually on the day of each annual shareholder meeting. Each outside director
will be eligible to receive options to purchase a maximum of 50,000 shares of
Class A Common Stock pursuant to the 1997 Incentive Stock Plan. Each option will
have an exercise price equal to the fair market value of a share of Class A
Common Stock on the date of grant. All such options granted to outside directors
will be immediately exercisable. See "--1997 Stock Incentive Plan."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Garofalo and
Finkelstein.
GAROFALO EMPLOYMENT AGREEMENT. Mr. Garofalo's employment agreement, dated
as of February 26, 1997, has a five year term and provides for a base salary of
$295,000 for the first year, $335,000 for the second year, $375,000 for the
third year, $415,000 for the fourth year and $455,000 for the fifth year. Mr.
Garofalo is also entitled to receive an annual incentive bonus to be determined
by the Compensation Committee. The incentive bonus will not be less than
$100,000 per year. Mr. Garofalo's employment agreement also provides for other
employee benefits such as life insurance and health care, in addition to certain
disability and death benefits. In addition, pursuant to Mr. Garofalo's
employment agreement he was granted options to purchase 380,250 shares of Class
A Common Stock at an exercise price of $1.97 per share, which options are
immediately exercisable and expire 10 years from their grant. The Company is
required to register the shares of Class A Common Stock underlying the options
under the Securities Act upon the consummation of the Offerings. Except in the
case of disability, the Company may terminate Mr. Garofalo's employment only for
cause upon which termination Mr. Garofalo shall have no right to receive any
compensation or benefit from the Company. If the agreement is terminated without
cause, or if Mr. Garofalo terminates employment for good reason, the Company is
obligated to pay Mr. Garofalo an amount equal to the greater of (i) his monthly
base salary as then in effect multiplied by the number of months remaining in
term of his employment as of such termination date and (ii) $1,000,000. "Good
reason" includes (i) a reduction in the nature or scope of Mr. Garofalo's
titles, authorities, powers, duties or responsibilities; (ii) a change in the
method or formula for determining the bonus which results in a decrease in the
amount of bonus payable to Mr. Garofalo; (iii) removal of Mr. Garofalo as a
member of the Board of the Company, unless such removal occurs after termination
of Mr. Garofalo's employment for cause; (iv) a sale of all or substantially all
of the ownership interests or assets of the Company or a merger or consolidation
of the Company with any other corporation; (v) a change in control of the
Company defined as any person or entity becoming a
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beneficial owner as defined in Rule 13d-3 of the Securities Exchange Act of 1934
(the "Exchange Act") directly or indirectly of securities of the Company
representing 50% or more of the combined voting power of the Company's then
outstanding securities; or (vi) the Company's materially breaching its
affirmative or negative covenants or undertakings in the employment agreement
and failing to remedy within 15 days. Pursuant to the agreement, Mr. Garofalo
has agreed not to compete with the Company for a period of one year following
termination of the agreement. During such non-compete period, Mr. Garofalo shall
be entitled to receive an amount equal to his base salary as in effect on the
date of termination provided that the agreement was not terminated prior to the
expiration of the term by either party.
FINKELSTEIN EMPLOYMENT AGREEMENT. Mr. Finkelstein's employment agreement,
dated as of April 30, 1997, has a three year term and provides for a base salary
of $295,000 for the first year, $335,000 for the second year and $375,000 for
the third year. Mr. Finkelstein is also entitled to receive an annual incentive
bonus to be determined by the Compensation Committee. The incentive bonus will
not be less than $100,000 for each year. Mr. Finkelstein's employment agreement
also provides for other employee benefits such as life insurance and health
care, in addition to certain disability and death benefits. In addition,
pursuant to Mr. Finkelstein's employment agreement, as amended, he was granted
options to purchase 1,521,000 shares of Class A Common Stock at an exercise
price of $1.97 per share, which options are immediately exercisable and expire
10 years from their grant. The Company is required to register such shares of
Class A Common Stock under the Securities Act on Form S-8 upon the consummation
of the Offerings. Except in the case of disability, the Company may terminate
Mr. Finkelstein's employment only for cause upon which termination Mr.
Finkelstein shall have no right to receive any compensation or benefit from the
Company. If the agreement is terminated without cause or if Mr. Finkelstein
terminates employment for good reason, the Company is obligated to pay to Mr.
Finkelstein his base salary, bonus and benefits that are accrued and unpaid as
of the date of termination as well as an amount equal to one and a half times
his base salary as then in effect. "Good reason" includes (i) a reduction in the
nature or scope of Mr. Finkelstein's titles, authorities, powers, duties or
responsibilities; (ii) a change in the method or formula for determining the
bonus which results in a decrease in the amount of bonus payable to Mr.
Finkelstein; (iii) removal of Mr. Finkelstein as a member of the Board of the
Company, unless such removal occurs after termination of Mr. Finkelstein's
employment for cause; (iv) a sale of all or substantially all of the ownership
interests or assets of the Company or a merger or consolidation of the Company
with any other corporation; (v) a change in control of the Company defined as
any person or entity (other than Stephen Garofalo) becoming a beneficial owner
as defined in Rule 13d-3 of the Exchange Act directly or indirectly of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities; or (vi) the Company's materially
breaching its affirmative or negative covenants or undertakings in the
employment agreement and failing to remedy within 15 days. Pursuant to the
agreement, Mr. Finkelstein has agreed not to compete with the Company for a
period of one year following termination of the agreement. During such
non-compete period, Mr. Finkelstein shall be entitled to receive an amount equal
to his base salary as in effect on the date of termination provided that the
agreement was not terminated prior to the expiration of the term by either
party.
1997 STOCK INCENTIVE PLAN
In connection with the consummation of the Offerings the Company intends to
adopt the Metromedia Fiber Network, Inc. 1997 Incentive Stock Plan (the "1997
Incentive Stock Plan"). The following is a summary of the material features of
the 1997 Incentive Stock Plan.
The purpose of the 1997 Incentive Stock Plan is to give MFN a significant
advantage in retaining key employees, officers and directors, and to provide an
incentive to selected key employees, officers and directors of MFN who have
substantial responsibility in the direction of MFN, and others whom the
Committee (as defined below) determines provide substantial and important
services to MFN, to acquire
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<PAGE>
a proprietary interest in MFN, to continue as employees, officers and directors
or in their other capacities, and to increase their efforts on behalf of MFN.
TYPES OF AWARDS
The types of awards that may be granted pursuant to the 1997 Incentive Stock
Plan include (i) incentive stock options ("ISOs") and (ii) non-qualified stock
options ("NQSOs" and together with ISOs, "Stock Options" and "Awards"). ISOs are
intended to be treated as incentive stock options within the meaning of Section
422 of the Code. NQSOs are, in general, options which do not have the special
income tax advantages associated with ISOs. Stock Option grants will consist of
the maximum number of ISOs that may be granted to a particular grantee under
applicable law with the balance of the Stock Options being NQSOs.
ADMINISTRATION OF THE PLAN
The 1997 Incentive Stock Plan will be administered by the Compensation
Committee of the Board (the "Committee"). The Committee will consist of two or
more members of the Board each of whom shall be an "outside director" as defined
under Section 162(m) of the Code, and the regulations and interpretations
thereunder. Members of the Committee will be eligible to receive certain Awards
(other than ISOs) under the 1997 Incentive Stock Plan.
Subject to the terms and conditions of the 1997 Incentive Stock Plan and the
formula awards for Independent Directors (as defined below), the Committee is
authorized to grant Awards, to determine which employees, officers, directors or
other individuals may be granted Awards, to determine the type and number of
Awards to be granted, to determine the term of such Awards, to determine the
exercise price of any Award, to determine the terms of any agreement pursuant to
which Awards are granted, to interpret and construe the 1997 Incentive Stock
Plan, and to determine any other matters delegated to it under the 1997
Incentive Stock Plan or necessary for the proper administration of the 1997
Incentive Stock Plan.
SHARES OF CLASS A COMMON STOCK SUBJECT TO THE 1997 INCENTIVE STOCK PLAN
Subject to certain exceptions set forth in the 1997 Incentive Stock Plan,
the aggregate number of shares of the Class A Common Stock that may be the
subject of Awards under the 1997 Incentive Stock Plan is 1,000,000. The maximum
number of shares of Class A Common Stock available with respect to Awards
granted to any one grantee shall not exceed, in the aggregate, 100,000. Shares
of Class A Common Stock granted under the 1997 Incentive Stock Plan may either
be authorized but unissued shares of Class A Common Stock not reserved for any
other purpose or shares of Class A Common Stock held in or acquired for the
treasury of MFN.
Shares of Class A Common Stock subject to an Award which terminates
unexercised may again be the subject to an Award under the 1997 Incentive Stock
Plan. In addition, shares of Class A Common Stock surrendered to MFN in payment
of the exercise price or applicable taxes upon exercise or settlement of an
Award may also be used thereafter for additional Awards.
ELIGIBILITY
Any key employee, officer and director, including a director who is not an
employee and a director who serves on the Committee, of MFN and its subsidiaries
who has substantial responsibility in the direction of MFN and its subsidiaries
and anyone else whom the Committee determines provides substantial and important
services to MFN is eligible to receive Awards.
Any Independent Director who first serves on the Board subsequent to the
date the 1997 Incentive Stock Plan was adopted shall be entitled to receive
Awards under the 1997 Incentive Stock Plan with
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<PAGE>
respect to 5,000 shares of Common Stock, each having an exercise price equal to
the fair market value of a share of Class A Common Stock on the date of grant.
For purposes hereof, "Independent Directors" shall mean any member of the Board
who during his entire term as a director was not employed by MFN and its
subsidiaries, within the meaning of Section 424(f) of the Internal Revenue Code
of 1986, as amended (the "Code"), and who also satisfies the criteria for
"outside director" under Section 162(m) of the Code.
TERMS AND CONDITIONS OF STOCK OPTIONS
The exercise price of all ISOs granted under the 1997 Incentive Stock Plan
is the fair market value of the Class A Common Stock on the date of grant. The
exercise price of all NQSOs granted under the 1997 Incentive Stock Option Plan
will be determined by the Committee, although the initial awards will be made at
fair market value of the Class A Common Stock on the date of grant. The term of
each Stock Option granted under the 1997 Incentive Stock Plan will be determined
by the Committee but will in no event be greater than ten years from the date of
grant.
With respect to ISOs granted to a grantee who owns stock possessing more
than 10% of the voting rights of MFN's outstanding capital stock on the date of
grant, the exercise price of the ISO shall be equal to 110% of the fair market
value of the Class A Common Stock subject to the ISO on the date of grant and
the ISO may not be exercisable more than five years after the date of grant.
Stock Options shall vest and become exercisable over a period of years as
determined by the Committee.
Subject to the following sentence, upon the exercise of a Stock Option, the
grantee must pay the exercise price in cash. At the discretion of the Committee,
the exercise price may be paid with shares of Class A Common Stock already owned
by, and in possession of, the grantee or in a combination of cash or shares of
Class A Common Stock.
The aggregate fair market value of the Class A Common Stock (determined on
the date of grant) for which ISOs granted under the 1997 Incentive Stock Plan
and any other plan of MFN or a subsidiary may be exercisable for the first time
by any grantee during any calendar year cannot exceed $100,000 or such other
amount as may be prescribed under the Code or applicable regulations and rulings
from time to time.
ACCELERATION OF VESTING AND EXERCISABILITY
If a grantee's employment with MFN is terminated because of the grantee's
death, the grantee's retirement on or after attaining age sixty-five or a Change
in Control prior to the date of the Stock Option is by its terms exercisable,
the Stock Option shall be immediately exercisable (and the restrictions thereof,
if any, shall lapse) as of the date of the termination of the grantee's
employment, subject to the other terms of the 1997 Incentive Stock Plan.
Upon a Change in Control of MFN, (i) each holder of a Stock Option shall
have the right to exercise the Stock Option in full without regard to any
waiting period, installment period or other limitation or restriction thereon
and (ii) each holder of a Stock Option shall have the right, exercisable by
written notice to MFN within sixty days after the Change in Control, to receive,
in exchange for the surrender of the Stock Option or any portion thereof to the
extent the Stock Option is then exercisable in accordance with clause (i), an
amount of cash equal to the difference between the fair market value of the
Class A Common Stock on the date of exercise and the exercise price of the Stock
Option.
In general, under the 1997 Incentive Stock Plan, a "Change in Control" of
MFN shall be deemed to have occurred as of the first day any one or more of the
following four conditions have been satisfied: (i) any event whereby a Person
(other than (a) MFN or an affiliate, as defined in the Exchange Act or (b) any
employee benefit plan or trust sponsored or maintained by MFN or an affiliate,
as defined in the
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<PAGE>
Exchange Act) (x) acquires 35% or more of MFN's outstanding voting securities,
(y) acquires securities of MFN bearing a majority of voting power with respect
to election of directors of MFN or (z) acquires all or substantially all of
MFN's assets, whether by sale, lease, exchange or other transfer (in one
transaction or in a series of related transactions); (ii) a change in the
composition of the Board such that at any time a majority of the Board shall not
have been members of the Board for twenty-four months; provided, however, that
directors who were appointed or nominated for election by at least two-thirds of
the directors who were directors at the beginning of such twenty-four month
period (or deemed to be such directors under this clause (ii)) shall be deemed
to be directors at the beginning of such twenty-four month period for the
purposes of this clause (ii); (iii) the stockholders of MFN approve any plan or
proposal for the liquidation or dissolution of MFN; or (iv) any consolidation or
merger of MFN, other than a merger or consolidation of MFN in which the voting
securities of MFN outstanding immediately prior thereto continue to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least 50% of the combined voting power of the voting
securities of MFN or such surviving entity outstanding immediately after such
merger or consolidation. "Person" shall have the same meaning as ascribed to
such term in Section 3(a)(9) of the Exchange Act and used in Section 13(d)
thereof.
ADJUSTMENT PROVISIONS
The total number and character of shares of Class A Common Stock subject to
Awards and the number and character of shares of Class A Common Stock subject to
outstanding Awards and/or the exercise price of such shares will be
appropriately adjusted by the Committee if the shares of Class A Common Stock
are changed into or exchanged for a different number or kind of shares of stock
or other securities of MFN or of another corporation (whether by reason of
merger, consolidation, recapitalization, reclassification, split, reverse split,
combination of shares, or otherwise). The Committee may also make appropriate
adjustments in the event of a merger, consolidation or other transaction or
event having a similar event.
AMENDMENT AND TERMINATION OF THE 1997 INCENTIVE STOCK PLAN
Unless terminated earlier by action of the Board of MFN, the 1997 Incentive
Stock Plan will terminate on the tenth anniversary of its adoption, and no
additional grants under the 1997 Incentive Stock Plan will be made after that
date.
The Board may amend or terminate the 1997 Incentive Stock Plan at any time,
but may not, without the written consent of the grantee, make any such
alteration which would impair the rights of a holder of an outstanding Award.
Furthermore, the 1997 Incentive Stock Plan may not be amended without the
approval of the holders of a majority of the outstanding stock of MFN (i) to
decrease the minimum exercise price for ISOs; (ii) to extend the term of the
1997 Incentive Stock Plan beyond ten years, (iii) to extend the maximum terms of
the Awards granted beyond ten years, (iv) to withdraw the administration of the
1997 Incentive Stock Plan from the Committee, (v) to change the class of
eligible employees, officers, directors and other grantees, (vi) to increase the
aggregate number of shares of Class A Common Stock authorized to be issued, and
(vii) to otherwise require stockholder approval to comply with Rule 16b-3 or any
other applicable law, regulation, or listing requirement or to qualify for an
exemption or characterization that is deemed desirable by the Board. No
amendment or terminations of the 1997 Incentive Stock Plan shall, without
written consent of the grantee, alter the terms of Awards already granted and
such Stock Options shall remain in full force and effect as if the 1997
Incentive Stock Plan had not been terminated.
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MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS
The Committee may, within the limitations of the Incentive Stock Plan,
modify, extend or renew outstanding Awards granted under the 1997 Incentive
Stock Plan, or accept the surrender of outstanding Awards and authorize the
granting of new Awards in substitution therefor. No modification may, without
the consent of the grantee, alter or impair any rights or obligations under any
Award theretofore granted to the grantee nor shall any modification adversely
affect the status of an ISO under Section 422 of the Code.
TRANSFERABILITY OF AWARDS AND OTHER PROVISIONS
The rights of a grantee with respect to the Awards granted pursuant to the
1997 Incentive Stock Plan are not transferable other than by will or the laws of
descent and distribution and are exercisable, during the lifetime of the
grantee, only by the grantee or by the guardian or legal representative of the
grantee acting in a fiduciary capacity on behalf of the grantee under state law
or court supervision. An Award is not subject, in whole or in part, to
attachment, execution or levy of any kind.
RIGHTS UPON TERMINATION OF EMPLOYMENT
If the grantee dies while an employee or when no longer an employee but
while he or she still has the right to exercise an Award, the grantee's estate
shall have the right for a period of one year following the date of death to
exercise the Award to the extent such Award is exercisable and to the extend
such Award has not yet expired.
Upon a grantee's retirement from MFN or a subsidiary on or after attaining
age sixty-five the grantee shall have the right for a period of three months
following the date of retirement to exercise an Award to the extent such Award
is exercisable and to the extent such Award has not yet expired.
Upon a grantee's termination of employment from MFN on account of
disability, the grantee or the legal representative of the grantee, shall have
the right for a period of one year following the date of such termination to
exercise an Award to the extent such award is exercisable and to the extent such
Award has not yet expired.
In the event the grantee's employment with MFN or a subsidiary is terminated
for any reason other than disability, death or retirement on or after attaining
age sixty-five, the grantee may exercise an Award within three months after his
or her termination of employment.
RIGHTS AS STOCKHOLDER
No grantee of any Stock Option has any rights as a stockholder with respect
to any shares of Common Stock subject to his or her Stock Option prior to the
date on which he or she is recorded as the holder of such shares of Class A
Common Stock on the records of MFN.
RIGHT TO CONTINUED EMPLOYMENT
The 1997 Incentive Stock Plan is not a contract of employment, and the terms
of employment of any grantee shall not be affected in any way by the 1997
Incentive Stock Plan or related instruments except as specifically provided
therein. The establishment of the 1997 Incentive Stock Plan shall not be
construed as conferring any legal rights upon any grantee for a continuation of
employment, nor shall it interfere with the right of MFN or any subsidiary to
discharge any grantee and to treat him or her without regard to the effect which
such treatment might have upon him or her as a grantee.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of October 7, 1997, certain information
regarding the beneficial ownership of the Company's voting stock by (i) each of
the Company's directors, (ii) each person believed by the Company to own
beneficially more than 5% of its outstanding voting stock, (iii) each of the
Named Executive Officers and (iv) all executive officers and directors of the
Company as a group. The information set forth below assumes consummation of the
Reverse Stock Split and the Reclassifications and excludes any shares that may
be acquired pursuant to stock options that may be granted under the 1997
Incentive Stock Plan. Except as otherwise indicated, each stockholder listed
below has sole voting and investment power with respect to shares beneficially
owned by such person.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK(A)
------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
NUMBER PERCENT NUMBER PERCENT PERCENT OF
OF SHARES OF CLASS OF SHARES OF CLASS TOTAL VOTING POWER
------------ ----------- ----------- ----------- ---------------------
Stephen A. Garofalo.............................. 5,686,939(b) 57.0% -- -- 10.9%
110 East 42nd Street
Suite 1502
New York, NY 10017
Metromedia Company............................... -- -- 3,932,756 93.2% 75.9%
One Meadowlands Plaza
East Rutherford, NJ 07073
Howard M. Finkelstein............................ 1,521,000(c) 13.7% -- -- 2.9%
110 East 42nd Street
Suite 1502
New York, NY 10017
Peter Sahagen.................................... 1,104,030(d) 11.5% -- -- 2.1%
3590 South Ocean Blvd.
South Palm Beach, FL 33480
Vincent A. Galluccio............................. 197,730(e) 2.0% -- -- *
James Urbelis.................................... 136,890(f) 1.4% -- -- *
John S. Mahon.................................... 136,890(f) 1.4% -- -- *
Louis J. Gambino................................. 15,210(g) * -- -- *
Silvia Kessel.................................... 63,809(h) * -- -- *
John W. Kluge.................................... 253,500(i) 2.6% 3,932,756(j) 93.2% 76.0%
215 East 67th Street
New York, NY 10021
David Rockefeller................................ 348,638(k) 3.6% -- -- *
Stuart Subotnick................................. 253,500(i) 2.6% 4,221,159(j) 100.0% 81.6%
215 East 67th Street
New York, NY 10021
Arnold L. Wadler................................. 76,918(h) * -- -- *
Leonard White.................................... -- -- -- -- *
Gerald Vento..................................... -- -- -- -- *
All Directors and Executive Officers as a 9,840,685 77.8% 4,221,159 100.0% 94.9%
group........................................
</TABLE>
- ------------------------
* less than 1.0%
(a) The shares of Class B Common Stock are convertible into shares of Class A
Common Stock at the rate of one share of Class A Common Stock for each share
of Class B Common Stock and the holders of shares of Class B Common Stock
are entitled to 10 votes per share.
(b) Includes presently exercisable options to purchase 380,250 shares of Class A
Common Stock at an exercise price of $1.97 per share.
(c) Represents presently exercisable options to purchase 1,521,000 shares of
Class A Common Stock at an exercise price of $1.97 per share.
(d) All of such shares are owned by an entity controlled by Mr. Sahagen.
(e) Represents presently exercisable options to purchase 197,730 shares of Class
A Common Stock at an exercise price of $1.97 per share.
(f) Represents presently exercisable options to purchase 136,890 shares of
Class A Common Stock at an exercise price of $1.97 per share.
(g) Represents presently exercisable options to purchase 15,210 shares of Class
A Common Stock at an exercise price of $1.97 per share.
(h) Includes 50,700 presently exercisable options to acquire shares of Class A
Common Stock at an exercise price of $1.97 held by each of Ms. Kessel and
Mr. Wadler. Does not include shares owned by Metromedia. Ms. Kessel and Mr.
Wadler are employed by Metromedia and disclaim beneficial ownership of the
shares owned by Metromedia.
(i) Consists of 253,500 presently exercisable options to acquire shares of
Class A Common Stock at an exercise price of $1.97 held by each of Mr. Kluge
and Mr. Subotnick.
(j) Includes 3,932,756 shares owned by Metromedia. Messrs. Kluge and Subotnick,
Directors of the Company, are general partners of Metromedia.
(k) Represent 348,638 shares owned by DR & Descendents Partnership, of which Mr.
Rockefeller is a partner and for which he exercises voting and investment
power.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
HISTORICAL TRANSACTIONS
Stephen A. Garofalo, the Company's Chairman of the Board, Chief Executive
Officer and a principal stockholder, served as chief executive officer and
principal stockholder of F. Garofalo Electric Co., Inc. ("Garofalo Electric").
Garofalo Electric provided the Company with electrical contracting services in
connection with the installation of the Company's fiber optic network. As of
December 31, 1995, the Company owed Garofalo Electric $692,887 for such
services. The Company believes that the terms pursuant to which such services
were rendered to the Company by Garofalo Electric were fair to the Company and
comparable to those which could have been obtained in arm's-length negotiations
with unaffiliated parties. On July 24, 1995, Garofalo Electric assigned to the
Company its interest in an agreement between Garofalo Electric and Oppenheimer
Capital for the provision of dark fiber. In May 1996, the Company, Garofalo
Electric and Frank Garofalo, the assignee of Garofalo Electric's receivable from
the Company and the father of Stephen A. Garofalo, entered into an agreement
whereby the full amount was satisfied by the issuance of 456,300 shares of Class
A Common Stock to Frank Garofalo. Garofalo Electric is currently in the process
of winding up its business and affairs.
Stephen A. Garofalo has made various loans to the Company. At December 31,
1994, such loans totaled $1,967,109. In April 1995 Mr Garofalo agreed to
contribute to the Company's capital $1.7 million of amounts due him. By
agreement between the Company and Mr. Garofalo in May 1996 the transaction was
rescinded. During 1995, the Company made repayments (net of additional advances)
of $1,070,130. The loans from Mr. Garofalo totaled approximately $896,979 at
December 31, 1995. On May 21, 1996, the Company issued to Mr. Garofalo 152,100
shares of Class A Common Stock in satisfaction of $600,000 of the outstanding
balance. All outstanding amounts have been repaid to Mr. Garofalo.
As of December 31, 1996, the Company had outstanding approximately $4.9
million of indebtedness due to US ONE Communications of New York, Inc. ("US
ONE"), a lessee of the Company's dark fiber, which was personally guaranteed by
Stephen A. Garofalo. On April 30, 1997, upon consummation of the Metromedia
Investment, $1,370,000 of the indebtedness was paid off in cash from proceeds of
the Metromedia Investment while the remainder was converted into a prepaid lease
payment to the Company. Therefore, there is no such indebtedness currently
outstanding.
On March 16, 1995, the Company entered into a loan agreement (the "Rubin
Loan Agreement") with Robert Rubin, at the time a Director of the Company,
pursuant to which the Company borrowed $500,000 at an interest rate of 10% per
annum and issued to Mr. Rubin 155,994 shares of Class A Common Stock as an
inducement for entering into the agreement. The Rubin Loan Agreement had a term
of one year and the obligations of the Company were (i) guaranteed by Stephen A.
Garofalo and (ii) collateralized by shares of Common Stock owned by Mr.
Garofalo. The Rubin Loan Agreement, including all accrued interest, was fully
repaid in March 1996.
On January 12, 1996, the Company entered into an agreement with its then
legal counsel, Silverman, Collura, Chernis & Balzano, P.C. ("SCCB"), pursuant to
which the Company agreed to issue shares of Class A Common Stock as additional
consideration for legal services provided to the Company. Pursuant to this
agreement, and a subsequent amendment dated April 16, 1996, the Company issued
to SCCB 491,105 shares of Class A Common Stock during March and April of 1996.
At the time of the April 16 amendment, Peter Silverman, a partner of SCCB, was a
Director of the Company. On June 15, 1996, the Company granted SCCB a warrant to
purchase an aggregate of 152,100 shares of Class A Common Stock at an exercise
price of $.07 per share as additional consideration for legal services provided
to the Company. In January 1997, SCCB exercised this warrant and purchased
152,100 shares of Class A Common Stock.
In February, 1996, the Company entered into a settlement agreement (the
"Katz Settlement Agreement") with Howard Katz, the Company's former Chief
Financial Officer, and Realprop Capital Corp. ("Realprop"), an affiliate of Mr.
Katz, in connection with the termination of Mr. Katz's employment with the
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Company. Pursuant to the Katz Settlement Agreement, the Company agreed to pay
Mr. Katz approximately $940,000 over a period of five years, including $90,000
per year pursuant to a consulting agreement (the "Consulting Agreement"). Under
the Consulting Agreement, Realprop was to provide consulting services relating
to Katz's knowledge and understanding of transactions and the conduct of
business in which the Company engaged and to such other areas of consultation as
Katz and the Company mutually agreed upon. On November 12, 1996, Howard Katz,
Lauren Katz, Stephen Katz and Realprop (collectively, the "Katz Group") entered
into an agreement (the "Katz Purchase Agreement") with Peter Sahagen, at the
time Acting Vice Chairman--Finance of the Company, pursuant to which Mr. Sahagen
was granted the right to purchase an aggregate of 264,631 shares of Class A
Common Stock and an option to purchase warrants for the purchase of 207,883
shares of Class A Common Stock (collectively, the "Katz Securities") for an
aggregate purchase price of $640,000. In conjunction with the Katz Purchase
Agreement, in a letter agreement dated December 10, 1996, Howard Katz and
Realprop Capital Corp. agreed to release the Company from all liabilities and
obligations arising out of the Katz Settlement Agreement, and to reduce the term
of the $90,000 per year Consulting Agreement from five years to three years. On
February 11, 1997, Mr. Sahagen entered into a letter agreement with the Company
acknowledging that he was acting as nominee for the Company with respect to the
Katz Purchase Agreement and assigned to the Company all of his rights, title and
interest in and to the Katz Purchase Agreement. The Company agreed to reimburse
Mr. Sahagen for $25,000 in payments made to Mr. Katz for extending Mr. Sahagen's
right to purchase the Katz Securities. On February 11, 1997, the Company entered
into an agreement with the Katz Group, pursuant to which the Company purchased
the Katz Securities for $640,000 and confirmed that the Consulting Agreement may
be terminated by the Company after three years of its term had concluded. The
purchase price was funded with a portion of the proceeds of the Metromedia Loan
(as described below). The foregoing transaction is the subject of a pending
lawsuit. See "Business--Legal Proceedings."
On April 15, 1996, the Company entered into an employment agreement with
Gerald Vento pursuant to which Mr. Vento would serve as Chief Executive Officer
of the Company. On the same day, the Company entered into a stock purchase
agreement and a consulting agreement with Vento & Company of New York, LLC
("VCNY"). Pursuant to the stock purchase agreement, the Company issued 1,521,000
shares of Class A Common Stock to VCNY as consideration for prior services
provided by VCNY. On October 9, 1996, the Company entered into a settlement
agreement with Mr. Vento and VCNY. Pursuant to such settlement agreement, (i)
the Company and Mr. Vento agreed to terminate Mr. Vento's employment agreement,
(ii) VCNY agreed to sell to Stephen A. Garofalo 1,368,900 shares of Class A
Common Stock (the "Vento Shares") and (iii) the Company agreed to pay $112,500
to VCNY on behalf of Mr. Vento. On January 3, 1997, Mr. Garofalo assigned his
right to purchase the Vento Shares to Mr. Sahagen, who together with other
parties on January 13, 1997 purchased the Vento Shares for $425,000.
On October 28, 1996, the Knobel 1995 Childrens' Investment Trust (the
"Knobel Trust") granted to Stephen A. Garofalo an option to purchase 399,889
shares of Class A Common Stock of the Company for an aggregate purchase price of
$500,000. By letter dated December 3, 1996, the option was amended to reduce the
number of option shares to 323,839. The option was thereafter assigned by Mr.
Garofalo to the Company. On February 11, 1997, the Company exercised the option
by payment of the sum of $500,000 to the Knobel Trust. Payment of such amount
was funded with a portion of the proceeds of the Metromedia Loan.
On February 11, 1997, the Company entered into an agreement (the "Sahagen
Agreement") with Mr. Sahagen. Pursuant to the Sahagen Agreement, (i) the Company
agreed to pay Mr. Sahagen a fee of $250,000 upon an equity investment in the
Company of at least $10 million, in full and complete payment for all services
rendered by Mr. Sahagen in his capacity as Acting Vice Chairman--Finance of the
Company and in facilitating the Metromedia Investment and for any fees or
compensation due to Mr. Sahagen pursuant to any prior agreements with the
Company, (ii) Mr. Sahagen agreed to release the Company from any claims against
the Company, subject to payments required by the Sahagen Agreement, (iii) the
Company agreed to designate Mr. Sahagen or a suitable designee selected by
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Mr. Sahagen as a Director of the Company for a term of six months and (iv) the
Company granted Mr. Sahagen certain "piggyback" registration rights. In
connection with the Metromedia Investment, the Company paid the $250,000 fee to
Mr. Sahagen.
On December 13, 1996, the Company issued and sold to Penny Lane Partners,
L.P. ("Penny Lane"), for aggregate cash consideration of $2,025,000, (i) 150,000
shares of 10% cumulative convertible
preferred stock (the "Series A Preferred Stock") bearing dividends at a rate of
$1.35 per share per annum, (ii) warrants to purchase 114,075 shares of Class A
Common Stock at an exercise price of $4.93 per share (the "Penny Lane Warrants")
and (iii) a contingent stock subscription warrant to purchase a number of shares
of Class A Common Stock (such number to be determined based on certain future
events) at an exercise price of $0.02 per share (the "Contingent Warrants"). In
connection with the Metromedia Investment, Penny Lane agreed to permit the
Series A Preferred Stock and the Contingent Warrants to be redeemed at an
aggregate redemption price of $2,115,000 (which includes accrued but unpaid
dividends on the Series A Preferred Stock) and in connection therewith the
number of shares underlying the Penny Lane Warrants was increased from 114,075
to 228,150.
In 1994 the Company engaged Richard A. Eisner & Company, LLP ("Eisner") to
serve as its independent auditors. During 1995, Gerald Vento began his
affiliation with the Company and requested that the Company engage M.R. Weiser &
Co. LLP, Certified Public Accountants ("Weiser"), to serve as the Company's
independent auditors. Stephen A. Garofalo, majority stockholder and Chairman of
the Board, approved the dismissal of Eisner and the engagement of Weiser. In
September 1996, the Company decided to engage a "big six" accounting firm and
engaged Ernst & Young LLP ("Ernst & Young") to serve as its independent
auditors. Stephen A. Garofalo, majority stockholder, approved the dismissal of
Weiser and the engagement of Ernst & Young. At no time during the periods in
which Eisner and Weiser served as the Company's independent auditors were there
any disagreements between the Company and Eisner or Weiser regarding any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedures. Both Eisner and Weiser included in their opinions
on the Company's financial statements a separate paragraph stating that there
was substantial doubt about the Company's ability to continue as a going
concern. Ernst & Young's report on the Company's consolidated financial
statements for the year ended December 31, 1996 does not contain a similar
statement.
RECENT TRANSACTIONS
METROMEDIA INVESTMENT. On February 10, 1997, Metromedia agreed to loan
$2,000,000 to the Company. See "Principal Stockholders." Pursuant to an
agreement dated March 6, 1997, Metromedia agreed to loan to the Company up to an
additional $6,000,000, subject to certain conditions (together with the loan on
February 10, the "Metromedia Loan"). On April 30, 1997, the Metromedia Loan was
repaid with a portion of the proceeds from the Metromedia Investment. The
Metromedia Loan was funded in two installments: (i) $1,140,000 on February 10,
1997 and (ii) $860,000 on February 14, 1997, and provided for a revolving loan
of up to an additional $6,000,000. The Metromedia Loan was scheduled to mature
on August 31, 1997 and bore interest at the prime rate announced by The Chase
Manhattan Bank. The proceeds from the first installment of the Metromedia Loan
were used to fund an escrow account which repurchased on behalf of the Company
588,470 shares of Class A Common Stock and warrants to purchase 207,883 shares
of Class A Common Stock (the "Repurchased Securities"). Pursuant to an escrow
arrangement, the Repurchased Securities were pledged to Metromedia as security
for the Metromedia Loan. The proceeds from the other installments of the
Metromedia Loan were used for working capital. On April 30, 1997, the Company
entered into the Metromedia Agreement, pursuant to which the Company sold to
Metromedia, Mr. Subotnick, Mr. Wadler and Ms. Kessel shares of the Series B
Preferred Stock (which constituted 100% of such series) for $32,500,000. The
shares of the Series B Preferred Stock were exchanged for 4,221,159 shares of
Class B Common Stock pursuant to the Series B Reclassification. The proceeds
from this transaction were used to redeem the Series A Preferred Stock and
Contingent Warrants ($2,115,000), to repay the Metromedia Loan and accrued
interest thereon ($4,058,126), to repay indebtedness to US ONE ($1,370,000), to
repay indebtedness to
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Sterling Capital LLC ("Sterling") ($555,000), and the balance for working
capital. Upon repayment of the Metromedia Loan, the Repurchased Shares were
released from escrow and delivered to the Company.
METROMEDIA LEASE. In March 1997, the Company entered into an agreement to
lease approximately 5,300 square feet of office space in Manhattan from an
affiliate of Metromedia. The lease commenced on April 1, 1997. Aggregate monthly
rent payments are approximately $127,800 for the one year term of the lease. In
June 1997, the Company entered into another agreement with the same affiliate of
Metromedia to lease approximately 1,146 additional square feet of office space
in the same building. The lease commenced on June 20, 1997. Aggregate monthly
rent payments are approximately $27,504 for the one year term of the lease. The
Company believes that the terms of the leases are fair to the Company and
comparable to those which have been obtained in arm's-length negotiations with
unaffiliated third parties. In September 1997, the Metromedia affiliate disposed
of its interest in this office building.
TRADEMARK LICENSE AGREEMENT. MFN is a party to a license agreement with
Metromedia (the "Metromedia License Agreement"), pursuant to which Metromedia
has granted a non-exclusive, non-transferable, non-assignable right and license,
without the right to grant sublicenses, to use the trade name, trademark and
corporate name "Metromedia" in the United States and worldwide, royalty-free for
a term of 10 years. The Metromedia License Agreement can be terminated by
Metromedia upon one month's prior written notice in the event that (i)
Metromedia or its affiliates own less than 20% of the Common Stock; (ii) a
Change in Control of MFN (as defined below) occurs; or (iii) any of the stock or
all or substantially all of the assets of any of the subsidiaries of MFN are
sold or transferred, in which case, the Metromedia License Agreement shall
terminate with respect to such subsidiary. A Change in Control of MFN is defined
as (a) a transaction in which a person or "group" (within the meaning of Section
13(d)(3) of the Exchange Act) not in existence at the time of the execution of
the Metromedia License Agreement becomes the beneficial owner of stock entitling
such person or group to exercise 50% or more of the combined voting power of all
classes of stock of MFN; (b) a change in the composition of MFN's Board of
Directors whereby a majority of the members thereof are not directors serving on
the Board at the time of the Metromedia License Agreement or any person
succeeding such director who was recommended or elected by such directors; (c) a
reorganization, merger or consolidation where following consummation thereof,
Metromedia would hold less than 20% of the combined voting power of all classes
of MFN stock; (d) a sale or other disposition of all or substantially all of the
assets of MFN; or (e) any transaction the result of which would be that the
Common Stock would not be required to be registered under the Exchange Act and
the holders of Common Stock would not receive common stock of the survivor to
the transaction which is required to be registered under the Exchange Act.
In addition, Metromedia has reserved the right to terminate the Metromedia
License Agreement in its entirety immediately upon written notice to MFN if, in
Metromedia's sole judgment, MFN's continued use of "Metromedia" as a trade name
would jeopardize or be detrimental to the good will and reputation of
Metromedia.
Pursuant to the Metromedia License Agreement, MFN has agreed to indemnify
and hold harmless Metromedia against any and all losses, claims, suits, actions,
proceedings, investigations, judgments, deficiencies, damages, settlements,
liabilities and reasonable legal expenses (and other expenses related thereto)
arising in connection with the Metromedia License Agreement.
TRANSACTIONS ENTERED INTO IN CONNECTION WITH THE OFFERINGS
RECLASSIFICATIONS. In connection with the Offerings, the Company intends to
effect the Reclassifications. Pursuant to the Series B Reclassification, each
share of Series B Preferred Stock will be converted into and exchanged for 507
shares of Class B Common Stock. Pursuant to the Common Stock Reclassification,
the Old Common Stock will be reclassified as Class A Common Stock, with all of
the rights and preferences currently found in the Old Common Stock. See
"Description of Capital Stock--Common Stock" for a description of the relative
rights of holders of Class A Common Stock and Class B Common Stock.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200,000,000 shares
of Common Stock, par value $0.01 per share (the "Common Stock"), of which
180,000,000 shares have been designated Class A Common Stock and 20,000,000
shares have been designated as Class B Common Stock, and 20,000,000 shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock"). Effective
upon completion of the Offerings, 16,204,267 shares of Class A Common Stock will
be issued and outstanding, 4,221,159 shares of Class B Common Stock will be
issued and outstanding and no shares of Preferred Stock will be issued and
outstanding. In addition, 4,260,511 shares of Class A Common Stock will be
reserved for issuance under outstanding options and warrants and 4,221,159
shares of Class A Common Stock will be reserved for issuance upon conversion of
the Class B Common Stock. As of October 7, 1997, there were 79 holders of record
of Old Common Stock and four holders of record of Series B Preferred Stock.
The following summary of certain provisions of the Common Stock and
Preferred Stock, outstanding warrants and related registration rights does not
purport to be complete and is subject to, and qualified in its entirety by, the
provisions of the Company's Amended and Restated Certificate of Incorporation
and Bylaws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
The shares of Class A Common Stock and Class B Common Stock are identical in
all respects, except for voting rights and certain conversion rights and
transfer restrictions in respect of the shares of the Class B Common Stock. The
number of authorized shares of any class or classes of capital stock of the
Company may be increased or decreased (but not below the number of shares
thereof then outstanding) by the affirmative vote of the holders of a majority
of the voting power of the Common Stock of the Company entitled to vote
generally in the election of directors irrespective of the provisions of Section
242(b)(2) of the General Corporation Law of the State of Delaware (the "Delaware
Law") or any corresponding provisions hereinafter enacted.
VOTING RIGHTS. The holders of Class A Common Stock are entitled to one vote
per share. Holders of Class B Common Stock are entitled to ten votes per share.
Holders of all classes of Common Stock entitled to vote will vote together as a
single class on all matters presented to the stockholders for their vote or
approval except for the election and the removal of directors as described below
and as otherwise required by applicable law. In addition, with respect to the
election of directors, the Company's Amended and Restated Certificate of
Incorporation provides that holders of Class B Common Stock will vote as a
separate class to elect at least 75% of the members of the Company's Board.
Directors may be removed, with or without cause, only by the holders of the
class of Common Stock or series of Preferred Stock that, as of the date such
removal is effected, would be entitled to elect such director at the next annual
meeting of stockholders. Vacancies in a directorship may be filled only by (a)
the remaining directors elected by holders of each class of Common Stock or
series of Preferred Stock that (x) elected such director and (y) as of the date
such vacancy is filled, would be entitled to elect such director at the next
annual meeting of the stockholders or (b) if there are no such remaining
directors, then by the vote of the holders of the class or classes of Common
Stock or series of Preferred Stock, that, as of the date such vacancy is filled,
would be entitled to elect such director at the next annual meeting of
stockholders, voting as a separate class at a meeting, special or otherwise, of
the holders of Common Stock of such class or series of Preferred Stock.
DIVIDENDS. Holders of Class A Common Stock and the Class B Common Stock are
entitled to receive dividends at the same rate if, as and when such dividends
are declared by the Board out of assets legally available therefor after payment
of dividends required to be paid on shares of Preferred Stock, if any. The
Company may not make any dividend or distribution to any holder of any class of
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Common Stock unless simultaneously with such dividend or distribution the
Company makes the same dividend or distribution with respect to each outstanding
share of Common Stock regardless of class. In the case of a dividend or other
distribution payable in shares of a class of Common Stock, including
distributions pursuant to Stock splits or divisions of Common Stock, only shares
of Class A Common Stock may be distributed with respect to Class A Common Stock
and only shares of Class B Common Stock may be distributed with respect to Class
B Common Stock. Whenever a dividend or distribution, including distributions
pursuant to stock splits or divisions of the Common Stock, is payable in shares
of a class of Common Stock, the number of shares of each class of Common Stock
payable per share of such class of Common Stock shall be equal in number. In the
case of dividends or other distributions consisting of other voting securities
of the Company or of voting securities of any corporation which is a
wholly-owned subsidiary of the Company, the Company shall declare and pay such
dividends in two separate classes of such voting securities, identical in all
respects except that (i) the voting rights of each such security issued to the
holders of Class A Common Stock shall be one-tenth of the voting rights of each
such security issued to holders of Class B Common Stock, (ii) such security
issued to holders of Class B Common Stock shall convert into the security issued
to the holders of Class A Common Stock upon the same terms and conditions
applicable to the conversion of Class B Common Stock into Class A Common Stock
and shall have the same restrictions on transfer and ownership applicable to the
transfer and ownership of the Class B Common Stock, and (iii) with respect only
to dividends or other distributions of voting securities of any corporation
which is a wholly owned subsidiary of the Company, the respective voting rights
of each such security issued to holders of the Class A Common Stock and Class B
Common Stock with respect to election of directors shall otherwise be as
comparable as is practicable to those of the Class A Common Stock and Class B
Common Stock. In the case of dividends or other distributions consisting of
securities convertible into, or exchangeable for, voting securities of the
Company or of voting securities of any corporation which is a wholly owned
subsidiary of the Company, the Company shall provide that such convertible or
exchangeable securities and the underlying securities be identical in all
respects (including, without limitation, the conversion or exchange rate) except
that the underlying securities may have the same differences as they would have
if the Company issued voting securities of the Company or of a wholly owned
subsidiary rather than issuing securities convertible into, or exchangeable for,
such securities. The Company does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy."
RESTRICTIONS ON ADDITIONAL ISSUANCES AND TRANSFER. The Company may not
issue or sell any shares of Class B Common Stock or any securities (including,
without limitation, any rights, options, warrants or other securities)
convertible into, or exchangeable or exercisable for, shares of Class B Common
Stock to any person or entity other than to Metromedia, Messrs. Kluge and
Subotnick, their affiliates, relatives and certain other entities (the
"Permitted Holders"). Additionally, shares of Class B Common Stock may not be
transferred, whether by sale, assignment, gift, bequest, appointment or
otherwise, to a person other than to a Permitted Holder. Notwithstanding the
foregoing (i) any Permitted Holder may pledge his, her or its shares of Class B
Common Stock to a financial institution pursuant to a bona fide pledge of such
shares as collateral security for indebtedness due to the pledgee provided that
such shares remain subject to the transfer restrictions and that, in the event
of foreclosure or other similar action by the pledgee, such pledged shares of
Class B Common Stock may only be transferred to a Permitted Holder or converted
into shares of Class A Common Stock, as the pledgee may elect and (ii) the
foregoing transfer restrictions shall not apply in the case of a merger,
consolidation or business combination of the Company with or into another
corporation in which all of the outstanding shares of Common Stock and Preferred
Stock of the Company regardless of class are purchased by the acquiror.
CONVERSION. Class A Common Stock has no conversion rights. Shares of Class
B Common Stock are convertible into Class A Common Stock, in whole or in part,
at any time and from time to time at the option of the holder, on the basis of
one share of Class A Common Stock for each share of Class B Common Stock
converted. Additionally, at such time as a person ceases to be a (i) Permitted
Holder, any share of Class B Common Stock held by such person at such time shall
convert into a share of Class A
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Common Stock. The Company covenants that (i) it will at all times reserve and
keep available out of its authorized but unissued shares of Class A Common
Stock, such number of shares of Class A Common Stock issuable upon the
conversion of all outstanding shares of Class B Common Stock, (ii) it will cause
any shares of Class A Common Stock issuable upon conversion of a share of Class
B Common Stock that require registration with or approval of any governmental
authority under federal or state law before such shares may be issued upon
conversion to be so registered or approved and (iii) it will use its best
efforts to list the shares of Class A Common Stock required to be delivered upon
conversion prior to such delivery upon such national securities exchange upon
which the outstanding Class A Common Stock is listed at the time of such
delivery.
RECLASSIFICATION AND MERGER. In the event of a reclassification or other
similar transaction as a result of which the shares of Class A Common Stock are
converted into another security, then a holder of Class B Common Stock will be
entitled to receive upon conversion the amount of such other security that the
holder would have received if the conversion occurred immediately prior to the
record date of such reclassification or other similar transaction. No
adjustments in respect of dividends will be made upon the conversion of any
share of Class B Common Stock; except if a share is converted subsequent to the
record date for the payment of a dividend or other distribution on shares of
Class B Common Stock but prior to such payment, then the registered holder of
such share at the close of business on such record date will be entitled to
receive the dividend or other distribution payable on such date regardless of
the conversion thereof or the Company's default in payment of the dividend due
on such date.
In the event the Company enters into any consolidation, merger, combination
or other transaction in which shares of Common Stock are exchanged for or
changed into other stock or securities, cash and/ or any other property, then,
and in such event, the shares of each class of Common Stock will be exchanged
for or changed into either (1) the same amount of stock, securities, cash and/or
any other property, as the case may be, into which or for which each share of
any other class of Common Stock is exchanged for or changed into shares of
capital stock, such shares so exchanged for or changed into may differ to the
extent and only to the extent that the Class A Common Stock and the Class B
Common Stock differ as provided in the Company's Amended and Restated
Certificate of Incorporation or (2) if holders of each class of Common Stock are
to receive different distributions of stock, securities, cash and/or any other
property, an amount of Stock, securities, cash and/or property per share having
a value, as determined by an independent investment banking firm of national
reputation selected by the Board of Directors, equal to the value per share into
which or for which each share of any other class of Common Stock is exchanged or
changed.
LIQUIDATION. In the event of a liquidation of the Company, after payment of
the debts and other liabilities of the Company and after making provision for
the holders of Preferred Stock, if any, the remaining assets of the Company will
be distributable ratably among the holders of the Class A Common Stock and Class
B Common Stock treated as a single class.
OTHER PROVISIONS. Except as described below, the holders of the Class A
Common Stock and Class B Common Stock are not entitled to preemptive rights.
None of the Class A Common Stock or Class B Common Stock may be subdivided or
combined in any manner unless the other classes are subdivided or combined in
the same proportion. The Company may not make any offering of options, rights or
warrants to subscribe for shares of Class B Common Stock. If the Company makes
an offering of options, rights or warrants to subscribe for shares of any other
class or classes of capital stock (other than Class B Common Stock) to all
holders of a class of Common Stock, then the Company is required to
simultaneously make an identical offering to all holders of the other classes of
Common Stock other than to any class the holders of which, voting as a separate
class, agrees that such offering need not be made to such class. All such
options, rights or warrants offerings shall offer the respective holders of
Class A Common Stock and Class B Common Stock the right to subscribe at the same
rate per share. All
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outstanding shares of Common Stock are, and all shares of Common Stock offered
hereby when issued will be, upon payment therefor, validly issued, fully paid
and nonassessable.
Special meetings of stockholders for any purpose may be called at any time
by the Chairman, Vice Chairman or the Board of Directors, by the President or by
the holders of at least thirty-three percent (33%) of the voting power of the
outstanding shares of Common Stock.
Delaware law does not require stockholder approval for any issuance of
authorized shares of Common Stock. Such authorized and unissued shares may be
used for a variety of corporate purposes, including future public offerings to
raise additional capital or to facilitate corporate acquisitions. One of the
effects of the existence of unissued and unreserved Common Stock may be to
enable the Board to issue shares to persons friendly to current management,
which issuance could render more difficult or discourage an attempt to obtain
control of the Company by means of a merger, tender offer, proxy consent or
otherwise, and thereby protect the continuity of the Company's current
management and possibly deprive the stockholders of opportunities to sell their
shares of Common Stock at prices higher than prevailing market prices.
At present there is no established trading market for the Class A Common
Stock.
The Class A Common Stock has been approved for quotation and trading on the
Nasdaq National Market under the symbol "MFNX".
PREFERRED STOCK
The Board has the authority, without any further action by the stockholders
of the Company, to issue from time to time shares of Preferred Stock in one or
more series and to fix the designations, preferences, rights, qualifications,
limitations and restrictions thereof, including voting rights, dividend rights,
dividend rates, conversion rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series. The
issuance of Preferred Stock with voting rights could have an adverse effect on
the voting power of holders of Common Stock by increasing the number of
outstanding shares having voting rights. In addition, if the Board authorizes
Preferred Stock with conversion rights, the number of shares of Common Stock
outstanding could potentially be increased up to the authorized amount. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock. Any such issuance could
also have the effect of delaying, deterring or preventing a change in control of
the Company and may adversely affect the rights of holders of Common Stock. The
Board does not presently intend to issue any additional shares of Preferred
Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
As a Delaware corporation, the Company is subject to the DGCL, including
Section 203. Section 203 of the DGCL prohibits certain transactions between a
Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation. This provision prohibits certain business
combinations (defined broadly to include mergers, consolidations, sales or other
dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation, and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder becomes an interested
stockholder, unless (i) prior to the date the interested stockholder becomes an
interested stockholder, the business combination or the transaction by which the
stockholder becomes an interested stockholder is approved by the corporation's
board of directors, (ii) upon consummation of the transaction which resulted in
the stockholder becoming an interested stockholder, such stockholder held at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (other
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than stock held by directors who are also officers or by certain employee stock
plans) or (iii) the business combination is approved by a majority of the board
of directors, and at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder. Mr. Garofalo and
Metromedia are interested stockholders under the DGCL. However since their
acquisition of the Company's securities was approved in advance by the Company's
Board of Directors, they would not be prohibited from engaging in a business
combination with the Company.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The By-laws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or special meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 70 days nor more than 90 days prior to the meeting;
provided, however, that in the event that the date of the annual meeting is
advanced by more than 20 days or delayed by more than 70 days from such
anniversary date, notice by the stockholder to be timely must be received no
earlier than the close of business on the ninetieth day prior to such annual
meeting and not later than the close of business on the later of the seventieth
day prior to such annual meeting or the tenth day following the day on which
public announcement of the date of such meeting is first made. The By-laws also
specify certain requirements for a stockholder's notice to be in proper written
form. These provisions may preclude some stockholders from bringing matters
before the stockholders at an annual or special meeting or from making
nominations for directors at an annual or special meeting.
The Company's Amended and Restated Certificate of Incorporation provides
that to the fullest extent permitted by the DGCL, no director of the Company
shall be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director. Under current Delaware law, liability of
a director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases and (iv) for any transaction from which the director derives an
improper personal benefit. The effect of the provision of the Charter is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the rights of the Company or any stockholder to seek
nonmonetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. In addition, the Charter provides that the Company
shall indemnify its directors, officers, employees and agents to the extent not
prohibited by Delaware law.
In addition, prior to the completion of the Offerings, the Company intends
to enter into agreements (the "Indemnification Agreements") with each of the
directors of the Company pursuant to which the Company will agree to indemnify
each such director against claims, liabilities, damages, expenses, losses,
costs, penalties or amounts paid in settlement (collectively, "Losses") incurred
by such director and arising out of his capacity as a director, executive
officer, employee and/or agent of the Company to the maximum extent permitted by
applicable law. In addition, such director or officer shall be entitled to an
advance of expenses to the maximum extent authorized or permitted by law to meet
the obligations indemnified against. The Indemnification Agreements will also
obligate the Company to purchase and maintain insurance for the benefit and on
behalf of its directors insuring against all liabilities that may be incurred by
such director in or arising out of his capacity as a director, officer, employee
and/or agent of the Company.
To the extent that the Board or the stockholders of the Company may in the
future wish to limit or repeal the ability of the Company to indemnify
directors, such repeal or limitation may not be effective as
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to directors who are currently parties to the Indemnification Agreements,
because their rights to full protection will be contractually assured by the
Indemnification Agreements. It is anticipated that similar contracts may be
entered into, from time to time, with future directors and with executive
officers of the Company.
WARRANTS
In February, 1997, the Company issued to a customer (in replacement for an
existing warrant) a warrant to purchase 456,300 shares of Class A Common Stock
at an exercise price of $4.85 per share. The new warrant expires on February 13,
2000. The warrants are subject to provisions for the adjustment of the exercise
price and the aggregate number of shares issuable upon exercise of the warrants
under certain circumstances, including stock dividends, stock splits and
reclassifications.
On June 14, 1996, the Company issued 38,025 Class A Common Stock purchase
warrants to two investors. The warrants are exercisable at $2.62 per share for a
period of 4 years (the "Exercise Period"), provided that in the event of an
initial public offering of the Company's Common Stock during the Exercise
Period, the exercise price will be reduced to the lesser of $2.62 or one half of
the initial public offering price per share. The warrants are subject to
provisions for the adjustment of the exercise price and the aggregate number of
shares issuable upon exercise of the warrants under certain circumstances,
including stock dividends, stock splits and reclassifications.
On September 24, 1996, the Company issued an aggregate of 94,302 Common
Stock purchase warrants to various bridge lenders (the "Bridge Warrants"). The
exercise price of the warrants is the lesser of (i) $5.92 per share; (ii) the
price at which the Company issues its securities in the future if less than
$5.92; and (iii) 50% of the price at which the Class A Common Stock of the
Company is offered in an initial public offering. The exercise price is subject
to further reduction to a price such that the difference between the exercise
price and the market price of a share would yield an aggregate gross profit upon
exercise of all of the warrants equal to at least $550,000. The warrants are
exercisable until the later of September 24, 1999 or twelve months after the
Company has completed an initial public offering and the shares issuable
pursuant to the exercise of the warrants have been covered by an effective
registration statement which has remained in effect for 90 days. The warrants
are subject to provisions for the adjustment of the exercise price and the
aggregate number of shares issuable upon exercise of the warrants under certain
circumstances, including stock dividends, stock splits and reclassifications.
In October 1995, concurrent with the issuance of notes in a private
offering, warrants were issued by the Company to certain noteholders which are
exercisable at a rate of 15,210 shares of common stock per $100,000 of note
principal. Such warrants, entitling the holders to purchase an aggregate of
130,502 shares, are exercisable at a price equal to 50% of the per share price
of an initial public offering of common stock over a three-year period beginning
on the effective date of such initial public offering. The warrants are subject
to provisions for the adjustment of the exercise price and the aggregate number
of shares issuable upon exercise of the warrants under certain circumstances,
including stock dividends, stock splits and reclassifications.
In December 1996, the Company offered certain private placement noteholders
warrants to purchase 107,078 shares of its Class A Common Stock exercisable at
50% of the price for which shares are sold in an initial public offering for a
period of three years following such offering in exchange for the extension of
the due dates of the notes. All of the noteholders accepted this offer. The
warrants are subject to provisions for the adjustment of the exercise price and
the aggregate number of shares issuable upon exercise of the warrants under
certain circumstances, including stock dividends, stock splits and
reclassifications.
In March 1997, the Company issued warrants to private placement noteholders
to purchase 57,682 shares of Class A Common Stock exercisable at 50% of the
price for which shares are sold in an initial public offering for a period of
three years following such offering in exchange for the extension of the due
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<PAGE>
dates of the notes. The warrants are subject to provisions for the adjustment of
the exercise price and the aggregate number of shares issuable upon exercise of
the warrants under certain circumstances, including stock dividends, stock
splits and reclassifications.
On December 13, 1996, the Company issued and sold to an investor warrants to
purchase 114,075 shares of Class A Common Stock at an exercise price of $4.93
per share (the "Investor Warrants") and a contingent stock subscription warrant
to purchase a number of shares of Class A Common Stock (such number to be
determined based upon certain future events) at an exercise price of $0.02 per
share (the "Contingent Warrants"). On April 30, 1997, the Contingent Warrants,
along with a series of preferred stock the investor had acquired, were redeemed
at an aggregate redemption price of $2,115,000. In connection therewith, the
number of Investor Warrants was increased from 114,075 to 228,150. The Investor
Warrants are exercisable on or prior to December 31, 2001. The Investor Warrants
contain provisions for the adjustment of the exercise price and the aggregate
number of shares issuable upon the exercise of a warrant under certain
circumstances including the issuance of Class A Common Stock, options to
purchase Class A Common Stock or securities convertible into Class A Common
Stock at a price less than the exercise price, stock dividends, stock splits,
combinations, capital reorganizations and reclassifications.
Another of the Company's customers, subject to the satisfaction of certain
conditions set forth in an agreement with the Company, may acquire warrants to
purchase a minimum of 76,050 and, subject to the approval of the Company, a
maximum of 456,300 Class A Common Stock purchase warrants exercisable at $0.02
per share (the "Customer Warrants"). The purchase price for the warrants shall
be either (i) $1.47 per warrant, or (ii) in the event that the Company sells
Class A Common Stock in a private placement for an aggregate purchase price of
$7,500,000 or more, the sales price per warrant shall be the same as the price
per share of Class A Common Stock in such placement less $0.01; PROVIDED THAT,
in no event shall the aggregate purchase price exceed $1.25 million. The
warrants are exercisable on or prior to March 20, 2009. The warrants have
provisions for adjustment of the number of shares issuable upon exercise of the
warrants under certain circumstances including stock dividends, stock splits,
combinations, issuances of additional shares of Class A Common Stock at a price
less than the current market value of the Class A Common Stock, and issuances of
warrants, options, convertible securities or indebtedness or other rights,
exercisable for or convertible into Class A Common Stock at an exercise price
less than the current market value of the Class A Common Stock.
REGISTRATION RIGHTS
After the Company's initial public offering, each time that the Company
proposes to register any of its securities (other than on a registration
statement on Form S-8 or Form S-4) under the Securities Act, holders of the
Customer Warrants have the right to have their shares of Class A Common Stock of
the Company, whether owned as of the date of the grant of the warrant or issued
pursuant to the exercise of the warrant (the "Registrable Shares"), included in
such registration. If the managing underwriter advises the Company in writing
that the number of shares requested to be included in such registration exceeds
the number of shares which can be sold in such offering, the Company will be
obligated to include in such registration only (i) first, any and all shares of
Class A Common Stock for sale by the Company, and (ii) second, pro rata among
the Registrable Shares and any other shares of Class A Common Stock requested to
be included in the registration pursuant to any other registration rights. The
Company is required to use all reasonable efforts to effect the registration and
the sale of the Registrable Shares.
Pursuant to a letter agreement dated February 11, 1996 between Mr. Sahagen
and the Company, Mr. Sahagen was granted the same "piggyback" registration
rights as those granted to the holders of the Customer Warrants with respect to
shares of Class A Common Stock owned by him.
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For five years after the issuance of the Bridge Warrants, at any time the
Company proposes to file a registration statement for the public sale of
securities (other than in connection with a merger or pursuant to Form S-4, Form
S-8 or a comparable registration statement), holders of these warrants have the
right to include the shares underlying the warrants registered under such
registration statement. If the managing underwriter advises the Company in
writing that the number of shares requested to be included in such registration
exceeds the number of shares which can be sold in such offering, the Company
will be obligated to include in such registration only (i) first, any and all
shares of Class A Common Stock for sale by the Company, and (ii) second, pro
rata among the shares underlying the warrants and any other shares of Class A
Common Stock requested to be included in the registration pursuant to any other
registration rights.
On March 20, 1996, an individual entered into a consulting and stock sale
agreement with the Company under which such individual received 182,520 shares
of Class A Common Stock and certain registration rights. After the Company's
initial public offering, at any time the Company proposes to register its
securities (other than pursuant to a Form S-4 or Form S-8 or in connection with
a merger), such individual has the right to include his shares in such
registration. If the managing underwriter in such offering advises the Company
that it declines to include a portion or all of the shares requested by such
individual to be included in the registration statement, then such portion or
all of such shares shall be excluded from the registration statement, with a
portion of the excluded shares allocated to such individual in proportion to the
respective numbers of shares requested to be registered by such individual.
On April 15, 1996, VCNY entered into a stock purchase agreement with the
Company for the purchase of 1,521,000 shares of Class A Common Stock. Under that
agreement, certain piggyback rights were granted to VCNY. In the event the
Company proposes to register any of its securities (other than in connection
with an initial public offering, a merger or pursuant to Form S-4 or Form S-8),
the Company is required, at VCNY's request, to include the shares sold to VCNY
in such registration. If the managing underwriter in such offering advises the
Company that it declines to include a portion or all of the shares requested by
VCNY to be included in the registration statement, then such portion or all of
such shares shall be excluded from the registration statement, with the excluded
shares being allocated among all shareholders requesting registration in
proportion to the respective numbers of shares requested to be registered by
each such shareholder. On October 9, 1996, VCNY and MFN entered into a
settlement agreement which provided for the termination of Mr. Vento's
employment with the Company. On January 13, 1997, VCNY sold 1,368,900 of the
shares of Class A Common Stock to certain investors. On January 15, 1997, the
Company entered into a registration rights agreement with some of these
investors who had purchased 264,870 shares of Class A Common Stock ("Vento
Investors"). Pursuant to this registration rights agreement, at any time
following the effective date of an initial public offering of Class A Common
Stock, holders of a majority of shares of Class A Common Stock held by the Vento
Investors may request a demand registration of such shares. This demand
registration may be exercised up to three separate times, but the Company shall
not be required to file any such demand registration within 90 days of the
effectiveness of another registration statement (other than pursuant to a Form
S-8) and may delay a filing for up to 90 days from a demand request under
certain circumstances. The Vento Investors have indicated that they intend to
exercise their demand registration rights immediately upon consummation of the
Offerings. If such investors exercise their rights, the Company may be compelled
to register such shares and other investors' shares that are entitled to
piggyback registration rights as described in this Prospectus. See "Risk
Factors--Shares Eligible for Future Sale; Potential Adverse Effect on Stock
Price; Registration Rights." The Vento Investors also have certain piggyback
registration rights. The registration rights granted to the Vento Investors are
subject to customary cut-back provisions. In addition, at such time as (i) the
Company is qualified to use Form S-3 and (ii) at least one year has passed since
an initial public offering of the Class A Common Stock, the Vento Investors
having at least 10 of the shares purchased from VCNY have the unlimited right to
request the Company register such shares on Form S-3 (or a successor form),
provided that each such registration has an anticipated offering price of at
least $250,000. The remaining 1,104,030 shares of
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Class A Common Stock owned by VCNY that were sold on January 13, 1997 were sold
to Mr. Sahagen, who was granted piggyback registration rights pursuant to a
February 11, 1997 letter agreement with the Company, as discussed above. The
152,100 shares of Class A Common Stock owned by VCNY not sold to the Vento
Investors or to Mr. Sahagen were transferred to another entity. The Company
believes that the entity assumed the registration rights connected with such
shares as described above pursuant to the April 15, 1996 stock purchase
agreement between VCNY and the Company.
Pursuant to a registration rights agreement dated December 13, 1996, as
amended on April 30, 1997, at any time the Company proposes to register its
shares (other than pursuant to a Form S-4, Form S-8, or in connection with an
initial public offering of shares without inclusion of shares held by other
stockholders of the Company), a certain investor (the"Investor") has the right
to have its shares included in such registration. If the managing underwriter
advises the Company that the number of shares requested to be included in the
registration exceeds the number of shares which can be sold in such offering,
the Company will be obligated to include in such registration (i) first, any and
all shares of Class A Common Stock for sale by the Company and (ii) second, such
shares requested to be included by the Investor in such registration pro rata
among the other shares requested to be included in such registration. For the
purpose of any holdback, lock-up or other similar restriction on the sale of
Class A Common Stock before or after any underwritten registration, the Investor
will be subject to no restriction greater than the least restrictive holdback,
lock-up or other restriction then applicable to any other shareholder of the
Company.
Pursuant to employment agreements and stock option agreements with the
Company, certain officers of the Company have rights with respect to the
registration of the shares underlying their stock options. Stephen A. Garofalo
was granted options to purchase 380,250 shares of Class A Common Stock, and
Howard Finkelstein was granted options to purchase 1,521,000 shares of Class A
Common Stock. John Mahon and Jim Urbelis were both granted options to purchase
136,890 shares of Class A Common Stock, and Vincent Galluccio has been granted
options to purchase 197,730 shares of Class A Common Stock. Upon the
consummation of an initial public offering, the Company is required to register
the shares underlying the stock options of Mr. Garofalo and Mr. Finkelstein on
Form S-8. At any time the Company proposes to file a registration statement on
Form S-8, and if permissible under such form, the Company is required to include
on such statement the shares underlying the stock options of Messrs. Mahon,
Urbelis and Galluccio.
Under the Metromedia Agreement, as amended, Metromedia, Stuart Subotnick,
Arnold Wadler and Silvia Kessel (the "Buyers") and Stephen A. Garofalo, were
granted certain demand and piggyback registration rights. Under his employment
agreement, Mr. Finkelstein was granted certain demand and piggyback registration
rights. At any time, Mr. Garofalo, Mr. Finkelstein or the holders of a majority
of the Class A Common Stock owned by the Buyers or issuable upon conversion of
the Class B Common Stock ("Majority Holders") may demand that the Company
register their shares of Class A Common Stock (assuming holders of Class B
Common Stock have converted their shares of Class B Common Stock into shares of
Class A Common Stock), and upon such demand, the Company is required to use its
best efforts to effect such registration. With certain exceptions, unless Mr.
Garofalo, Mr. Finkelstein or the Majority Holders consent to such inclusion, no
such registration may include any other securities. For each of Mr. Garofalo,
Mr. Finkelstein and the Majority Holders, the Company is not required to effect
(i) more than three such registrations in the aggregate; (ii) more than two such
registrations within any six month period; (iii) any such registration within
six months after the effectiveness of a registration by the Company offering its
Class A Common Stock (other than a registration on Form S-8 with respect to an
employee benefit plan), unless the Company has completed the sale of at least
80% of the offering pursuant to such registration; or (iv) any such registration
valued at less than $5,000,000 based upon the then current market price or fair
market value as estimated by the Company's underwriters.
Each time the Company proposes to file a registration statement to register
its securities (except for registration on Form S-4 or Form S-8), the Company
will use its best efforts to effect the registration of
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shares requested to be registered by Mr. Garofalo, Mr. Finkelstein or the
Buyers. In the case of any such piggyback registration in connection with a
demand registration initiated by Metromedia, Mr. Subotnick, Ms. Kessel, or Mr.
Wadler, the amount of shares to be included in such piggyback registration may
not, without the prior written consent of the person initiating the demand
registration, exceed 10% of Mr. Garofalo's or Mr. Finkelstein's total equity
interest in the Company. In the case of a piggyback registration in connection
with a demand registration initiated by Mr. Garofalo or Mr. Finkelstein, the
amount of shares to be included in such piggyback registration may not, without
the prior written consent of the person initiating the demand registration,
exceed 10% of the Buyers' total equity interest in the Company. In the case of
any such piggyback registration in connection with an underwritten primary
registration on behalf of the Company, if the Company's underwriters advise the
Company in writing that the number of shares to be included in such registration
exceeds the number of shares which, in the estimation of such underwriters, can
be reasonably expected to be sold in such offering, then the Company shall
include in such registration (i) first, the Class A Common Stock for sale by the
Company and (ii) second, if additional shares of Class A Common Stock can be
included in such registration in the estimation of the Company's underwriters,
the shares requested by Mr. Garofalo, Mr. Finkelstein or the Buyers, on a pro
rata basis with each other eligible person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is ChaseMellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has been no market for the shares of the Class
A Common Stock. Sales of a substantial amount of Class A Common Stock in the
public market, or the perception that such sales may occur, could adversely
affect the market price of the Class A Common Stock prevailing from time to time
in the public market and could impair the Company's ability to raise additional
capital through the sale of its equity securities in the future.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted securities from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the holder is entitled to sell within any three-month period a
number of shares of Class A Common Stock that does not exceed the greater of 1%
of the then-outstanding shares of the Class A Common Stock or the average weekly
trading volume of shares of Class A Common Stock on all exchanges and reported
through the automated quotation system of a registered security association
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
restrictions on the manner of sales, notices, requirements and the availability
of current public information about the Company. If two years have elapsed since
the date of acquisition of restricted shares from the Company or from any
"affiliate" of the Company, and the holder thereof is deemed not to have been an
affiliate of the Company at any time during the 90 days preceding a sale, such
person would be entitled to sell such Class A Common Stock in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
Upon completion of the Offerings, the Company will have approximately
16,204,267 shares of Class A Common Stock outstanding (17,194,267 if the
Underwriters' overallotment option is exercised in full), including 6,600,000
shares of Class A Common Stock sold in the Offerings (7,590,000 if the
Underwriters' overallotment option is exercised in full) and 9,604,267
"restricted" shares of Common Stock. Of the restricted shares held by persons
other than "affiliates" of the Company within the meaning of Rule 144, 1,781,444
shares of Class A Common Stock are currently eligible for sale under Rule 144,
as currently in effect, and an additional 1,029,381 shares of Class A Common
Stock may become eligible for sale under Rule 144, as currently in effect,
through March 31, 1998. Upon completion
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of the Offerings, the Company will have 4,221,159 shares of Class B Common Stock
outstanding, which shares are convertible into shares of Class A Common Stock on
a one-for-one basis. All of the shares of Class B Common Stock are currently
owned by persons who are Affiliates of the Company and, in addition, are subject
to lock-up agreements with the Underwriters. Shares of Class A Common Stock
converted from shares of Class B Common Stock will be eligible for sale under
Rule 144 beginning on April 30, 1998 (subject to certain volume limitations and
other restrictions prescribed by Rule 144).
The shares of Class A Common Stock offered in the Offerings will be freely
tradeable without restriction or further registration under the Securities Act
by persons other than "affiliates" of the Company within the meaning of Rule
144. The holders of restricted shares generally will be entitled to sell these
shares in the public securities market without registration under the Securities
Act to the extent permitted by Rule 144 or any exemption under the Securities
Act.
The Company and each of its executive officers and directors and certain
other stockholders have entered into lock-up agreements with the Underwriters,
providing that, subject to certain exceptions, they will not, for a period of
180 days from the date of this Prospectus, offer, sell or contract to sell or
otherwise dispose, directly or indirectly, or announce an offering of, any
shares of Class A Common Stock or any securities convertible into, or
exchangeable for, shares of Class A Common Stock without prior written consent
of Salomon Brothers Inc, subject to certain exceptions. See "Underwriting."
Promptly after completion of the Offerings, the Company intends to file with
the Commission a Registration Statement on Form S-8, covering the shares of
Common Stock issuable upon exercise of certain officer's options and the shares
of Class A Common Stock underlying options granted under the 1997 Incentive
Stock Plan. This registration statement will become effective immediately upon
filing with the Commission. As a result, the shares of Class A Common Stock so
registered and acquired pursuant to the 1997 Incentive Stock Plan will be
available for sale by non-affiliates in the public securities market without
limitation and by affiliates, subject to the volume limitations of Rule 144.
Certain persons have registration rights agreements with the Company and/or
warrant agreements with the Company to purchase shares of Class A Common Stock.
Such registration rights may require the Company to register under the
Securities Act shares of Class A Common Stock as early as 90 days after
consummation of the Offerings and may require the Company to register up to
1,703,520 shares of Class A Common Stock and up to 322,452 shares of Class A
Common Stock underlying currently outstanding warrants. One party (the Vento
Investors) that is entitled to demand registration rights for 264,870 shares of
Class A Common Stock has indicated to the Company that it intends to immediately
exercise such rights upon consummation of the Offerings. As a result, the number
of shares eligible for future sale and the availability of such shares in the
public securities market may be effected by the exercise of these registration
rights and warrants and by additional shares of Class A Common Stock that are
entitled to "piggyback" registration rights and may be included in any such
registration. See "Risk Factors--Shares Eligible for Future Sale; Potential
Adverse Effect on Stock Price; Registration Rights," and "Description of Capital
Stock--Registration Rights" and "Description of Capital Stock-- Warrants".
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the U.S. Underwriters (the "U.S. Underwriting Agreement"),
the Company has agreed to sell to each of the U.S. Underwriters named below (the
"U.S. Underwriters"), and each of the U.S. Underwriters, for whom Salomon
Brothers Inc, Donaldson, Lufkin & Jenrette Securities Corporation and Deutsche
Morgan Grenfell Inc. are acting as the U.S. representatives (the "U.S.
Representatives"), has severally agreed to purchase from the Company the number
of shares of Class A Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
- ------------------------------------------------------------------------------ -------------
<S> <C>
Salomon Brothers Inc..........................................................
Donaldson, Lufkin & Jenrette Securities Corporation...........................
Deutsche Morgan Grenfell Inc..................................................
-------------
Total....................................................................... 5,610,000
-------------
-------------
</TABLE>
The Company has been advised by the U.S. Representatives that the several
U.S. Underwriters initially propose to offer such shares of Class A Common Stock
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share of Class A Common Stock. The U.S. Underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share of Class
A Common Stock to other dealers. After the Offerings, the public offering price
and such concessions may be changed.
The Company has granted to the U.S. Underwriters and the international
underwriters (the "International Underwriters" and, collectively with the U.S.
Underwriters, the "Underwriters") an option, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to 990,000 additional
shares of Class A Common Stock from the Company at the price to public less the
underwriting discount, solely to cover over-allotments. To the extent that the
U.S. Underwriters and the International Underwriters exercise such option, each
of the U.S. Underwriters and the International Underwriters, as the case may be,
will be committed, subject to certain conditions, to purchase a number of option
shares proportionate to such U.S. Underwriter's or International Underwriter's
initial commitment.
The Company has entered into an International Underwriting Agreement with
the International Underwriters named therein, for whom Salomon Brothers
International Limited, Donaldson, Lufkin & Jenrette Securities Corporation and
Morgan Grenfell & Co., Limited are acting as the representatives (the
"International Representatives" and, together with the U.S. Representatives, the
"Representatives"), providing for the concurrent offer and sale of 990,000
shares of Class A Common Stock (in addition to the shares covered by the
over-allotment options described above) outside the United States and Canada.
Both the U.S. Underwriting Agreement and the International Underwriting
Agreement provide that the obligations of the U.S. Underwriters and the
International Underwriters are such that if any of the shares of Class A Common
Stock are purchased by the U.S. Underwriters pursuant to the U.S.
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Underwriting Agreement, or by the International Underwriters pursuant to the
International Underwriting Agreement, all the shares of Class A Common Stock
agreed to be purchased by either the U.S. Underwriters or the International
Underwriters, as the case may be, pursuant to their respective agreements must
be so purchased. The price to public and underwriting discount per share of
Class A Common Stock for the U.S. Offering and the International Offering will
be identical. The closing of the International Offering is a condition to the
closing of the U.S. Offering and the closing of the U.S. Offering is a condition
to the closing of the International Offering.
Each U.S. Underwriter has severally agreed that, as part of the distribution
of the 5,610,000 shares of Class A Common Stock offered by the U.S.
Underwriters, (i) it is not purchasing any shares of Class A Common Stock for
the account of anyone other than a United States or Canadian Person and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly, any
shares of Class A Common Stock or distribute this Prospectus to any person
outside of the United States or Canada or to anyone other than a United States
or Canadian Person. Each International Underwriter has severally agreed that, as
part of the distribution of the 990,000 shares of Class A Common Stock offered
by the International Underwriters, (i) it is not purchasing any shares of Class
A Common Stock for the account of any United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any shares of Class A Common Stock or distribute any Prospectus relating to the
International Offering to any person in the United States or Canada or to any
United States or Canadian Person.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S. Underwriters
and International Underwriters. "United States or Canadian Person" means any
person who is a national or resident of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or of any political subdivision thereof, and
any estate or trust the income of which is subject to United States or Canadian
federal income taxation, regardless of the source of its income (other than the
foreign branch of any United States or Canadian Person), and includes any United
States or Canadian branch of a person other than a United States or Canadian
Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of shares of Class A Common Stock as
may be mutually agreed. The price of any shares of Class A Common Stock so sold
shall be the public offering price, less an amount not greater than the
concession to securities dealers. To the extent that there are sales between the
U.S. Underwriters and the International Underwriters pursuant to the Agreement
Between U.S. Underwriters and International Underwriters, the number of shares
of Class A Common Stock initially available for sale by the U.S. Underwriters or
by the International Underwriters may be more or less than the amount specified
on the cover page of this Prospectus.
Any offer of the shares of Class A Common Stock in Canada will be made only
pursuant to an exemption from the registration and qualification requirements in
any jurisdiction in Canada in which such offer is made.
The U.S. Underwriting Agreement and the International Underwriting Agreement
provide that the Company will indemnify the U.S. Underwriters and the
International Underwriters against certain liabilities and expenses, including
liabilities under the Securities Act, or contribute to payments the U.S.
Underwriters and the International Underwriters may be required to make in
respect thereof.
The Company, and each of its directors and officers and certain other
stockholders have agreed not to offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, or announce the offering of any shares of
Class A Common Stock, including any such shares beneficially or indirectly owned
or controlled by the Company, or any securities convertible into, or
exchangeable or exercisable for, shares of Class A Common Stock, for 180 days
from the date of this Prospectus, without the prior written consent of Salomon
Brothers Inc, except for (i) shares issued in connection with any employee
benefit or
75
<PAGE>
incentive plans of the Company existing on the date of this Prospectus, (ii)
shares issued in respect of obligations existing before the date of this
Prospectus and (iii) shares in connection with the Offerings.
At the Company's request, the Underwriters have reserved up to 330,000
shares of Class A Common Stock (the "Directed Shares") for sale at the public
offering price to persons who are directors, officers or employees of, or
otherwise associated with, the Company and its affiliates and who have advised
the Company of their desire to purchase such shares of Class A Common Stock. The
number of shares of Class A Common Stock available for sale to the general
public will be reduced to the extent of sales of Directed Shares to any of the
persons for whom they have been reserved. Any shares of Class A Common Stock not
so purchased will be offered by the Underwriters on the same basis as all other
shares of Class A Common Stock offered hereby.
Certain persons engaged in the distribution of the shares of Class A Common
Stock may engage in stabilizing transactions, syndicate covering transactions
and penalty bids in accordance with Rule 104 under the Exchange Act. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of shares of Class A Common Stock in the open
market after the distributions has been completed in order to cover syndicate
short positions. Penalty bids permit an underwriter to reclaim a selling
concession from a syndicate member when the shares of Class A Common Stock
originally sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Underwriters and prospective
underwriters intend to engage in passive market making in accordance with Rule
103 under the Exchange Act, which, in general, permits entities which are Nasdaq
market makers to continue to maintain bids for the shares of Class A Common
Stock so long as certain price and daily quantity limits are observed. Such
stabilizing transactions, syndicate covering transactions, penalty bids and
passive market making may cause the price of the Class A Common Stock to be
higher than it would otherwise be in the absence of such transactions.
Prior to the Offerings, there has been no public market for the Class A
Common Stock. The initial public offering price was determined by negotiations
between the Company and the Representatives. Among the factors considered in
determining the initial public offering price were the information set forth in
this Prospectus and otherwise available to the Representatives, the history of
and future prospects for the industry in which the Company competes, the ability
of the Company's management, the general conditions of the securities market at
the time of the Offerings and the market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of the Company. There can be no assurance that the price at which the
shares of Class A Common Stock will sell in the public market after the
Offerings will not be lower than the price at which they are sold in the
Offerings by the Underwriters.
The U.S. Underwriters and the International Underwriters do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
The Class A Common Stock has been approved for quotation and trading on the
Nasdaq National Market under the symbol "MFNX".
76
<PAGE>
CERTAIN FEDERAL TAX CONSEQUENCES
The following is a general discussion of certain U.S. Federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
"Non-United States Holder" and of the issuance of the Class A Common Stock by
the Company. A "Non-United States Holder" is a person or entity that, for U.S.
Federal income tax purposes, is (i) a non-resident alien individual, (ii) a
foreign corporation or partnership, (iii) an estate, other than an estate the
income of which is includible in gross income for United States Federal income
tax purposes regardless of its source, or (iv) a trust that is not subject
either to the primary supervision of a court within the United States or the
control of a United States fiduciary.
This discussion is based on the Code and administrative interpretations as
of the date hereof, all of which may be changed either retroactively or
prospectively. This discussion does not address all aspects of U.S. Federal
income and estate taxation that may be relevant to Non-United States Holders in
light of their particular circumstances and does not address any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction.
Prospective holders should consult their tax advisors with respect to the
United States Federal, state, local and non-United States income and other tax
consequences to them of holding and disposing of Class A Common Stock.
CONSEQUENCES TO NON-UNITED STATES HOLDERS OF COMMON STOCK
DIVIDENDS
Subject to the discussion below, dividends paid to a Non-United States
Holder of Class A Common Stock generally will be subject to withholding tax at a
30% rate or such lower rate as may be specified by an applicable income tax
treaty unless the dividend is effectively connected with the conduct of a trade
or business within the United States, or, if an income tax treaty applies, is
attributable to a United States permanent establishment of the Non-United States
Holder and, in either case, the Non-United States Holder provides the payor with
proper documentation (Form 4224), in which event the dividend will be taxable
under the rules discussed below. In order to claim the benefit of an applicable
tax treaty rate, a Non-United States Holder may have to file with the Company or
its dividend paying agent an exemption or reduced treaty rate certificate or
letter in accordance with the terms of such treaty.
Under current United States Treasury regulations, for purposes of
determining whether tax is to be withheld at a 30% rate or at a reduced rate as
specified by an income tax treaty, the Company ordinarily will presume that
dividends paid to a stockholder at an address in a foreign country are paid to a
resident of such country absent knowledge that such presumption is not
warranted. However, under proposed United States Treasury regulations which have
not yet been put into effect, additional certification requirements would apply
after December 1, 1997. See "--Information Reporting Requirements and Backup
Withholding Tax."
In the case of dividends that are effectively connected with the Non-United
States Holder's conduct of a trade or business within the United States or, if
an income tax treaty applies, are attributable to a United States permanent
establishment of the Non-United States Holder, the Non-United States Holder will
generally be subject to regular U.S. income tax in the same manner as if the
Non-United States Holder were a United States resident. A Non-United States
corporation receiving effectively connected dividends also may be subject to an
additional "branch profits tax" which is imposed, under certain circumstances,
at a rate of 30% (or such lower rate as may be specified by an applicable
treaty) of the Non-United States corporation's "effectively connected earnings
and profits," subject to certain adjustments.
77
<PAGE>
GAIN ON DISPOSITION OF CLASS A COMMON STOCK
A Non-United States Holder generally will not be subject to U.S. Federal
income tax with respect to gain realized on a sale or other disposition of Class
A Common Stock unless (i) the gain is effectively connected with a trade or
business of such Non-United States Holder in the U.S., (ii) in the case of
certain Non-United States Holders who are non-resident alien individuals and
hold the Common Stock as a capital asset, such individuals are present in the
U.S. for 183 or more days in the taxable year of the disposition and either (a)
such individuals have a "tax home" (as defined for United States Federal income
tax purposes) in the U.S., or (b) the gain is attributable to an office or other
fixed place of business maintained by such individuals in the U.S., (iii) the
Non-United States Holder is subject to tax, pursuant to the provisions of U.S.
tax law applicable to certain U.S. expatriates, or (iv) the Company is or has
been a "United States real property holding corporation" within the meaning of
Section 897(c)(2) of the Code at any time within the shorter of the five-year
period preceding such disposition or such Non-United States holding period.
The Company believes that it is not currently, but may become, a United
States real property holding corporation. If the Company were to become a United
States real property holding corporation, any gain recognized by a Non-United
States Holder would be subject to United States Federal income tax if the Common
Stock were regularly traded on an established securities market for tax purposes
and the Non-United States Holder held, directly or indirectly, at any time
within the five-year period preceding such disposition more than 5% of the
outstanding Class A Common Stock.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Under United States Treasury regulations, the Company must report annually
to the Internal Revenue Service and to each Non-United States Holder the amount
of dividends paid to such holder and any tax withheld with respect to such
dividends. These information reporting requirements apply regardless of whether
withholding is required. Copies of the information returns reporting such
dividends and withholding may also be made available to the tax authorities in
the country in which the Non-United States Holder is a resident under the
provisions of an applicable income tax treaty or agreement.
United States backup withholding (which generally is withholding tax imposed
at the rate of 31% on certain payments to persons that fail to furnish certain
information under the United States information reporting requirements)
generally will not apply to (i) dividends paid to Non-United States Holders that
are subject to the 30% withholding discussed above (or that are not so subject
because a tax treaty applies that reduces or eliminates such 30% withholding) or
(ii) under current law, dividends paid to a Non-United States Holder at an
address outside of the United States. However, under proposed United States
Treasury regulations, in the case of dividends paid after December 31, 1997
(December 31, 1999 in the case of dividends paid to accounts in existence on or
before the date that is 60 days after the proposed United States Treasury
regulations are published as final regulations), a Non-United States Holder
generally would be subject to backup withholding at a rate of 31% unless certain
procedures or documentary evidence procedures, as applicable, are complied with,
directly or through an intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.
The payment of the proceeds of the disposition of Class A Common Stock to or
through the U.S. office of a broker is subject to information reporting unless
the disposing holder, under penalty of perjury, certifies its Non-United States
status or otherwise establishes an exemption. Generally, U.S. information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the payment is made outside the U.S. through a Non-United States
office of a Non-United States broker. However, information reporting
requirements (but not backup withholding) will apply to a payment of disposition
78
<PAGE>
proceeds outside the U.S. if (a) the payment is made through an office outside
the U.S. of a broker that is either (i) a U.S. person, (ii) a foreign person
which derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the U.S., or (iii) a "controlled foreign
corporation" for U.S. Federal Income tax purposes and (b) the broker fails to
maintain documentary evidence that the holder is a Non-United States Holder and
that certain conditions are met, or that the holder otherwise is entitled to an
exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
FEDERAL ESTATE TAXES
An individual Non-United States Holder who is treated as the owner of or has
made certain lifetime transfers of an interest in the Class A Common Stock will
be required to include the value thereof in his gross estate for U.S. Federal
estate tax purposes, and may be subject to U.S. Federal estate tax unless an
applicable estate tax treaty provides otherwise.
CONSEQUENCES TO THE COMPANY
LIMITATION ON USE OF NET OPERATING LOSSES
Under Section 382 of the Code, if the percentage of stock (by value) of a
corporation (the "Loss Corporation") that is owned by one or more "five-percent
shareholders" has increased by more than 50 percentage points over the lowest
percentage of stock owned by the same shareholders during a three year testing
period (an "ownership change"), the use of pre-ownership change net operating
losses of the Loss Corporation following such Ownership Change will be limited
based on the value of the Loss Corporation on the date the Ownership Change
occurs (a "Section 382 Limitation"). As of the end of its most recent taxable
year, the Company had net operating losses that are currently subject to Section
382 Limitations. Although the Company believes that the issuance of the Common
Stock should not result in an Ownership Change, future equity issuances or
transactions among shareholders may trigger an Ownership Change. If such an
Ownership Change occurs, the Company's use of its net operating losses will be
subject to a Section 382 Limitation based on the value of the Company on the
date of such an Ownership Change.
The financial statements of the Company do not reflect a provision for
Federal income taxes for the year ended December 31, 1996. A full valuation
allowance has been recorded in the financial statements against the net deferred
tax asset as its realization is uncertain.
THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS TAX ADVISOR WITH
RESPECT TO THE UNITED STATES FEDERAL INCOME TAX AND FEDERAL ESTATE TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF CLASS A COMMON STOCK, INCLUDING
THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN, OR OTHER
TAXING JURISDICTION.
LEGAL MATTERS
The validity of the Class A Common Stock and certain other legal matters in
connection with the Class A Common Stock offered hereby will be passed upon for
the Company by Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the
Americas, New York, NY 10019-6064. Certain legal matters in connection with the
Offerings will be passed upon for the Underwriters by Cravath, Swaine & Moore,
Worldwide Plaza, 825 Eighth Avenue, New York, New York.
79
<PAGE>
EXPERTS
The consolidated financial statements of Metromedia Fiber Network, Inc.
(formerly National Fiber Network, Inc.) at December 31, 1996 and for the year
then ended, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. The consolidated balance sheet of the Company as of December 31, 1995
and the related consolidated statements of operations, stockholders' deficiency
and cash flows for the twelve months then ended have been audited by M.R. Weiser
& Co. LLP, Certified Public Accountants, as stated on their report, which is
included herein upon the authority of such firm as experts in accounting and
auditing. Their report contains an explanatory paragraph regarding an
uncertainty as to the Company's ability to continue as a going concern. The
statements of operations, changes in stockholders' (deficiency) equity and cash
flows for the year ended December 31, 1994 were audited by Richard A. Eisner &
Company, LLP, independent auditors, as stated in their report dated June 5,
1995, which is included herein and in the Registration Statement, in reliance
upon such report given upon the authority of said firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of the
Exchange Act. As a result of the Offerings, the Company will be required to file
reports and other information with the Commission pursuant to the informational
requirements of the Exchange Act. The Company intends to furnish its
stockholders with annual reports containing consolidated financial statements
audited by independent certified public accountants and such other unaudited
quarterly or other interim reports as it deems appropriate.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the securities offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus, which
is a part of the Registration Statement, omits certain information, exhibits,
schedules and undertakings set forth in the Registration Statement. For further
information pertaining to the Company and the securities offered hereby,
reference is made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance, reference is made to the copy of the document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Registration Statement may be inspected without charge at the office of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement may be obtained from the Commission at prescribed rates
from the Public Reference Section of the Commission at such address and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's site on the Internet's World Wide Web,
located at http://www.sec.gov.
80
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Auditors....................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996
and June 30, 1997 (Unaudited)....................................................... F-5
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1996 and 1997 (Unaudited).................................................. F-6
Consolidated Statements of Changes in Stockholders' (Deficiency) Equity for the
years ended December 31, 1994, 1995 and 1996 and the six months
ended June 30, 1997 (Unaudited)..................................................... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and the six months
ended June 30, 1996 and 1997 (Unaudited)............................................ F-8
Notes to Consolidated Financial Statements............................................ F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Metromedia Fiber Network, Inc.
We have audited the accompanying consolidated balance sheet of Metromedia
Fiber Network, Inc. (formerly National Fiber Network, Inc.) and Subsidiary (the
"Company") as of December 31, 1996, and the related consolidated statements of
operations, stockholders' deficiency and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides 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
Metromedia Fiber Network, Inc. (formerly National Fiber Network, Inc.) and
Subsidiary as of December 31, 1996, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Ernst & Young LLP
New York, New York
April 30, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Metromedia Fiber Network, Inc.
We have audited the accompanying consolidated balance sheet of Metromedia
Fiber Network, Inc. (formerly National Fiber Network, Inc.) (a Delaware
corporation) and Subsidiary (the "Company") as of December 31, 1995, and the
related consolidated statements of operations, stockholders' deficiency and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides 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
Metromedia Fiber Network, Inc. (formerly National Fiber Network, Inc.) and
Subsidiary as of December 31, 1995, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company's significant recurring
losses, operating history and significant working capital deficiency, including
significant amounts of past due payables, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also discussed in Note 1. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.
M.R. Weiser & Co. LLP
New York, New York
June 26, 1996
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Metromedia Fiber Network, Inc. (formerly National Fiber Network, Inc.)
We have audited the accompanying statements of operations, changes in
stockholders' (deficiency) equity and cash flows of Metromedia Fiber Network,
Inc. (formerly National Fiber Network, Inc.) for the year ended December 31,
1994. 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 enumerated above present fairly, in
all material respects, the results of operations of Metromedia Fiber Network,
Inc. (formerly National Fiber Network, Inc.) and its cash flows for the year
ended December 31, 1994 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company had incurred net losses and significant
construction costs and will require additional financing. These issues raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 1.
Richard A. Eisner & Company, LLP
New York, New York
June 5, 1995
F-4
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
<S> <C> <C> <C>
1995 1996 1997
------------- -------------- --------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 5,913 $ 464,324 $ 22,893,466
Accounts receivable............................................. 182,718 180,790 354,792
Prepaid expenses................................................ 65,425 -- 261,048
------------- -------------- --------------
Total current assets.............................................. 254,056 645,114 23,509,306
Fiber optic transmission network and related equipment, net....... 5,884,679 6,368,653 6,708,854
Property and equipment, net....................................... 467,631 525,268 645,914
Franchise costs, net.............................................. 324,937 299,941 287,442
Deferred charges and other assets................................. 145,717 138,530 499,595
------------- -------------- --------------
$ 7,077,020 $ 7,977,506 $ 31,651,111
------------- -------------- --------------
------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Notes payable................................................... $ 3,850,036 $ 5,950,000 $ 500,000
Current portion of settlement agreement......................... 549,282 115,000 90,000
Accounts payable................................................ 3,364,728 5,256,929 1,151,231
Accrued expenses................................................ 1,058,705 683,227 727,794
Due to related parties.......................................... 1,589,866 119,299 --
Notes payable--private placements............................... 1,383,000 1,408,000 12,500
------------- -------------- --------------
Total current liabilities......................................... 11,795,617 13,532,455 2,481,525
Settlement agreement, net of current portion...................... 326,864 180,000 135,000
Deferred revenue.................................................. 275,034 1,107,724 9,976,492
Other............................................................. 15,243 15,243 15,243
Commitments and contingencies
Shareholders' (deficiency) equity:
Preferred stock, $.10 par value, authorized 2,000,000 shares,
150,000 shares issued and outstanding......................... -- 15,000 --
Series B convertible preferred stock $.01 par value 8,403 shares
authorized, issued and outstanding............................ -- -- 84
Common stock, $.01 par value; authorized 60,000,000 shares,
6,239,994, 10,001,310 and 9,564,940 shares issued and
outstanding, respectively..................................... 62,400 100,013 95,649
Additional paid-in capital...................................... (17,400) 8,766,506 52,904,837
Accumulated deficit............................................. (5,380,738) (15,739,435) (33,957,719)
------------- -------------- --------------
(5,335,738) (6,857,916) 19,042,851
------------- -------------- --------------
$ 7,077,020 $ 7,977,506 $ 31,651,111
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
-------------- -------------- --------------- -------------- ---------------
Revenue....................... $ -- $ 56,149 $ 236,082 $ 82,035 $ 541,886
Expenses:
Cost of sales............... -- -- 698,793 265,029 1,081,677
Selling, general and
administrative............ 874,000 3,886,568 2,070,345 1,276,853 2,186,291
Consulting and employment
incentives................ -- -- 3,652,101 3,651,442 13,419,900
Depreciation and
amortization.............. -- 161,576 612,530 292,319 372,935
-------------- -------------- --------------- -------------- ---------------
Loss from operations.......... (874,000) (3,991,995) (6,797,687) (5,403,608) (16,518,917)
Interest income -- -- -- -- 204,175
Interest expense (including
financing costs)............ -- (327,106) (3,561,010) (1,807,956) (679,427)
-------------- -------------- --------------- -------------- ---------------
Net loss...................... $ (874,000) $ (4,319,101) $ (10,358,697) $ (7,211,564) $ (16,994,169)
-------------- -------------- --------------- -------------- ---------------
-------------- -------------- --------------- -------------- ---------------
Net loss per share............ $ (0.10) $ (0.48) $ (0.87) $ (0.66) $ (1.36)
-------------- -------------- --------------- -------------- ---------------
-------------- -------------- --------------- -------------- ---------------
Weighted average number of
shares outstanding.......... 8,721,210 9,094,472 11,851,801 10,993,990 12,599,295
-------------- -------------- --------------- -------------- ---------------
-------------- -------------- --------------- -------------- ---------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
--------------------- -------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- --------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993................... 1,521,000 $ 15,210 $ (5,210) $ (187,637)
Sale of common stock......................... 4,563,000 45,630 (15,630) --
Net loss for the year........................ -- -- -- (874,000)
---------- --------- --------- --------- ----------- -------------
Balance at December 31, 1994................... 6,084,000 60,840 (20,840) (1,061,637)
Issuance of common stock as an inducement for
entering into a loan agreement............. 155,994 1,560 3,440 --
Net loss for the year........................ -- -- -- (4,319,101)
---------- --------- --------- --------- ----------- -------------
Balance at December 31, 1995................... 6,239,994 62,400 (17,400) (5,380,738)
Issuance of common stock in 1996 for legal
services rendered.......................... 491,105 4,911 902,390 --
Issuance of common stock and warrants in
conjunction with sale of Senior
Subordinated Notes in 1996................. 381,087 3,811 685,202 --
Issuance of shares to holder of Senior
Subordinated Notes in exchange for
warrants................................... 228,150 2,282 (2,282) --
Issuance of common stock in April 1996 to
extend maturity of private placement
subordinated notes......................... 59,359 594 106,728 --
Issuance of common stock in exchange for
management services........................ 1,521,000 15,210 2,744,790 --
Issuance of additional common stock to the
holder of the Senior subordinated notes in
connection with antidilution provisions.... 38,025 380 (380) --
Issuance of common stock in April 1996 and
July 1996 in connection with the exercise
of Warrants................................ 190,543 1,905 (1,905) --
Issuance of common stock to related
electrical contractor in May 1996 as
payment for services....................... 456,300 4,563 688,324 --
Issuance of common stock to majority
shareholder in May 1996 in exchange for
debt....................................... 152,100 1,521 598,479 --
Sale of common stock and warrants in June
1996....................................... 38,025 380 99,620 --
Issuance of common stock in July 1996 in
exchange for services rendered............. 12,168 122 21,078 --
Issuance of common stock for services
rendered................................... 182,520 1,825 332,975 --
Sale of common stock in September 1996....... 10,934 109 23,391 --
Issuance of warrants for legal services
rendered (to purchase 152,100 shares at
$.06 per share)............................ -- -- 200,000 --
Issuance of warrants in connection with debt
issuance (to purchase 94,302 shares at
$5.92 per share)........................... -- -- 13,640 --
Issuance of warrants in connection with debt
issuance (to purchase 190,543 shares at
$.006 per share)........................... -- -- 250,550 --
Issuance of warrants in connection with debt
issuance (to purchase 107,078 shares)...... 111,306
Sale of preferred stock with warrants in
December 1996.............................. 150,000 $ 15,000 2,010,000
Net loss for the year........................ -- -- -- (10,358,697)
---------- --------- --------- --------- ----------- -------------
Balance at December 31, 1996................... 10,001,310 100,013 150,000 15,000 8,766,506 (15,739,435)
Issuance of common stock in connection with the
exercise of warrants (unaudited)............. 152,100 1,521 8,479
Issuance of options to employees (to purchase
2,372,760 shares) (unaudited)................ 13,419,900
Issuance of warrants in connection with debt
extension (to purchase 57,682 shares)
(unaudited).................................. 220,036
Dividends (unaudited).......................... (76,562)
Repurchase and retirement of Series A preferred
stock and warrants (unaudited)............... (150,000) (15,000) (2,010,000) (13,438)
Repurchase and retirement of common stock and
warrants (unaudited)......................... (588,470) (5,885) (1,134,115)
Sale of Series B preferred stock (unaudited)... 8,403 84 32,499,916
Net loss for the period (unaudited)............ (16,994,169)
---------- --------- --------- --------- ----------- -------------
Balance at June 30, 1997 (unaudited)........... 9,564,940 $ 95,649 8,403 $ 84 $52,904,837 $(33,957,719)
---------- --------- --------- --------- ----------- -------------
---------- --------- --------- --------- ----------- -------------
<CAPTION>
TOTAL
------------
<S> <C>
Balance at December 31, 1993................... $ (177,637)
Sale of common stock......................... 30,000
Net loss for the year........................ (874,000)
------------
Balance at December 31, 1994................... (1,021,637)
Issuance of common stock as an inducement for
entering into a loan agreement............. 5,000
Net loss for the year........................ (4,319,101)
------------
Balance at December 31, 1995................... (5,335,738)
Issuance of common stock in 1996 for legal
services rendered.......................... 907,301
Issuance of common stock and warrants in
conjunction with sale of Senior
Subordinated Notes in 1996................. 689,013
Issuance of shares to holder of Senior
Subordinated Notes in exchange for
warrants................................... --
Issuance of common stock in April 1996 to
extend maturity of private placement
subordinated notes......................... 107,322
Issuance of common stock in exchange for
management services........................ 2,760,000
Issuance of additional common stock to the
holder of the Senior subordinated notes in
connection with antidilution provisions.... --
Issuance of common stock in April 1996 and
July 1996 in connection with the exercise
of Warrants................................ --
Issuance of common stock to related
electrical contractor in May 1996 as
payment for services....................... 692,887
Issuance of common stock to majority
shareholder in May 1996 in exchange for
debt....................................... 600,000
Sale of common stock and warrants in June
1996....................................... 100,000
Issuance of common stock in July 1996 in
exchange for services rendered............. 21,200
Issuance of common stock for services
rendered................................... 334,800
Sale of common stock in September 1996....... 23,500
Issuance of warrants for legal services
rendered (to purchase 152,100 shares at
$.06 per share)............................ 200,000
Issuance of warrants in connection with debt
issuance (to purchase 94,302 shares at
$5.92 per share)........................... 13,640
Issuance of warrants in connection with debt
issuance (to purchase 190,543 shares at
$.006 per share)........................... 250,550
Issuance of warrants in connection with debt
issuance (to purchase 107,078 shares)...... 111,306
Sale of preferred stock with warrants in
December 1996.............................. 2,025,000
Net loss for the year........................ (10,358,697)
------------
Balance at December 31, 1996................... (6,857,916)
Issuance of common stock in connection with the
exercise of warrants (unaudited)............. 10,000
Issuance of options to employees (to purchase
2,372,760 shares) (unaudited)................ 13,419,900
Issuance of warrants in connection with debt
extension (to purchase 57,682 shares)
(unaudited).................................. 220,036
Dividends (unaudited).......................... (76,562)
Repurchase and retirement of Series A preferred
stock and warrants (unaudited)............... (2,038,438)
Repurchase and retirement of common stock and
warrants (unaudited)......................... (1,140,000)
Sale of Series B preferred stock (unaudited)... 32,500,000
Net loss for the period (unaudited)............ (16,994,169)
------------
Balance at June 30, 1997 (unaudited)........... $ 19,042,851
------------
------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ----------- ------------ ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................... $ (874,000) $(4,319,101) $(10,358,697) $(7,211,564) $ (16,994,169)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization............. -- 161,576 612,530 292,319 372,935
Common stock issued for services.......... -- -- 5,395,132 5,248,986 13,639,936
Changes in operating assets and
liabilities:
Accounts receivable..................... -- (182,718) 1,928 7,817 (174,002)
Prepaid expenses........................ (73,000) (44,674) 65,425 2,336 (261,048)
Deferred charges and other assets....... -- (111,869) (52,495) 36,157 (255,170)
Accounts payable and accrued expenses... -- 2,417,155 1,516,723 (653,938) (4,174,932)
Due to related parties.................. 475,000 (377,243) (177,680) (1,370,632) (119,299)
Settlement agreement.................... -- 876,146 (581,146) (300,344) (70,000)
Advance payments received from
customers............................. -- 275,034 832,690 100,000 8,868,768
Other................................... (10,000) 14,877 -- -- --
---------- ----------- ------------ ----------- -------------
Net cash used in operating activities....... (482,000) (1,290,817) (2,745,590) (3,848,863) 833,019
---------- ----------- ------------ ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures on fiber optic
transmission network and related
equipment................................. (548,000) (3,709,928) (974,107) (86,456) (662,722)
Capital expenditures on property and
equipment................................. -- (476,378) (95,356) (49,427) (150,655)
Other....................................... (76,000) -- --
---------- ----------- ------------ ----------- -------------
Net cash used in investing activities....... (624,000) (4,186,306) (1,069,463) (135,883) (813,377)
---------- ----------- ------------ ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock
and warrants.............................. -- -- 2,025,000 -- 32,500,000
Proceeds from issuance of common stock...... 30,000 -- 123,500 1,409,887 10,000
Repayment of note payable................... (3,350,036) (2,850,036) (5,450,000)
Proceeds from note payable.................. -- 3,850,036 5,450,000 5,400,000
Proceeds from stockholder's note............ 1,326,000 -- -- -- --
Dividend.................................... -- -- -- -- (76,562)
Net Proceeds from notes payable--private
placements................................ -- 1,383,000 25,000 25,000 (1,395,500)
Purchase of common stock.................... -- -- -- -- (1,140,000)
Purchase of preferred stock................. -- -- -- -- (2,038,438)
---------- ----------- ------------ ----------- -------------
Net cash provided by financing activities... 1,356,000 5,233,036 4,273,464 3,984,851 22,409,500
---------- ----------- ------------ ----------- -------------
Net increase (decrease) in cash 250,000 (244,087) 458,411 105 22,429,142
Cash--beginning of period -- 250,000 5,913 5,913 464,324
---------- ----------- ------------ ----------- -------------
Cash--end of period......................... $ 250,000 $ 5,913 $ 464,324 $ 6,018 $ 22,893,466
---------- ----------- ------------ ----------- -------------
---------- ----------- ------------ ----------- -------------
</TABLE>
See accompanying notes.
F-8
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS AND LINE OF BUSINESS
Metromedia Fiber Network, Inc. (formerly National Fiber Network, Inc.) and
its subsidiary, National Fiber Network of New Jersey, Inc. (the "Company"), was
a development stage company for the period from inception (April 8, 1993)
through October 1995. Effective December 20, 1993, the Company was granted a
nonexclusive right from the City of New York to provide telecommunication
services and construct a fiber optic network for the purpose of providing these
services. In October 1995, the basic backbone of the Fiber Optic Cable Network
was completed and the Company began servicing its customers.
The Company incurred significant costs in connection with the construction
of the initial backbone of the fiber optic network and expects to continue to
incur more costs when the Company extends its network construction.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company.
All material intercompany balances and transactions have been eliminated in
consolidation.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Since inception,
the Company has suffered significant recurring losses and, as of December 31,
1996, the Company had a working capital deficiency of approximately $12,887,000
and a stockholders' deficiency of approximately $6,858,000. Further, at December
31, 1996, substantially all of its trade payables and certain current
liabilities were past due. In addition, the Company was not in compliance with
certain debt and settlement agreements. These factors, raised substantial doubt
about the Company's ability to continue as a going concern. On April 30, 1997
the Company sold 8,403.325 shares of Series B preferred shares in exchange for
$32,500,000 in cash. A portion of the cash was used to satisfy the
aforementioned obligations. Management believes that these funds are sufficient
to meet the Company's obligations for at least the next year.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECOGNITION OF REVENUE
The Company recognizes revenue on telecommunications services ratably over
the term of the applicable agreements with customers.
F-9
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE
Deferred revenue represents prepayments received from customers for future
use of the Company's fiber optic network.
ORGANIZATION COSTS
Costs incurred in connection with the organization of the Company were
capitalized and are being amortized over five years on a straight-line basis.
CONSULTING AND EMPLOYMENT INCENTIVES
The amounts represent the value of common stock, warrants and options issued
to consultants and officers of the Company as incentive for the consultants and
officers to provide services to the Company.
The 1997 amounts represent the value of options to purchase 2,372,760 shares
of the Company's common stock issued in 1997 to executive officers of the
Company. The options have been valued in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" at the difference between the
exercise price of the options and the fair market value of the Company's common
stock.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations in
accounting for its stock options.
FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
The fiber optic transmission network and related equipment are stated at
cost. Various costs are capitalized during the installation and expansion of the
network. Depreciation is computed using the straight-line method through the
expiration date of the franchise agreement, December 20, 2008.
LONG LIVED ASSETS
In fiscal 1996, the Company adopted SFAS No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. No such impairment
indicators have been identified by the Company.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line and accelerated cost recovery methods over the shorter of the
estimated useful lives of the assets or the term of the lease.
ACCRUED EXPENSES
Accrued expenses includes accrued interest of approximately $124,000,
$683,000 and $262,900 as of June 30, 1997, December 31, 1996 and 1995
respectively.
The Company incurred accrued capital expenditures on fiber optic
transmission network and related equipment of $1,281,000 during 1994.
F-10
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FRANCHISE COSTS
Amortization of franchise costs began upon commencement of service to
customers and is computed on the straight-line method through December 20, 2008
(159 months), the expiration date of the franchise agreement.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets, if any, for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are provided when the expected realization of tax assets does not
meet a more likely than not criterion.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with an original maturity of three
months or less when purchased to be cash equivalents.
RECAPITALIZATION
In April 1997, the Company increased its authorized common stock of $.01 par
value to 60,000,000 shares; in addition, authorized preferred stock with a par
value of $.01 was increased to 2,000,000 shares.
On February 17, 1995, the Company effected a 4,000 for one stock split of
its outstanding shares of common stock. The financial statements give
retroactive effect to this stock split.
On April 29, 1997, the Company effected a 3 for one stock split of its
outstanding shares of common stock. The financial statements give retroactive
effect to this stock split.
In September 1997, the Company effected a .507 for 1 reverse stock split.
The financial statements give retroactive effect to this stock split.
EARNINGS PER SHARE
Net loss per share computations are based upon net loss divided by the
weighted average number of shares of common stock outstanding during the
respective periods. The weighted average number of common shares outstanding
have been calculated in accordance with Staff Accounting Bulletin 83 ("SAB 83")
of the Securities and Exchange Commission. SAB 83 requires that shares of common
stock and options issued one-year prior to the initial filing of a registration
statement relating to an initial public offering at amounts below the public
offering price be considered outstanding for all periods presented in the
Company's registration statement. In computing the effect of stock options,
using the treasury stock method, the Company assumed that the market value of
the stock was $15.00 per share.
UNAUDITED INFORMATION
The unaudited financial statements at June 30, 1997 and for the six months
ended June 30, 1996 and 1997 reflect adjustments, all of which are of a normal
recurring nature, which are, in the opinion of
F-11
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
management, necessary to a fair presentation. The results for the interim
periods presented are not necessarily indicative of full year results.
2. FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
Fiber optic transmission network and related equipment consist of the
following:
<TABLE>
<CAPTION>
1995 1996 JUNE 30, 1997
------------- ------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Engineering and layout costs....................................... $ 3,058,917 $ 3,243,448 $ 3,297,683
Material--fiber optic cable........................................ 975,815 1,219,067 985,740
Electrical installation costs...................................... 407,642 407,642 407,642
Headends........................................................... 363,343 363,343 363,343
Fiber optic cable installation costs............................... 802,886 1,230,041 1,637,151
Other.............................................................. 389,243 508,412 945,475
------------- ------------- --------------
5,997,846 6,971,953 7,637,034
Less accumulated depreciation...................................... (113,167) (603,300) (928,180)
------------- ------------- --------------
$ 5,884,679 $ 6,368,653 $ 6,708,854
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30
1995 1996 1997 USEFUL LIFE
----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Furniture and equipment.................................. $ 6,452 $ 42,776 $ 190,165 5 years
Leasehold improvements................................... 469,926 528,958 532,225 174 months
----------- ----------- ------------
476,378 571,734 722,390
Less accumulated depreciation and amortization........... (8,747) (46,466) (76,476)
----------- ----------- ------------
$ 467,631 $ 525,268 $ 645,914
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
4. RELATED PARTY TRANSACTIONS
In connection with the installation of the Company's fiber optic network,
the Company engaged the services of an electrical contractor controlled by the
Company's majority shareholder. During 1995 the Company incurred charges for
labor and materials of $692,887. As of December 31, 1995, $692,887 was owed to
this related company. In May 1996, the Company and the assignee of this related
party entered into an agreement whereby the full amount of this indebtedness was
satisfied by the issuance of 456,300 shares of the Company's common stock. The
value of the stock was based upon the invoices rendered for services performed
based upon negotiations between the Company and the electrical contractor.
The Company's majority shareholder made loans to the Company which at
December 31, 1994 totaled $1,967,109. In April 1995 the majority shareholder of
the Company agreed to contribute to the Company's capital $1.7 million of
amounts due to him. By agreement between the Company and the
F-12
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
majority shareholder in May 1996 the transaction was rescinded. During 1995, the
Company made repayments (net of additional advances) of $1,070,130. As of
December 31, 1995, the Company owed the majority shareholder $896,979. Pursuant
to an agreement dated May 21, 1996, the Company issued 152,100 shares of its
common stock to the majority shareholder in consideration for the cancellation
of $600,000 of the outstanding balance. In May 1997, the remaining balance of
the note was repaid in full.
In March and June 1997, the Company entered into two one year leases for
office space with an affiliate. Rent expense charged to operations under such
leases was approximately $33,000 for the period ending June 30, 1997.
5. NOTES PAYABLE
Notes payable-other consists of the following:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Tomen America, Inc............................................................... a) $ 2,850,036 $ --
Stockholder note................................................................. b) 500,000 --
AT&T Wireless.................................................................... c) 500,000 500,000
U.S. One Communications.......................................................... d) -- 4,900,000
Sterling Capital Bridge Loan..................................................... e) -- 550,000
------------- -------------
$ 3,850,036 $ 5,950,000
------------- -------------
------------- -------------
</TABLE>
a) On April 27, 1995, the Company entered into a bridge financing agreement
with Tomen America, Inc. ("Tomen"). The agreement provided for maximum
aggregate borrowings of $2,500,000 consisting of the following: (i) working
capital advances of $1,500,000, and (ii) equipment and materials procurement
of $1,000,000. A supplemental agreement executed on July 11, 1995 increased
these limits to $1,800,000 and $1,050,000, respectively, for an aggregate
line of credit of $2,850,000. As of December 31, 1995, the Company had
outstanding borrowings aggregating $2,850,036.
All amounts advanced under this agreement were scheduled to mature on April
26, 1996 and bore interest at a rate equal to Tomen's base lending rate plus
1.75%. The outstanding balance was collateralized as follows: (i) a security
interest in the assets of the Company, (ii) a pledge of shares of common
stock of the Company personally owned by the Company's president, and (iii)
the personal guaranty of the Company's president.
The agreement also provided for the Company to reimburse Tomen for certain
transaction expenses. As of December 31, 1995, a total of $152,604 of such
costs was included in accrued expenses.
On April 16, 1996, the Company repaid the entire principal balance, all
accrued and unpaid interest, and all expenses concurrent with the execution
of the refinancing agreement with U.S. One Communications.
b) On March 16, 1995, the Company entered into a loan agreement with one of the
Company's directors for $500,000 bearing interest at 10% per annum, due on
March 16, 1996. As an inducement for entering into this loan agreement, the
Company issued 155,994 shares of common stock. This share issuance was
recorded at an amount equal to the value of the discounted interest rate
F-13
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
5. NOTES PAYABLE (CONTINUED)
that the note bears over the term of the loan, or $5,000. This loan was
collateralized by 38 shares of the Company's common stock owned by the
Company's president, and was personally guaranteed by the president. This
loan and all accrued interest was fully repaid in March 1996.
c) On April 18, 1995, the Company entered into a loan agreement with AT&T
Wireless for $500,000 bearing interest at 11% per annum, originally due 120
days from the date of this loan. Pursuant to a supplemental agreement dated
January 12, 1996, the parties agreed to extend the maturity date of this
loan to November 18, 1996. Pursuant to a second supplemental agreement dated
March, 1997 the parties agreed to extend the maturity date to June 30, 1997.
In July 1997 the note was repaid in full.
On February 16, 1995, the Company issued to this party a warrant entitling
the holder to purchase a total of 669,167 shares of the Company's common
stock. This warrant, was canceled and replaced by a new warrant issued on
February 13, 1997 for 456,300 of non assessable shares of common stock at a
purchase price of $4.85 per share. The new warrant expires on February 13,
2000.
d) On April 16, 1996, the Company entered into an agreement with U.S. One
Communications ("U.S. One") for the exclusive usage rights for 8 to 12
fibers on the Company's fiber optic transmission network. The initial term
of the agreement was for a period beginning April 1996 and expiring December
2008. The agreement was renewable, at the option of U.S. One, for an
extended term of 13 years expiring December 2021. Concurrent with the
execution of the original agreement, the Company and U.S. One entered into a
bridge financing agreement. This was done for the purpose of refinancing the
Company's existing indebtedness to Tomen America and to obtain additional
funding until the construction borrowing arrangement was secured. In
connection with this agreement, the Company borrowed $4,900,000 from U.S.
One, of which $3,227,867 was immediately used to repay all amounts owed to
Tomen America as of April 16, 1996.
On April 30, 1997 the Company amended this agreement which allows U.S. One
to have the exclusive right to use 888 fiber miles of the network.
Additionally, pursuant to the amended agreement, U. S. One received an
option to acquire from the Company up to 1,620 additional fiber miles upon
payment of a predetermined amount. In accordance with the amended agreement
the following occurred: (i) all interest accrued from the inception of the
bridge loan to the closing date of the agreement was waived by U.S. One, and
(ii) the $4,900,000 principal balance of the loan was offset against the
$3,530,000 scheduled payment due from U.S. One to the Company under the
amended lease agreement. (iii) the Company paid to U.S. One the difference
of $1,370,000 on April 30, 1997 with proceeds from the Metromedia
transaction.
F-14
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
5. NOTES PAYABLE (CONTINUED)
In connection with the execution of the aforementioned lease and bridge
financing agreements, the Company entered into a letter agreement with U.S.
One providing for the sale of a warrant to purchase common stock of the
Company. Under this arrangement, the warrant is exercisable for a number of
shares to be determined at the Company's discretion subject to a minimum
number of 76,050 shares and a maximum number of 456,300 shares. The per
share exercise price is to be determined pursuant to a formula, but in no
event shall the aggregate purchase price exceed $1,250,000.
e) On September 24, 1996, the Company entered into a loan agreement with
Sterling Capital ("Sterling") for $550,000. The loan bears interest at 10%
per annum and matures on March 1, 1997. The loan was secured by all of NFN's
assets and was subordinated to the aforementioned U.S. One loan. As an
incentive for the loan, NFN issued to Sterling warrants to purchase 94,302
shares of common stock at an exercise price of $5.92. The warrants can be
exercised on the later of (i) the third anniversary or (ii) twelve months
after the Company has completed a public offering. On May 1, 1997 the
Company repaid the loan in full and all accrued interest with proceeds from
the sale of convertible preferred stock to Metromedia.
6. SENIOR SUBORDINATED NOTES
On February 13, 1996, the Company entered into an investment agreement with
an individual (the "Investor") pursuant to which the Company borrowed $1,000,000
in consideration for the issuance of 12% senior subordinated promissory notes
maturing on November 1, 1996. The notes are guaranteed personally by the
Company's president. The notes are convertible at a price of $2.62 per unit for
each $1,000 of principal outstanding. Each unit consists of the following: (i)
one share of stock, and (ii) one warrant to purchase one share of stock at $5.27
per share. As an inducement for entering into the investment agreement, the
Company issued to the investor the following: (i) 381,087 fully paid shares of
common stock, and (ii) a warrant to purchase 381,087 shares of common stock at
$5.27 per share, exercisable for a five year period beginning August 15, 1997
and expiring August 15, 2002. The Company recorded non-cash charges of $689,013
for such issuances.
On March 19, 1996, a supplemental investment agreement was executed with the
same investor providing for an additional advance of $500,000 with the same
maturity date, interest rate, conversion rights, and guaranty features as the
initial $1,000,000 investment. This advance was subsequently repaid, along with
interest on April 16, 1996. In connection with this supplemental agreement, the
Company issued a warrant to purchase 190,543 shares of common stock at $5.27 per
share, exercisable for a five year period beginning August 15, 1997 and expiring
August 15, 2002. The Company also issued a warrant to purchase an additional
190,543 shares at $0.006 per share (the "Penny Warrants"), exercisable for a
period beginning August 15, 1997 and expiring August 15, 2002. The Company
recorded a noncash charge of $250,550 for such issuance.
On April 11, 1996, a memorandum of understanding was entered into between
the parties pursuant to which the warrants issued on February 13, 1996 to
purchase 381,087 shares at $5.27 per share and the warrants issued on March 19,
1996 to purchase 190,543 shares at $5.27 per share were surrendered
F-15
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
6. SENIOR SUBORDINATED NOTES (CONTINUED)
by the investor to the Company in consideration for the issuance of 228,150
shares of the Company's common stock.
In April and July 1996, the investor purchased 152,100 and 38,443 shares of
common stock, respectively, at $.006 per share in connection with an exercise of
the Penny Warrants. The Company granted the investor the right to exercise prior
to the stated exercise period.
Further, in accordance with the investment agreement an additional 38,025
shares of common stock was issued to the investor in compliance with the
anti-dillutive requirements in the agreement.
7. NOTES PAYABLE--PRIVATE PLACEMENTS
a. In August 1995, the Company initiated a $600,000 private offering of
subordinated notes. These notes were scheduled to mature in March 1996 and
bear interest at an annual rate of 15%, payable quarterly in arrears.
Concurrent with the issuance of these notes, warrants were issued by the
Company to the noteholders which were exercisable for common shares of the
Company in an amount equal to 0.7% of the outstanding shares of common stock
immediately following an initial public offering of the Company's common
stock, at an exercise price equal to 60% of the initial public offering
price. These warrants are exercisable over a three-year period beginning on
the effective date of such initial public offering.
In April 1996, the Company offered the warrantholders fully paid shares of
common stock equal to 0.7% of the common stock then issued and outstanding,
in exchange for the surrender and cancellation of the outstanding warrants,
and in consideration for the extension of the maturity date of the notes
through June 30, 1996. In 1996 the Company repaid $50,000 of the private
placement debt. All of the warrantholders accepted this offer and,
accordingly, the Company issued a total of 59,359 shares of the Company's
common stock. The Company recorded a noncash charge of $107,322 in
connection with such issuance.
b. In October 1995, the Company initiated a private offering of $858,000 of
convertible subordinated notes. Through December 31, 1995, $783,000 of
convertible notes were sold pursuant to this offering, and an additional
$75,000 of notes were sold during January and February of 1996. These notes
were scheduled to mature during the period October 1996 through February
1997 and bear interest at an annual rate of 15%, payable at maturity. The
notes are convertible, at the Company's option, at any time into shares of
common stock at a rate of 1.52 shares of common stock per $1,000 of note
principal, at a conversion price equal to 60% of the per share price of an
initial public offering of the Company's common stock. Concurrent with the
issuance of these notes, warrants were issued by the Company to the
noteholders which are exercisable at a rate of 15,210 shares of common stock
per $100,000 of note principal. Such warrants, entitling the holders to
purchase an aggregate of 130,502 shares, are exercisable at a price equal to
50% of the per share price of an initial public offering of common stock
over a three-year period beginning on the effective date of such initial
public offering.
c. In December 1996, the Company offered the Private Placement Noteholders
Common Stock Purchase Warrants to purchase 107,078 shares of its common
stock exercisable at one half of the price for which shares are sold in an
initial public offering for a period of three years following such
F-16
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
7. NOTES PAYABLE--PRIVATE PLACEMENTS (CONTINUED)
offering; in exchange for the extension of the due dates of the notes. All
of the noteholders accepted this offer and accordingly, the Company recorded
a non cash charge of $111,306.
8. SETTLEMENT AGREEMENTS
In February 1996, the Company entered into a settlement agreement with the
Company's former chief financial officer regarding the termination of such
officer's services. This agreement provided for the Company to make payments to
the officer totaling $1,003,000, including interest. The former officer's
services effectively terminated prior to December 31, 1995. Accordingly, as of
December 31, 1995, the Company recorded $876,146 as a liability in accordance
with the terms of the settlement agreement.
The settlement agreement also reaffirmed the option previously issued to
this former officer on May 1, 1995, which entitles the holder to purchase
207,883 shares of the Company's common stock at $.006 per share through February
1, 1999. In 1997 the Company repurchased and retired the warrant.
On November 14, 1996, the Company amended the above referenced settlement
agreement with the former officer, whereby a consultant to the Company agreed to
purchase common stock of the Company from the former officer and certain of his
affiliates in exchange for $640,000 and the complete satisfaction of the
aforementioned liability.
On February 11, 1997, the Company entered into an agreement (the
"Agreement") with a consultant/director. Pursuant to the Agreement the Company
agreed to pay the consultant/director a fee of $250,000 in full and complete
payment for all services provided to the Company by the consultant/ director and
for any fees or compensation due to the consultant/director resulting from any
prior agreements with the Company, and the consultant/director agreed to release
the Company from any claims against the Company.
9. STOCK ISSUED TO LEGAL COUNSEL
On January 12, 1996, the Company entered into an agreement with its legal
counsel which calls for the issuance by the Company of common stock as
additional consideration for legal services provided. Pursuant to this
agreement, and the subsequent amendment dated April 16, 1996, the Company issued
a total of 491,105 shares during March and April of 1996. Management has
estimated that the value of the 491,105 shares issued is equal to $907,301 and
has recorded a noncash charge in connection with such issuance.
10. STOCK TRANSACTIONS
COMMON STOCK
In June 1996, the Company sold a total of 38,025 shares of common stock to
two individuals for total proceeds of $100,000. Concurrent with the issuance of
these shares, warrants were issued by the Company to these shareholders
entitling the holders to purchase a total of 38,025 shares at $2.62 per share
for a three year period. In the event of an initial public offering of the
Company's common stock during the exercise period, the exercise price will be
reduced to the lesser of $2.62 or 50% of the per share price of the initial
public offering.
F-17
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
10. STOCK TRANSACTIONS (CONTINUED)
In July 1996, the Company issued 12,168 shares of common stock as
consideration for consulting services. The Company recorded a noncash charge of
$21,200 for such issuance. In addition, the Company issued 150,579 shares to
three employees for services rendered. The transaction was later rescinded and
the shares were returned to the Company.
In August 1996, the Company issued 182,520 shares of common stock for
consulting services. The Company has recorded a noncash charge of $334,800 for
such issuance.
In September 1996, the Company sold 10,934 shares of common stock to three
individuals for total proceeds of $23,500.
On April 15, 1996, the Company entered into a stock purchase agreement with
Vento & Company of New York, LLC ("VCNY"). Pursuant to this agreement, the
Company issued 1,521,000 shares of common stock to VCNY as consideration for
services provided by VCNY. The Company estimated the value of the stock issued
approximated $2,760,000.
Concurrent with the execution of the aforementioned stock purchase
agreement, the parties entered into a consulting agreement. The term of the
agreement was from April 15, 1996 to April 15, 2001. Under the terms of the
agreement, VCNY was to provide guidance and advice with respect to the
management of the day-to-day operations of the Company's fiber optic
transmission network. In consideration for such services, the Company reimbursed
VCNY for all reasonable personnel and travel costs incurred by VCNY with respect
to the performance of these services.
On October 9, 1996 (the "execution date") the Company entered into a
settlement agreement with the Company's former chief executive officer and VCNY
regarding the termination of such officer's employment and services provided by
VCNY. The agreement provided for VCNY to deliver a total of 1,521,000 shares of
common stock in exchange for payments made by the Company. The payments were not
made and the sale of the shares and the Company's obligation to buy the shares,
was deemed null and void.
On October 28, 1996, a shareholder granted to the Company's Chairman of the
Board an option to purchase 399,889 shares of Common Stock of the Company for an
aggregate exercise price of $500,000. By letter dated December 3, 1996, the
option was amended to reduce the number of option shares to 323,839 shares. The
option was thereafter assigned by the Chairman to the Company. On February 11,
1997, the Company exercised the option by payment of the sum of $500,000 to the
shareholder.
STOCK WARRANTS
In June 1996, the Company granted 152,100 common stock purchase warrants to
the Company's legal counsel exercisable at $.07 per share for a period of four
years as additional consideration for legal services provided. The Company has
recorded a noncash charge of $200,000 for such issuance.
In September 1996, the Company granted 94,302 common stock purchase warrants
to Sterling at an exercise price of the lesser of $5.92 per share, the price at
which the Company shall issue its securities in the future less $5.92, or one
half the price at which the common stock of the Company is offered in an initial
public offering exercisable on the later date of September 24, 1999 or twelve
months
F-18
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
10. STOCK TRANSACTIONS (CONTINUED)
and 90 days after the date the warrant shares have been covered by a
registration statement. The Company has recorded a noncash charge of $13,640 for
such issuance.
In December 1996, the Company offered the private placement noteholders
Common Stock purchase warrants to purchase 107,078 shares of common stock
exercisable at one half of the price for which shares are sold in an initial
public offering for a period of three years following such offering, in exchange
for the extension of the due dates of the notes. All of the noteholders accepted
this offer and accordingly, the Company recorded a noncash charge of $111,306.
In March 1997 the Company issued purchase warrants to private placement
noteholders to purchase 57,682 shares of common stock exercisable at one half of
the price for which shares are sold in an initial public offering for a period
of three years following such offering in exchange for the extension of the due
dates of the notes. The Company has recorded a noncash charge of $220,036 for
such issuance.
As of December 31, 1996 the Company has reserved approximately 2,129,400
shares of its common stock for exercise of warrants, contingent warrants and
conversion of debt.
On December 13, 1996, the Company issued and sold to Penny Lane Partners,
L.P. ("Penny Lane"), for aggregate cash consideration of $2,025,000, (i) 150,000
shares of 10% cumulative convertible preferred stock (the "Series A Preferred
Stock") bearing dividends at a rate of $1.35 per share per annum, (ii) warrants
to purchase 114,075 shares of Common Stock at an exercise price of $4.93 per
share (the "Penny Lane Warrants") and (iii) a contingent stock subscription
warrant to purchase a number of shares of Common Stock (such number to be
determined based on certain future events) at an exercise price of $0.02 per
share (the "Contingent Warrants"). In March 1997, Penny Lane agreed to permit
the Series A Preferred Stock and the contingent Warrants to be redeemed at an
aggregate redemption price of $2,115,000 (which includes accrued but unpaid
dividends on the Series A Preferred Stock) and in connection therewith the
number of Penny Lane Warrants was increased from 114,075 to 228,150.
STOCK OPTIONS
In February and April 1997, the Company granted to certain executives
options to purchase up to 2,372,760, shares of its Common Stock. The options
have an exercise price of $1.97 per share and expire on April 2007. The Company
has recorded a noncash charge of $13,419,900 for such issuance.
11. INCOME TAXES
There was no provision for federal or state income taxes for the years ended
December 31, 1994, 1995 and 1996. At December 31, 1996, the Company has
approximately $10,000,000 of net operating loss carryforwards, expiring in the
years 2009 through 2011. The Company has recorded a full valuation allowance
against the deferred tax asset as its realization is uncertain.
F-19
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
12. COMMITMENTS AND CONTINGENCIES
a. The Company entered into a franchise agreement with the City of New York on
December 20, 1993, whereby the Company was granted a nonexclusive franchise
to install, operate, repair, maintain and replace cable, wire, fiber or
other transmission medium and the related equipment and facilities on, over
and under the property of the City of New York. In exchange, the Company is
obligated to pay franchise fees commencing on the completion date of the
initial backbone of the fiber optic cable network through December 20, 2008.
In connection with the agreement, among other requirements, the Company
maintains a performance bond in the amount of approximately $1,750,000 and
has provided the City with a $500,000 letter of credit as a security fund.
Franchise fees are based on a percentage of the Company's gross sales: 10%
for the first and second years, 6% for the third year and 5% for the fourth
and each year thereafter. However, during each year of the term, the
franchise fee shall be no less than $200,000.
Franchise fees charged to operations in connection with this agreement
amounted to $200,000 in both 1996 and 1995 ($100,000 for the six months
ending June 30, 1996 and 1997).
b. The Company entered into a license agreement with Jersey City, New Jersey on
July 10, 1995, whereby the Company was granted a license to construct a
fiber-optic system within Jersey City. The term of this agreement continues
until written notice of termination is given by either party.
c. The Company entered into a conduit occupancy agreement with New York
Telephone Company in May 1993, whereby the Company was granted a right to
place and maintain cable facilities in the conduit system of New York
Telephone Company. The term of this agreement is for one year from the date
of the agreement and thereafter until three months after written notice of
termination is given by either party.
The Company also has the right to place and maintain cable facilities in the
conduit system of Empire City Subway Company, Ltd., by virtue of the
franchise agreement with the city of New York.
Occupancy fees charged to operations in connection with this agreement were
approximately $152,000 for the year ending December 31, 1996.
d. The Company leases its office facility under an operating lease expiring on
March 31, 2010.
Rent expense charged to operations was approximately $158,000 and $148,000
for the years ending December 31, 1996 and 1995.
e. On June 1, 1995, the Company entered into two lease agreements with the Port
Authority of New York and New Jersey, whereby the Company was granted a
nonexclusive right to lease two ducts in the North and South tubes of the
Holland Tunnel to install, maintain, operate and provide telecommunications
equipment for its customers. The term of these agreements is for ten years
through June 1, 2005.
Lease expense charged to operations in connection with these leases was
approximately $107,000 and $63,000 for the years ending December 31, 1996
and 1995.
f. On August 11, 1995, the Company entered into a service agreement with an
unrelated party, for the maintenance of the Company's telecommunication
equipment located in Jersey City. The term of
F-20
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
this agreement is for one year with an option to renew this agreement
annually for up to five consecutive one year renewal terms.
g. Approximate minimum annual franchise, license, lease and service fees and
conduit payments under the aforementioned agreements are as follows:
<TABLE>
<S> <C>
For the year ended December 31:
1997................................. $ 644,500
1998................................. 644,500
1999................................. 644,500
2000................................. 635,500
2001................................. 464,500
Thereafter........................... 3,352,500
-----------
$ 6,386,000
-----------
-----------
</TABLE>
h. A former investment advisor to the Company has made a claim in the amount of
$305,731 pursuant to an agreement made on June 27, 1995, for the payment of
certain fees and expenses. The Company has rejected the claim based on the
failure of the investment advisor to properly perform its services and
fiduciary duties. Accordingly, the Company has not made provision in the
consolidated financial statements for this claim.
i. On or about April 18, 1997, Howard Katz, Realprop Capital Corp. and Evelyn
Katz commenced an action against, among others, the Company, Stephen A.
Garofalo, Peter Sahagen and Peter Silverman in the United States District
Court for the Southern District Court of New York captioned KATZ, ET AL. v.
NATIONAL FIBER NETWORK, INC., ET AL., No. 97 Civ. 2764 (JGK) (the "Katz
Litigation"). (National Fiber Network, Inc. is the former name of the
Company). On May 28, 1997, the plaintiffs filed an amended complaint and on
September 15, 1997 the plaintiffs filed a second amended complaint. The
amended complaint alleges causes of action for, among other things, common
law fraud, violations of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder, breach of fiduciary duty and
negligent misrepresentation for alleged misrepresentations and omissions
made in connection with the repurchase of the Katz Securities (as defined
below under "Certain Relationships and Related Transactions"). The amended
complaint also contains allegations of corporate waste against the Company
and Mr. Garofalo. Plaintiffs seek, among other things, compensatory damages
of not less than $12 million, punitive damages in the amount of $100 million
and, in the alternative, rescission of the purchase by the Company of the
Common Stock and Warrants. On June 11, 1997, various defendants, including
the Company and Stephen A. Garofalo moved to dismiss the amended complaint.
The Company intends to vigorously defend itself against these allegations
based on its belief that MFN acted appropriately in connection with the
matters at issue in this litigation. No assurance can be made, though, that
the Company will not determine that the advantages of entering into a
settlement outweigh the risks and expense of protracted litigation or that
ultimately the Company will be successful in its defense of the allegations.
If the Company is unsuccessful in its defense of the allegations, an award
of the magnitude being sought by the plaintiffs in the Katz litigation would
have a material adverse effect on the Company's financial condition or
results of operations.
F-21
<PAGE>
METROMEDIA FIBER NETWORK, INC. (FORMERLY NATIONAL FIBER NETWORK, INC.) AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND EACH OF THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition, the Company is subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, the
Company believes that none of such current claims, or proceedings,
individually or in the aggregate, including the Katz Litigation, will have a
material adverse effect on the Company's financial condition or results of
operations, although there can be no assurances in this regard.
13. METROMEDIA TRANSACTIONS
Through April 30, 1997, Metromedia loaned the Company an aggregate of
$4,000,000. On April 30, 1997, the Metromedia Loan was repaid with a portion of
the proceeds from the Metromedia Investment. The Metromedia Loan bore interest
at the prime rate announced by The Chase Manhattan Bank and was convertible into
Common Stock based on a formula if the principle and interest was not repaid in
full by August 31, 1997.
A portion of the proceeds from the Metromedia Loan were used to fund an
escrow account which repurchased on behalf of the Company, 588,470 shares of
Common Stock and warrants to purchase 207,883 shares of Common Stock. Pursuant
to an escrow arrangement, such securities were pledged to Metromedia as security
for the Loan.
On April 30, 1997, the Company sold an aggregate of 8,403.325 shares of
series B convertible preferred stock to Metromedia and affiliates, for an
aggregate purchase price of $32.5 million, (the "Metromedia Investment").
The proceeds from the Metromedia Investment were used to redeem the Series A
Preferred Stock and Contingent Warrants ($2,115,000), repay the Metromedia Loan
and accrued interest thereon ($4,058,127), and repay other short-term
indebtedness ($3,485,000). Upon repayment of the Metromedia Loan, the
repurchased shares were released from escrow and delivered to the Company.
F-22
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
Access Charge:............................... The fees paid by long distance carriers to
LECs for originating and terminating long
distance calls on the LECs' local networks.
Analog Transmission:......................... A way of sending voice, video and data
signals electronically in which the
transmitted signal is analogous to the
original signal.
ATM (Asynchronous Transfer Mode):............ An information transfer standard that is one
of a general class of packet technologies
that relay traffic by way of an address
contained within the first five bytes of a
standard fifty-three-byte-long packet or
cell. The ATM format can be used by many
different information systems, including
local area networks to deliver traffic at
varying rates, permitting a mix of voice,
data and video (multimedia).
Backbone:.................................... The backbone is the part of the
telecommunications network which carries the
most traffic. It is the through-portion of a
transmission network, as opposed to spurs
which branch off the though-potions.
Bandwidth:................................... The range of analog frequencies or digital
signals that can be passed through a
transmission medium, such as fiber optic
cable. The greater the bandwidth, the greater
the information carrying capacity. Bandwidth
is measured in Hertz (analog) or Bits Per
Second (digital).
Bit:......................................... A contraction of the term Binary Digit, it is
the basic unit in data communications. Bits
are typically represented by ones or zeros.
Capacity:.................................... The information carrying ability of a
telecommunications facility.
Central Office:.............................. Telephone company facility where subscribers'
lines are joined to switching equipment for
connecting other subscribers to each other,
locally and long distance.
Channel:..................................... A path of communication either electrical or
electromagnetic, between two or more points.
Also called a circuit, facility, line, link,
or path.
</TABLE>
G-1
<PAGE>
<TABLE>
<S> <C>
CLEC (Competitive Local Exchange Carrier):... A company that competes with local exchange
carriers in the local services market.
Coaxial Cable:............................... A cable composed of an insulated central
conducting wire wrapped in another
cylindrical conducting wire. It is typically
used to carry high-speed data.
Collocation:................................. Collocation refers to the physical location
of a telecommunication carrier's switch in
the ILECs premises to facilitate the
interconnection of their respective switching
equipment.
Common Carrier:.............................. A government defined group of private
companies offering telecommunications
services or facilities to the general public
on a non-discriminatory basis.
Conduit:..................................... A pipe, usually made of metal, ceramic or
plastic, that protects buried cables.
Dark Fiber:.................................. Fiber optic cable without any of the
electronic or optronic equipment necessary to
use the fiber for transmission.
Digital:..................................... Describes a method of storing, processing and
transmitting information through the use of
distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital
transmission/switching technologies employ a
sequence of discrete, distinct pulses to
represent information, as opposed to the
continuously variable analog signal.
DS-3:........................................ DS is the standard telecommunications
industry designation of a hierarchy of
digital signal speeds used to classify
capacities of lines and trunks. DS-3 service
has a bit rate of approximately 45 megabits
per second and can transmit roughly 672
simultaneous voice conversations.
FCC (Federal Communications Regulatory body established pursuant to the
Commission):............................... Communications Act of 1934; it has the
authority to regulate all interstate
communications originating in the United
States.
Fiber Miles.................................. The number of strands of fiber in a length of
fiber optic cable multiplied by the length of
the cable in miles.
</TABLE>
G-2
<PAGE>
<TABLE>
<S> <C>
Fiber Optics:................................ A technology in which light is used to
transport information from one point to
another. Fiber optic cables are thin
filaments of glass through which light beams
are transmitted over long distances carrying
enormous amounts of data. Modulating light on
thin strands of glass produces major benefits
in high-bandwidth, relatively low cost, low
power consumption, small space needs, total
insensitivity to electromagnetic interference
and great insensitivity to being bugged.
Frame Relay.................................. A high-speed, data-packet switching service
used to transmit data between computers.
Frame Relay supports data units of variable
lengths at access speeds ranging from 56
kilobits per second to 1.5 megabits per
second. This service is well-suited for
connecting local area networks, but is not
presently well-suited for voice and video
applications due to the variable delays which
can occur. Frame Relay was designed to
operate at high speeds on modern fiber optic
networks.
ILEC (Incumbent Local Exchange Carrier):..... A company historically providing local
telephone service. Often refers to one of the
Regional Bell Operating Companies (RBOCs).
Often referred to as "LEC" (Local Exchange
Carrier).
ISP (Internet Service Provider):............. A vendor who provides direct access to the
Internet. The ISP also usually provides a
core group of Internet utilities and services
like E-mail and News Group Readers.
IXC (Interexchange Carrier):................. Literally, a company providing services which
cross local exchange boundaries. Refers to
long distance providers.
LAN (Local Area Network):.................... A short distance data communications network
(typically within a building or campus) used
to link together computers and peripheral
devices (such as printers) under some form of
standard control.
Lit Fiber:................................... Fiber activated or equipped with the
requisite electronic and optronic equipment
necessary to use the fiber for transmission.
Metered Telecommunications Service:.......... Service provided by phone companies where
charges are levied based on use, as opposed
to unmetered service, where charges are
levied according to a flat, fixed rate.
</TABLE>
G-3
<PAGE>
<TABLE>
<S> <C>
OC-3, OC-12, OC-48 and OC-192:............... OC, or Optical Carrier, is a measure of a
SONET transmission optical carrier level. The
number following the OC designation is equal
to the corresponding number of DS-3s. (e.g.
OC-192 is equal to 192 DS-3s).
POP (Point of Presence):..................... The place where an IXC terminates an end
user's long distance lines just before those
lines are connected to the end user's local
phone company's lines or the end-user's own
direct hookup.
Private Line:................................ A direct channel specifically dedicated to a
customer's use between specified points.
RBOCs (Regional Bell Operating Companies):... The seven local telephone companies (formerly
part of AT&T) established as a result of the
AT&T Divestiture Decree.
Regeneration/Amplifier:...................... Devices which automatically re-transmit or
boost signals on an out-bound circuit.
Route Miles.................................. The number of miles spanned by fiber optic
cable calculated without including physically
overlapping segments of cable.
SONET (Synchronous Optical Network):......... An electronics and network architecture for
variable bandwidth products which enables
transmission of voice, data and video
(multimedia) at very high speeds. SONET ring
architecture provides for virtually
instantaneous restoration of service in the
event of a fiber cut by automatically
rerouting traffic in the opposite direction
around the ring.
Switch:...................................... A device which opens or closes circuits,
completes or breaks an electrical path, or
selects paths or circuits. Switching is the
process of interconnecting circuits to form a
transmission path between users. It also
captures information for billing purposes.
Tier I....................................... The top 15 cities in the United States based
on population.
Unbundled.................................... Services, programs, software and training
sold separately from the hardware.
Video Services............................... The provision of video over a channel. Akin
to voice dial tone.
Wireless..................................... A communications system that operates without
wires. Cellular service is an example.
</TABLE>
G-4
<PAGE>
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................ 3
Risk Factors.................................. 9
Use of Proceeds............................... 21
Dividend Policy............................... 21
Dilution...................................... 22
Capitalization................................ 23
Selected Consolidated Financial and Operating
Data........................................ 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 26
Business...................................... 30
Management.................................... 47
Principal Stockholders........................ 57
Certain Relationships and Related
Transactions................................ 58
Description of Capital Stock.................. 62
Shares Eligible for Future Sale............... 71
Underwriting.................................. 73
Certain Federal Tax Consequences.............. 76
Legal Matters................................. 78
Experts....................................... 79
Additional Information........................ 79
Index to Consolidated Financial Statements.... F-1
Glossary...................................... G-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
6,600,000 SHARES
METROMEDIA FIBER
NETWORK, INC.
CLASS A COMMON STOCK
($.01 PAR VALUE)
[LOGO]
SALOMON BROTHERS INC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DEUTSCHE MORGAN GRENFELL
PROSPECTUS
DATED , 1997
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
DATED OCTOBER 23, 1997
PROSPECTUS
[LOGO]
6,600,000 SHARES
METROMEDIA FIBER NETWORK, INC.
CLASS A COMMON STOCK
($.01 PAR VALUE)
All of the shares of Class A Common Stock, par value $.01 per share (the "Class
A Common Stock") offered hereby are being sold by Metromedia Fiber Network, Inc.
("MFN" or the "Company"). Of the 6,600,000 shares of Class A Common Stock
offered hereby, 990,000 shares of Class A Common Stock are being offered by the
International Underwriters (as defined herein) outside the United States and
Canada (the "International Offering") and 5,610,000 shares of Class A Common
Stock are being offered by the U.S. Underwriters (as defined herein) in a
concurrent offering in the United States and Canada (the "U.S. Offering" and,
together with the International Offering, the "Offerings"), subject to transfers
between the International Underwriters and the U.S. Underwriters (collectively,
the "Underwriters"). The initial public offering price and the aggregate
underwriting discount per share will be identical for the Offerings. See
"Underwriting." The closing of the International Offering and the U.S. Offering
are conditioned upon each other. Each share of Class A Common Stock entitles its
holder to one vote, whereas each share of the Company's Class B Common Stock,
par value $.01 per share (the "Class B Common Stock"), entitles its holder to
ten votes per share. In addition, holders of the Class B Common Stock vote as a
separate class to elect at least 75% of the members of the Company's Board of
Directors. Metromedia Company and its partners beneficially own all of the
outstanding shares of Class B Common Stock.
Prior to the Offerings, there has been no public market for the Class A Common
Stock. It is currently anticipated that the initial public offering price will
be between $14.00 and $16.00 per share of Class A Common Stock. See
"Underwriting" for information relating to the factors considered in determining
the initial public offering price. The Class A Common Stock has been approved
for quotation and trading on the Nasdaq National Market under the symbol "MFNX".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
Per Share......................... $ $ $
<S> <C> <C> <C>
Total(2).......................... $ $ $
</TABLE>
(1) Before deducting offering expenses payable by the Company, estimated at
$1,000,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 990,000 additional shares of Class A Common Stock at the
Price to Public, less the Underwriting Discount, solely to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Class A Common Stock are offered subject to receipt and acceptance
by the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the shares of Class A Common Stock
offered hereby will be made at the office of Salomon Brothers Inc, Seven World
Trade Center, New York, New York, or through the facilities of The Depository
Trust Company, on or about , 1997.
SALOMON BROTHERS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
DEUTSCHE MORGAN GRENFELL
The date of this Prospectus is , 1997.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the International Underwriters (the "International
Underwriting Agreement"), the Company has agreed to sell to each of the
International Underwriters named below (the "International Underwriters"), and
each of the International Underwriters, for whom Salomon Brothers International
Limited, Donaldson, Lufkin & Jenrette Securities Corporation and Morgan Grenfell
& Co., Limited are acting as the International representatives (the
"International Representatives"), has severally agreed to purchase from the
Company the number of shares of Class A Common Stock set forth opposite its name
below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL UNDERWRITERS OF SHARES
- ------------------------------------------------------------------------------ -------------
<S> <C>
Salomon Brothers International Limited........................................
Donaldson, Lufkin & Jenrette Securities Corporation...........................
Morgan Grenfell & Co., Limited................................................
-------------
Total....................................................................... 990,000
-------------
-------------
</TABLE>
The Company has been advised by the International Representatives that the
several International Underwriters initially propose to offer such shares of
Class A Common Stock to the public at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share of Class A Common Stock. The
International Underwriters may allow, and such dealers may re-allow, a
concession not in excess of $ per share of Class A Common Stock to other
dealers. After the Offerings, the public offering price and such concessions may
be changed.
The Company has granted to the International Underwriters and certain
underwriters in the United States and Canada (the "U.S. Underwriters" and,
collectively with the International Underwriters, the "Underwriters") an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to 990,000 additional shares of Class A Common Stock from the
Company at the price to public less the underwriting discount, solely to cover
over-allotments. To the extent that the International Underwriters and the U.S.
Underwriters exercise such option, each of the International Underwriters and
the U.S. Underwriters, as the case may be, will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such
International Underwriter's or U.S. Underwriter's initial commitment.
The Company has entered into a U.S. Underwriting Agreement with the U.S.
Underwriters named therein, for whom Salomon Brothers Inc, Donaldson, Lufkin &
Jenrette Securities Corporation and Deutsche Morgan Grenfell Inc. are acting as
the representatives (the "U.S. Representatives" and, together with the
International Representatives, the "Representatives"), providing for the
concurrent offer and sale of 5,610,000 shares of Class A Common Stock (in
addition to the shares covered by the
73
<PAGE>
over-allotment options described above) in the United States and Canada. Both
the International Underwriting Agreement and the U.S. Underwriting Agreement
provide that the obligations of the International Underwriters and the U.S.
Underwriters are such that if any of the shares of Class A Common Stock are
purchased by the International Underwriters pursuant to the International
Underwriting Agreement, or by the U.S. Underwriters pursuant to the U.S.
Underwriting Agreement, all the shares of Class A Common Stock agreed to be
purchased by either the International Underwriters or the U.S. Underwriters, as
the case may be, pursuant to their respective agreements must be so purchased.
The price to public and underwriting discount per share of Class A Common Stock
for the International Offering and the U.S. Offering will be identical. The
closing of the U.S. Offering is a condition to the closing of the International
Offering and the closing of the International Offering is a condition to the
closing of the U.S. Offering.
Each International Underwriter has severally agreed that, as part of the
distribution of the 990,000 shares of Class A Common Stock offered by the
International Underwriters, (i) it is not purchasing any shares of Class A
Common Stock for the account of any United States or Canadian Person and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly, any
shares of Class A Common Stock or distribute any Prospectus relating to the
International Offering to any person in the United States or Canada or to any
United States or Canadian Person. Each U.S. Underwriter has severally agreed
that, as part of the distribution of the 5,610,000 shares of Class A Common
Stock offered by the U.S. Underwriters, (i) it is not purchasing any shares of
Class A Common Stock for the account of anyone other than a United States or
Canadian Person and (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any shares of Class A Common Stock or distribute this
Prospectus to any person outside of the United States or Canada or to anyone
other than a United States or Canadian Person.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S. Underwriters
and International Underwriters. "United States or Canadian Person" means any
person who is a national or resident of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or of any political subdivision thereof, and
any estate or trust the income of which is subject to United States or Canadian
federal income taxation, regardless of the source of its income (other than the
foreign branch of any United States or Canadian Person), and includes any United
States or Canadian branch of a person other than a United States or Canadian
Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the International Underwriters and the
U.S. Underwriters of such number of shares of Class A Common Stock as may be
mutually agreed. The price of any shares of Class A Common Stock so sold shall
be the public offering price, less an amount not greater than the concession to
securities dealers. To the extent that there are sales between the International
Underwriters and the U.S. Underwriters pursuant to the Agreement Between U.S.
Underwriters and International Underwriters, the number of shares of Class A
Common Stock initially available for sale by the International Underwriters or
by the U.S. Underwriters may be more or less than the amount specified on the
cover page of this Prospectus.
Any offer of the shares of Class A Common Stock in Canada will be made only
pursuant to an exemption from the registration and qualification requirements in
any jurisdiction in Canada in which such offer is made.
The International Underwriting Agreement and the U.S. Underwriting Agreement
provide that the Company will indemnify the International Underwriters and the
U.S. Underwriters against certain liabilities and expenses, including
liabilities under the Securities Act, or contribute to payments the
International Underwriters and the U.S. Underwriters may be required to make in
respect thereof.
The Company, and each of its directors and officers and certain other
stockholders have agreed not to offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, or announce the offering of any shares of
Class A Common Stock, including any such shares beneficially or indirectly owned
or
74
<PAGE>
controlled by the Company, or any securities convertible into, or exchangeable
or exercisable for, shares of Class A Common Stock, for 180 days from the date
of this Prospectus, without the prior written consent of Salomon Brothers Inc,
except for (i) shares issued in connection with any employee benefit or
incentive plans of the Company existing on the date of this Prospectus, (ii)
shares issued in respect of obligations existing before the date of this
Prospectus and (iii) shares in connection with the Offerings.
At the Company's request, the Underwriters have reserved up to 330,000
shares of Class A Common Stock (the "Directed Shares") for sale at the public
offering price to persons who are directors, officers or employees of, or
otherwise associated with, the Company and its affiliates and who have advised
the Company of their desire to purchase such shares of Class A Common Stock. The
number of shares of Class A Common Stock available for sale to the general
public will be reduced to the extent of sales of Directed Shares to any of the
persons for whom they have been reserved. Any shares of Class A Common Stock not
so purchased will be offered by the Underwriters on the same basis as all other
shares of Class A Common Stock offered hereby.
Certain persons engaged in the distribution of the shares of Class A Common
Stock may engage in stabilizing transactions, syndicate covering transactions
and penalty bids in accordance with Rule 104 under the Exchange Act. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of shares of Class A Common Stock in the open
market after the distributions has been completed in order to cover syndicate
short positions. Penalty bids permit an underwriter to reclaim a selling
concession from a syndicate member when the shares of Class A Common Stock
originally sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Underwriters and prospective
underwriters intend to engage in passive market making in accordance with Rule
103 under the Exchange Act, which, in general, permits entities which are Nasdaq
market makers to continue to maintain bids for the shares of Class A Common
Stock so long as certain price and daily quantity limits are observed. Such
stabilizing transactions, syndicate covering transactions, penalty bids and
passive market making may cause the price of the Class A Common Stock to be
higher than it would otherwise be in the absence of such transactions.
Prior to the Offerings, there has been no public market for the Class A
Common Stock. The initial public offering price was determined by negotiations
between the Company and the Representatives. Among the factors considered in
determining the initial public offering price were the information set forth in
this Prospectus and otherwise available to the Representatives, the history of
and future prospects for the industry in which the Company competes, the ability
of the Company's management, the general conditions of the securities market at
the time of the Offerings and the market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of the Company. There can be no assurance that the price at which the
shares of Class A Common Stock will sell in the public market after the
Offerings will not be lower than the price at which they are sold in the
Offerings by the Underwriters.
The International Underwriters and the U.S. Underwriters do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
The Class A Common Stock has been approved for quotation and trading on the
Nasdaq National Market under the symbol "MFNX".
75
<PAGE>
ALTERNATE PAGE
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................ 3
Risk Factors.................................. 9
Use of Proceeds............................... 21
Dividend Policy............................... 21
Dilution...................................... 22
Capitalization................................ 23
Selected Consolidated Financial and Operating
Data........................................ 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 26
Business...................................... 30
Management.................................... 47
Principal Stockholders........................ 57
Certain Relationships and Related
Transactions................................ 58
Description of Capital Stock.................. 62
Shares Eligible for Future Sale............... 71
Underwriting.................................. 73
Certain Federal Tax Consequences.............. 76
Legal Matters................................. 78
Experts....................................... 79
Additional Information........................ 79
Index to Consolidated Financial Statements.... F-1
Glossary...................................... G-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
6,600,000 SHARES
METROMEDIA FIBER
NETWORK, INC.
CLASS A COMMON STOCK
($.01 PAR VALUE)
[LOGO]
SALOMON BROTHERS
INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DEUTSCHE MORGAN GRENFELL
PROSPECTUS
DATED , 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, in connection with the issuance and distribution of
the securities registered hereby. All the amounts shown are estimates, except
for the Securities and Exchange Commission registration fee, the NASD filing fee
and the Nasdaq National Market listing fee. All of the following fees and
expenses will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................ $ 34,849
NASD filing fee................................................................ 12,000
Nasdaq National Market listing fee............................................. 50,000
Printing and engraving expenses................................................ 250,000
Legal fees and expenses........................................................ 400,000
Accounting fees and expenses................................................... 200,000
Blue Sky fees and expenses (including counsel fees and expenses)............... 25,000
Transfer Agent and Registrar fees and expenses................................. 25,000
Miscellaneous.................................................................. 3,151
----------
Total...................................................................... $1,000,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the General Corporation Law of the State of Delaware
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no cause to believe his conduct was unlawful.
Section 145(b) provides that a Delaware corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted under similar standards, except that no indemnification may be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the court in which such action or suit was brought shall determine that despite
the adjudication of liability, such person is fairly and reasonably entitled to
be indemnified for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense of any claim, issue, or
matter therein, he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and
II-1
<PAGE>
that the corporation may purchase and maintain insurance on behalf of a director
or officer of the corporation against any liability asserted against him or
incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under such Section 145.
Section 102(b)(7) of the General Corporation Law provides that a corporation
in its original certificate of incorporation or an amendment thereto validly
approved by stockholders may eliminate or limit personal liability of members of
its board of directors or governing body for breach of a director's fiduciary
duty. However, no such provision may eliminate or limit the liability of a
director for breaching his duty of loyalty, failing to act in good faith,
engaging in intentional misconduct or knowingly violating a law, paying a
dividend or approving a Stock repurchase which was illegal, or obtaining an
improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for breach
of fiduciary duty. The Company's Charter contains such a provision.
The Company's Charter further provides that the Company shall indemnify its
officers and directors and, to the extent authorized by the Board, employees and
agents of the Company, to the fullest extent permitted by and in the manner
permissible under the laws of the State of Delaware.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued the following
securities, none of which have been registered under the Securities Act.
As of December 31, 1995, the Company owed its majority shareholder $896,979.
Pursuant to an agreement dated May 21, 1996, the Company issued 152,100 shares
of its Class A Common Stock to the majority shareholder in consideration for the
cancellation of a portion of the outstanding balance.
The Company engaged the services of an electrical contractor controlled by
the Company's majority shareholder in connection with the construction of the
fiber optic network. As of December 31, 1995, the entire $692,887 was owed to
this related company. In May 1996, the Company and the assignee of this related
party entered into an agreement whereby the full amount of this indebtedness was
satisfied by the issuance of 456,300 shares of the Company's Class A Common
Stock.
On May 1, 1995, the Company issued Option Warrants to Realprop for 207,883
shares of Class A Common Stock at $.01 per share, exercisable prior to February
1, 1999. The warrants were redeemed by the Company as part of the Katz
Securities.
On March 16, 1995, the Company entered into the Rubin Loan Agreement with
one of the Company's directors for $500,000 bearing interest at 10% per annum
due on March 16, 1996. As an inducement for entering into this loan agreement,
the Company issued to the director 155,994 shares of Class A Common Stock.
On April 18, 1995, the Company entered into a loan agreement with a customer
for $500,000 bearing interest at 11% per annum, originally due 120 days from the
date of this loan. Pursuant to a supplemental agreement dated January 12, 1996,
the parties agreed to extend the maturity date of this loan to November 18,
1996. Pursuant to a second supplemental agreement dated March 1997, the parties
agreed to extend the maturity date to June 30, 1997. On February 16, 1995, the
Company issued to this party a warrant entitling the holder to purchase a total
of 669,167 shares of the Company's Class A Common Stock. This warrant was
cancelled and replaced by a new warrant issued on February 13, 1997 for 456,300
nonassessable shares of Class A Common Stock at a purchase price of $4.85 per
share. The new warrant expires on February 13, 2000.
On April 16, 1996, the Company entered into an agreement with US ONE for the
lease of exclusive usage rights for 8 to 12 fibers on the Company's fiber optic
transmission network. On April 30, 1997, the Company amended this agreement.
Concurrent with the execution of the original lease agreement, the
II-2
<PAGE>
Company and US ONE entered into a bridge financing agreement. Concurrent with
the execution of the aforementioned lease and bridge financing agreements, the
Company entered into a letter agreement with US ONE providing for the sale of a
warrant to purchase Class A Common Stock of the Company. Under this agreement,
the warrant is exercisable for a number of shares to be determined at the
Company's discretion subject to a minimum number of 76,050 shares and a maximum
number of 456,300 shares. The per share exercise price is to be determined
pursuant to a formula, but in no event shall the aggregate purchase price exceed
$1,250,000.
On September 24, 1996, the Company entered into a loan agreement with
Sterling Capital, LLC ("Sterling") for $550,000. As an incentive for the loan,
MFN issued to Sterling warrants to purchase 94,302 shares of Class A Common
Stock at an exercise price of the lesser of $5.92 per share, the price at which
the Company shall issue its securities in the future less $5.92, or one half the
price at which the Class A Common Stock of the Company is offered in an initial
public offering. The warrants can be exercised at the later of (i) the third
anniversary or (ii) twelve months and 90 days after the Company has completed a
public offering.
On February 13, 1996, the Company entered into an investment agreement with
an individual, Patrice Knobel (the "Investor"), pursuant to which the Company
borrowed $1,000,000 in consideration for the issuance of 12% senior subordinated
promissory notes maturing on November 1, 1996. The notes were convertible at a
price of $2.62 per unit for each $1,000 of principal outstanding. Each unit
consists of the following: (i) .507 shares of Class A Common Stock, and (ii) one
warrant to purchase one share of Class A Common Stock at $5.27 per share. As an
inducement for entering into the investment agreement, the Company issued to the
investor the following: (i) 381,087 paid shares of Class A Common Stock, and
(ii) a warrant to purchase 381,087 shares of Class A Common Stock at $5.27 per
share, exercisable for a five year period beginning August 15, 1997 and ending
August 15, 2002. On March 19, 1996, a supplemental investment agreement was
executed with the same investor providing for an additional advance of $500,000
with the same maturity date, interest rate, conversion rights, and guaranty
features as the initial $1,000,000 investment. This advance was subsequently
repaid, along with interest on April 16, 1996. In connection with this
supplemental agreement, the Company issued a warrant to purchase 190,543 shares
of Class A Common Stock at $5.27 per share, exercisable for a five year period
beginning on August 15, 1997 and expiring August 15, 2002. The Company also
issued a warrant to purchase an additional 190,543 shares at $.006 per share
(the "Penny Warrants"), exercisable for a period beginning August 15, 1997 and
expiring August 15, 2002. On April 11, 1996, a memorandum of understanding was
entered into between the parties pursuant to which the warrants issued on
February 13, 1996 to purchase 381,087 shares at $5.27 per share and the warrants
issued on March 19, 1996 to purchase 190,543 shares at $5.27 per share were
surrendered by the investor to the Company in consideration for the issuance of
228,150 shares of the Company's Class A Common Stock. In April and July 1996,
the investor purchased 152,100 and 38,443 shares of Class A Common Stock,
respectively, at $.006 per share in connection with an exercise of the Penny
Warrants. The Company granted the investor the right to exercise prior to the
stated exercise period. Further, in accordance with the investment agreement an
additional 38,025 shares of Class A Common Stock was issued to the investor in
compliance with the anti-dilutive requirements in the agreement.
In August 1995, the Company initiated a $600,000 private offering of
subordinated notes. Those notes were scheduled to mature in March 1996 and bear
interest at an annual rate of 15%, payable quarterly in arrears. Concurrent with
the issuance of these notes, warrants were issued by the Company to the
noteholders which were exercisable for common shares of the Company in an amount
equal to 0.7% of the outstanding shares of Class A Common Stock immediately
following an initial public offering of the Company's Class A Common Stock, at
an exercise price equal to 60% of the initial public offering price. These
warrants are exercisable over a three-year period beginning on the effective
date of such initial public offering. In April 1996, the Company offered the
warrant holders fully paid shares of Class A Common Stock equal to 0.7% of the
Class A Common Stock then issued and outstanding, in exchange
II-3
<PAGE>
for the surrender and cancellation of the outstanding warrants, and in
consideration for the extension of the maturity date of the notes through June
30, 1996. All of the warrant holders accepted this offer and accordingly, the
Company issued a total of 59,359 shares of the Company's Class A Common Stock.
In October 1995, the Company initiated a private offering of $858,000 of
convertible subordinated notes. Through December, 1995, $783,000 of convertible
notes were sold pursuant to this offering, and an additional $75,000 of notes
were sold during January and February of 1996. These notes were scheduled to
mature during the period October 1996 through February 1997 and bear interest at
an annual rate of 15%, payable at maturity. The notes are convertible, at the
Company's option, at any time into shares of Class A Common Stock at a rate of
1.521 shares of Class A Common Stock per $1,000 of note principal, at a
conversion price equal to 60% of the per share price of an initial public
offering of the Company's Class A Common Stock. Concurrently with the issuance
of these notes, warrants were issued by the Company to the noteholders which are
exercisable at a rate of 15,210 shares of Class A Common Stock per $100,000 of
note principal. Such warrants, entitling the holders to purchase an aggregate of
130,502 shares, are exercisable at a price equal to 50% of the per share price
of an initial pubic offering of Class A Common Stock over a three-year period
beginning on the effective date of such public offering.
In December 1996, the Company offered the private placement noteholders
Common Stock purchase warrants to purchase 107,078 shares of its Class A Common
Stock exercisable at one half of the price for which shares are sold in an
initial public offering for a period of three years following such offering in
exchange for the extension of the due dates of the notes. All of the noteholders
accepted this offer.
In March 1997, the Company issued purchase warrants to private placement
noteholders to purchase 57,682 shares of common stock exercisable at one half of
the price for which shares are sold in an initial public offering for a period
of three years following such offering in exchange for the extension of the due
dates of the notes.
On January 12, 1996, the Company entered into an agreement with its then
legal counsel which called for the issuance by the Company of Class A Common
Stock as additional consideration for legal services provided. Pursuant to this
agreement, and a subsequent amendment dated April 16, 1996, the Company issued a
total of 491,105 shares during March and April of 1996.
In June 1996, the Company sold a total of 38,025 shares of Class A Common
Stock to two individuals for total proceeds of $100,000. Concurrent with the
issuance of these shares, warrants were issued by the Company to these
shareholders entitling the holders to purchase a total of 38,025 shares at $2.62
per share for a three year period. In the event of an initial public offering of
the Company's Class A Common Stock during the exercise period, the exercise
price will be reduced to the lesser of $2.62 or 50% of the per share price of
the initial public offering.
In July 1996, the Company issued 12,168 shares of Class A Common Stock as
consideration for consulting services. In addition, the Company issued 150,579
shares to three employees for services rendered. The transaction was later
rescinded and the shares were returned to the Company.
In August 1996, the Company issued 182,520 shares of Class A Common Stock
for consulting services to Marc Pelson.
In September 1996, the Company sold 10,935 shares of Class A Common Stock to
three individuals for total proceeds of $23,500.
On April 15, 1996, the Company entered into a stock purchase agreement with
VCNY. Pursuant to this agreement, the Company issued 1,521,000 shares of Class A
Common Stock to VCNY as consideration for services provided by VCNY.
II-4
<PAGE>
In June 1996, the Company granted 152,100 Class A Common Stock purchase
warrants to the Company's legal counsel exercisable at $.07 per share for a
period of four years as additional consideration for legal services provided.
This warrant was exercised in January 1997.
On December 13, 1996, the Company issued and sold to Penny Lane Partners,
L.P. ("Penny Lane"), for aggregate cash consideration of $2,025,000, (i) 150,000
shares of 10% cumulative convertible preferred Stock (the "Series A Preferred
Stock") bearing dividends at a rate of $1.35 per share per annum, (ii) warrants
to purchase 114,075 shares of Class A Common stock at an exercise price of $4.93
per share (the "Penny Lane Warrants") and (iii) a contingent Stock subscription
warrant to purchase a number of shares of Class A Common Stock (such number to
be determined based on certain future events) at an exercise price of $.02 per
share (the "Contingent Warrants"), In March 1997, Penny Lane agreed to permit
the Series A Preferred Stock and the Contingent Warrants to be redeemed at an
aggregate redemption price of $2,115,000 (which includes accrued but unpaid
dividends on the Series A Preferred Stock) and in connection therewith the
number of Penny Lane Warrants was increased from 114,075 to 228,150.
Through April 30, 1997, Metromedia loaned the Company an aggregate of
$4,000,000. The Metromedia Loan bore interest at the prime rate announced by The
Chase Manhattan Bank and was convertible into Class A Common Stock based on a
formula if the principal and interest was not repaid in full by August 31, 1997.
On April 30, 1997, the Metromedia Loan was repaid with a portion of the proceeds
from the Metromedia Investment.
On April 30, 1997, the Company sold an aggregate of 8,403.325 shares of
Series B Preferred Stock to Metromedia and certain of its affiliates, for an
aggregate price of $32.5 million. The shares of Series B Preferred Stock were
exchanged for shares of Class B Common Stock in the Series B Reclassification.
Each of the foregoing transactions was effected without registration under
the Securities Act in reliance on the exemption from registration provided
pursuant to Section 4(2) and Regulation D promulgated thereunder.
II-5
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of Metromedia Fiber Network, Inc.
3.2 Form of Amended and Restated Bylaws of Metromedia Fiber Network, Inc.
4.1 Specimen Class A Common Stock Certificate of Metromedia Fiber Network,
5.1 Form of Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1 Form of Metromedia Fiber Network, Inc. 1997 Incentive Stock Plan.
10.2 Employment Agreement by and between National Fiber Network, Inc. and Stephen A. Garofalo, dated as of
February 26, 1997.
10.3 Employment Agreement by and between National Fiber Network, Inc. and Howard Finkelstein, dated as of
April 30, 1997.
10.4 Agreement made as of April 30, 1997, to be amended by a Modification Agreement made as of October ,
1997 by and among Metromedia Company, Stuart Subotnick, Arnold Wadler, Silvia Kessel, Stephen A.
Garofalo and National Fiber Network, Inc.
10.5** Franchise Agreement between The City of New York and National Fiber Network, Inc., dated as of December
20, 1993.
10.6** Conduit Occupancy Agreement by and between New York Telephone Company and National Fiber Network, Inc.,
dated as of May 1993.
10.7 Consulting Agreement between National Fiber Network and Realprop Capital Corporation, dated as of
February 1, 1996.
10.8** Letter Agreement from National Fiber Network, Inc. to Peter Sahagen dated February 11, 1997.
10.9** Office Lease by and between National Fiber Network, Inc. and 110 East 42nd Street Associates, dated as
of March 19, 1997.
10.10** Office Lease by and between National Fiber Network, Inc. and 110 East 42nd Street, dated as of June
1997.
10.11** Trademark License Agreement by and between Metromedia Company and Metromedia Fiber Network, Inc., dated
as of August 14, 1997.
10.12** Fiber Optic Use Agreement between National Fiber Network, Inc. and a confidential party, dated as of
June 3, 1997.
10.13** Amended and Restated Agreement for the Provision of a Fiber Optic Transmission Network dated as of the
Effective Date by and between US ONE Communications of New York, Inc. and National Fiber Network, Inc.
11.1** Statement Re Computation of Per Share Earnings.
21.1 List of Subsidiaries of Metromedia Fiber Network, Inc.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
23.1 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (contained in the opinion filed as Exhibit 5.1
hereto).
23.2** Consent of Ernst & Young, LLP
23.3** Consent of M. R. Weiser & Co., LLP
23.4** Consent of Richard A. Eisner & Company, LLP
23.5** Consent of David Rockefeller.
23.6** Consent of Leonard White.
24.1** Power of Attorney from officers and directors (contained on signature page).
27.1** Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification for such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on October 23, 1997.
<TABLE>
<S> <C> <C>
By: /s/ STEPHEN A. GAROFALO
-----------------------------------------
Stephen A. Garofalo
CHAIRMAN, CHIEF EXECUTIVE OFFICER &
SECRETARY
</TABLE>
II-8
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the registration statement has been signed by the following persons
in the capacities and on the dates indicated.
SIGNATURES TITLE OR CAPACITIES DATE
- ------------------------------ --------------------------- -------------------
* Chairman of the Board,
- ------------------------------ Chief Executive Officer October 23, 1997
Stephen A. Garofalo and Secretary
/s/ HOWARD M. FINKELSTEIN President, Chief Operating
- ------------------------------ Officer and Director
Howard M. Finkelstein October 23, 1997
Attorney-in-fact
* Chief Financial Officer and
- ------------------------------ Chief Accounting Officer October 23, 1997
Stephen W. Ellis
* Senior Vice President--
- ------------------------------ Business Development and October 23, 1997
Vincent A. Galluccio Director
* Director
- ------------------------------ October 23, 1997
John W. Kluge
* Director
- ------------------------------ October 23, 1997
Silvia Kessel
* Director
- ------------------------------ October 23, 1997
Stuart Subotnick
* Director
- ------------------------------ October 23, 1997
Arnold L. Wadler
- ------------------------
<TABLE>
<S> <C> <C>
/s/ HOWARD M. FINKELSTEIN
-----------------------------------------
Howard M. Finkelstein
*By: ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of Metromedia Fiber Network, Inc.
3.2 Form of Amended and Restated Bylaws of Metromedia Fiber Network, Inc.
4.1 Specimen Class A Common Stock Certificate of Metromedia Fiber Network, Inc.
5.1 Form of Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1 Form of Metromedia Fiber Network, Inc. 1997 Incentive Stock Plan.
10.2 Employment Agreement by and between National Fiber Network, Inc. and Stephen A. Garofalo,
dated as of February 26, 1997.
10.3 Employment Agreement by and between National Fiber Network, Inc. and Howard Finkelstein, dated
as of April 30, 1997.
10.4 Agreement made as of April 30, 1997, to be amended by a Modification Agreement made as of
October , 1997 by and among Metromedia Company, Stuart Subotnick, Arnold Wadler, Silvia
Kessel, Stephen A. Garofalo and National Fiber Network, Inc.
10.5** Franchise Agreement between The City of New York and National Fiber Network, Inc., dated as of
December 20, 1993.
10.6** Conduit Occupancy Agreement by and between New York Telephone Company and National Fiber
Network, Inc., dated as of May 1993.
10.7 Consulting Agreement between National Fiber Network and Realprop Capital Corporation, dated as
of February 1, 1996.
10.8** Letter Agreement from National Fiber Network, Inc. to Peter Sahagen dated February 11, 1997.
10.9** Office Lease by and between National Fiber Network, Inc. and 110 East 42nd Street Associates,
dated as of March 19, 1997.
10.10** Office Lease by and between National Fiber Network, Inc. and 110 East 42nd Street, dated as of
June 1997.
10.11** Trademark License Agreement by and between Metromedia Company and Metromedia Fiber Network,
Inc., dated as of August 14, 1997.
10.12** Fiber Optic Use Agreement between National Fiber Network, Inc. and a confidential party, dated
as of June 3, 1997.
10.13** Amended and Restated Agreement for the Provision of a Fiber Optic Transmission Network dated
as of the Effective Date by and between US ONE Communications of New York, Inc. and National
Fiber Network, Inc.
11.1** Statement Re Computation of Per Share Earnings.
21.1 List of Subsidiaries of Metromedia Fiber Network, Inc.
23.1 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (contained in the opinion filed as Exhibit
5.1 hereto).
23.2** Consent of Ernst & Young, LLP
23.3** Consent of M. R. Weiser & Co., LLP
23.4** Consent of Richard A. Eisner & Company, LLP
23.5** Consent of David Rockefeller.
23.6** Consent of Leonard White.
24.1** Power of Attorney from officers and directors (contained on signature page).
27.1** Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
Exhibit 1.1
Metromedia Fiber Network, Inc.
5,610,000 Shares*
Common Stock
($.01 par value)
Form of U.S. Underwriting Agreement
New York, New York
October [ ], 1997
Salomon Brothers Inc
Donaldson, Lufkin & Jenrette Securities Corporation
Deutsche Morgan Grenfell Inc.
As U.S. Representatives of the several U.S. Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Metromedia Fiber Network, Inc., a Delaware corporation (the
"Company"), proposes to sell to the underwriters named in Schedule I hereto (the
"U.S. Underwriters"), for whom you (the "U.S. Representatives") are acting as
representatives, 5,610,000 shares of Class A of Common Stock, $.01 par value
("Common Stock"), of the Company (said shares to be issued and sold by the
Company being hereinafter called the "U.S. Underwritten Securities"). The
Company also proposes to grant to the U.S. Underwriters an option to purchase up
to 841,500 additional shares of Common Stock (the "U.S. Option Securities"; the
U.S. Option Securities, together with the U.S. Underwritten Securities, being
hereinafter called the "U.S. Securities"). To the extent there are no
additional U.S. Underwriters listed on Schedule I other than you, the term U.S.
Representatives as used herein shall mean you, as U.S. Underwriters, and the
terms U.S. Representatives and U.S. Underwriters shall mean either the singular
or plural as the context requires.
It is understood that the Company is concurrently entering into an
International Underwriting Agreement dated the date hereof (the "International
Underwriting Agreement") providing for the sale by the Company of an aggregate
of 990,000 shares of Common Stock (said shares to be sold by the Company
pursuant to the International Underwriting Agreement being hereinafter called
the "International Underwritten Securities"), outside the United States and
Canada through arrangements with certain underwriters outside the United States
and Canada (the "International Underwriters"), for whom Salomon Brothers
International Limited, Donaldson, Lufkin & Jenrette Securities Corporation and
Deutsche Morgan Grenfell Inc. are acting as representatives (the
- ----------------------
* Plus an option to purchase from Metromedia Fiber Network, Inc., up to
990,000 additional shares.
<PAGE>
2
"International Representatives"), and providing for the grant to the
International Underwriters of an option to purchase from the Company up to
148,500 additional shares of Common Stock (the "International Option
Securities"; the International Option Securities, together with the
International Underwritten Securities, being hereinafter called the
"International Securities," and the U.S. Securities, together with the
International Securities, being hereinafter called the "Securities").
It is further understood and agreed that the U.S. Underwriters and the
International Underwriters have entered into an Agreement Between U.S.
Underwriters and International Underwriters dated the date hereof (the
"Agreement Between U.S. Underwriters and International Underwriters"), pursuant
to which, among other things, the International Underwriters may purchase from
the U.S. Underwriters a portion of the U.S. Securities to be sold pursuant to
the U.S. Underwriting Agreement and the U.S. Underwriters may purchase from the
International Underwriters a portion of the International Securities to be sold
pursuant to the International Underwriting Agreement.
In this Agreement, unless otherwise specified, all references to
"dollars" or "$" are to the currency of the United States.
At the request of the Company, the U.S. Underwriters and the
International Underwriters have agreed to reserve up to 330,000 shares of the
U.S. Underwritten Securities and the International Underwritten Securities to be
purchased by the U.S. Underwriters and the International Underwriters for sale
by the U.S. Underwriters and the International Underwriters to directors,
executives and other officers, employees and business associates (collectively,
all such reserved shares being the "Reserve Shares") as part of the distribution
of the U.S. Underwritten Securities by the U.S. Underwriters and the
International Underwritten Securities by the International Underwriters, subject
to the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. To the extent that such Reserved
Shares are not so purchased by such directors, executives and other officers,
employees and business associates, such Reserved Shares may be offered to the
public as part of the public offering contemplated hereby.
1. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to, and agrees with, each U.S. Underwriter as set forth below in this
Section 1. Certain terms used in this Section 1 are defined in Section 17
hereof.
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement (file number 333-33653) on
Form S-1, including related preliminary prospectuses, for the registration
under the Act of the offering and sale of the Securities. The Company may
have filed one or more amendments thereto, including the related
preliminary prospectuses, each of which has previously been furnished to
you. The Company will next file with the Commission either (i) prior to
the Effective Date of such registration statement, a further amendment to
such registration statement (including the form of final prospectuses) or
(ii) after the Effective Date of such registration statement, final
prospectuses in accordance with Rules 430A and 424(b)(1) or (4). In the
case of clause (ii), the Company has included in such registration
statement, as amended at
<PAGE>
3
the Effective Date, all information (other than Rule 430A Information)
required by the Act and the rules and regulations thereunder to be included
in such registration statement and the Prospectuses. As filed, such
amendment and form of final prospectuses, or such final prospectuses, shall
contain all Rule 430A Information, together with all other such required
information, and, except to the extent the U.S. Representatives shall agree
in writing to a modification, shall be in all substantive respects in the
form furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest U.S. Preliminary Prospectus) as the Company has advised you, prior
to the Execution Time, will be included or made therein.
It is understood that two forms of prospectus are to be used in
connection with the offering and sale of the Securities: one form of
prospectus relating to the U.S. Securities, which are to be offered and
sold to United States and Canadian Persons which for purposes of
distribution to Canadian Persons shall have a Canadian "wrap-around" (the
"Canadian Offering Memorandum"), and one form of prospectus relating to the
International Securities, which are to be offered and sold to persons other
than United States and Canadian Persons. The two forms of prospectus are
identical except for the outside front cover page, the discussion under the
headings "Underwriting" and "Certain Federal Tax Consequences" and the
outside back cover page. Such form of prospectus relating to the U.S.
Securities as first filed with the Commission pursuant to Rule 424(b) after
the Execution Time or, if no filing pursuant to Rule 424(b) is required,
such form of final prospectus relating to the U.S. Securities included in
the Registration Statement at the Effective Date, is hereinafter called the
"U.S. Prospectus"; such form of prospectus relating to the International
Securities as first filed with the Commission pursuant to Rule 424(b) after
the Execution Time or, if no filing pursuant to Rule 424(b) is required,
such form of final prospectus relating to the International Securities
included in the Registration Statement at the Effective Date, is
hereinafter called the "International Prospectus"; and the U.S. Prospectus
and the International Prospectus are hereinafter collectively called the
"Prospectuses". Insofar as they relate to offers or sales of Securities in
Canada, all references herein to the U.S. Preliminary Prospectus and the
U.S. Prospectus shall include the Canadian Offering Memorandum.
(b) On the Effective Date, the Registration Statement did or will,
and when the Prospectuses are first filed (if required) in accordance with
Rule 424(b) and on the Closing Date (as defined) and on any date on which
shares sold in respect of the U.S. Underwriters' over-allotment option are
purchased, if such date is not the Closing Date (a "settlement date"), the
Prospectuses (and any supplements thereto) will comply in all material
respects with the applicable requirements of the Act and the rules and
regulations thereunder; on the Effective Date and at the Execution Time,
the Registration Statement did not or will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectuses, if not filed
pursuant to Rule 424(b), will not, and on the date of any filing pursuant
to Rule 424(b) and on the Closing Date and any settlement date, the
Prospectuses (together with any supplement thereto) will not,
<PAGE>
4
include any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that the Company makes no representations or warranties as to the
information contained in or omitted from the Registration Statement or the
Prospectuses (or any supplement thereto) in reliance upon and in conformity
with information furnished herein or in writing to the Company by or on
behalf of any U.S. Underwriter through the U.S. Representatives
specifically for inclusion in the Registration Statement or the U.S.
Prospectus (or any supplement thereto).
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or organized
with full corporate power and authority to own its properties and conduct
its business as described in the Prospectuses, and is duly qualified to do
business as a foreign corporation and is in good standing under the laws of
each jurisdiction which requires such qualification wherein it owns or
leases material properties or conducts material business, except where the
failure to be so qualified would not have a material adverse effect on the
Company or any of its subsidiaries.
(d) all the outstanding shares of capital stock of each Subsidiary
(as defined herein) have been duly and validly authorized and issued and
are fully paid and nonassessable, and, except as otherwise set forth in the
Prospectuses, all outstanding shares of capital stock of the Subsidiaries
are owned by the Company either directly or through wholly owned
subsidiaries free and clear of any perfected security interest and, to the
knowledge of the Company, any other security interests, claims, liens or
encumbrances.
(e) The Company's authorized equity capitalization is as set forth in
the Prospectuses; the capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectuses; the
Securities being sold hereunder and under the International Underwriting
Agreement have been duly and validly authorized, and, when issued and
delivered to and paid for by the U.S. Underwriters pursuant to this
Agreement and by the International Underwriters pursuant to the
International Underwriting Agreement, will be fully paid and nonassessable;
the Securities have been duly authorized for listing, subject to official
notice of issuance on the Nasdaq National Market; the certificates for the
Securities are in valid and sufficient form; except for the holders under
that certain agreement dated as of [ ], 1996 between the Company and
[ ], the holders of outstanding shares of capital stock of the
Company are not entitled to preemptive or other rights to subscribe for the
Securities; and, except as set forth in the Prospectuses, no options,
warrants or other rights to purchase, agreements or other obligations to
issue, or rights to convert any obligations into or exchange any securities
for, shares of capital stock of or ownership interests in the Company are
outstanding.
(f) There is no franchise, contract or other document of a character
required to be described in the Registration Statement or Prospectuses, or
to be filed as an
<PAGE>
5
exhibit thereto, which is not described or filed as required; and the
statements in the Prospectuses under the headings "Certain Federal Tax
Consequences", and "Business--Regulation" and "Business--Legal Proceedings"
fairly summarize the matters therein described.
(g) This Agreement and the International Underwriting Agreement have
been duly authorized, executed and delivered by the Company and constitute
valid and binding obligations of the Company enforceable in accordance with
their respective terms.
(h) The Company is not and, after giving effect to the offering and
sale of the Securities and the application of the proceeds thereof as
described in the Prospectuses, will not be an "investment company" as
defined in the Investment Company Act of 1940, as amended;
(i) No consent, approval, authorization, filing with or order of any
court or governmental agency or body is required in connection with the
transactions contemplated herein, except such as have been obtained under
the Act and from the City of New York and such as may be required under the
blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters in the manner
contemplated herein, in the International Underwriting Agreement and in the
Prospectuses.
(j) Neither the issue and sale of the Securities nor the consummation
of any other of the transactions contemplated herein or in the
International Underwriting Agreement nor the fulfillment of the terms
hereof or thereof will conflict with, result in a breach or violation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any of its subsidiaries pursuant to, (i) the charter or
by-laws of the Company or any of its subsidiaries or (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument
to which the Company or any of its subsidiaries is a party or bound or to
which its or their property is subject (including without limitation, the
Franchise Agreement (as defined)) or (iii) any statute, law, rule,
regulation, judgment, order or decree applicable to the Company or any of
its subsidiaries of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction over
the Company or any of its subsidiaries or any of its or their properties,
except in the case of clauses (i), (ii) and (iii), as could not be
reasonably expected to have a material adverse effect on the Company and
its subsidiaries taken as a whole.
(k) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement, except as
disclosed in the Prospectuses under the heading "Description of Capital
Stock--Registration Rights".
(l) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Prospectuses and
the Registration Statement present fairly in all material respects the
financial condition, results of
<PAGE>
6
operations and cash flows of the Company as of the dates and for the
periods indicated and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved (except as otherwise noted therein). The selected
financial data set forth under the caption " Selected Consolidated
Financial and Operating Data" in the Prospectuses and Registration
Statement fairly present, on the basis stated in the Prospectuses and the
Registration Statement, the information included therein.
(m) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any of its subsidiaries or its or their property is pending or
threatened that if the subject of an unfavorable decision, ruling or
finding (i) could reasonably be expected to have a material adverse effect
on the performance of this Agreement or the International Underwriting
Agreement or the consummation of any of the transactions contemplated
hereby or thereby or (ii) could reasonably be expected to result in a
material adverse change in the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in
the Prospectuses (exclusive of any supplement thereto); and no labor
disturbance by or dispute with the employees of the Company exists or is
threatened or is imminent that could reasonably be expected to have a
material adverse change in the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in
the Prospectuses (exclusive of any supplement thereto).
(n) Each of the Company and each of its subsidiaries, owns, licenses
or leases all such properties as are necessary to the conduct of its
operations as presently conducted; neither the Company nor any subsidiary
is in violation of any law, rule or regulation of any Federal, state or
local governmental or regulatory authority applicable to it or is not in
non-compliance with any term or condition of, or has failed to obtain and
maintain in effect, any license, certificate, permit or other governmental
authorization required for the ownership or lease of its property or the
conduct of its business, which violation, non-compliance or failure would
individually or in the aggregate have a material adverse change in the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole, whether
or not arising from transactions in the ordinary course of business, except
as set forth in or contemplated by the Prospectuses (exclusive of any
supplement thereto); and the Company has not received notice of any
proceedings relating to the revocation or material modification of any such
license, certificate, permit or other authorization which, singularly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding
would result in a material adverse change in the condition (financial or
otherwise), prospects, earnings, business or properties of the Company and
its subsidiaries, except as set forth in or contemplated by the Prospectus.
<PAGE>
7
(o) Neither the Company nor any subsidiary is in violation or default
of (i) any provision of its charter or bylaws, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument
to which it is a party or bound or to which its property is subject or
(iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or such
subsidiary or any of its properties, as applicable, except in the case of
clauses (i), (ii) and (iii) as could not be reasonably expected to have a
material adverse effect on the Company and its subsidiaries taken as a
whole.
(p) Each of (i) Richard A. Eisner & Company, LLP, (ii) M. R. Weiser &
Co. LLP and (iii) Ernst & Young LLP, each of whom have certified certain
financial statements of the Company and its consolidated subsidiaries and
delivered their report with respect to the audited consolidated financial
statements and schedules included in the Prospectuses, are independent
public accountants with respect to the Company within the meaning of the
Act and the applicable published rules and regulations thereunder.
(q) There are no transfer taxes or other similar fees or charges
under Federal law or the laws of any state, or any political subdivision
thereof, required to be paid in connection with the execution and delivery
of this Agreement or the International Underwriting Agreement, or the
issuance by the Company or sale by the Company of the Securities.
(r) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
except in any case in which the failure so to file would not have a
material adverse change in the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in
the Prospectuses (exclusive of any supplement thereto) and has paid all
taxes required to be paid by it and any other assessment, fine or penalty
levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is currently
being contested in good faith or as would not result in a material adverse
change in the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated by the Prospectuses
(exclusive of any supplement thereto).
(s) No labor dispute with the employees of the Company or any of its
subsidiaries exists or is threatened or imminent that could result in a
material adverse change in the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated by
the Prospectuses (exclusive of any supplement thereto).
<PAGE>
8
(t) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any such subsidiary has been refused
any insurance coverage sought or applied for and not obtained similar
customary insurance from alternative insurers of recognized financial
responsibility; and neither the Company nor any such subsidiary has any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a
cost that would not have a material adverse change in the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business, except as set forth
in or contemplated by the Prospectuses (exclusive of any supplement
thereto).
(u) No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the
Company any loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to the Company or
any other subsidiary of the Company, except as described in or contemplated
by the Prospectuses.
(v) The Company and its subsidiaries possess the certificates,
authorizations, approvals, franchises, licenses, rights-of-way and permits
issued by the appropriate federal, state or foreign regulatory authorities
necessary to conduct their respective businesses, and neither the Company
nor any such subsidiary has received any notice of proceedings relating to
the revocation or modification of any such certificate, authorization,
approval, franchise, license, right-of-way or permit which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a material adverse change in the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business, except as set forth
in or contemplated by the Prospectuses (exclusive of any supplement
thereto).
(x) Neither the Company nor any of its subsidiaries is in violation
of any federal or state law or regulation relating to occupational safety
and health or to the storage, handling or transportation of hazardous or
toxic materials and the Company and its subsidiaries have received all
permits, licenses or other approvals required of them under applicable
federal and state occupational safety and health and environmental laws and
regulations to conduct their respective businesses, and the Company and
each such subsidiary is in compliance with all terms and conditions of any
such permit, license or approval, except any such violation of law or
regulation, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals which would not, singly or in the aggregate,
result in a material adverse change in the condition (financial or
otherwise), prospects, earnings, business or properties of the Company and
its subsidiaries, taken as a whole, whether or not arising from
<PAGE>
9
transactions in the ordinary course of business, except as set forth in or
contemplated by the Prospectuses (exclusive of any supplement thereto).
(y) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(z) The subsidiaries listed on Schedule III attached hereto are the
only significant subsidiaries of the Company as defined by Rule 1-02 of
Regulation S-X (the "Subsidiaries").
(aa) The Company (i) does not have any material lending or other
relationship with any bank or lending affiliate of Salomon Brothers Inc,
and (ii) does not intend to use any of the proceeds from the sale of the
Securities hereunder or under the International Underwriting Agreement to
repay any outstanding debt owed to any affiliate of Salomon Brothers Inc.
Any certificate signed by any officer of the Company and delivered to
the U.S. Representatives or counsel for the U.S. Underwriters in connection with
the offering of the Securities shall be deemed a representation and warranty by
the Company, as to matters covered thereby, to each U.S. Underwriter.
2. PURCHASE AND SALE. (a) Subject to the terms and conditions and
in reliance upon the representations and warranties herein set forth, the
Company agrees to sell to each U.S. Underwriter, and each U.S. Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of $____ per share, the amount of U.S. Underwritten Securities set forth
opposite such U.S. Underwriter's name in Schedule I hereto. It is understood
that the U.S. Underwriters are not obligated to purchase any U.S. Underwritten
Securities unless all the International Underwritten Securities are
contemporaneously purchased by the International Underwriters.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants an
option to the several U.S. Underwriters to purchase, severally and not jointly,
up to 148,500 shares of U.S. Option Securities at the same purchase price per
share as the U.S. Underwriters shall pay for the U.S. Underwritten Securities.
Said option may be exercised only to cover over-allotments in the sale of the
U.S. Underwritten Securities by the U.S. Underwriters. Said option may be
exercised in whole or in part at any time (but not more than once) on or before
the 30th day after the date of the U.S. Prospectus upon written notice by the
U.S. Representatives to the Company setting forth the number of shares of the
U.S. Option Securities as to which the several U.S. Underwriters are exercising
the option and, subject to Section 3 hereof, the settlement date. Delivery of
certificates for the shares of U.S.
<PAGE>
10
Option Securities, and payment therefor, shall be made as provided in Section 3
hereof. The number of shares of the U.S. Option Securities to be purchased by
each U.S. Underwriter shall be the same percentage of the total number of shares
of the U.S. Option Securities to be purchased by the several U.S. Underwriters
as such U.S. Underwriter is purchasing of the U.S. Underwritten Securities,
subject to such adjustments as you in your absolute discretion shall make to
eliminate any fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the
Underwritten Securities and the U.S. Option Securities (if the option provided
for in Section 2(b) hereof shall have been exercised on or before the third
Business Day prior to the Closing Date) shall be made at 10:00 AM, New York City
time, on [ ], 1997, or at such time on such later date [not more than
three Business Days after the foregoing date as the U.S. Representatives and the
International Representatives shall designate,] which date and time may be
postponed by agreement between the U.S. Representatives, the International
Representatives and the Company or as provided in Section 9 hereof (such date
and time of delivery and payment for the U.S. Securities being herein called the
"Closing Date"). Delivery of the U.S. Securities shall be made to the U.S.
Representatives for the respective accounts of the several U.S. Underwriters
against payment by the several U.S. Underwriters through the U.S.
Representatives of the purchase price thereof to or upon the order of the
Company by wire transfer payable in same-day funds to an account specified by
the Company. Delivery of the U.S. Underwritten Securities and the U.S. Option
Securities shall be made through the facilities of The Depository Trust Company
or at such location as the U.S. Representatives shall reasonably designate at
least one business day in advance of the closing date.
If the option provided for in Section 2(b) hereof is exercised after
the third Business Day prior to the Closing Date, the Company will deliver the
U.S. Option Securities (at the expense of the Company) to the U.S.
Representatives on the date specified by the U.S. Representatives (which shall
be within three Business Days after exercise of said option), against payment by
the several U.S. Underwriters through the U.S. Representatives thereof to or
upon the order of the Company by wire transfer payable in same-day funds to an
account specified by the Company. If settlement for the U.S. Option Securities
occurs after the Closing Date, the Company will deliver to the U.S.
Representatives on the settlement date for the U.S. Option Securities, and the
obligation of the U.S. Underwriters to purchase the U.S. Option Securities shall
be conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
4. OFFERING BY U.S. UNDERWRITERS. It is understood that the several
U.S. Underwriters propose to offer the U.S. Securities for sale to the public as
set forth in the U.S. Prospectus.
5. AGREEMENTS. (a) The Company agrees with the several U.S.
Underwriters that:
(i) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Execution Time, and any amendment
thereof, to become effective. Prior to the termination of the offering of
the Securities,
<PAGE>
11
the Company will not file any amendment of the Registration Statement,
supplement to the Prospectuses or any Rule 462(b) Registration Statement
unless the Company has furnished you a copy for your review prior to filing
and will not file any such proposed amendment or supplement to which you
reasonably object. Subject to the foregoing sentence, if the Registration
Statement has become or becomes effective pursuant to Rule 430A, or filing
of the Prospectuses is otherwise required under Rule 424(b), the Company
will cause the Prospectuses, properly completed, and any supplement thereto
to be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the U.S. Representatives of such timely filing. Upon your
request, the Company will cause the Rule 462(b) Registration Statement,
completed in compliance with the Act and the applicable rules and
regulations thereunder, to be filed with the Commission pursuant to
Rule 462(b) and will provide evidence satisfactory to the U.S.
Representatives of such filing. The Company will promptly advise the U.S.
Representatives (i) when the Registration Statement, if not effective at
the Execution Time, shall have become effective, (ii) when the
Prospectuses, and any supplement thereto, shall have been filed (if
required) with the Commission pursuant to Rule 424(b) or when any
Rule 462(b) Registration Statement shall have been filed with the
Commission, (iii) when, prior to termination of the offering of the
Securities, any amendment to the Registration Statement shall have been
filed or become effective, (iv) of any request by the Commission or its
staff for any amendment of the Registration Statement, or any Rule 462(b)
Registration Statement, or for any supplement to the Prospectuses or of any
additional information, (v) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (vi) of
the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of
any such stop order or the suspension of any such qualification and, if
issued, to obtain as soon as possible the withdrawal thereof.
(ii) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of
which the Prospectuses as then supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein in the light of the circumstances under
which they were made not misleading, or if it shall be necessary to amend
the Registration Statement or supplement either of the Prospectuses to
comply with the Act or the rules and regulations thereunder, the Company
promptly will (x) prepare and file with the Commission, subject to the
second sentence of paragraph (i) of this Section 5(a), an amendment or
supplement which will correct such statement or omission or effect such
compliance and (y) supply any supplemented Prospectuses to you in such
quantities as you may reasonably request.
(iii) As soon as practicable, the Company will make generally
available to its security holders and to the U.S. Representatives an
earnings statement or statements of the Company and its subsidiaries which
will satisfy the provisions of Section 11(a) of the Act and Rule 158 under
the Act.
<PAGE>
12
(iv) The Company will furnish to the U.S. Representatives and counsel
for the U.S. Underwriters, without charge, signed copies of the
Registration Statement (including exhibits thereto) and to each other U.S.
Underwriter a copy of the Registration Statement (without exhibits thereto)
and, so long as delivery of a prospectus by a U.S. Underwriter or dealer
may be required by the Act, as many copies of each of the U.S. Preliminary
Prospectus and the U.S. Prospectus and any supplement thereto as the U.S.
Representatives may reasonably request. The Company will pay the expenses
of printing or other production of all documents relating to the offering.
(v) The Company will arrange, if necessary, for the qualification of
the Securities for sale under the laws of such jurisdictions as the U.S.
Representatives may designate, will maintain such qualifications in effect
so long as required for the distribution of the Securities (PROVIDED,
HOWEVER, that the Company shall not be required to qualify as a foreign
corporation, file a general consent to service of process or take any
action that would subject it to taxation in any such jurisdiction as to
matters and transactions relating to the Prospectus, the Registration
Statement or the offering or sale of the U.S. Underwritten Securities) and
will pay any fee of the National Association of Securities Dealers, Inc.,
in connection with its review of the offering.
(vi) The Company will not, and will not permit its directors or
officers listed in Schedule II hereto to, for a period of 180 days
following the Execution Time, without the prior written consent of Salomon
Brothers Inc, offer, sell or contract to sell, pledge or otherwise dispose
of (or enter into any transaction which is designed to, or could be
expected to, result in the disposition (whether by actual disposition or
effective economic disposition due to cash settlement or otherwise) by the
Company or any affiliate of the Company or any person in privity with the
Company or any affiliate of the Company) directly or indirectly, or
announce the offering of, any other shares of Common Stock or any
securities convertible into, or exchangeable for, shares of Common Stock;
PROVIDED, HOWEVER, that the Company may register shares of Common Stock if
required under the terms of registration rights agreements disclosed in the
Prospectus under the heading "Description of Capital Stock--Registration
Rights" and it may issue and sell Common Stock pursuant to any employee
stock option plan, stock ownership plan or dividend reinvestment plan of
the Company in effect at the Execution Time and the Company may issue
Common Stock issuable upon the conversion of securities or the exercise of
warrants or stock options outstanding at the Execution Time.
(b) Each U.S. Underwriter agrees with the Company that (i) it is not
purchasing any of the U.S. Securities for the account of anyone other than a
United States or Canadian Person, (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any of the U.S. Securities or distribute
any U.S. Prospectus to any person outside of the United States or Canada, or to
anyone other than a United States or Canadian Person, and (iii) any dealer to
whom it may sell any of the U.S. Securities will represent that it is not
purchasing for the account of anyone other than a United States or Canadian
Person and agree that it will not offer or resell, directly or indirectly, any
of the U.S. Securities outside of the United States or Canada, or to anyone
other than a United States or Canadian Person
<PAGE>
13
or to any other dealer who does not so represent and agree; PROVIDED, HOWEVER,
that the foregoing shall not restrict (A) purchases and sales between the U.S.
Underwriters on the one hand and the International Underwriters on the other
hand pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, (B) stabilization transactions contemplated under the Agreement
Between U.S. Underwriters and International Underwriters, conducted through
Salomon Brothers Inc (or through the U.S. Representatives and the International
Representatives) as part of the distribution of the Securities and (C) sales to
or through (or distributions of U.S. Prospectuses or U.S. Preliminary
Prospectuses to) United States or Canadian Persons who are investment advisors,
or who otherwise exercise investment discretion, and who are purchasing for the
account of anyone other than a United States or Canadian Person.
(c) The agreements of the U.S. Underwriters set forth in
paragraph (b) of this Section 5 shall terminate upon the earlier of the
following events:
(i) a mutual agreement of the U.S. Representatives and the
International Representatives to terminate the selling restrictions set
forth in paragraph (b) of this Section 5 and in Section 5(b) of the
International Underwriting Agreement; or
(ii) the expiration of a period of 30 days after the Closing Date,
unless (A) the International Representatives shall have given notice to the
Company and the U.S. Representatives that the distribution of the
International Securities by the International Underwriters has not yet been
completed or (B) the U.S. Representatives shall have given notice to the
Company and the International Underwriters that the distribution of the
U.S. Securities by the U.S. Underwriters has not yet been completed. If
such notice by the U.S. Representatives or the International
Representatives is given, the agreements set forth in such paragraph (b)
shall survive until the earlier of (1) the event referred to in clause (i)
of this subsection (c) or (2) the expiration of an additional period of
30 days from the date of any such notice.
6. CONDITIONS TO THE OBLIGATIONS OF THE U.S. UNDERWRITERS. The
obligations of the U.S. Underwriters to purchase the U.S. Underwritten
Securities and the U.S. Option Securities, as the case may be, shall be subject
to the accuracy of the representations and warranties on the part of the Company
contained herein as of the Execution Time, the Closing Date and any settlement
date pursuant to Section 3 hereof, to the accuracy of the statements of the
Company made in any certificates pursuant to the provisions hereof, to the
performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the U.S. Representatives agree in writing to a
later time, the Registration Statement will become effective not later than
(i) 6:00 PM New York City time on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 PM New
York City time on such date or (ii) 9:30 AM on the Business Day following
the day on which the public offering price was determined, if such
determination occurred after 3:00 PM New York City time on such date; if
filing of either of the Prospectuses, or any supplement thereto,
<PAGE>
14
is required pursuant to Rule 424(b), the Prospectuses, and any such
supplement, will be filed in the manner and within the time period required
by Rule 424(b); and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or threatened.
(b) The Company shall have furnished to the U.S. Representatives the
opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel for the
Company, dated the Closing Date, to the effect that:
(i) each of the Company and the Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or
organized, with full corporate power and authority to own its
properties and conduct its business as described in the Prospectuses;
(ii) all the outstanding shares of capital stock of each Subsidiary
have been duly and validly authorized and issued and are fully paid
and nonassessable, and, except as otherwise set forth in the
Prospectuses, all outstanding shares of capital stock of the
Subsidiaries are owned by the Company either directly or through
wholly owned subsidiaries free and clear of any perfected security
interest and, to the knowledge of such counsel, after due inquiry, any
other security interests, claims, liens or encumbrances;
(iii) the Company's authorized equity capitalization is as set forth
in the Prospectuses; the capital stock of the Company conforms in all
material respects to the description thereof contained in the
Prospectuses; the outstanding shares of Common Stock have been duly
and validly authorized and validly issued and are fully paid and
nonassessable; the Securities have been duly and validly authorized,
and, when issued and delivered to and paid for by the U.S.
Underwriters pursuant to this Agreement and by the International
Underwriters, pursuant to the International Underwriting Agreement,
will be fully paid and nonassessable; the Securities have been duly
authorized for listing, subject to official notice of issuance, on the
Nasdaq National Market; the certificates for the Securities are in
valid and sufficient form; except as set forth in the agreement dated
as of [ ], 1996 between the Company and [ ], the
holders of outstanding shares of capital stock of the Company are not
entitled to preemptive or other rights to subscribe for the
Securities; and, except as set forth in the Prospectuses, to such
counsel's knowledge no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to convert any
obligations into or exchange any securities for, shares of capital
stock of or ownership interests in the Company are outstanding;
(iv) to the knowledge of such counsel, after due inquiry, there is
no pending or threatened action, suit or proceeding by or before any
court or governmental agency, authority or body or any arbitrator
involving the Company or any of its subsidiaries of a character
required to be disclosed in the Registration Statement which is not
adequately disclosed in the
<PAGE>
15
Prospectuses, and there is no franchise, contract or other document of
a character required to be described in the Registration Statement or
Prospectuses, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements in the Prospectuses
under the headings "Certain Federal Tax Consequences", and
"Business--Regulation" and "Business--Legal Matters" fairly summarize
the matters therein described;
(v) the Registration Statement has become effective under the Act;
any required filing of the Prospectuses, and any supplements thereto,
pursuant to Rule 424(b) has been made in the manner and within the
time period required by Rule 424(b); to the knowledge of such counsel
after due inquiry, no stop order suspending the effectiveness of the
Registration Statement has been issued, no proceedings for that
purpose have been instituted or threatened by the Commission and the
Registration Statement and the Prospectuses (other than the financial
statements and other financial information contained therein, as to
which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
rules thereunder; and such counsel has no reason to believe that on
the Effective Date or at the Execution Time the Registration Statement
contained or contains any untrue statement of a material fact or
omitted or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading or that the
Prospectuses as of their dates and on the Closing Date included or
includes any untrue statement of a material fact or omitted or omit to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading
(in each case, other than the financial statements and other financial
information contained therein, as to which such counsel need express
no opinion), except that the matters set forth in this paragraph do
not apply to statements or omissions in the Registration Statement
based upon information furnished to the Company in writing by the U.S.
Underwriters through the U.S. Representatives expressly for use
therein;
(vi) this Agreement and the International Underwriting Agreement
have been duly authorized, executed and delivered by the Company;
(vii) the Company is not and, after giving effect to the offering
and sale of the Securities and the application of the proceeds thereof
as described in the Prospectuses, will not be an "investment company"
as defined in the Investment Company Act of 1940, as amended;
(viii) no consent, approval, authorization, filing with or order of
any court or governmental agency or body is required in connection
with the execution and delivery of this Agreement or the International
Underwriting Agreement or for the offering, issuance, sale or delivery
of the Securities in accordance with this Agreement and the
International Underwriting Agreement except such as have been obtained
under the Act and such as may
<PAGE>
16
be required under the blue sky laws of any jurisdiction in connection
with the purchase and distribution of the Securities by the
Underwriters in the manner contemplated in this Agreement, in the
International Underwriting Agreement and in the Prospectuses;
(ix) neither the issue and sale of the Securities, nor the
consummation of any other of the transactions contemplated herein or
in the International Underwriting Agreement nor the fulfillment of the
terms hereof or thereof will conflict with, result in a breach or
violation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or its subsidiaries pursuant to,
(i) the charter or by-laws of the Company or its subsidiaries or
(ii) the terms of any indenture, contract, lease, mortgage, deed of
trust, note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company or its
subsidiaries is a party or bound or to which its property is subject
(including, without limitation, the Franchise Agreement) which is
known to such counsel and which is material to the Company or
(iii) any statute, law, rule, regulation, judgment, order or decree
applicable to the Company or its subsidiaries of any court, regulatory
body, administrative agency, governmental body, arbitrator or other
authority having jurisdiction over the Company or its subsidiaries or
any of its or their properties which is known to such counsel; and
(x) to the knowledge of such counsel, no holders of securities of
the Company have rights to the registration of such securities under
the Registration Statement, except as disclosed in the Prospectuses
under the heading "Description of Capital Stock--Registration Rights".
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
State of New York, the Federal laws of the United States or the
General Corporation Law of the State of Delaware, to the extent they
deem proper and specified in such opinion, upon the opinion of other
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the U.S. Underwriters and (B) as to
matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company and public officials. References
to the Prospectuses in this paragraph (b) include any supplements
thereto at the Closing Date.
(c) The Company shall have furnished to the U.S. Representatives the
opinion of [ ], special regulatory counsel for the Company, dated the
Closing Date, to the effect that:
(i) to the extent they constitute a summary of the regulatory
matters referred to therein, the statements in the Prospectuses under
the captions "Risk Factors--Extensive Regulation" and
"Business--Regulation" fairly summarize the matters referred to
therein; and
<PAGE>
17
(ii) to the knowledge of such counsel, after due inquiry, (A) the
Company and the Subsidiaries have in effect all the telecommunications
regulatory licenses, permits, authorizations, consents and approvals
required to conduct their respective businesses as presently
conducted; (B) all such licenses, permits, authorizations, consents
and approvals have been duly and validly issued and are in full force
and effect; (C) the Company and the Subsidiaries are not in violation
of any such licenses, permits, authorizations, consents or approvals;
and (D) no proceedings to revoke or restrict any such licenses,
permits, authorizations, consents or approvals are pending or
threatened.
(d) The U.S. Representatives shall have received from Cravath,
Swaine & Moore, counsel for the U.S. Underwriters, such opinion or
opinions, dated the Closing Date, with respect to the issuance and sale of
the Securities, the Registration Statement, the Prospectuses (together with
any supplement thereto) and other related matters as the U.S.
Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they request for the purpose of
enabling them to pass upon such matters.
(e) The Company shall have furnished to the U.S. Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the Company,
dated the Closing Date, to the effect that the signers of such certificate
have carefully examined the Registration Statement, the Prospectuses, any
supplements to the Prospectuses, this Agreement and the International
Underwriting Agreement and that:
(i) the representations and warranties of the Company in this
Agreement and the International Underwriting Agreement are true and
correct in all material respects on and as of the Closing Date with
the same effect as if made on the Closing Date and the Company has
complied with all the agreements and satisfied all the conditions on
its part to be performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have
been instituted or, to the Company's knowledge, threatened; and
(iii) since the date of the most recent financial statements
included in the Prospectuses (exclusive of any supplement thereto),
there has been no material adverse change in the condition (financial
or otherwise), prospects, earnings, business or properties of the
Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business, except as set
forth in or contemplated in the Prospectuses (exclusive of any
supplement thereto).
(f) At the Execution Time and at the Closing Date, Ernst & Young LLP
shall have furnished to the U.S. Representatives letters, dated
respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the
<PAGE>
18
U.S. Representatives, confirming that they are independent accountants
within the meaning of the Act and the applicable published rules and
regulations thereunder and that they have performed a review of the
unaudited interim financial information of the Company for the six-month
period ended June 30, 1997, and as at June 30, 1997, in accordance with
Statement on Accounting Standards No. 71 and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Registration Statement
and the Prospectuses and reported on by them comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company and its subsidiaries; their
review, in accordance with standards established under Statement on
Auditing Standards No. 71, of the unaudited interim financial
information for the six-month period ended June 30, 1997, and as at
June 30, 1997, as indicated in their report dated ____________, 1997;
carrying out certain specified procedures (but not an examination in
accordance with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the
comments set forth in such letter; a reading of the minutes of the
meetings of the stockholders, directors and committees of the Company
and the Subsidiaries; and inquiries of certain officials of the
Company who have responsibility for financial and accounting matters
of the Company and its subsidiaries as to transactions and events
subsequent to December 31, 1996, nothing came to their attention which
caused them to believe that:
(1) any unaudited financial statements included in the
Registration Statement and the Prospectuses do not comply in form
in all material respects with applicable accounting requirements
of the Act and with the published rules and regulations of the
Commission with respect to registration statements on Form S-1;
and said unaudited financial statements are not in conformity
with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial
statements included in the Registration Statement and the
Prospectuses;
(2) with respect to the period subsequent to June 30,
1997, there were any changes, at a specified date not more than
five days prior to the date of the letter, in the long-term
liabilities of the Company and its subsidiaries or capital stock
of the Company or decreases in the stockholders' equity of the
Company as compared with the amounts shown on the June 30, 1997
consolidated balance sheet included in the Registration Statement
and the Prospectuses, or for the period from July 1, 1997 to such
specified date there were any decreases, as compared with the
corresponding period in the
<PAGE>
19
preceding year, in revenues or in total or per share amounts of
net loss of the Company and its subsidiaries, except in all
instances for changes or decreases set forth in such letter, in
which case the letter shall be accompanied by an explanation by
the Company as to the significance thereof unless said
explanation is not deemed necessary by the U.S. Representatives;
or
(3) the information included in the Registration Statement
and Prospectuses in response to Regulation S-K, Item 301
(Selected Financial Data), Item 302 (Supplementary Financial
Information), Item 402 (Executive Compensation) and Item 503(d)
(Ratio of Earnings to Fixed Charges) is not in conformity with
the applicable disclosure requirements of Regulation S-K; and
(iii) they have performed certain other specified procedures as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company and its subsidiaries) set
forth in the Registration Statement and the Prospectuses including the
information set forth under the captions "Prospectus Summary", "Risk
Factors", "Use of Proceeds", "Dilution", "Capitalization", "Selected
Consolidated Financial and Operating Data", "Management's Discussion
and Analysis of Financial Condition and Results of Operations",
"Business", "Management", and "Certain Relationships and Related
Transactions" in the Prospectuses, agrees with the accounting records
of the Company and its subsidiaries, excluding any questions of legal
interpretation.
References to the Prospectuses in this paragraph (f) include any
supplement thereto at the date of the letter.
(g) The U.S. Representatives shall have also received from Ernst &
Young LLP a letter stating that the Company's system of internal accounting
controls taken as a whole is sufficient to meet the broad objectives of
internal accounting control insofar as those objectives pertain to the
prevention or detection of errors or irregularities in amounts that would
be material in relation to the financial statements of the Company and its
subsidiaries.
(h) At the Execution Time and at the Closing Date, M. R. Weiser & Co.
LLP shall have furnished to the U.S. Representatives letters, dated
respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the U.S. Representatives, confirming that
they are independent accountants within the meaning of the Act and the
applicable rules and regulations thereunder, and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Registration Statement
and the Prospectuses and reported on by them comply in form in all
material respects
<PAGE>
20
with the applicable accounting requirements of the Act and the related
published rules and regulations; and
(ii) they have performed certain other specified procedures as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company and its subsidiaries) set
forth in the Registration Statement and the Prospectuses agrees with
the accounting records of the Company and its subsidiaries, excluding
any questions of legal interpretation.
References to the Prospectuses in this paragraph (h) include any
supplement thereto at the date of the letter.
(i) At the Execution Time and at the Closing Date, Richard A. Eisner &
Company, LLP shall have furnished to the U.S. Representatives a letter or
letters, dated respectively as of the Execution Time and as of the Closing
Date, in form and substance satisfactory to the U.S. Representatives,
confirming that they are independent accountants within the meaning of the
Act and the applicable rules and regulations thereunder, and stating in
effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Registration Statement
and the Prospectuses and reported on by them comply in form in all
material respects with the accounting requirements of the Act and the
related published rules and regulations; and
(ii) they have performed certain other specified procedures as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company and its subsidiaries) set
forth in the Registration Statement and the Prospectuses agrees with
the accounting records of the Company and its subsidiaries, excluding
any questions of legal interpretation.
References to the Prospectuses in this paragraph (i) include any
supplement thereto at the date of the letter.
(j) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectuses (exclusive of any supplement
thereto), there shall not have been (i) any change or decrease specified in
the letter or letters referred to in paragraph (f) of this Section 6 or
(ii) any change, or any development involving a prospective change, in or
affecting the condition (financial or otherwise), earnings, business or
properties of the Company and its subsidiaries, taken as a whole, whether
or not arising from transactions in the ordinary course of business, except
as set forth in or contemplated in the Prospectuses (exclusive of any
supplement thereto) the effect of which, in any case referred to in
clause (i) or (ii) above, is, in the sole
<PAGE>
21
judgment of the U.S. Representatives, so material and adverse as to make it
impractical or inadvisable to proceed with the offering or delivery of the
Securities as contemplated by the Registration Statement (exclusive of any
amendment thereof) and the Prospectuses (exclusive of any supplement
thereto).
(k) At the Execution Time, the Company shall have furnished to the
U.S. Representatives a letter substantially in the form of Exhibit A hereto
from each officer and director of the Company and major shareholders listed
in Schedule II hereto addressed to the U.S. Representatives.
(l) On or prior to the Closing Date, the Company shall have received
an approval from the City of New York, pursuant to the Franchise Agreement
between the Company and the City of New York dated December 20, 1993, of
the transactions contemplated hereby, by the International Underwriting
Agreement and by the Prospectuses.
(m) The Company shall have caused the Securities to be eligible for
trading on the Nasdaq National Market upon issuance.
(n) The closing of the purchase of the International Underwritten
Securities to be issued and sold by the Company pursuant to the
International Underwriting Agreement shall occur concurrently with the
closing described herein.
(o) Prior to the Closing Date, the Company shall have furnished to the
U. S. Representatives such further information, certificates and documents
as the U. S. Representatives may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the U.S. Representatives and counsel for the U.S. Underwriters,
this Agreement and all obligations of the U.S. Underwriters hereunder may be
canceled at, or at any time prior to, the Closing Date by the U.S.
Representatives. Notice of such cancelation shall be given to the Company in
writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the office of Cravath, Swaine & Moore, counsel for the U.S.
Underwriters, at Worldwide Plaza, 825 Eighth Avenue, New York, New York, on the
Closing Date.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the U.S. Underwriters set forth in Section 6 hereof is not
satisfied, because of any termination pursuant to Section 10 hereof or because
of any refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the U.S. Underwriters, the Company will reimburse the U.S.
Underwriters severally through Salomon Brothers Inc on demand for all
out-of-pocket
<PAGE>
22
expenses (including reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Securities.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each U.S. Underwriter, the directors, officers,
employees and agents of each U. S. Underwriter and each person who controls any
U.S. Underwriter within the meaning of either the Act or the Exchange Act
against any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
other Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement for the
registration of the Securities as originally filed or in any amendment thereof,
or in any U.S. Preliminary Prospectus or International Preliminary Prospectus or
in either of the Prospectuses, or in any amendment thereof or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; PROVIDED, HOWEVER, that (i) the Company will
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any U.S. Underwriter through the U.S. Representatives specifically for
inclusion therein and (ii) with respect to any untrue statement or omission of
material fact made in any U.S. Preliminary Prospectus, the indemnity agreement
contained in this Section 8(a) shall not inure to the benefit of any U.S.
Underwriter (or any of the directors, officers, employees and agents of such
U.S. Underwriter or any controlling person of such U.S. Underwriter) from whom
the person asserting any such loss, claim, damage or liability purchased the
Securities concerned, to the extent that any such loss, claim, damage or
liability of such U.S. Underwriter occurs under the circumstances where it shall
have been determined by a court of competent jurisdiction by final and
nonappealable judgment that (w) the Company had previously furnished copies of
the U.S. Prospectus to the U.S. Underwriters, (x) delivery of the U.S.
Prospectus was required by the Act to be made to such person, (y) the untrue
statement or omission of material fact contained in the U.S. Preliminary
Prospectus was corrected in the U.S. Prospectus and (z) there was not sent or
given to such person, at or prior to the written confirmation of the sale of
such Securities to such person, a copy of the U.S. Prospectus. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have.
(b) Each U.S. Underwriter severally agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within the
meaning of either the Act or the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each U.S. Underwriter, but only with
reference to written information relating to such U.S. Underwriter furnished to
the Company by or on behalf of such U.S. Underwriter through the U.S.
Representatives specifically for inclusion in the documents referred to in the
foregoing indemnity. This indemnity agreement will be in addition to any
liability which
<PAGE>
23
any U.S. Underwriter may otherwise have. The Company acknowledges that the
statements set forth in the last paragraph of the cover page regarding delivery
of the Securities, the stabilization legend in block capital letters on page 2
and, under the heading "Underwriting", (i) the sentences related to concessions
and reallowances and (ii) the paragraph related to stabilization in any U.S.
Preliminary Prospectus or International Preliminary Prospectus and the
Prospectuses constitute the only information furnished in writing by or on
behalf of the several U.S. Underwriters for inclusion in any U.S. Preliminary
Prospectus or International Preliminary Prospectus or the Prospectuses.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will not relieve it from liability under paragraph (a) or (b) above unless
and to the extent it did not otherwise learn of such action and such failure
results in the forfeiture by the indemnifying party of substantial rights and
defenses and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a) or (b) above. The indemnifying party shall
be entitled to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any action
for which indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
PROVIDED, HOWEVER, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the U.S. Underwriters agree to
contribute to the aggregate losses, claims, damages and liabilities (including
legal or other expenses reasonably incurred in
<PAGE>
24
connection with investigating or defending same) (collectively "Losses") to
which the Company and one or more of the U.S. Underwriters may be subject in
such proportion as is appropriate to reflect the relative benefits received by
the Company and by the U.S. Underwriters from the offering of the U.S.
Securities; PROVIDED, HOWEVER, that in no case shall any U.S. Underwriter
(except as may be provided in any agreement among underwriters relating to the
offering of the U.S. Securities) be responsible for any amount in excess of the
underwriting discount or commission applicable to the Securities purchased by
such U.S. Underwriter hereunder. If the allocation provided by the immediately
preceding sentence is unavailable for any reason, the Company and the U.S.
Underwriters shall contribute in such proportion as is appropriate to reflect
not only such relative benefits but also the relative fault of the Company and
of the U.S. Underwriters in connection with the statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
Benefits received by the Company shall be deemed to be equal to the total net
proceeds from the offering (before deducting expenses) received by it, and
benefits received by the U.S. Underwriters shall be deemed to be equal to the
total underwriting discounts and commissions, in each case as set forth on the
cover page of the U.S. Prospectus. Relative fault shall be determined by
reference to, among other things, whether any untrue or any alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information provided by the Company on the one hand or
the U.S. Underwriters on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the U.S. Underwriters agree that
it would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls a U.S. Underwriter within the meaning
of either the Act or the Exchange Act and each director, officer, employee and
agent of a U.S. Underwriter shall have the same rights to contribution as such
U.S. Underwriter, and each person who controls the Company within the meaning of
either the Act or the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (d).
9. DEFAULT BY A U.S. UNDERWRITER. If any one or more U.S.
Underwriters shall fail to purchase and pay for any of the Securities agreed to
be purchased by such U.S. Underwriter or U.S. Underwriters hereunder and such
failure to purchase shall constitute a default in the performance of its or
their obligations under this Agreement, the remaining U.S. Underwriters shall be
obligated severally to take up and pay for (in the respective proportions which
the amount of U.S. Securities set forth opposite their names in Schedule I
hereto bears to the aggregate amount of U.S. Securities set forth opposite the
names of all the remaining U.S. Underwriters) the U.S. Securities which the
defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to purchase;
PROVIDED, HOWEVER, that in the event that the aggregate amount of U.S.
Securities which the defaulting U.S. Underwriter or U.S. Underwriters agreed but
failed to purchase shall exceed 10% of the aggregate amount of U.S. Securities
set forth in Schedule I hereto, the remaining U.S. Underwriters shall have
<PAGE>
25
the right to purchase all, but shall not be under any obligation to purchase
any, of the U.S. Securities, and if such nondefaulting U.S. Underwriters do not
purchase all the U.S. Securities, this Agreement will terminate without
liability to any nondefaulting U.S. Underwriter or the Company. In the event of
a default by any U.S. Underwriter as set forth in this Section 9, the Closing
Date shall be postponed for such period, not exceeding five Business Days, as
the U.S. Representatives shall determine in order that the required changes in
the Registration Statement and the Prospectuses or in any other documents or
arrangements may be effected. Nothing contained in this Agreement shall relieve
any defaulting U.S. Underwriter of its liability, if any, to the Company and any
nondefaulting U.S. Underwriter for damages occasioned by its default hereunder.
10. TERMINATION. This Agreement shall be subject to termination in
the absolute discretion of the U.S. Representatives, by notice given to the
Company prior to delivery of and payment for the U.S. Securities, if at any time
prior to such time (i) trading in the Company's Common Stock shall have been
suspended by the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or limited or minimum prices shall have been
established on such Exchange or National Market, (ii) a banking moratorium shall
have been declared either by Federal or New York State authorities or
(iii) there shall have occurred any outbreak or escalation of hostilities,
declaration by the United States of a national emergency or war or other
calamity or crisis the effect of which on financial markets is such as to make
it, in the sole judgment of the U.S. Representatives, impractical or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the U.S. Prospectus (exclusive of any supplement thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the U.S. Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of any U.S. Underwriter or the Company or
any of the officers, directors or controlling persons referred to in Section 8
hereof, and will survive delivery of and payment for the U.S. Securities. The
provisions of Sections 7 and 8 hereof shall survive the termination or
cancelation of this Agreement.
12. NOTICES. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the U.S. Representatives, will be
mailed, delivered or telefaxed to the Salomon Brothers Inc General Counsel (fax
no.: (212) 783-1752) and confirmed to the General Counsel, care of Salomon
Brothers Inc, at Seven World Trade Center, New York, New York, 10048, Attention:
General Counsel; or, if sent to the Company, will be mailed, delivered or
telefaxed to Howard M. Finkelstein (fax no.: (212) 687-9188) and confirmed to it
at 110 East 42nd Street, Suite 1502, New York, New York 10017, attention of
Howard M. Finkelstein.
13. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
<PAGE>
26
14. APPLICABLE LAW. This Agreement will be governed by and construed
in accordance with the laws of the State of New York, without regard to the
conflict of law provisions thereof.
15. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. HEADINGS. The section headings used herein are for convenience
only and shall not affect the construction hereof.
17. DEFINITIONS. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City.
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any
Rule 462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
"International Preliminary Prospectus" shall mean any preliminary
prospectus with respect to the offering of the International Securities
referred to in paragraph 1(a) above and any preliminary prospectus with
respect to the offering of the International Securities included in the
Registration Statement at the Effective Date that omits Rule 430A
Information.
"Preliminary Prospectus" shall mean the U.S. Preliminary Prospectus or
the International Preliminary Prospectus, as the case may be.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become effective) and, in the
event any post-effective amendment thereto or any Rule 462(b) Registration
Statement becomes effective prior to the Closing Date shall also mean such
registration statement as so amended or such Rule 462(b) Registration
Statement, as the case may be. Such term shall include any Rule 430A
Information deemed to be included therein at the Effective Date as provided
by Rule 430A.
<PAGE>
27
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the
Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating
to the offering covered by the initial registration statement.
"United States or Canadian Person" shall mean any person who is a
national or resident of the United States of Canada, any corporation,
partnership or other entity created or organized in or under the laws of
the United States or Canada or of any political subdivision thereof, or any
estate or trust the income of which is subject to United States or Canadian
Federal income taxation, regardless of its source (other than any
non-United States or non-Canadian branch of any United States or Canadian
Person), and shall include any United States or Canadian branch of a person
other than a United States or Canadian Person.
"U.S." or "United States" shall mean shall mean the United States of
America (including the states thereof and the District of Columbia), its
territories, its possessions and other areas subject to its jurisdiction.
"U.S. Preliminary Prospectus" shall mean any preliminary prospectus
with respect to the offering of the U.S. Securities referred to in
paragraph 1(a) above and any preliminary prospectus with respect to the
offering of the U.S. Securities included in the Registration Statement at
the Effective Date that omits Rule 430A Information.
<PAGE>
28
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company and the several U.S. Underwriters.
METROMEDIA FIBER NETWORK, INC.,
By:
-------------------------------------
Name: Howard M. Finkelstein
Title: President and Chief Operating
Officer
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
SALOMON BROTHERS INC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DEUTSCHE MORGAN GRENFELL INC.,
By: SALOMON BROTHERS INC
By:
-------------------------
Name:
Title:
For themselves and the other several U.S.
Underwriters named in Schedule I to the
foregoing Agreement.
<PAGE>
SCHEDULE I
----------
Number of Shares
U.S. Underwriters to be Purchased
Salomon Brothers Inc...................................
Donaldson, Lufkin & Jenrette Securities Corporation....
Deutsche Morgan Grenfell Inc...........................
------------
Total............................................
------------
------------
<PAGE>
SCHEDULE II
- -----------
OFFICERS AND DIRECTORS AND MAJOR SHAREHOLDERS
Stephen W. Ellis
Howard M. Finkelstein
Vincent A. Galluccio
Louis J. Gambino
Stephen A. Garofalo
Silvia Kessel
John W. Kluge
John S. Mahon
John McLeod
Metromedia Company
David Rockefeller
Peter Sahagen
Stuart Subotnick
Nicholas M. Tanzi
James Urbelis
Gerald Vento
Arnold Wadler
Leonard White
<PAGE>
SCHEDULE III
SUBSIDIARY
- ----------
1. Metromedia Fiber Network NYC, Inc.
2. Metromedia Fiber Network of New Jersey, Inc.
<PAGE>
EXHIBIT A
[Letterhead of officer, director or major shareholder of
Metromedia Fiber Network, Inc.]
METROMEDIA FIBER NETWORK, INC.
PUBLIC OFFERING OF COMMON STOCK
October [ ], 1997
Salomon Brothers Inc
Donaldson, Lufkin & Jenrette Securities Corporation
Deutsche Morgan Grenfell Inc.
As U.S. Representatives of the several U.S. Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed U.S. Underwriting Agreement (the "U.S. Underwriting Agreement"),
between Metromedia Fiber Network, Inc., a Delaware corporation (the
"Company"), and each of you as representatives of a group of U.S.
Underwriters named therein, relating to an underwritten public offering of
Class A Common Stock, $.01 par value, of the Company.
In order to induce you and the other U.S. Underwriters to enter into
the U.S. Underwriting Agreement, the undersigned will not, without the prior
written consent of Salomon Brothers Inc, offer, sell, contract to sell,
pledge or otherwise dispose of, or file a registration statement with the
Commission in respect of, or establish or increase a put equivalent position
or liquidate or decrease a call equivalent position within the meaning of
Section 16 of the Exchange Act with respect to, any shares of capital stock
of the Company or any securities convertible into or exercisable or
exchangeable for such capital stock, or publicly announce an intention to
effect any such transaction, for a period of 180 days after the date of this
Agreement, other than (i) any option or warrant or the conversion of a
security outstanding on the date hereof and referred to in the Prospectuses
to which this Agreement and the International Underwriting Agreement relate
and (ii) shares of capital stock of the Company disposed of as bona fide
gifts approved by Salomon Brothers Inc.
<PAGE>
If for any reason the U.S. Underwriting Agreement shall be
terminated prior to the Closing Date (as defined in the U.S. Underwriting
Agreement), the agreement set forth above shall likewise be terminated.
Yours very truly,
By:
----------------------------
Name:
Address:
<PAGE>
Exhibit 3.1
FORM OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
of
METROMEDIA FIBER NETWORK, INC.
(Originally Incorporated April 8, 1993 as National Fiber Networks Inc.)
METROMEDIA FIBER NETWORK, INC., a corporation organized and existing
under the laws of the State of Delaware (hereinafter called the "Corporation"),
hereby certifies pursuant to Sections 242 and 245 of the General Corporation
Law of the State of Delaware (the "General Corporation Law") as follows:
FIRST: The Corporation's name is Metromedia Fiber Network, Inc.
SECOND: The Certificate of Incorporation of the Corporation was
filed with the Secretary of State on April 8, 1993. A Certificate of Amendment
was filed with the Secretary of State on May 13, 1993. A Restated Certificate
of Incorporation was filed with the Secretary of State on March 31, 1995. A
Certificate of Amendment was filed with the Secretary of State on July 19, 1996.
A Restated Certificate of Incorporation was filed with the Secretary of State on
December 13, 1996. A Certificate of Designation was filed with the Secretary of
State on December 16, 1996. A Certificate of Amendment was filed with the
Secretary of
<PAGE>
State on April 28, 1997. A Certificate of Designation was filed with the
Secretary of State on April 29, 1997. A Certificate of Amendment was filed with
the Secretary of State on September 23, 1997. A Certificate of Correction to
the Certificate of Amendment was filed with the Secretary of State on
September 24, 1997.
THIRD: This Amended and Restated Certificate of Incorporation
amends and restates the Certificate of Incorporation of the Corporation, as
previously amended and now in effect. This Amended and Restated Certificate of
Incorporation was adopted by the Board of Directors and stockholders of the
Corporation entitled to vote in respect thereof in the manner and by the vote
prescribed by Section 242 of the General Corporation Law to read as follows:
1. NAME. The name of the corporation is Metromedia Fiber Network,
Inc.
2. ADDRESS; REGISTERED OFFICE AND AGENT. The address of the
Corporation's registered office is 9 East Loockerman Street, in the City of
Dover, County of Kent, State of Delaware; and its registered agent at such
address is National Corporate Research, Ltd.
3. PURPOSES. The purpose of the Corporation is to engage in, carry
on and conduct any lawful act or activity for which corporations may be
organized under the General Corporation Law.
4. CAPITAL STOCK.
4.1 AUTHORIZED CAPITAL STOCK. The total number of shares of
stock that the Corporation shall have the authority to issue is two-hundred
twenty million (220,000,000) shares, consisting of (a) one-hundred eighty
million
2
<PAGE>
(180,000,000) shares of Class A Common Stock, par value $.01 per share (the
"Class A Common Stock"); (b) twenty million (20,000,000) shares of Class B
Common Stock, par value $.01 per share (the "Class B Common Stock"); and
(c) twenty million (20,000,000) shares of Preferred Stock, par value $.01 per
share (the "Preferred Stock"), issuable in one or more series as hereinafter
provided. The Class A Common Stock and the Class B Common Stock shall
hereinafter collectively be called the "Common Stock." Immediately upon the
effectiveness of this Amended and Restated Certificate of Incorporation, each
share of Common Stock of the Corporation, par value $.01 per share, that is
issued and outstanding immediately prior to such effectiveness shall be changed
into and reclassified as one (1) share of Class A Common Stock and each share of
Series B Convertible Preferred Stock of the Corporation, par value $1.00 per
share, that is issued and outstanding immediately prior to such effectiveness
shall be changed into and reclassified as five hundred and seven (507) shares of
Class B Common Stock. The number of authorized shares of any class or classes
of capital stock of the Corporation may be increased or decreased (but not below
the number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the voting power of the stock of the Corporation
entitled to vote generally in the election of directors irrespective of the
provisions of Section 242(b)(2) of the General Corporation Law or any
corresponding provision hereinafter enacted.
3
<PAGE>
4.2 TERMS OF COMMON STOCK. All shares of Common Stock will be
identical in all respects and will entitle the holders thereof to the same
rights and privileges, except as otherwise provided herein.
(a) VOTING RIGHTS. The holders of shares of Common Stock
shall have the following voting rights:
(i) Each share of Class A Common Stock shall entitle
the holder thereof to one vote in person or by proxy on all matters
submitted to a vote of the stockholders of the Corporation.
(ii) Each share of Class B Common Stock shall entitle
the holder thereof to ten votes in person or by proxy on all matters
submitted to a vote of the stockholders of the Corporation.
(iii) Except for the election and the removal of
directors described below, and as otherwise required by applicable law, the
holders of shares of Common Stock shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation (or, except
for the election or the removal of directors entitled to be elected by the
holders of Common Stock described below, if any holders of shares of
Preferred Stock are entitled to vote together with the holders of Common
Stock, as a single class with such holders of shares of Preferred Stock).
(iv) With respect to the annual election of directors,
the holders of Class B Common Stock shall be entitled, as a separate class,
to elect the number of directors nominated by the Class B Nominating
4
<PAGE>
Committee (as defined in the Corporation's By-Laws) determined by
multiplying the total number of directorships of the Corporation by .75,
and rounding up any reminder. The holders of Class A Common Stock and any
holders of any series of Preferred Stock, if entitled to vote for
directors, shall be entitled, as a separate class, to vote for any
remaining directorships, such directors to be nominated by the Class A
Nominating Committee (as defined in the Corporation's By-Laws).
(v) Directors may be removed, with or without cause,
only by the holders of the class or classes of Common Stock or series of
Preferred Stock that, as of the date such removal is effected, would be
entitled to elect such directorship at the next annual meeting of
stockholders. Vacancies in a directorship may be filled only by (a) the
remaining directors elected by holders of each class of Common Stock or
series of Preferred Stock that (x) elected such directorship and (y) as of
the date such vacancy is filled, would be entitled to elect such
directorship at the next annual meeting of stockholders or, (b) if there
are no such remaining directors, then by the vote of the holders of the
class or classes of Common Stock or series of Preferred Stock that, as of
the date such vacancy is filled, would be entitled to elect such
directorship at the next annual meeting of stockholders, voting as a
separate class at a meeting, special or otherwise, of the holders of Common
Stock of such class or classes or series of Preferred Stock.
5
<PAGE>
(b) DIVIDENDS AND DISTRIBUTIONS. Subject to the
preferences applicable to Preferred Stock outstanding at any time, the holders
of shares of Common Stock shall be entitled to receive such dividends and other
distributions in cash, property or shares of stock of the Corporation as may be
declared thereon by the Board of Directors from time to time out of assets or
funds of the Corporation legally available therefor; provided, that, subject to
the provisions of this Section 4.2(b), the Corporation shall not pay dividends
or make distributions to any holders of any class of Common Stock unless
simultaneously with such dividend or distribution, as the case may be, the
Company makes the same dividend or distribution with respect to each outstanding
share of Common Stock regardless of class. In the case of dividends or other
distributions payable in Class A Common Stock or Class B Common Stock, including
distributions pursuant to stock splits or divisions of Class A Common Stock or
Class B Common Stock which occur after the first date upon which the Corporation
has issued shares of either Class A Common Stock or Class B Common Stock, only
shares of Class A Common Stock shall be distributed with respect to Class A
Common Stock and only shares of Class B Common Stock shall be distributed with
respect to Class B Common Stock. Whenever a dividend or distribution, including
distributions pursuant to stock splits or divisions of the Common Stock, is
payable in shares of Class A Common Stock or Class B Common Stock, the number of
shares of each class of Common Stock payable per share of such class of Common
Stock shall be equal in number. In the case of dividends or other distributions
consisting of other voting securities of the
6
<PAGE>
Corporation or of voting securities of any corporation which is a wholly-owned
subsidiary of the Corporation, the Corporation shall declare and pay such
dividends in two separate classes of such voting securities, identical in all
respects, except that (i) the voting rights of each such security paid to the
holders of Class A Common Stock shall be one-tenth of the voting rights of each
such security paid to the holders of Class B Common Stock, (ii) such security
paid to the holders of Class B Common Stock shall convert into the security paid
to the holders of Class A Common Stock upon the same terms and conditions
applicable to the conversion of Class B Common Stock into Class A Common Stock
and shall have the same restrictions on transfer and ownership applicable to the
transfer and ownership of the Class B Common Stock and (iii) with respect only
to dividends or other distributions of voting securities of any corporation
which is a wholly-owned subsidiary of the Company, the respective voting rights
of each such security paid to holders of Class A Common Stock and Class B Common
Stock with respect to the election of directors shall otherwise be as comparable
as is practicable to those of the Class A Common Stock and Class B Common Stock,
respectively. In the case of dividends or other distributions consisting of
securities convertible into, or exchangeable for, voting securities of the
Corporation or voting securities of another corporation which is a wholly-owned
subsidiary of the corporation, the Corporation shall provide that such
convertible or exchangeable securities and the underlying securities be
identical in all respects (including, without limitation, the conversion or
exchange rate), except that (i) the voting rights of each security underlying
the convertible or exchangeable security paid
7
<PAGE>
to the holders of Class A Common Stock shall be one-tenth of the voting rights
of each security underlying the convertible or exchangeable security paid to the
holders of the Class B Common Stock and (ii) such underlying securities paid to
the holders of Class B Common Stock shall convert into the underlying securities
paid to the holders of Class A Common Stock upon the same terms and conditions
applicable to the conversion of Class B Common Stock into Class A Common Stock
and shall have the same restrictions on transfer and ownership applicable to the
transfer and ownership of the Class B Common Stock.
(c) CONVERSION RIGHTS OF CLASS B COMMON STOCK.
(i) Each holder of Class B Common Stock shall be
entitled to convert, at any time and from time to time, any or all of the
shares of such holder's Class B Common Stock on a one-for-one basis, into
the same number of fully paid and non-assessable shares of Class A Common
Stock. Such right shall be exercised by the surrender of the certificate
or certificates representing the shares of Class B Common Stock to be
converted to the Corporation at any time during normal business hours at
the principal executive offices of the Corporation or at the office of the
Transfer Agent, accompanied by a written notice of the holder of such
shares stating that such holder desires to convert such shares, or a stated
number of the shares represented by such certificate or certificates, into
an equal number of shares of the Class A Common Stock, and (if so required
by the Corporation or the Transfer Agent) by instruments of transfer, in
form satisfactory to the
8
<PAGE>
corporation and to the Transfer Agent, duly executed by such holder or such
holder's duly authorized attorney, and transfer tax stamps or funds
therefor, if required pursuant to Section 4.2(c)(v).
(ii) As promptly as practicable following the surrender
for conversion of a certificate representing shares of Class B Common Stock
in the manner provided in Section 4.2(c)(i) and the payment in cash of any
amount required by the provisions of Section 4.2(c)(v), the Corporation
will deliver or cause to be delivered at the office of the Transfer Agent,
a certificate or certificates representing the number of full shares of
Class A Common Stock issuable upon such conversion, issued in such name or
names as such holder may direct. Such conversion shall be deemed to have
been effected immediately prior to the close of business on the date of the
surrender of the certificate or certificates representing shares of Class B
Common Stock. Upon the date any such conversion is made or effected, all
rights of the holder of such shares as such holder shall cease, and the
person or persons in whose name or names the certificates or certificates
representing the shares of Class A Common Stock are to be issued shall be
treated for all purposes as having become the record holder or holders of
such shares of Class A Common Stock; provided, however, that if any such
surrender and payment occurs on any date when the stock transfer books of
the Corporation shall be closed, the person or persons in whose name or
names the certificate or certificates representing shares of Class A Common
Stock are to be issued
9
<PAGE>
shall be deemed the record holder or holders thereof for all purposes
immediately prior to the close of business on the next succeeding day on
which the stock transfer books are open.
(iii) In the event of a reclassification or other
similar transaction as a result of which the shares of Class A Common Stock
are converted into another security, then a holder of Class B Common Stock
shall be entitled to receive upon conversion the amount of such security
that such holder would have received if such conversion had occurred
immediately prior to the record date of such reclassification or other
similar transaction. No adjustments in respect of dividends shall be made
upon the conversion of any share of Class B Common Stock; provided,
however, that if a share shall be converted subsequent to the record date
for the payment of a dividend or other distribution on shares of Class B
Common Stock but prior to such payment, then the registered holder of such
share at the close of business on such record date shall be entitled to
receive the dividend or other distribution payable on such share on such
date notwithstanding the conversion thereof or the Corporation's default in
payment of the dividend due on such date.
(iv) The Corporation covenants that it will at all
times reserve and keep available out of its authorized but unissued shares
of Class A Common Stock, solely for the purpose of issuance upon conversion
of the outstanding shares of Class B Common Stock, such number of shares of
Class A Common Stock that shall be issuable upon the conversion of all such
10
<PAGE>
outstanding shares of Class B Common Stock; provided that, nothing
contained herein shall be construed to preclude the Corporation from
satisfying its obligations in respect of the conversion of the outstanding
shares of Class B Common Stock by delivery of purchased shares of Class A
Common Stock which are held in the treasury of the Corporation. The
Corporation covenants that if any shares of Class A Common Stock require
registration with or approval of any governmental authority under any
federal or state law before such shares of Class A Common stock may be
issued upon conversion, the Corporation will cause such shares to be duly
registered or approved, as the case may be. The Corporation will use its
best efforts to list the shares of Class A Common Stock required to be
delivered upon conversion prior to such delivery upon each national
securities exchange upon which the outstanding Class A Common Stock is
listed at the time of such delivery. The Corporation covenants that all
shares of Class A Common Stock that shall be issued upon conversion of the
shares of Class B Common Stock will, upon issue, be validly issued, fully
paid and non-assessable.
(v) The issuance of certificates for shares of Class A
Common Stock upon conversion of shares of Class B Common Stock shall be
made without charge to the holders of such shares for any stamp or other
similar tax in respect of such issuance; provided, however, that, if any
such certificate is to be issued in a name other than that of the holder of
the share or shares of Class B Common Stock converted, then the person or
11
<PAGE>
persons requesting the issuance thereof shall pay to the Corporation the
amount of any tax that may be payable in respect of any transfer involved
in such issuance or shall establish to the satisfaction of the Corporation
that such tax has been paid.
(vi) Shares of Class B Common Stock that are converted
into shares of Class A Common Stock as provided herein shall continue to be
authorized shares of Class B Common Stock and available for reissue by the
Corporation; provided, however, that no shares of Class B Common Stock
shall be reissued except as expressly permitted by Sections 4.2(b) and
4.2(d) of this Amended and Restated Certificate of Incorporation.
(d) STOCK SPLITS. The Corporation shall not in any manner
subdivide (by any stock split, stock dividend, reclassification,
recapitalization or otherwise) or combine (by reverse stock split,
reclassification, recapitalization or otherwise) the outstanding shares of one
class of Common Stock unless the outstanding shares of all classes of Common
Stock shall be proportionately subdivided or combined.
(e) OPTIONS, RIGHTS OR WARRANTS.
(i) The Corporation shall not make any offering of
options, rights or warrants to subscribe for shares of Class B Common
Stock. If the Corporation makes an offering of options, rights or warrants
to subscribe for shares of any other class or classes of capital stock
(other than
12
<PAGE>
Class B Common Stock) to all holders of a class of Common Stock then the
Corporation shall simultaneously make an identical offering to all holders
of the other classes of Common Stock other than to any class of Common
Stock the holders of which, voting as a separate class, determine that such
offering need not be made to such class. All such options, rights or
warrants offerings shall offer the respective holders of Class A Common
Stock and Class B Common Stock the right to subscribe at the same rate per
share.
(ii) Subject to Section 4.2(c)(iii) and 4.2(e)(i), the
Corporation shall have the power to create and issue, whether or not in
connection with the issue and sale of any shares of stock or other
securities of the Corporation, rights or options entitling the holders
thereof to purchase from the Corporation any shares of its capital stock of
any class or classes at the time authorized (other than Class B Common
Stock), such rights or options to have such terms and conditions, and to be
evidenced by or in such instrument or instruments, as shall be approved by
the Board of Directors.
(f) MERGERS, CONSOLIDATION, ETC. In the event that the
Corporation shall enter into any consolidation, merger, combination or other
transaction in which shares of Common Stock are exchanged for or changed into
other stock or securities, cash and/or any other property, then, and in such
event, the shares of each class of Common Stock shall be exchanged for or
changed into either (1) the same amount of stock, securities, cash and/or any
other property, as the case may be, into which or for which each share of any
other class of Common Stock is exchanged
13
<PAGE>
or changed; provided, however, that if shares of Common Stock are exchanged for
or changed into shares of capital stock, such shares so exchanged for or changed
into may differ to the extent and only to the extent that the Class A Common
Stock and the Class B Common Stock differ as provided herein or (2) if holders
of each class of Common Stock are to receive different distributions of stock,
securities, cash and/or any other property, an amount of stock, securities, cash
and/or property per share having a value, as determined by an independent
investment banking firm of national reputation selected by the Board of
Directors, equal to the value per share into which or for which each share of
any other class of Common Stock is exchanged or changed.
(g) LIQUIDATION RIGHTS. In the event of any dissolution,
liquidation or winding up of the affairs of the Corporation, whether voluntary
or involuntary, after payment or provision for payment of the debts and other
liabilities of the Corporation and after making provision for the holders of
each series of Preferred Stock, if any, the remaining assets and funds of the
Corporation, if any, shall be divided among and paid ratably to the holders of
the shares of the Class A Common Stock and the Class B Common Stock treated as a
single class.
(h) NO PREEMPTIVE RIGHTS. Except as provided in Section
4.2(e), the holders of shares of Common Stock are not entitled to any preemptive
right to subscribe for, purchase or receive any part of any new or additional
issue of stock of any class, whether now or hereafter authorized, or of bonds,
debentures or other securities convertible into or exchangeable for stock.
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(i) TRANSFER OF CLASS B COMMON STOCK.
(i) No person may, directly or indirectly, sell
(whether by involuntary or judicial sale or otherwise), assign, transfer,
grant a security interest in, pledge, encumber, hypothecate, give (by
bequest, gift or appointment) or otherwise (voluntarily or by operation of
law) dispose of (collectively, "Transfer") any interest in his, her or its
shares of Class B Common Stock or in any shares of Class B Common Stock
held by such person for the benefit of or on the behalf of another person,
it being understood that the term Transfer shall not include the power to
vote or provide a consent with respect to his, her or its shares of Class B
Common Stock by proxy or otherwise, and the Corporation and the transfer
agent for the Class B Common Stock, if any (the "Class B Transfer Agent"),
shall not register the Transfer of such shares of Class B Common Stock,
except to the Corporation or a Class B Permitted Holder; provided, however,
such restrictions on transfer shall not apply to a merger, consolidation or
business combination of the Corporation with or into another corporation
pursuant to which all of the outstanding shares of each class of Common
Stock and Preferred Stock of the Company is being acquired. Any transfer
of Class B Common Stock in violation of this Section 4.2(i) shall be null
and void AB INITIO, and the Corporation shall not register such Transfer.
For the purposes of this Article Four, a "Class B Permitted Holder" shall
include only the following persons: (i) Metromedia Company; (ii) John W.
Kluge, Stuart
15
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Subotnick and their respective estates, guardians, conservators or
committees; (iii) the spouses of John W. Kluge or Stuart Subotnick and
their respective estates, guardians, conservators or committees; (iv) each
descendant of John W. Kluge or Stuart Subotnick (a "Kluge Descendant" or
"Subotnick Descendant," respectively) and their respective estates,
guardians, conservators or committees; (iv) each Kluge Family Controlled
Entity or Subotnick Family Controlled Entity (each as defined below); and
(v) the trustees, in their respective capacities as such, of each Kluge
Family Trust or Subotnick Family Trust (each as defined below). The term
"Kluge Family Controlled Entity" means (i) any not-for-profit corporation
if at least a majority of its board of directors is composed of John Kluge,
the spouse of John Kluge and/or Kluge Descendants; (ii) any other
corporation if at least a majority of the value of its outstanding equity
is owned by Class B Permitted Holders; (iii) any partnership if at least a
majority of the economic interest of its partnership interests are owned by
Class B Permitted Holders; and (iv) any limited liability or similar
company if at least a majority of the economic interest of the company is
owned by Class B Permitted Holders. The term "Subotnick Family Controlled
Entity" means (i) any not-for-profit corporation if at least a majority of
its board of directors is composed of Stuart Subotnick, the spouse of
Stuart Subotnick and/or Subotnick Descendants; (ii) any other corporation
if at least a majority of the value of its outstanding equity is owned by
Class B Permitted Holders; (iii) any partnership if at least a majority of
the economic
16
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interest of its partnership interests are owned by Class B Permitted
Holders; and (iv) any limited liability or similar company if at least a
majority of the economic interest of the company is owned by Class B
Permitted Holders. The term "Kluge Family Trust" includes trusts the
primary beneficiaries of which are Mr. Kluge, the spouse of John Kluge,
Kluge Descendants, Mr. Kluge's siblings, spouses of Kluge Descendants and
their respective estates, guardians, conservators or committees and/or
charitable organizations (collectively, "Kluge Beneficiaries"). The term
"Subotnick Family Trust" includes trusts the primary beneficiaries of which
are Mr. Subotnick, the spouse of Stuart Subotnick, Subotnick Descendants,
Mr. Subotnick's siblings, spouses of Subotnick Descendants and their
respective estates, guardians, conservators or committees and/or charitable
organizations (collectively, "Subotnick Beneficiaries"). For purposes of
this provision, the primary beneficiaries of a trust will be deemed to be
Kluge Beneficiaries (or, alternatively, Subotnick Beneficiaries) if, under
the maximum exercise of discretion by the trustee in favor of persons who
are not Kluge Beneficiaries or Subotnick Beneficiaries, accordingly, the
value of the interests of such persons in such trust, computed actuarially,
is 50% or less. The factors and methods prescribed in section 7520 of the
Internal Revenue Code of 1986, as amended, for use in ascertaining the
value of certain interests shall be used in determining a beneficiary's
actuarial interest in a trust for purposes of applying this provision. For
purposes of this provision, the actuarial value of the
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interest in a trust of any person in whose favor a testamentary power of
appointment may be exercised shall be deemed to be zero. For purposes of
this provision, in the case of a trust created by a Kluge Descendant or
Subotnick Descendant, accordingly, the actuarial value of the interest in
such trust of any person who may receive trust property only at the
termination of the trust and then only in the event that, at the
termination of the trust, there are no living issue of such Kluge
Descendant or Subotnick Descendant, accordingly, shall be deemed to be
zero.
(ii) Notwithstanding anything to the contrary set forth
herein, any Class B Permitted Holder may pledge his, her or its shares of
Class B Common Stock to a financial institution pursuant to a bona fide
pledge of such shares as collateral security for indebtedness due to the
pledgee; provided, that, such shares shall remain subject to the provisions
of this Section 4.2(i). In the event of foreclosure or other similar
action by the pledgee, such pledged shares of Class B Common Stock may only
be transferred to a Class B Permitted Holder or converted into shares of
Class A Common Stock, as the pledgee may elect.
(iii) For purposes of this Section 4.2(i):
(1) the relationship of any person that is
derived by or through legal adoption shall be considered a natural
relationship;
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(2) a minor who is a descendant of John Kluge or
Stuart Subotnick and for whom shares of Class B Common Stock are held
pursuant to a Uniform Gifts to Minors Act or similar law shall be
considered a Class B Permitted Holder and the custodian who is the
record holder of such shares shall not be considered the Class B
Permitted Holder of such shares;
(3) an incompetent stockholder who is a Class B
Permitted Holder but whose shares are owned or held by a guardian or
conservator shall be considered a Class B Permitted Holder of such
shares and such guardian or conservator who is the holder of such
shares shall not be considered the Class B Permitted Holder of such
shares;
(4) unless otherwise specified, the term "person"
means and includes natural persons, corporations, partnerships,
unincorporated associations, firms, joint ventures, trusts and all
other entities; and
(5) except as provided in clauses (2) and (3)
above, for purposes of determining whether the holder of shares of
Class B Common Stock is a Class B Permitted Holder, the record holder
of such share shall be considered the holder; provided, however, that
if such record holder is a nominee, the holder for purposes of
determining whether the holder of shares of Class B Common Stock is
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a Class B Permitted Holder shall be the first person in the chain of
ownership of such share of Class B Common Stock who is not holding such
share solely as a nominee.
(j) CERTAIN AUTOMATIC CONVERSIONS OF CLASS B COMMON STOCK.
Subject to Section 4.2(i), at such time as a person ceases to be a Class B
Permitted Holder, any and all shares of Class B Common Stock held by such person
at such time shall automatically convert into shares of Class A Common Stock,
PROVIDED THAT, no conversion shall occur upon the pledge of a Class B Permitted
Holder's share of Class B Common Stock to a financial institution as
contemplated by and pursuant to Section 4.2(i)(ii).
(k) RESTRICTIONS ON ISSUANCE. The Corporation shall not
issue or sell any shares of Class B Common Stock or any securities (including,
without limitation, any rights, options, warrants or other securities)
convertible, exchangeable or exercisable into shares of Class B Common Stock to
any person who is not a Class B Permitted Holder. Any issuance or sale of
shares of Class B Common Stock (or securities convertible into, or exchangeable
or exercisable for, shares of Class B Common Stock) in violation of this
Section 4.2(k) shall be null and void AB INITIO.
4.3 PREFERRED STOCK. Shares of Preferred Stock may be issued
from time to time in one or more series of any number of shares provided that
the aggregate number of shares issued and not canceled of any and all series
shall not exceed the total number of shares of Preferred Stock hereinabove
authorized. The
20
<PAGE>
Board of Directors is authorized, by resolution adopted and filed in accordance
with law, to provide for the issue of such series of shares of Preferred Stock.
Each series of shares of Preferred Stock: (a) may have such voting powers, full
or limited, or may be without voting powers; provided, however, that, unless
holders of at least seventy-five percent (75%) of the outstanding shares of
Class B Common Stock have approved the issuance of such shares of Preferred
Stock, the Board of Directors may not issue any shares of Preferred Stock that
have the right (i) to vote for the election of directors under ordinary
circumstances, or (ii) under any circumstances to elect twenty-five percent
(25%) or more of the directors of the Corporation; (b) may be subject to
redemption at such time or times and at such prices; (c) may be entitled to
receive dividends (which may be cumulative or non-cumulative) at such rate or
rates, on such conditions and at such times, and payable in preference to, or in
such relation to, the dividends payable on any other class or classes or series
of stock; (d) may have such rights upon the dissolution of, or upon any
distribution of the assets of, the Corporation; (e) may be made convertible
into, or exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the Corporation or
such other corporation or other entity at such price or prices or at such rates
of exchange and with such adjustments; (f) may be entitled to the benefit of a
sinking fund to be applied to the purchase or redemption of shares of such
series in such amount or amounts; (g) may be entitled to the benefit of
conditions and restrictions upon the creation of indebtedness of the Corporation
or any subsidiary, upon the issue of any additional shares (including additional
shares of such
21
<PAGE>
series or of any other series) and upon the payment of dividends or the making
of other distributions on, and the purchase, redemption or other acquisition by
the Corporation or any subsidiary of, any outstanding shares of the Corporation;
and (h) may have such other relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, all as shall be
stated in said resolution or resolutions providing for the issue of such shares
of Preferred Stock. Any of the voting powers, designations, preferences, rights
and qualifications, limitations or restrictions of any such series of Preferred
Stock may be made depended upon facts ascertainable outside of the resolution or
resolutions provided for the issue of such Preferred Stock adopted by the Board
of Directors pursuant to the authority vested in it by this Section 4.3,
provided that the manner in which such facts shall operate upon the voting
powers, designations, preferences, rights and qualifications, limitations or
restrictions of such series of Preferred Stock is clearly and expressly set
forth in the resolution or resolutions provided for the issue of such Preferred
Stock. The term "facts" as used in the next preceding sentence shall have the
meaning given to it in Section 151(a) of the General Corporation Law. Shares of
Preferred Stock of any series that have been redeemed or repurchased by the
Corporation (whether through the operation of a sinking fund or otherwise) or
that, if convertible or exchangeable, have been converted or exchanged in
accordance with their terms shall be retired and have the status of authorized
and unissued shares of Preferred Stock of the same series and may be reissued as
a part of the series of which they were originally a part or may, upon the
filing of an appropriate certificate
22
<PAGE>
with the Delaware Secretary of State, be reissued as part of a new series of
shares of Preferred Stock to be created by resolution or resolutions of the
Board of Directors or as part of any other series of shares of Preferred Stock,
all subject to the conditions or restrictions on issuance set forth in the
resolution or resolutions adopted by the Board of Directors providing for the
issue of any series of shares of Preferred Stock. Notwithstanding anything
herein to the contrary, in no event shall any series of shares of Preferred
Stock be entitled to vote together with any class of Common Stock with respect
to the election of any directors entitled to be elected by such class of Common
Stock pursuant to Section 4.2(a)(iv).
5. BOARD OF DIRECTORS.
5.1 NUMBER OF DIRECTORS. Initially, the number of Directors
shall be fixed initially at twelve (12), consisting of nine (9) directors to be
designated by the holders of Class B Common Stock and three (3) directors to be
designated by the holders of Class A Common Stock, and such number of Directors
may be changed from time to time by action of the stockholders or by action of
the Board of Directors. The members of the Board of Directors to be designated
by the holders of Class A Common Stock and Class B Common Stock, as the case may
be, on the date this Amended and Restated Certificate of Incorporation is filed
with the Secretary of State shall be determined by the Board of Directors by
resolution. Any vacancies shall be filed in accordance with the provisions of
Section 4.2(a)(v) of this Certificate of Incorporation. The use of the phrase
"Entire Board" refers to the total number of
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directors in office, whether or not present at a meeting of the Board, but
disregarding vacancies.
5.2 POWERS OF THE BOARD OF DIRECTORS. The business and affairs
of the Corporation shall be managed by or under the direction of the Board of
Directors selected as provided by law and this Amended and Restated Certificate
of Incorporation and the By-laws of the Corporation (the "By-laws"). In
furtherance, and not in limitation, of the powers conferred by the laws of the
State of Delaware, the Board of Directors is expressly authorized to:
(a) adopt, amend, alter, change or repeal By-laws of the
Corporation; provided, however, that no By-law hereafter adopted shall
invalidate any prior act of the Corporation that would have been valid if such
new By-laws had not been adopted;
(b) subject to the By-laws as from time to time in effect,
determine the rules and procedures for the conduct of the business of the Board
of Directors and the management and direction by the Board of Directors of the
business and affairs of the Corporation, including the power to designate and
empower committees of the Board of Directors, to elect, or authorize the
appointment of, and empower officers and other agents of the Corporation, and to
determine the time and place of, the notice requirements for, and the manner of
conducting, Board meetings, as well as other notice requirements for, and the
manner of taking, Board action; and
24
<PAGE>
(c) exercise all such powers and do all such acts as may be
exercised or done by the Corporation, subject to the provisions of the General
Corporation Law and this Amended and Restated Certificate of Incorporation and
By-laws of the Corporation.
6. LIABILITY OF DIRECTORS.
6.1 LIMITATION OF LIABILITY. No director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that this provision
shall not eliminate or limit the liability of a director (a) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under section 174 of the General Corporation Law
or (d) for any transaction from which the director derived any improper personal
benefits. If the General Corporation Law is amended after approval by the
stockholders of this article to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law, as so amended.
6.2 AMENDMENTS. Any repeal or modification of Section 6.1
hereof by the stockholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at the time of
such repeal or modification.
25
<PAGE>
7. INDEMNIFICATION.
7.1 To the extent not prohibited by law, the Corporation shall
indemnify any person who is or was made, or threatened to be made, a party to
any threatened, pending or completed action, suit or proceeding (a
"Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director or
officer of the Corporation, or, at the request of the Corporation, is or was
serving as a director or officer of any other corporation or in a capacity with
comparable authority or responsibilities for any partnership, joint venture,
trust, employee benefit plan or other enterprise (an "Other Entity"), against
judgments, fines, penalties, excise taxes, amounts paid in settlement and costs,
charges and expenses (including attorneys' fees, disbursements and other
charges). Persons who are not directors or officers of the Corporation (or
otherwise entitled to indemnification pursuant to the preceding sentence) may be
similarly indemnified in respect of service to the Corporation or to an Other
Entity at the request of the Corporation to the extent the Board at any time
specifies that such persons are entitled to the benefits of this Section 7.
7.2 The Corporation shall, from time to time, reimburse or
advance to any director or officer or other person entitled to indemnification
hereunder the funds necessary for payment of expenses, including attorneys' fees
and disbursements, incurred in connection with any Proceeding, in advance of the
final
26
<PAGE>
disposition of such Proceeding; PROVIDED, HOWEVER, that, if required by the
General Corporation Law, such expenses incurred by or on behalf of any director
or officer or other person may be paid in advance of the final disposition of a
Proceeding only upon receipt by the Corporation of an undertaking, by or on
behalf of such director or officer (or other person indemnified hereunder), to
repay any such amount so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right of appeal that such
director, officer or other person is not entitled to be indemnified for such
expenses.
7.3 The rights to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Section 7
shall not be deemed exclusive of any other rights to which a person seeking
indemnification or reimbursement or advancement of expenses may have or
hereafter be entitled under any statute, this Certificate of Incorporation, the
By-laws, any agreement, any vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office.
7.4 The rights to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Section 7
shall continue as to a person who has ceased to be a director or officer (or
other person indemnified hereunder) and shall inure to the benefit of the
executors, administrators, legatees and distributees of such person.
7.5 The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
27
<PAGE>
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of an Other Entity,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability under the provisions of this Section 7, the By-laws or under
section 145 of the General Corporation Law or any other provision of law.
7.6 The provisions of this Section 7 shall be a contract between
the Corporation, on the one hand, and each director and officer who serves in
such capacity at any time while this Section 7 is in effect and any other person
entitled to indemnification hereunder, on the other hand, pursuant to which the
Corporation and each such director, officer, or other person intend to be, and
shall be, legally bound. No repeal or modification of this Section 7 shall
affect any rights or obligations with respect to any state of facts then or
theretofore existing or thereafter arising or any proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
7.7 The rights to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Section 7
shall be enforceable by any person entitled to such indemnification or
reimbursement or advancement of expenses in any court of competent jurisdiction.
The burden of proving that such indemnification or reimbursement or advancement
of expenses is not appropriate shall be on the Corporation. Neither the failure
of the Corporation
28
<PAGE>
(including its Board, its independent legal counsel and its stockholders) to
have made a determination prior to the commencement of such action that such
indemnification or reimbursement or advancement of expenses is proper in the
circumstances nor an actual determination by the Corporation (including its
Board, its independent legal counsel and its stockholders) that such person is
not entitled to such indemnification or reimbursement or advancement of expenses
shall constitute a defense to the action or create a presumption that such
person is not so entitled. Such a person shall also be indemnified for any
expenses incurred in connection with successfully establishing his or her right
to such indemnification or reimbursement or advancement of expenses, in whole or
in part, in any such proceeding.
7.8 Any director or officer of the Corporation serving in any
capacity of (a) another corporation of which a majority of the shares entitled
to vote in the election of its directors is held, directly or indirectly, by the
Corporation or (b) any employee benefit plan of the Corporation or any
corporation referred to in clause (a) shall be deemed to be doing so at the
request of the Corporation.
7.9 Any person entitled to be indemnified or to reimbursement or
advancement of expenses as a matter of right pursuant to this Section 7 may
elect to have the right to indemnification or reimbursement or advancement of
expenses interpreted on the basis of the applicable law in effect at the time of
the occurrence of the event or events giving rise to the applicable Proceeding,
to the extent permitted by law, or on the basis of the applicable law in effect
at the time such indemnification or reimbursement or advancement of expenses is
sought.
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Such election shall be made, by a notice in writing to the Corporation, at the
time indemnification or reimbursement or advancement of expenses is sought;
PROVIDED, HOWEVER, that if no such notice is given, the right to indemnification
or reimbursement or advancement of expenses shall be determined by the law in
effect at the time indemnification or reimbursement or advancement of expenses
is sought.
8. ADOPTION, AMENDMENT AND/OR REPEAL OF BY-LAWS. The Board may from
time to time adopt, amend or repeal the By-laws; PROVIDED, HOWEVER, that any
By-laws adopted or amended by the Board may be amended or repealed, and any
By-laws may be adopted, by the stockholders of the Corporation by vote of a
majority of the holders of shares of stock of the Corporation entitled to vote
in the election of directors of the Corporation.
9. SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of
stockholders for any purpose may be called at any time by the Chairman, Vice
Chairman of the Board of Directors, by the President of the Corporation or by
the holders of at least thirty-three percent (33%) of the voting power of the
outstanding shares of Common Stock. Special meetings of stockholders shall be
held at such place or places within or without the State of Delaware and shall
from time to time be designated by the Board of Directors and stated in such
notice of meeting. At a special meeting of stockholders no business shall be
transacted and no corporate action shall be taken other than that stated in the
notice of meeting.
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IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation of the Corporation, which restates, integrates and amends the
provisions of the certificate of incorporation of the Corporation, and which was
duly approved pursuant to resolutions set forth in unanimous written consents
adopted by the Board of Directors of the Corporation and the holders of all of
the outstanding shares of stock of the Corporation in accordance with the
requirements of Sections 228, 242 and 245 of the General Corporation Law, has
been executed by Stephen A. Garofalo, acting in his capacity as Chairman of the
Board, Chief Executive Officer and Secretary for the Corporation, this [
]th day of October, 1997.
METROMEDIA FIBER NETWORK, INC.
---------------------------------------
Stephen A. Garofalo
Chairman of the Board, Chief Executive
Officer and Secretary
31
<PAGE>
Exhibit 3.2
FORM OF
AMENDED AND RESTATED BY-LAWS
of
METROMEDIA FIBER NETWORK, INC.
(A Delaware Corporation)
-------------------------
ARTICLE 1
DEFINITIONS
-----------
As used in these By-laws, unless the context otherwise requires, the
term:
1.1 "Assistant Secretary" means an Assistant Secretary of the
Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the
Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "By-laws" means the initial by-laws of the Corporation, as
amended, supplemented or restated from time to time.
1.5 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.6 "Chairman" means the Chairman of the Board of Directors of the
Corporation.
1.7 "Chief Executive Officer" means the Chief Executive Officer of
the Corporation.
1.8 "Chief Operating Officer" means the Chief Operating Officer of
the Corporation.
1.9 "Class A Common Stock" has the meaning specified in Section
2.2.2.
1.10 "Class A Directors" has the meaning specified in Section 4.2.
1.11 "Class A Nomination Committee" has the meaning specified in
Section 4.2.
<PAGE>
2
1.12 "Class B Common Stock" has the meaning specified in Section 2.4.
1.13 "Class B Directors" has the meaning specified in Section 4.3.
1.14 "Class B Nominating Committee" has the meaning specified in
Section 4.3.
1.15 "Corporation" means METROMEDIA FIBER NETWORK, INC.
1.16 "Directors" means directors of the Corporation.
1.17 "Entire Board" means all directors of the Corporation in office,
whether or not present at a meeting of the Board, but disregarding vacancies.
1.18 "General Corporation Law" means the General Corporation Law of
the State of Delaware, as amended from time to time.
1.19 "Office of the Corporation" means the executive office of the
Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
1.20 "President" means the President of the Corporation.
1.21 "Secretary" means the Secretary of the Corporation.
1.22 "Stockholders" means stockholders of the Corporation.
1.23 "Treasurer" means the Treasurer of the Corporation.
1.24 "Vice Chairman" means the Vice Chairman of the Board of Directors
of the Corporation.
1.25 "Vice President" means a Vice President of the Corporation.
ARTICLE 2
STOCKHOLDERS
------------
2.1 PLACE OF MEETINGS. Every meeting of Stockholders shall be held
at the office of the Corporation or at such other place within or without the
State of Delaware as shall be specified or fixed in the notice of such meeting
or in the waiver of notice thereof.
<PAGE>
3
2.2 ANNUAL MEETING. A meeting of Stockholders shall be held annually
for the election of Directors and the transaction of other business as may
properly come before the meeting at such date and time as may be determined by
the Board and designated in the notice of meeting.
2.2.1 At any such annual meeting of stockholders, only such
business shall be conducted, and only such proposals shall be acted upon, as
shall have been properly brought before the annual meeting of stockholders
(A) by, or at the direction of, the Board of Directors or (B) by a stockholder
of the Corporation who complies with the procedures set forth in this
Section 2.2.1. For business or a proposal to be properly brought before an
annual meeting of stockholders by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the scheduled date of the annual meeting, regardless
of any postponement, deferral or adjournment of that meeting to a later date;
PROVIDED, HOWEVER, that if less than 70 days' notice or prior public disclosure
of the date of the annual meeting is given or made to stockholders, notice by
the stockholder to be timely must be so delivered or received not later than the
close of business on the 10th day following the earlier (i) the day on which
such notice of the date of the meeting was mailed or (ii) the day on which such
public disclosure was made.
A stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before an annual meeting of
stockholders (i) a description, in 500 words or less, of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business and any other
stockholders known by such stockholder to be supporting such proposal, (iii) the
class and number of shares of the Corporation which are beneficially owned by
such stockholder on the date of such stockholder's notice and by any other
stockholders known by such stockholder to be supporting such proposal on the
date of such stockholder's notice, (iv) a description, in 500 words or less, of
any interest of the stockholder in such proposal and (v) a representation that
the stockholder is a holder of record of stock of the Corporation and intends to
appear in person or by proxy at the meeting to present the proposal specified in
the notice. Notwithstanding anything these Amended and Restated By-Laws or in
the Amended and Restated Certificate of Incorporation to the contrary, no
business shall be conducted at a meeting of stockholders except in accordance
with the procedures set forth in this Section 2.2.1.
The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that the business was not properly brought
before the meeting in accordance with the procedures prescribed by this
<PAGE>
4
Section 2.2.1, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted. Notwithstanding the foregoing, nothing in this Section 2.2.1 shall
be interpreted or construed to require the inclusion of information about any
such proposal in any proxy statement distributed by, at the direction of, or on
behalf of, the Board.
2.2.2 Subject to the rights, if any, of the holders of any
series of Preferred Stock then outstanding, only persons nominated in accordance
with the procedures set forth in this Section 2.2.2 shall be eligible for
election as directors. Nominations for election to the Board shall be made by
(i) in the case of the Class A Directors, by the Class A Nominating Committee,
and (ii) in the case of the Class B Directors, by the Class B Nominating
Committee. In addition, nominations of persons for election to the Board as
Class A Directors may be made at an annual meeting of stockholders or special
meeting of stockholders called by the Board for the purpose of electing
directors by any holder of the Corporation's Class A Common Stock, par value
$.01 per share (the "Class A Common Stock") entitled to vote for the election of
directors at such meeting who complies with the notice procedures set forth in
this Section 2.2.2. Such nominations shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation not less than 60 days nor more than 90 days prior to
the scheduled date of the meeting, regardless of any postponement, deferral or
adjournment of that meeting to a later date; PROVIDED, HOWEVER, that if less
than 70 days' notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by the stockholder to be timely must be so
delivered or received not later than the close of business on the 10th day
following the earlier of (i) the day on which such notice of the date of the
meeting was mailed or (ii) the day on which such public disclosure was made.
A stockholder's notice to the Secretary shall set forth (i) as to
each person whom the stockholder proposes to nominate for election or reelection
as a director (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the class
and number of shares of the Corporation which are beneficially owned by such
person on the date of such stockholder's notice and (d) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, or any successor statute thereto (the "Exchange Act") (including,
without limitation, such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (ii) as to the
stockholder giving the notice (a) the name and address, as they appear on the
Corporation's books, of such stockholder and any other stockholders known by
such stockholder to be supporting such nominee(s), (b) the class and number of
shares of the Corporation which are beneficially owned by such stockholder on
the date of such
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5
stockholder's notice and by any other stockholders known by such stockholder to
be supporting such nominee(s) on the date of such stockholder's notice, (c) a
representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; and (iii) a description of all arrangements or understandings between
the stockholder and each nominee and other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder.
No person (other than persons nominated by or at the direction of
the Board, the Class A Nominating Committee or the Class B Nominating Committee)
shall be eligible for election as director of the Corporation unless nominated
in accordance with the procedures set forth in this Section 2.2.2. The chairman
of the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the procedures prescribed by
this Section 2.2.2, and, if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
2.3 DEFERRED MEETING FOR ELECTION OF DIRECTORS, ETC. If the annual
meeting of Stockholders for the election of Directors and the transaction of
other business is not held within the months specified in Section 2.2 hereof,
the Board shall call a meeting of Stockholders for the election of Directors and
the transaction of other business as soon thereafter as convenient.
2.4 OTHER SPECIAL MEETINGS. A special meeting of Stockholders (other
than a special meeting for the election of Directors), unless otherwise
prescribed by statute or by the Certificate of Incorporation, may be called at
any time by the Board, the Chairman, the Vice Chairman, the President or the
holders of at least thirty-three percent (33%) of the voting power of the
Corporation's Class A Common Stock and Class B Common Stock, par value $.01 per
share (the "Class B Common Stock"). At any special meeting of Stockholders only
such business may be transacted as is related to the purpose or purposes of such
meeting set forth in the notice thereof given pursuant to Section 2.6 hereof or
in any waiver of notice thereof given pursuant to Section 2.7 hereof.
2.5 FIXING RECORD DATE. For the purpose of (a) determining the
Stockholders entitled (i) to notice of or to vote at any meeting of Stockholders
or any adjournment thereof, (ii) unless otherwise provided in the Certificate of
Incorporation to express consent to corporate action in writing without a
meeting or (iii) to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock; or (b) any other lawful action, the
Board may fix a record date, which record date shall not precede the date upon
which the resolution fixing the record date was adopted by the Board and which
record date shall not be (x) in the case of clause (a)(i) above, more than sixty
nor less than ten days before the date of such meeting, (y) in the case
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6
of clause (a)(ii) above, more than 10 days after the date upon which the
resolution fixing the record date was adopted by the Board and (z) in the case
of clause (a)(iii) or (b) above, more than sixty days prior to such action. If
no such record date is fixed:
2.5.1 the record date for determining Stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the day on which notice is given, or,
if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held;
2.5.2 the record date for determining stockholders entitled
to express consent to corporate action in writing without a meeting (unless
otherwise provided in the Certificate of Incorporation), when no prior
action by the Board is required under the General Corporation Law, shall be
the first day on which a signed written consent setting forth the action
taken or proposed to be taken is delivered to the Corporation by delivery
to its registered office in the State of Delaware, its principal place of
business, or an officer or agent of the Corporation having custody of the
book in which proceedings of meetings of stockholders are recorded; and
when prior action by the Board is required under the General Corporation
Law, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close of
business on the date on which the Board adopts the resolution taking such
prior action; and
2.5.3 the record date for determining stockholders for any
purpose other than those specified in Sections 2.5.1 and 2.5.2 shall be at
the close of business on the day on which the Board adopts the resolution
relating thereto.
When a determination of Stockholders entitled to notice of or to vote at any
meeting of Stockholders has been made as provided in this Section 2.5, such
determination shall apply to any adjournment thereof unless the Board fixes a
new record date for the adjourned meeting. Delivery made to the Corporation's
registered office in accordance with Section 2.5.2 shall be by hand or by
certified or registered mail, return receipt requested.
2.6 NOTICE OF MEETINGS OF STOCKHOLDERS. Except as otherwise provided
in Sections 2.5 and 2.7 hereof, whenever under the provisions of any statute,
the Certificate of Incorporation or these By-laws, Stockholders are required or
permitted to take any action at a meeting, written notice shall be given stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. Unless otherwise
provided by any statute, the Certificate of Incorporation or these By-laws, a
copy of the notice of any
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7
meeting shall be given, personally or by mail, not less than ten nor more than
sixty days before the date of the meeting, to each Stockholder entitled to
notice of or to vote at such meeting. If mailed, such notice shall be deemed to
be given when deposited in the United States mail, with postage prepaid,
directed to the Stockholder at his or her address as it appears on the records
of the Corporation. An affidavit of the Secretary or an Assistant Secretary or
of the transfer agent of the Corporation that the notice required by this
Section 2.6 has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken,
and at the adjourned meeting any business may be transacted that might have been
transacted at the meeting as originally called. If, however, the adjournment is
for more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each Stockholder of record entitled to vote at the meeting.
2.7 WAIVERS OF NOTICE. Whenever the giving of any notice is required
by statute, the Certificate of Incorporation or these By-laws, a waiver thereof,
in writing, signed by the Stockholder or Stockholders entitled to said notice,
whether before or after the event as to which such notice is required, shall be
deemed equivalent to notice. Attendance by a Stockholder at a meeting shall
constitute a waiver of notice of such meeting except when the Stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting has
not been lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the Stockholders need be
specified in any written waiver of notice unless so required by statute, the
Certificate of Incorporation or these By-laws.
2.8 LIST OF STOCKHOLDERS. The Secretary shall prepare and make, or
cause to be prepared and made, at least ten days before every meeting of
Stockholders, a complete list of the Stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
Stockholder and the number of shares registered in the name of each Stockholder.
Such list shall be open to the examination of any Stockholder, the Stockholder's
agent, or attorney, at the Stockholder's expense, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any Stockholder who is present. The
Corporation shall maintain the Stockholder list in written form or in another
form capable of conversion into written form within a reasonable time. Upon the
willful neglect or refusal of the Directors to produce such a list at any
meeting for the election of Directors, they shall be ineligible for election to
any office at such
<PAGE>
8
meeting. The stock ledger shall be the only evidence as to who are the
Stockholders entitled to examine the stock ledger, the list of Stockholders or
the books of the Corporation, or to vote in person or by proxy at any meeting of
Stockholders.
2.9 QUORUM OF STOCKHOLDERS; ADJOURNMENT. Except as otherwise
provided by any statute, the Certificate of Incorporation or these By-laws, the
holders of one-third of all outstanding shares of stock entitled to vote at any
meeting of Stockholders, present in person or represented by proxy, shall
constitute a quorum for the transaction of any business at such meeting. When a
quorum is once present to organize a meeting of Stockholders, it is not broken
by the subsequent withdrawal of any Stockholders. The holders of a majority of
the shares of stock present in person or represented by proxy at any meeting of
Stockholders, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. Shares of its own
stock belonging to the Corporation or to another corporation, if a majority of
the shares entitled to vote in the election of directors of such other
corporation is held, directly or indirectly, by the Corporation, shall neither
be entitled to vote nor be counted for quorum purposes; PROVIDED, HOWEVER, that
the foregoing shall not limit the right of the Corporation to vote stock,
including but not limited to its own stock, held by it in a fiduciary capacity.
2.10 VOTING; PROXIES. Unless otherwise provided in the Certificate of
Incorporation, every Stockholder of record shall be entitled at every meeting of
Stockholders to one vote for each share of capital stock standing in his or her
name on the record of Stockholders determined in accordance with Section 2.5
hereof. If the Certificate of Incorporation provides for more or less than one
vote for any share on any matter, each reference in the By-laws or the General
Corporation Law to a majority or other proportion of stock shall refer to such
majority or other proportion of the votes of such stock. The provisions of
Sections 212 and 217 of the General Corporation Law shall apply in determining
whether any shares of capital stock may be voted and the persons, if any,
entitled to vote such shares; but the Corporation shall be protected in assuming
that the persons in whose names shares of capital stock stand on the stock
ledger of the Corporation are entitled to vote such shares. Holders of
redeemable shares of stock are not entitled to vote after the notice of
redemption is mailed to such holders and a sum sufficient to redeem the stocks
has been deposited with a bank, trust company, or other financial institution
under an irrevocable obligation to pay the holders the redemption price on
surrender of the shares of stock. At any meeting of Stockholders (at which a
quorum was present to organize the meeting), all matters, except as otherwise
provided by statute or by the Certificate of Incorporation or by these By-laws,
shall be decided by a majority of the votes cast at such meeting by the holders
of shares present in person or represented by proxy and entitled to vote
thereon, whether or not a quorum is present when the vote is taken. All
elections of Directors shall be by written ballot unless otherwise provided in
the Certificate of Incorporation. In voting on any other question on which a
vote by ballot is required by law or is demanded by any Stockholder entitled to
vote, the
<PAGE>
9
voting shall be by ballot. Each ballot shall be signed by the Stockholder
voting or the Stockholder's proxy and shall state the number of shares voted.
On all other questions, the voting may be VIVA VOCE. Each Stockholder entitled
to vote at a meeting of Stockholders or to express consent or dissent to
corporate action in writing without a meeting may authorize another person or
persons to act for such Stockholder by proxy. The validity and enforceability
of any proxy shall be determined in accordance with Section 212 of the General
Corporation Law. A Stockholder may revoke any proxy that is not irrevocable by
attending the meeting and voting in person or by filing an instrument in writing
revoking the proxy or by delivering a proxy in accordance with applicable law
bearing a later date to the Secretary.
2.11 VOTING PROCEDURES AND INSPECTORS OF ELECTION AT MEETINGS OF
STOCKHOLDERS. The Board, in advance of any meeting of Stockholders, may appoint
one or more inspectors to act at the meeting and make a written report thereof.
The Board may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate has been appointed
or is able to act at a meeting, the person presiding at the meeting may appoint,
and on the request of any Stockholder entitled to vote thereat shall appoint,
one or more inspectors to act at the meeting. Each inspector, before entering
upon the discharge of his or her duties, shall take and sign an oath faithfully
to execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspectors shall (a) ascertain the number of
shares outstanding and the voting power of each, (b) determine the shares
represented at the meeting and the validity of proxies and ballots, (c) count
all votes and ballots, (d) determine and retain for a reasonable period a record
of the disposition of any challenges made to any determination by the
inspectors, and (e) certify their determination of the number of shares
represented at the meeting and their count of all votes and ballots. The
inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of their duties. Unless otherwise provided by the
Board, the date and time of the opening and the closing of the polls for each
matter upon which the Stockholders will vote at a meeting shall be determined by
the person presiding at the meeting and shall be announced at the meeting. No
ballot, proxies or votes, or any revocation thereof or change thereto, shall be
accepted by the inspectors after the closing of the polls unless the Court of
Chancery of the State of Delaware upon application by a Stockholder shall
determine otherwise.
2.12 ORGANIZATION. At each meeting of Stockholders, the Chairman, or
in the absence of the Chairman, the Vice Chairman, or in the absence of the Vice
Chairman, the Chief Executive Officer, or in the absence of the Chief Executive
Officer, the President, or in the absence of the President, a Vice President,
and in case more than one Vice President shall be present, that Vice President
designated by the Board (or in the absence of any such designation, the most
senior Vice President, based on age, present), shall act as chairman of the
meeting. The Secretary, or in his
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10
or her absence, one of the Assistant Secretaries, shall act as secretary of the
meeting. In case none of the officers above designated to act as chairman or
secretary of the meeting, respectively, shall be present, a chairman or a
secretary of the meeting, as the case may be, shall be chosen by a majority of
the votes cast at such meeting by the holders of shares of capital stock present
in person or represented by proxy and entitled to vote at the meeting.
2.13 ORDER OF BUSINESS. The order of business at all meetings of
Stockholders shall be as determined by the chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
2.14 WRITTEN CONSENT OF STOCKHOLDERS WITHOUT A MEETING. Unless
otherwise provided in the Certificate of Incorporation, any action required by
the General Corporation Law to be taken at any annual or special meeting of
stockholders 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 the holders of outstanding stock 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 shares entitled to vote thereon were present and voted
and shall be delivered (by hand or by certified or registered mail, return
receipt requested) to the Corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer or agent
of the Corporation having custody of the book in which proceedings of meetings
of stockholders are recorded. Every written consent shall bear the date of
signature of each stockholder who signs the consent and no written consent shall
be effective to take the corporate action referred to therein unless, within
60 days of the earliest dated consent delivered in the manner required by this
Section 2.14, written consents signed by a sufficient number of holders to take
action are delivered to the Corporation as aforesaid. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those Stockholders who have not consented in writing.
ARTICLE 3
DIRECTORS
---------
3.1 GENERAL POWERS. Except as otherwise provided in the Certificate
of Incorporation, the business and affairs of the Corporation shall be managed
by or under the direction of the Board. The Board may adopt such rules and
regulations, not inconsistent with the Certificate of Incorporation or these
By-laws or applicable laws, as it may deem proper for the conduct of its
meetings and the management of the Corporation. In addition to the powers
expressly conferred by these By-laws, the Board may exercise all powers and
perform all acts that are not
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11
required, by these By-laws or the Certificate of Incorporation or by statute, to
be exercised and performed by the Stockholders.
3.2 NUMBER; QUALIFICATION; TERM OF OFFICE. The number of Directors
shall be fixed initially at twelve (12) and may thereafter be changed from time
to time by action of the stockholders or by action of the Board. Directors need
not be stockholders. Each Director shall hold office until a successor is
elected and qualified or until the Director's death, resignation or removal.
3.3 ELECTION. Directors shall, except as otherwise required by
statute or by the Certificate of Incorporation, be elected by a plurality of the
votes cast at a meeting of stockholders (or stockholders acting by written
consent) by the holders of shares entitled to vote in the election, voting as a
separate class.
3.4 NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Unless otherwise
provided in the Certificate of Incorporation, newly created Directorships
resulting from an increase in the number of Directors and vacancies occurring in
the Board for any other reason, including the removal of Directors without
cause, may be filled only by (a) the affirmative votes of a majority of the
remaining directors elected by holders of each class of Common Stock or series
of Preferred Stock that (x) elected such directorship and (y) as of the date
such vacancy is filled, would be entitled to elect such directorship at the next
annual meeting of stockholders or, (b) if there are no such remaining directors,
then by a plurality of the votes cast by the holders of the class or classes of
Common Stock or series of Preferred Stock that, as of the date such vacancy is
filled, would be entitled to elect such directorship at the next annual meeting
of stockholders, voting as a separate class at a meeting, special or otherwise,
of the holders of Common Stock of such class or classes or series of Preferred
Stock. A Director elected to fill a vacancy shall be elected to hold office
until a successor is elected and qualified, or until the Director's earlier
death, resignation or removal.
3.5 RESIGNATION. Any Director may resign at any time by written
notice to the Corporation. Such resignation shall take effect at the time
therein specified, and, unless otherwise specified in such resignation, the
acceptance of such resignation shall not be necessary to make it effective.
3.6 REMOVAL. Unless otherwise provided in the Certificate of
Incorporation, and subject to the provisions of Section 141(k) of the General
Corporation Law, directors may be removed with or without cause only by a
majority of the holders of the class or classes of Common Stock or series of
Preferred Stock that, as of the date such removal is effected, would be entitled
to elect such directorship at the next annual meeting of stockholders.
3.7 COMPENSATION. Each Director, in consideration of his or her
service as such, shall be entitled to receive from the Corporation such amount
per
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12
annum or such fees for attendance at Directors' meetings, or both, as the Board
may from time to time determine, together with reimbursement for the reasonable
out-of-pocket expenses, if any, incurred by such Director in connection with the
performance of his or her duties. Each Director who shall serve as a member of
any committee of Directors in consideration of serving as such shall be entitled
to such additional amount per annum or such fees for attendance at committee
meetings, or both, as the Board may from time to time determine, together with
reimbursement for the reasonable out-of-pocket expenses, if any, incurred by
such Director in the performance of his or her duties. Nothing contained in
this Section 3.7 shall preclude any Director from serving the Corporation or its
subsidiaries in any other capacity and receiving proper compensation therefor.
3.8 TIMES AND PLACES OF MEETINGS. The Board may hold meetings, both
regular and special, either within or without the State of Delaware. The times
and places for holding meetings of the Board may be fixed from time to time by
resolution of the Board or (unless contrary to a resolution of the Board) in the
notice of the meeting.
3.9 ANNUAL MEETINGS. On the day when and at the place where the
annual meeting of stockholders for the election of Directors is held, and as
soon as practicable thereafter, the Board may hold its annual meeting, without
notice of such meeting, for the purposes of organization, the election of
officers and the transaction of other business. The annual meeting of the Board
may be held at any other time and place specified in a notice given as provided
in Section 3.11 hereof for special meetings of the Board or in a waiver of
notice thereof.
3.10 REGULAR MEETINGS. Regular meetings of the Board may be held
without notice at such times and at such places as shall from time to time be
determined by the Board.
3.11 SPECIAL MEETINGS. Special meetings of the Board may be called by
the Chairman, the Vice Chairman, the Chief Executive Officer, the President or
the Secretary or by any two or more Directors then serving on at least one day's
notice to each Director given by one of the means specified in Section 3.14
hereof other than by mail, or on at least three days' notice if given by mail.
Special meetings shall be called by the Chairman, the Vice Chairman, the Chief
Executive Officer, the President or Secretary in like manner and on like notice
on the written request of any two or more of the Directors then serving.
3.12 TELEPHONE MEETINGS. Directors or members of any committee
designated by the Board may participate in a meeting of the Board or of such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 3.12 shall constitute
presence in person at such meeting.
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13
3.13 ADJOURNED MEETINGS. A majority of the Directors present at any
meeting of the Board, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. At least one day's
notice of any adjourned meeting of the Board shall be given to each Director
whether or not present at the time of the adjournment, if such notice shall be
given by one of the means specified in Section 3.14 hereof other than by mail,
or at least three days' notice if by mail. Any business may be transacted at an
adjourned meeting that might have been transacted at the meeting as originally
called.
3.14 NOTICE PROCEDURE. Subject to Sections 3.11 and 3.17 hereof,
whenever, under the provisions of any statute, the Certificate of Incorporation
or these By-laws, notice is required to be given to any Director, such notice
shall be deemed given effectively if given in person or by telephone, by mail
addressed to such Director at such Director's address as it appears on the
records of the Corporation, with postage thereon prepaid, or by telegram, telex,
telecopy or similar means addressed as aforesaid.
3.15 WAIVER OF NOTICE. Whenever the giving of any notice is required
by statute, the Certificate of Incorporation or these By-laws, a waiver thereof,
in writing, signed by the person or persons entitled to said notice, whether
before or after the event as to which such notice is required, shall be deemed
equivalent to notice. Attendance by a person at a meeting shall constitute a
waiver of notice of such meeting except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting has not been lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Directors or a committee of Directors
need be specified in any written waiver of notice unless so required by statute,
the Certificate of Incorporation or these By-laws.
3.16 ORGANIZATION. At each meeting of the Board, the Chairman, or in
the absence of the Chairman, the Vice Chairman, or in the absence of the Vice
Chairman, the Chief Executive Officer, or in the absence of the Chief Executive
Officer, the President, or in the absence of the President, a chairman chosen by
a majority of the Directors present, shall preside. The Secretary shall act as
secretary at each meeting of the Board. In case the Secretary shall be absent
from any meeting of the Board, an Assistant Secretary shall perform the duties
of secretary at such meeting; and in the absence from any such meeting of the
Secretary and all Assistant Secretaries, the person presiding at the meeting may
appoint any person to act as secretary of the meeting.
3.17 QUORUM OF DIRECTORS. The presence in person of a majority of the
Entire Board shall be necessary and sufficient to constitute a quorum for the
transaction of business at any meeting of the Board, but a majority of a smaller
number may adjourn any such meeting to a later date.
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14
3.18 ACTION BY MAJORITY VOTE. Except as otherwise expressly required
by statute, the Certificate of Incorporation or these By-laws, the act of a
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board.
3.19 ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these By-laws, any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if all Directors or members of such committee, as the case may
be, consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
ARTICLE 4
COMMITTEES OF THE BOARD
-----------------------
4.1 GENERAL. The Board may, by resolution passed by a vote of a
majority of the entire Board, designate one or more committees, each committee
to consist of one or more of the Directors of the Corporation. The Board may
designate one or more Directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of such committee. If
a member of a committee shall be absent from any meeting, or disqualified from
voting thereat, the remaining member or members present and not disqualified
from voting, whether or not such member or members constitute a quorum, may, by
a unanimous vote, appoint another member of the Board to act at the meeting in
the place of any such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the Board passed as aforesaid, shall have
and may exercise all the powers and authority of the Board in the management of
the business and affairs of the Corporation, and may authorize the seal of the
Corporation to be impressed on all papers that may require it, but no such
committee shall have the power or authority of the Board in reference to
amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation under section 251 or section 252 of the General Corporation Law,
recommending to the stockholders (a) the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, or (b) a dissolution
of the Corporation or a revocation of a dissolution, or amending the By-laws of
the Corporation; and, unless the resolution designating it expressly so
provides, no such committee shall have the power and authority to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law.
Unless otherwise specified in the resolution of the Board designating a
committee, at all meetings of such committee a majority of the total number of
members of the committee shall constitute a quorum for the transaction of
business, and the vote of a majority of the members of the committee present at
any meeting at which there is a quorum shall be the act of the committee. Each
committee shall keep regular minutes of its meetings. Unless the
<PAGE>
15
Board otherwise provides, each committee designated by the Board may make, alter
and repeal rules for the conduct of its business. In the absence of such rules
each committee shall conduct its business in the same manner as the Board
conducts its business pursuant to Article 3 of these By-laws.
4.2 CLASS A NOMINATING COMMITTEE. The Board of Directors, by
resolution adopted by a majority of the entire Board of Directors, shall
designate not less than three (3) of the directors then in office to constitute
a Class A Nominating Committee; PROVIDED, that at least a majority of such
directors must be Class A Directors. The Class A Nominating Committee: (i)
establish criteria and procedures for the election of the Class A Directors;
(ii) review management's evaluation of any officers proposed for nomination as
Class A Directors; (iii) review the qualifications of and, when necessary and
appropriate, interview candidates who may be proposed for nomination as Class A
Directors; (iv) recommend to the entire Board a slate of Class A Directors to be
elected for the following year; and (v) perform such other duties in connection
with the selection, election, or termination of the Class A Directors as the
Board may request.
For purposes of the Certificate of Incorporation and these By-laws the
term "Class A Directors" shall mean the Directors of the Corporation elected by
the holders of the Class A Common Stock and the term "Class A Nominating
Committee" shall mean the standing committee of the Board of Directors charged
with nominating Class A Directors.
4.3 CLASS B NOMINATING COMMITTEE.. The Board of Directors, by
resolution adopted by a majority of the entire Board of Directors, shall
designate not less than three (3) of the directors then in office to constitute
a Class B Nominating Committee; PROVIDED, that at least a majority of such
directors must be Class B Directors. The Class B Nominating Committee shall:
(i) establish criteria and procedures for the election of the Class B Directors;
(ii) review management's evaluation of any officers proposed for nomination as
Directors; (iii) review the qualifications of and, when necessary and
appropriate, interview candidates who may be proposed for nomination as Class B
Directors; (iv) recommend to the entire Board of Directors a slate of Class B
Directors to be elected for the following year; and (v) perform such other
duties in connection with the selection, election, or termination of the Class B
Directors as the Board of Directors may request.
For the purposes of the Certificate of Incorporation and these By-laws
the term "Class B Directors" shall mean the Directors of the Corporation elected
by the holders of the Class B Common Stock and the term "Class B Nominating
Committee" shall mean the standing committee of the Board of Directors charged
with nominating Class B Directors.
<PAGE>
16
4.4 EXECUTIVE COMMITTEE. The Board of Directors shall, by
resolution passed by majority of the entire Board, designate two or more of
their number to constitute an Executive Committee to hold office at the pleasure
of the Board. Executive Committee shall have reasonable access during normal
working hours to all significant information (including all books and records)
respecting the Corporation and its assets. Subject to the provisions of the
GCL, the Executive Committee shall have and may exercise all of the powers of
the Board of Directors in the management and affairs of Corporation including,
without limitation, the power and authority to declare a dividend, to authorize
the issuance of stock or to adopt a certificate of ownership and merger in
connection with the merger of the Corporation and any of its subsidiaries.
ARTICLE 5
OFFICERS
--------
5.1 POSITIONS. The officers of the Corporation shall be a President,
a Secretary, a Treasurer and such other officers as the Board may appoint,
including a Chairman, a Vice Chairman, a Chief Executive Officer, a Chief
Operating Officer, one or more Vice Presidents and one or more Assistant
Secretaries and Assistant Treasurers, who shall exercise such powers and perform
such duties as shall be determined from time to time by the Board. The Board
may designate one or more Vice Presidents as Executive Vice Presidents or Senior
Vice Presidents and may use descriptive words or phrases to designate the
standing, seniority or areas of special competence of the Vice Presidents
elected or appointed by it. Any number of offices may be held by the same
person unless the Certificate of Incorporation or these By-laws otherwise
provide.
5.2 APPOINTMENT. The officers of the Corporation shall be chosen by
the Board at its annual meeting or at such other time or times as the Board
shall determine.
5.3 COMPENSATION. The compensation of all officers of the
Corporation shall be fixed by the Board. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that the officer
is also a Director.
5.4 TERM OF OFFICE. Each officer of the Corporation shall hold
office for the term for which he or she is elected and until such officer's
successor is chosen and qualifies or until such officer's earlier death,
resignation or removal. Any officer may resign at any time upon written notice
to the Corporation. Such resignation shall take effect at the date of receipt
of such notice or at such later time as is therein specified, and, unless
otherwise specified, the acceptance of such resignation shall not be necessary
to make it effective. The resignation of an officer
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17
shall be without prejudice to the contract rights of the Corporation, if any.
Any officer elected or appointed by the Board may be removed at any time, with
or without cause, by vote of a majority of the entire Board. Any vacancy
occurring in any office of the Corporation shall be filled by the Board. The
removal of an officer without cause shall be without prejudice to the officer's
contract rights, if any. The election or appointment of an officer shall not of
itself create contract rights.
5.5 FIDELITY BONDS. The Corporation may secure the fidelity of any
or all of its officers or agents by bond or otherwise.
5.6 CHAIRMAN. The Chairman, if one shall have been appointed, shall
be a Director and shall preside at all meetings of the Board at which he is
present and shall exercise such powers and perform such other duties as shall be
determined from time to time by the Board.
5.7 VICE CHAIRMAN. The Vice Chairman, if one shall have been
appointed, shall exercise such powers and perform such other duties as shall be
determined from time to time by the Board.
5.8 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the
Corporation shall have general supervision over the business of the Corporation,
subject, however, to the control of the Board and of any duly authorized
committee of Directors. The Chief Executive Officer shall preside at all
meetings of the Stockholders and at all meetings of the Board at which the
Chairman (if there be one) or the Vice Chairman (if there be one) is not
present. The Chief Executive Officer may sign and execute in the name of the
Corporation deeds, mortgages, bonds, contracts and other instruments except in
cases in which the signing and execution thereof shall be expressly delegated by
the Board or by these By-laws to some other officer or agent of the Corporation
or shall be required by statute otherwise to be signed or executed and, in
general, the Chief Executive Officer shall perform all duties incident to the
office of Chief Executive Officer of a corporation and such other duties as may
from time to time be assigned to the Chief Executive Officer by the Board.
5.9 PRESIDENT. At the request of the Chief Executive Officer, or, in
the Chief Executive Officer's absence, at the request of the Board, the
President, if one shall have been appointed, shall perform all of the duties of
the Chief Executive Officer and, in so performing, shall have all the powers of,
and be subject to all restrictions upon, the Chief Executive Officer. The
President may sign and execute in the name of the Corporation deeds, mortgages,
bonds, contracts or other instruments, except in cases in which the signing and
execution thereof shall be expressly delegated by the Board or by these By-laws
to some other officer or agent of the Corporation, or shall be required by
statute otherwise to be signed or executed,
<PAGE>
18
and the President shall perform such other duties as from time to time may be
assigned to the President by the Board or by the Chief Executive Officer.
5.10 CHIEF OPERATING OFFICER. At the request of the Chief Executive
Officer, or, in the Chief Executive Officer's absence, at the request of the
Board, the Chief Operating Officer, if one shall have been appointed, shall
perform all of the duties of the Chief Executive Officer and, in so performing,
shall have all the powers of, and be subject to all restrictions upon, the Chief
Executive Officer. The Chief Operating Officer may sign and execute in the name
of the Corporation deeds, mortgages, bonds, contracts or other instruments,
except in cases in which the signing and execution thereof shall be expressly
delegated by the Board or by these By-laws to some other officer or agent of the
Corporation, or shall be required by statute otherwise to be signed or executed,
and the Chief Operating Officer shall perform such other duties as from time to
time may be assigned to the Chief Operating Officer by the Board or by the Chief
Executive Officer.
5.11 VICE PRESIDENTS. Any Vice President may sign and execute in the
name of the Corporation deeds, mortgages, bonds, contracts or other instruments,
except in cases in which the signing and execution thereof shall be expressly
delegated by the Board or by these By-laws to some other officer or agent of the
Corporation, or shall be required by statute otherwise to be signed or executed,
and each Vice President shall perform such other duties as from time to time may
be assigned to such Vice President by the Board, by the Chief Executive Officer
or by the President.
5.12 SECRETARY. The Secretary shall attend all meetings of the Board
and of the Stockholders and shall record all the proceedings of the meetings of
the Board and of the stockholders in a book to be kept for that purpose, and
shall perform like duties for committees of the Board, when required. The
Secretary shall give, or cause to be given, notice of all special meetings of
the Board and of the stockholders and shall perform such other duties as may be
prescribed by the Board or by the Chief Executive Officer, under whose
supervision the Secretary shall be. The Secretary shall have custody of the
corporate seal of the Corporation, and the Secretary, or an Assistant Secretary,
shall have authority to impress the same on any instrument requiring it, and
when so impressed the seal may be attested by the signature of the Secretary or
by the signature of such Assistant Secretary. The Board may give general
authority to any other officer to impress the seal of the Corporation and to
attest the same by such officer's signature. The Secretary or an Assistant
Secretary may also attest all instruments signed by the Chief Executive Officer,
the President or any Vice President. The Secretary shall have charge of all the
books, records and papers of the Corporation relating to its organization and
management, shall see that the reports, statements and other documents required
by statute are properly kept and filed and, in general, shall perform all duties
incident to the office of Secretary of a corporation and such other duties as
may from time to time be
<PAGE>
19
assigned to the Secretary by the Board, by the Chief Executive Officer or by the
President.
5.13 TREASURER. The Treasurer shall have charge and custody of, and
be responsible for, all funds, securities and notes of the Corporation; receive
and give receipts for moneys due and payable to the Corporation from any sources
whatsoever; deposit all such moneys and valuable effects in the name and to the
credit of the Corporation in such depositaries as may be designated by the
Board; against proper vouchers, cause such funds to be disbursed by checks or
drafts on the authorized depositaries of the Corporation signed in such manner
as shall be determined by the Board and be responsible for the accuracy of the
amounts of all moneys so disbursed; regularly enter or cause to be entered in
books or other records maintained for the purpose full and adequate account of
all moneys received or paid for the account of the Corporation; have the right
to require from time to time reports or statements giving such information as
the Treasurer may desire with respect to any and all financial transactions of
the Corporation from the officers or agents transacting the same; render to the
Chief Executive Officer or the Board, whenever the Chief Executive Officer or
the Board shall require the Treasurer so to do, an account of the financial
condition of the Corporation and of all financial transactions of the
Corporation; exhibit at all reasonable times the records and books of account to
any of the Directors upon application at the office of the Corporation where
such records and books are kept; disburse the funds of the Corporation as
ordered by the Board; and, in general, perform all duties incident to the office
of Treasurer of a corporation and such other duties as may from time to time be
assigned to the Treasurer by the Board, the Chief Executive Officer or by the
President.
5.14 ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. Assistant
Secretaries and Assistant Treasurers shall perform such duties as shall be
assigned to them by the Secretary or by the Treasurer, respectively, or by the
Board or by the Chief Executive Officer.
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
----------------------------------------------
6.1 EXECUTION OF CONTRACTS. The Board, except as otherwise provided
in these By-laws, may prospectively or retroactively authorize any officer or
officers, employee or employees or agent or agents, in the name and on behalf of
the Corporation, to enter into any contract or execute and deliver any
instrument, and any such authority may be general or confined to specific
instances, or otherwise limited.
6.2 LOANS. The Board may prospectively or retroactively authorize
the Chief Executive Officer or any other officer, employee or agent of the
Corporation to effect loans and advances at any time for the Corporation from
any
<PAGE>
20
bank, trust company or other institution, or from any firm, corporation or
individual, and for such loans and advances the person so authorized may make,
execute and deliver promissory notes, bonds or other certificates or evidences
of indebtedness of the Corporation, and, when authorized by the Board so to do,
may pledge and hypothecate or transfer any securities or other property of the
Corporation as security for any such loans or advances. Such authority
conferred by the Board may be general or confined to specific instances, or
otherwise limited.
6.3 CHECKS, DRAFTS, ETC. All checks, drafts and other orders for the
payment of money out of the funds of the Corporation and all evidences of
indebtedness of the Corporation shall be signed on behalf of the Corporation in
such manner as shall from time to time be determined by resolution of the Board.
6.4 DEPOSITS. The funds of the Corporation not otherwise employed
shall be deposited from time to time to the order of the Corporation with such
banks, trust companies, investment banking firms, financial institutions or
other depositaries as the Board may select or as may be selected by an officer,
employee or agent of the Corporation to whom such power to select may from time
to time be delegated by the Board.
ARTICLE 7
STOCK AND DIVIDENDS
-------------------
7.1 CERTIFICATES REPRESENTING SHARES. The shares of capital stock of
the Corporation shall be represented by certificates in such form (consistent
with the provisions of Section 158 of the General Corporation Law) as shall be
approved by the Board. Such certificates shall be signed by the Chairman, the
Chief Executive Officer, the Chief Operating Officer or a Vice President and by
the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, and may be impressed with the seal of the Corporation or a facsimile
thereof. The signatures of the officers upon a certificate may be facsimiles,
if the certificate is countersigned by a transfer agent or registrar other than
the Corporation itself or its employee. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon any
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may, unless otherwise
ordered by the Board, be issued by the Corporation with the same effect as if
such person were such officer, transfer agent or registrar at the date of issue.
7.2 TRANSFER OF SHARES. Transfers of shares of capital stock of the
Corporation shall be made only on the books of the Corporation by the holder
thereof or by the holder's duly authorized attorney appointed by a power of
attorney duly executed and filed with the Secretary or a transfer agent of the
Corporation, and on surrender of the certificate or certificates representing
such shares of capital stock properly endorsed for transfer and upon payment of
all necessary transfer taxes.
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21
Every certificate exchanged, returned or surrendered to the Corporation shall be
marked "Canceled," with the date of cancellation, by the Secretary or an
Assistant Secretary or the transfer agent of the Corporation. A person in whose
name shares of capital stock shall stand on the books of the Corporation shall
be deemed the owner thereof to receive dividends, to vote as such owner and for
all other purposes as respects the Corporation. No transfer of shares of
capital stock shall be valid as against the Corporation, its stockholders and
creditors for any purpose, except to render the transferee liable for the debts
of the Corporation to the extent provided by law, until such transfer shall have
been entered on the books of the Corporation by an entry showing from and to
whom transferred.
7.3 TRANSFER AND REGISTRY AGENTS. The Corporation may from time to
time maintain one or more transfer offices or agents and registry offices or
agents at such place or places as may be determined from time to time by the
Board.
7.4 LOST, DESTROYED, STOLEN AND MUTILATED CERTIFICATES. The holder
of any shares of capital stock of the Corporation shall immediately notify the
Corporation of any loss, destruction, theft or mutilation of the certificate
representing such shares, and the Corporation may issue a new certificate to
replace the certificate alleged to have been lost, destroyed, stolen or
mutilated. The Board may, in its discretion, as a condition to the issue of any
such new certificate, require the owner of the lost, destroyed, stolen or
mutilated certificate, or his or her legal representatives, to make proof
satisfactory to the Board of such loss, destruction, theft or mutilation and to
advertise such fact in such manner as the Board may require, and to give the
Corporation and its transfer agents and registrars, or such of them as the Board
may require, a bond in such form, in such sums and with such surety or sureties
as the Board may direct, to indemnify the Corporation and its transfer agents
and registrars against any claim that may be made against any of them on account
of the continued existence of any such certificate so alleged to have been lost,
destroyed, stolen or mutilated and against any expense in connection with such
claim.
7.5 RULES AND REGULATIONS. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these By-laws or
with the Certificate of Incorporation, concerning the issue, transfer and
registration of certificates representing shares of its capital stock.
7.6 RESTRICTION ON TRANSFER OF STOCK. A written restriction on the
transfer or registration of transfer of capital stock of the Corporation, if
permitted by Section 202 of the General Corporation Law and noted conspicuously
on the certificate representing such capital stock, may be enforced against the
holder of the restricted capital stock or any successor or transferee of the
holder, including an executor, administrator, trustee, guardian or other
fiduciary entrusted with like responsibility for the person or estate of the
holder. Unless noted conspicuously on the certificate representing such capital
stock, a restriction, even though permitted by
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22
Section 202 of the General Corporation Law, shall be ineffective except against
a person with actual knowledge of the restriction. A restriction on the
transfer or registration of transfer of capital stock of the Corporation may be
imposed either by the Certificate of Incorporation or by an agreement among any
number of stockholders or among such stockholders and the Corporation. No
restriction so imposed shall be binding with respect to capital stock issued
prior to the adoption of the restriction unless the holders of such capital
stock are parties to an agreement or voted in favor of the restriction.
7.7 DIVIDENDS, SURPLUS, ETC. Subject to the provisions of the
Certificate of Incorporation and of law, the Board:
7.7.1 may declare and pay dividends or make other
distributions on the outstanding shares of capital stock in such amounts
and at such time or times as it, in its discretion, shall deem advisable
giving due consideration to the condition of the affairs of the
Corporation;
7.7.2 may use and apply, in its discretion, any of the
surplus of the Corporation in purchasing or acquiring any shares of capital
stock of the Corporation, or purchase warrants therefor, in accordance with
law, or any of its bonds, debentures, notes, scrip or other securities or
evidences of indebtedness; and
7.7.3 may set aside from time to time out of such surplus or
net profits such sum or sums as, in its discretion, it may think proper, as
a reserve fund to meet contingencies, or for equalizing dividends or for
the purpose of maintaining or increasing the property or business of the
Corporation, or for any purpose it may think conducive to the best
interests of the Corporation.
ARTICLE 8
INDEMNIFICATION
---------------
8.1 INDEMNITY UNDERTAKING. To the extent not prohibited by law, the
Corporation shall indemnify any person who is or was made, or threatened to be
made, a party to any threatened, pending or completed action, suit or proceeding
(a "Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a Director or
officer of the Corporation, or, at the request of the Corporation, is or was
serving as a director or officer of any other corporation or in a capacity with
comparable authority or responsibilities for any partnership, joint venture,
trust, employee benefit plan or
<PAGE>
23
other enterprise (an "Other Entity"), against judgments, fines, penalties,
excise taxes, amounts paid in settlement and costs, charges and expenses
(including attorneys' fees, disbursements and other charges). Persons who are
not directors or officers of the Corporation (or otherwise entitled to
indemnification pursuant to the preceding sentence) may be similarly indemnified
in respect of service to the Corporation or to an Other Entity at the request of
the Corporation to the extent the Board at any time specifies that such persons
are entitled to the benefits of this Article 8.
8.2 ADVANCEMENT OF EXPENSES. The Corporation shall, from time to
time, reimburse or advance to any Director or officer or other person entitled
to indemnification hereunder the funds necessary for payment of expenses,
including attorneys' fees and disbursements, incurred in connection with any
Proceeding, in advance of the final disposition of such Proceeding; PROVIDED,
HOWEVER, that, if required by the General Corporation Law, such expenses
incurred by or on behalf of any Director or officer or other person may be paid
in advance of the final disposition of a Proceeding only upon receipt by the
Corporation of an undertaking, by or on behalf of such Director or officer (or
other person indemnified hereunder), to repay any such amount so advanced if it
shall ultimately be determined by final judicial decision from which there is no
further right of appeal that such Director, officer or other person is not
entitled to be indemnified for such expenses.
8.3 RIGHTS NOT EXCLUSIVE. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall not be deemed exclusive of any other rights to which a
person seeking indemnification or reimbursement or advancement of expenses may
have or hereafter be entitled under any statute, the Certificate of
Incorporation, these By-laws, any agreement, any vote of stockholders or
disinterested Directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
8.4 CONTINUATION OF BENEFITS. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall continue as to a person who has ceased to be a Director or
officer (or other person indemnified hereunder) and shall inure to the benefit
of the executors, administrators, legatees and distributees of such person.
8.5 INSURANCE. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of an Other Entity,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability
<PAGE>
24
under the provisions of this Article 8, the Certificate of Incorporation or
under section 145 of the General Corporation Law or any other provision of law.
8.6 BINDING EFFECT. The provisions of this Article 8 shall be a
contract between the Corporation, on the one hand, and each Director and officer
who serves in such capacity at any time while this Article 8 is in effect and
any other person entitled to indemnification hereunder, on the other hand,
pursuant to which the Corporation and each such Director, officer or other
person intend to be, and shall be legally bound. No repeal or modification of
this Article 8 shall affect any rights or obligations with respect to any state
of facts then or theretofore existing or thereafter arising or any proceeding
theretofore or thereafter brought or threatened based in whole or in part upon
any such state of facts.
8.7 PROCEDURAL RIGHTS. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall be enforceable by any person entitled to such
indemnification or reimbursement or advancement of expenses in any court of
competent jurisdiction. The burden of proving that such indemnification or
reimbursement or advancement of expenses is not appropriate shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, its independent legal counsel and its stockholders) to have made a
determination prior to the commencement of such action that such indemnification
or reimbursement or advancement of expenses is proper in the circumstances nor
an actual determination by the Corporation (including its Board of Directors,
its independent legal counsel and its stockholders) that such person is not
entitled to such indemnification or reimbursement or advancement of expenses
shall constitute a defense to the action or create a presumption that such
person is not so entitled. Such a person shall also be indemnified for any
expenses incurred in connection with successfully establishing his or her right
to such indemnification or reimbursement or advancement of expenses, in whole or
in part, in any such proceeding.
8.8 SERVICE DEEMED AT CORPORATION'S REQUEST. Any Director or officer
of the Corporation serving in any capacity (a) another corporation of which a
majority of the shares entitled to vote in the election of its directors is
held, directly or indirectly, by the Corporation or (b) any employee benefit
plan of the Corporation or any corporation referred to in clause (a) shall be
deemed to be doing so at the request of the Corporation.
8.9 ELECTION OF APPLICABLE LAW. Any person entitled to be
indemnified or to reimbursement or advancement of expenses as a matter of right
pursuant to this Article 8 may elect to have the right to indemnification or
reimbursement or advancement of expenses interpreted on the basis of the
applicable law in effect at the time of the occurrence of the event or events
giving rise to the applicable Proceeding, to the extent permitted by law, or on
the basis of the applicable law in effect at the
<PAGE>
25
time such indemnification or reimbursement or advancement of expenses is sought.
Such election shall be made, by a notice in writing to the Corporation, at the
time indemnification or reimbursement or advancement of expenses is sought;
PROVIDED, HOWEVER, that if no such notice is given, the right to indemnification
or reimbursement or advancement of expenses shall be determined by the law in
effect at the time indemnification or reimbursement or advancement of expenses
is sought.
ARTICLE 9
BOOKS AND RECORDS
-----------------
9.1 BOOKS AND RECORDS. There shall be kept at the principal office
of the Corporation correct and complete records and books of account recording
the financial transactions of the Corporation and minutes of the proceedings of
the stockholders, the Board and any committee of the Board. The Corporation
shall keep at its principal office, or at the office of the transfer agent or
registrar of the Corporation, a record containing the names and addresses of all
stockholders, the number and class of shares held by each and the dates when
they respectively became the owners of record thereof.
9.2 FORM OF RECORDS. Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of, punch cards,
magnetic tape, photographs, microphotographs, or any other information storage
device, provided that the records so kept can be converted into clearly legible
written form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
9.3 INSPECTION OF BOOKS AND RECORDS. Except as otherwise provided by
law, the Board shall determine from time to time whether, and, if allowed, when
and under what conditions and regulations, the accounts, books, minutes and
other records of the Corporation, or any of them, shall be open to the
stockholders for inspection.
ARTICLE 10
SEAL
----
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
<PAGE>
26
ARTICLE 11
FISCAL YEAR
-----------
The fiscal year of the Corporation shall be fixed, and may be changed,
by resolution of the Board.
ARTICLE 12
PROXIES AND CONSENTS
--------------------
Unless otherwise directed by the Board, the Chairman, the Vice
Chairman, the Chief Executive Officer, the Chief Operating Officer, the
President, any Vice President, the Secretary or the Treasurer, or any one of
them, may execute and deliver on behalf of the Corporation proxies respecting
any and all shares or other ownership interests of any Other Entity owned by the
Corporation appointing such person or persons as the officer executing the same
shall deem proper to represent and vote the shares or other ownership interests
so owned at any and all meetings of holders of shares or other ownership
interests, whether general or special, and/or to execute and deliver consents
respecting such shares or other ownership interests; or any of the aforesaid
officers may attend any meeting of the holders of shares or other ownership
interests of such Other Entity and thereat vote or exercise any or all other
powers of the Corporation as the holder of such shares or other ownership
interests.
ARTICLE 13
EMERGENCY BY-LAWS
-----------------
Unless the Certificate of Incorporation provides otherwise, the
following provisions of this Article 13 shall be effective during an emergency,
which is defined as when a quorum of the Corporation's Directors cannot be
readily assembled because of some catastrophic event. During such emergency:
13.1 NOTICE TO BOARD MEMBERS. Any one member of the Board or any one
of the following officers: Chairman, Vice Chairman, Chief Executive Officer,
Chief Operating Officer, President, any Vice President, Secretary, or Treasurer,
may call a meeting of the Board. Notice of such meeting need be given only to
those Directors whom it is practicable to reach, and may be given in any
practical manner, including by publication and radio. Such notice shall be
given at least six hours prior to commencement of the meeting.
13.2 TEMPORARY DIRECTORS AND QUORUM. One or more officers of the
Corporation present at the emergency Board meeting, as is necessary to achieve a
quorum, shall be considered to be Directors for the meeting, and shall so serve
in
<PAGE>
27
order of rank, and within the same rank, in order of seniority. In the event
that less than a quorum of the Directors are present (including any officers who
are to serve as Directors for the meeting), those Directors present (including
the officers serving as Directors) shall constitute a quorum.
13.3 ACTIONS PERMITTED TO BE TAKEN. The Board as constituted in
Section 13.2, and after notice as set forth in Section 13.1 may:
13.3.1 prescribe emergency powers to any officer of the
Corporation;
13.3.2 delegate to any officer or Director, any of the powers of
the Board;
13.3.3 designate lines of succession of officers and agents, in
the event that any of them are unable to discharge their duties;
13.3.4 relocate the principal place of business, or designate
successive or simultaneous principal places of business; and
13.3.5 take any other convenient, helpful or necessary action to
carry on the business of the Corporation.
ARTICLE 14
AMENDMENTS
----------
These By-laws may be amended or repealed and new By-laws may be
adopted by a vote of the holders of shares entitled to vote in the election of
Directors or by the Board. Any By-laws adopted or amended by the Board may be
amended or repealed by the Stockholders entitled to vote thereon.
<PAGE>
Exhibit 4.1
NUMBER [METROMEDIA FIBER NETWORK LOGO] SHARES
MFN
CLASS A COMMON STOCK METROMEDIA FIBER NETWORK, INC. CUSIP 591689 10 4
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS IS TO CERTIFY THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS A COMMON STOCK, $.01 PAR
VALUE PER SHARE, OR
------------------- -------------------
- ------------------------ METROMEDIA FIBER NETWORK, INC. ------------------------
------------------- -------------------
transferable on the books of the Corporation by the registered holder hereof
in person or by its duly authorized attorney, upon surrender of this
certificate properly endorsed.
This certificate and the shares represented hereby are issued and shall
be held subject to all of the provisions of the Amended and Restated
Certificate of Incorporation, as amended, of the Corporation (a copy of which
is on file with the Transfer Agent) to all of which the holder of this
certificate, by acceptance hereof, assents.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its authorized officers.
Dated:
[METROMEDIA FIBER NETWORK, INC. CORPORATE SEAL 1993 DELAWARE]
/s/ Arnold L. Wadler /s/ Howard M. Finkelstein
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT
AND REGISTRAR
BY:
AUTHORIZED OFFICER
<PAGE>
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and qualifications, limitations or restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- __________ Custodian ___________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------SHARES
OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT
- ------------------------------------------------------------------------ATTORNEY
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PROMISES.
DATED
---------------------
----------------------------------------------------------------
NOTICE: THIS SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- -----------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM). PURSUANT TO
S.E.C. RULE 17 AD-15.
<PAGE>
EXHIBIT 5.1
October , 1997
FORM OF OPINION OF PAUL, WEISS, RIFKIND, WHARTON & GARRISON
Metromedia Fiber Network, Inc.
110 East 42nd Street
Suite 1502
New York, New York 10017
Metromedia Fiber Network, Inc.
Registration Statement on Form S-1
Registration No. 333-33653
Ladies and Gentlemen:
In connection with the above-captioned Registration Statement, as the same
may be amended from time to time (the "Registration Statement"), filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Act"), and the Rules and Regulations promulgated thereunder (the
"Rules"), we have been requested by Metromedia Fiber Network, Inc., a Delaware
corporation (the "Company"), to furnish our opinion as to the legality of
6,600,000 shares (the "Shares") of the Company's Class A Common Stock, par value
$0.01 per share (the "Class A Common Stock"), offered by the Company (including
up to 990,000 shares to be sold upon exercise of the Underwriters'
over-allotment option), registered for sale thereunder.
In connection with the furnishing of this opinion, we have reviewed the
Registration Statement (including all amendments thereto), the form of the
Underwriting Agreement included as Exhibit 1.1 to the Registration Statement
(the "Underwriting Agreement"), originals, or copies certified or otherwise
identified to our satisfaction, of the Company's Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws, each as in effect
on the date hereof, and records of certain of the Company's corporate
proceedings. We have also examined and relied upon representations as to factual
matters contained in certificates of officers of the Company, and have made such
other investigations of fact and law and have examined and relied upon the
originals, or copies certified or otherwise identified to our satisfaction, of
such documents, records, certificates or other instruments, and upon such
factual information otherwise supplied to us, as in our judgment are necessary
or appropriate to render the opinion expressed below. In addition, we have
assumed, without independent investigation, the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity of original documents to all documents submitted to us as certified,
photostatic, reproduced or conformed copies, the authenticity of all such latter
documents and the legal capacity of all individuals who have executed any of the
documents.
Based upon the foregoing, we are of the opinion that the Shares, when
issued, delivered and paid for as contemplated in the Registration Statement and
the Underwriting Agreement, will be duly authorized, validly issued, fully paid
and nonassessable.
Our opinion expressed above is limited to the General Corporation Law of the
State of Delaware. Please be advised that no member of this firm is admitted to
practice in the State of Delaware. Our opinion is rendered only with respect to
the laws, and the rules, regulations and orders thereunder, which are currently
in effect.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" contained in the Prospectus included in the Registration Statement. In
giving this consent, we do not thereby admit that we come within the category of
persons whose consent is required by the Act or the Rules.
Very truly yours,
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
<PAGE>
FORM OF
METROMEDIA FIBER NETWORK, INC.
1997 INCENTIVE STOCK PLAN
1. Purpose. The purposes of the Metromedia Fiber Network, Inc.
Incentive Stock Plan are, in general, to give the Company a significant
advantage in retaining key employees, officers and directors, and to provide
an incentive to selected key employees, officers and directors of the Company
and its subsidiaries, within the meaning of Code Section 424(f), who have
substantial responsibility in the direction of the Company and its
subsidiaries, and others whom the Committee determines provide substantial
and important services to the Company, to acquire a proprietary interest in
the Company, to continue as employees, officers and directors or in their
other capacities, and to increase their efforts on behalf of the Company.
2. Definitions. Unless the context clearly indicates to the contrary,
the following terms, when used in the Plan, shall have the meanings set forth
in this Section 2.
"Act" shall mean the Securities Act of 1933, as amended.
"Award" means any stock option.
"Board" means the Board of Directors of the Company.
"Change in Control" means an event that shall be deemed to have
occurred as of the first day any one or more of the following have been
satisfied:
(a) any event whereby a Person (other than (i) the Company or an
affiliate, as defined in the Exchange Act, or (ii) any employee
benefit plan or trust sponsored or maintained by
-1-
<PAGE>
the Company or an affiliate, as defined in the Exchange Act) (x)
acquires 35% or more of the Company's outstanding voting
securities, or (y) acquires securities of the Company bearing a
majority of voting power with respect to the election of the
Board; or (z) acquires all or substantially all of the Company's
assets, whether by sale, lease, exchange or other transfer in
one transaction or in a series of related transactions).
"Person" shall have the same meaning as ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Section 13(d)
thereof;
(b) a change in the composition of the Board such that at any time a
majority of the Board shall not have been members of the Board
for twenty-four (24) months; provided, however, that directors
who were appointed or nominated for election by at least
two-thirds of the directors who were directors at the beginning
of such twenty-four (24) month period (or deemed to be such
directors under this subparagraph) shall be deemed to be
directors at the beginning of such twenty-four (24) month period
for the purposes of this subparagraph;
-2-
<PAGE>
(c) the stockholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; or
(d) any consolidation or merger of the Company, other than a merger
or consolidation of the Company in which the voting securities
of the Company outstanding immediately prior thereto continue to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 50% of
the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after
such merger or consolidation.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Committee" means the Committee described in Section 11 of the Plan.
"Common Stock" means Class A Common Stock of the Company.
"Company" shall mean Metromedia Fiber Network, Inc. or any successor
company thereto.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
-3-
<PAGE>
"Fair Market Value" shall mean the closing price of publicly traded
Common Stock on the national securities exchange on which the Common Stock is
listed (if the Common Stock is so listed) or on the NASDAQ National Market
System (if the Common Stock is regularly quoted on the NASDAQ National Market
System), or, if not so listed or regularly quoted, the mean between the
closing bid and asked prices of publicly traded Common Stock in the
over-the-counter market, or, if such bid and asked prices shall not be
available, as reported by any nationally recognized quotation service
selected by the Company, or as determined by the Committee in a manner
consistent with the provisions of the Code.
"Grantee" shall mean any key employee, officer or director of the
Company and its subsidiaries, within the meaning of Code Section 424(f), as
determined by the Committee, who has substantial responsibility in the
direction of the Company and its subsidiaries, and anyone else whom the
Committee determines provides substantial and important services to the
Company who is granted an Award under the Plan.
"Incentive Stock Option" or "ISO" shall mean any stock option as
defined in Code Section 422.
"Independent Directors" shall mean any member of the Board who
during his entire term as a director was not employed by the Company and its
subsidiaries within the meaning of Code Section 424(f) and who also satisfies
the criteria for "outside director" under Code Section 162(m).
"Non-Qualified Stock Option" or "NQSO" shall mean an option other
than an Incentive Stock Option.
-4-
<PAGE>
"Option" shall mean ISOs and NQSOs, collectively.
"Plan" shall mean the Metromedia Fiber Network, Inc. 1997 Incentive
Stock Plan.
"Reporting Person" shall mean any person subject to the reporting
requirements of Section 16(a) of the Exchange Act with respect to equity
securities of the Company.
"Rule 16b-3" means Rule 16b-3 of the Exchange Act, or any successor
thereto, that excepts transactions under employee benefit plans, as in effect
from time to time.
3. Types of Awards. The Plan provides for Incentive Stock Options and
Non-Qualified Stock Options. Except as provided herein, a particular form of
Award may be granted either alone or in addition to other grants hereunder.
The provisions of the particular forms of grants need not be the same with
respect to each recipient.
ISOs may be awarded to employees of the Company and its
subsidiaries, within the meaning of Code Section 424(f), including employees
who are officers and directors, but shall not be issued to directors or
others who are not employees.
NQSOs may be awarded to employees and directors, including directors
who are not employees of the Company and its subsidiaries (including, without
limitation, members of the Committee), within the meaning of Code Section
424(f), and anyone whom the Committee administering the Plan pursuant to
Section 11 determines provides substantial and important services to the
Company. Options will consist of the maximum number of ISOs that may be
issued to a Grantee under applicable law, with the balance (if any) of the
Options being NQSOs.
-5-
<PAGE>
Independent Directors who first serve on the Board subsequent to the
date of adoption of the Plan shall receive Awards with respect to 5,000
shares of Common Stock, each having an exercise price equal to the Fair
Market Value on the date of grant.
4. Term of Plan.
(a) Effective Date. This Plan shall become effective as of the
date of adoption thereof by the Board; provided, however, that the Plan shall
be submitted for approval by the stockholders of the Company no earlier than
twelve (12) months prior to, and no later than twelve (12) months after, the
date of adoption of the Plan by the Board.
(b) Termination Date. This Plan shall terminate on the earliest of:
(i) The tenth anniversary of the effective date as determined
under this Section 4;
(ii) The date when all shares of the Common Stock reserved for
issuance under the Plan, shall have been acquired through
exercise of any Awards granted under the Plan; or
(iii) Such earlier date as the Board may determine.
Any Award outstanding under the Plan at the time of its termination shall
remain in effect in accordance with its terms and conditions and those of the
Plan, but no additional Awards will be made after the date of termination.
5. The Stock. Subject to adjustment as provided in Section 9, the
aggregate number of shares of Common Stock which may be issued under the Plan
shall be 1,000,000 shares; provided, however, that the maximum number of
shares of Common Stock available
-6-
<PAGE>
with respect to the Awards granted by the Committee to any one Grantee under
the Plan, in the aggregate, shall not exceed 100,000. Such number of shares
of Common Stock may be set aside out of the authorized but unissued shares of
Common Stock not reserved for any other purpose or out of shares of Common
Stock held in or acquired for the treasury of the Company. The Company,
during the term of the Plan, will at all times reserve and keep available
such number of shares of Common Stock as shall be sufficient to satisfy the
requirements of the Plan. All or any shares of Common Stock subjected under
this Plan to an Award which, for any reason, terminates unexercised as to
such shares, may again be subjected to an Award under the Plan. In addition
to the foregoing, shares surrendered to the Company by, or on behalf of, a
Grantee in payment of the exercise price or applicable taxes upon exercise
may also be used thereafter for additional Awards.
6. Stock Options.
(a) Grants. Options may be granted by the Committee at any time
and from time to time prior to the termination of the Plan. Each Option
granted under the Plan shall be evidenced by an agreement in a form approved
by the Committee. The terms and conditions of such Option agreement need not
be identical with respect to each Grantee, but each Option agreement will
evidence on its face whether it is an ISO, a NQSO, or both. For purposes of
this Section, an Option shall be deemed granted on the date the Committee
selects an individual to be a Grantee, determines the number of shares to be
issued pursuant to such Option and specifies the terms and conditions of the
Option. Except as hereinafter provided,
-7-
<PAGE>
Options granted pursuant to the Plan shall be subject to the following terms
and conditions set forth in this Section 6.
(b) Price and Exercise. The purchase price of the shares of Common
Stock upon exercise of an ISO shall be no less than the Fair Market Value of
the shares of Common Stock at the time of grant of an ISO; provided, however,
if an ISO is granted to a person owning either directly (or through
application of the attribution rules under Code Section 318) shares of Common
Stock of the Company possessing more than 10% of the total combined voting
power of all classes of shares of Common Stock of the Company as defined in
Code Section 422 ("10% Stockholder"), the purchase price shall be equal to
110% of the Fair Market Value of the shares of Common Stock. The purchase
price of the shares of Common Stock upon exercise of a NQSO may be any price
set by the Committee.
The purchase price shall be paid in United States dollars in cash or
by certified or cashier's check payable to the order of the Company at the
time of purchase. At the discretion of the Committee, the purchase price may
be paid with: (i) shares of Common Stock already owned by, and in the
possession of, the Grantee; or (ii) any combination of United States dollars
or shares of Common Stock of the Company. Any required withholding tax shall
be paid by the Grantee in full in accordance with the provisions of Section
12. Shares of Common Stock of the Company used to satisfy the purchase price
of an Option shall be valued at their Fair Market Value. The purchase price
shall be subject to adjustment, but only as provided in Section 9 hereof.
-8-
<PAGE>
Any vested Option may be exercised in full at one time by giving
written notice to the Company, which notice shall be signed and dated by the
Grantee and shall state the number of shares of Common Stock with respect to
which the Option is being exercised. The notice of the exercise of any
Option shall be accompanied by payment in full of the purchase price. If
required by the Company, such notice of exercise of an Option shall be
accompanied by the Grantee's written representation in accordance with
Section 21. Upon such demand, delivery of such representation prior to the
delivery of any Common Stock issued upon exercise of an Option shall be a
condition precedent to the right of the Grantee or such other person to
purchase any shares of Common Stock.
(c) Vesting. Options shall vest in accordance with the schedule
established for each Grantee; provided, however, that all Options awarded to
a Grantee shall vest immediately upon said Grantee's death or retirement as
defined herein or, upon any Change in Control as defined herein. The
Committee may accelerate the vesting schedule of any Award other than in the
event of a Change in Control.
(d) Additional Restrictions on Exercise of an ISO. The aggregate
Fair Market Value of Common Stock (determined at the time an ISO is granted)
for which an ISO is exercisable for the first time by a Grantee during any
calendar year (under all plans of the Company and its subsidiaries or parent)
shall not exceed $100,000. To the extent that the aggregate Fair Market
Value of Common Stock (determined at the time an ISO is granted) with respect
to Options designated as ISOs exercisable for the first time by a Grantee
during any calendar year (under all plans of the Company and its subsidiaries
or parent) exceeds
-9-
<PAGE>
$100,000, such Options shall be treated as NQSOs. The foregoing shall be
applied by taking Options into account in the order in which they were
granted.
(e) Duration of Options. Options may be granted for terms of up to
but not exceeding ten (10) years from the effective date the particular
Option is granted; provided, however, that an ISO granted to a 10%
Stockholder may be granted for a term not exceeding five (5) years from the
effective date the particular ISO is granted.
If the stockholders of the Company have not approved the adoption of
the Plan prior to the end of one (1) year from the date the Plan is approved
by the Board, any Option granted under the Plan prior to such date shall be
null and void and the Company shall rescind the issuance of any shares of
Common Stock issued upon the exercise of such Options by a Grantee prior to
such date. In the event of such rescission, the Company shall refund the
price paid per share of Common Stock by the Grantee upon exercise of the
Options upon receipt of the certificate representing such shares.
(f) Modification, Extension and Renewal of Options. Subject to the
terms and conditions and within the limitations of the Plan, the Committee
may modify, extend or renew outstanding Options granted under the Plan, or
accept the surrender of outstanding Options (up to the extent not theretofore
exercised) and authorize the granting of new Options in substitution therefor
-10-
<PAGE>
specifying a lower price. Notwithstanding the foregoing or anything herein,
no modification of an Award shall, without the consent of the Grantee, alter
or impair any rights or obligations under any Award theretofore granted under
the Plan nor shall any modification be made which shall adversely affect the
status of an ISO under Code Section 422.
(g) Other Terms and Conditions. Awards may contain such other
provisions, which shall not be inconsistent with any of the foregoing terms,
as the Committee shall deem appropriate.
7. Termination of Employment.
Upon the termination of a Grantee's employment with the Company, any
Award then held by such Grantee or Grantee's estate may only be exercised as
follows:
(a) Retirement. If the Grantee's employment is terminated because
he or she has attained the age which the Company may from time to time
establish as the retirement age for any class of its employees, or in
accordance with the age specified in an employment agreement with a
Grantee, he or she may within three (3) months following such
termination, exercise the Award to the extent such Award is otherwise
exercisable. However, in the event of his or her death prior to the end
of the three (3) month period after the aforesaid termination of his or
her employment, his or her estate shall have the right to exercise the
Award within one (1) year (but in no event after the scheduled expiration
of the term of the Award) following such termination with
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<PAGE>
respect to all or any part of the stock subject thereto, to the extent
such Award is exercisable.
(b) Death. If the Grantee's employment with the Company is
terminated by death, his or her estate shall have the right to exercise
the Award within one (1) year (but in no event after the scheduled
expiration of the term of the Award) following such termination with
respect to all or any part of the stock subject thereto, to the extent
such Award is exercisable.
(c) Disability. If the Grantee's employment with the Company is
terminated by disability, as defined in Code Section 22(e)(3), he or she,
or his or her legal representative shall have the right for a period of
one (1) year (but in no event after the scheduled expiration of the term
of the Award) following the date of such termination of employment to
exercise any Award with respect to all or any part of the stock subject
thereto, to the extent such Award is exercisable.
(d) Other Reasons. If the Grantee's employment with the Company is
terminated for any reason other than those provided above under
"Retirement", "Death" or "Disability", the Grantee or Grantee's estate in
the event of his or her death shall have the right for a period of three
(3) months (but in no event after the scheduled expiration of the term of
the Award) following the date of such termination of employment to
exercise any Award,
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<PAGE>
with respect to all or any part of the stock subject thereto, to the
extent such Award is exercisable.
For purposes of this Section 7, "termination of employment" shall
mean the termination of a Grantee's employment with the Company or a
subsidiary or a parent within the meaning of Code Section 424. A Grantee
employed by a subsidiary shall also be deemed to have a termination of
employment if the subsidiary ceases to be a subsidiary of the Company, and
the Grantee does not immediately thereafter become an employee of the Company
or of a subsidiary or of a parent. A Grantee who is a member of the Board
but who is not also an employee of the Company shall be considered to have
terminated his or her employment at such time as he or she is no longer a
member of the Board. Any other Grantee who is not otherwise an employee of
the Company shall be considered to have terminated employment when
substantial services, as determined by the Committee, are no longer provided
to the Company by the Grantee.
Also for purposes of this Section 7, a Grantee's "estate" shall mean
his or her legal representatives upon his or her death or any person who
acquires the right to exercise an Award by reason of the Grantee's death.
The Committee may in its discretion require the transferee of a Grantee to
supply it with written notice of the Grantee's death or disability and to
supply it with a copy of the will (in the case of the Grantee's death) or
such other evidence as the Committee deems necessary to establish the
validity of the transfer of an Option.
If a Grantee's employment with the Company is terminated after a
Change in Control, the provisions of Section 8 shall supersede the provisions
of this Section 7.
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<PAGE>
8. Change in Control. In the event of a Change in Control, (i) each
Grantee with an outstanding Option shall have the right at any time
thereafter to exercise the Option in full notwithstanding any waiting period,
installment period or other limitation or restriction in any agreement or in
the Plan; (ii) each holder of an Option shall have the right, exercisable by
written notice to the Company, within sixty days after the Change in Control,
to receive in exchange for the surrender of the Option or any portion thereof
to the extent the Option is exercisable in accordance with clause (i) an
amount of cash equal tto the difference between the Fair Market Value of the
Common Stock on the date of exercise and the exercise price of the Option.
9. Adjustment of the Changes in the Stock.
(a) The total number and character of shares of Common Stock
subject to Awards, the number and character of shares of Common Stock subject
to outstanding Awards and/or the exercise price of such shares will be
appropriately adjusted by the Committee if the shares of Common Stock are
changed into or exchanged for a different number or kind of shares of stock
or other securities of the Company or of another corporation (whether by
reason of merger, consolidation, recapitalization, reclassification, split,
reverse split, combination of shares, or otherwise. The Committee may also
make appropriate adjustments in the event of a merger, consolidation, or
other transaction or event having a similar effect.
(b) The Company shall not be required to issue any fractional
shares of Common Stock pursuant to the Plan. Fractional shares resulting
from any adjustment in
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<PAGE>
Awards pursuant to this Section 9 may be settled in cash or otherwise as the
Board shall determine.
(c) Notice of any adjustment shall be given by the Company to each
holder of an Award which shall have been so adjusted and such adjustment
(whether or not such notice is given) shall be effective and binding for all
purposes of the Plan.
(d) If another corporation is merged into the Company or the
Company otherwise acquires another corporation, the Board may elect to assume
under the Plan any or all outstanding stock options or other awards granted
by such corporation under any stock option or other plan adopted by it prior
to such acquisition. Such assumptions shall be on such terms and conditions
as the Committee may determine; provided, however, that the awards as so
assumed do not contain any terms, conditions or rights that are inconsistent
with the terms of this Plan. Unless otherwise determined by the Board, such
awards shall not be taken into account for purposes of the limitations
contained in Section 5 of the Plan.
10. Transferability of Awards. An Award shall be transferable only by
will or the laws of descent and distribution and shall be exercisable during
the Grantee's lifetime only by the Grantee or by the guardian or legal
representative of the Grantee acting in a fiduciary capacity on behalf of the
Grantee under state law and court supervision. An Award is not subject, in
whole or in part, to attachment, execution or levy of any kind.
11. Administration.
(a) The Plan shall be administered by the Compensation Committee of
the Board which shall be composed of not less than two (2) members of the
Board, each of whom
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<PAGE>
shall be an "outside director" within the meaning of Code Section 162(m) and
the regulations and interpretations thereunder.
(b) The Committee shall act by a majority of its members at the
time in office and eligible to vote on any particular matter, and such action
may be taken either by a vote at a meeting or in writing without a meeting.
(c) Subject to the provisions of the Plan, the Committee shall from
time to time and at its discretion take the following actions:
(i) grant Awards;
(ii) determine which employees, officers, directors and other
individuals performing substantial and important services
may be granted Awards under the Plan;
(iii) determine the type of Awards to be granted;
(iv) determine the number of shares subject to each Award;
(v) determine the term of each Award granted under the Plan;
(vi) determine the date or dates on which the Award granted
shall be exercisable;
(vii) determine the exercise price of any Award granted;
(viii) determine the Fair Market Value of the Common Stock
subject to the Awards granted;
(ix) determine the terms of any agreement pursuant to which
Awards are granted;
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(x) amend any such agreement with the consent of the Grantee;
(xi) extend the exercise period of any Award;
(xii) accelerate the vesting period of any Award except in the
event of a Change in Control;
(xiii) establish performance-based goals within the meaning of
Code Section 162(m);
(xiv) establish such procedures as it deems appropriate for a
recipient of an Award hereunder to designate a
beneficiary to whom any benefits payable in the event of
his or her death are to be made; and
(xv) determine any other matters specifically delegated to it
under the Plan or necessary for the proper administration
of the Plan.
The Committee shall also have the final authority and discretion to
interpret and construe the terms of the Plan and of any Award granted and
such interpretation and construction by the Committee shall be final, binding
and conclusive upon all persons including, without limitation, the Company,
stockholders of the Company or any subsidiary, the Plan, and all persons
claiming an interest in the Plan. Notwithstanding anything contained in this
Section to the contrary, no term of the Plan relating to ISOs shall be
interpreted, nor shall any discretion or authority of the Committee be
exercised, so as to disqualify the Plan under Code Section 422 or, without
the consent of the Grantee, to disqualify any ISO under Code Section 422 or
in a manner inconsistent with Rule 16b-3.
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(d) No member of the Committee or director shall be liable for any
action, interpretation or construction made in good faith with respect to the
Plan or any Award granted hereunder.
12. Tax Withholding. The Company shall have the right to deduct from
any cash payment made under the Plan any federal, state or local income or
other taxes required by law to be withheld with respect to such payment. It
shall be a condition to the obligation of the Company to deliver shares or
securities of the Company upon exercise of an Award, that the Grantee of such
Award pay to the Company such amount as may be requested by the Company for
the purpose of satisfying any liability for such withholding taxes. The
Committee may, in its sole discretion, permit the Grantee of an Award, in
accordance with any applicable regulations of the authority issuing such
regulations, to pay a portion or all of the amount of such minimum required
or additional permitted withholding taxes in shares. At the Committee's sole
discretion, the Grantee shall be permitted to authorize the Company to
withhold, or shall agree to surrender back to the Company, on or about the
date such withholding tax liability is determinable, shares previously owned
by such Grantee or a portion of the shares that were or otherwise would be
distributed to such Grantee pursuant to such Award having a Fair Market Value
equal to the amount of such required or permitted withholding taxes to be
paid in shares.
13. Securities Law Requirements.
(a) No Award granted pursuant to this Plan shall be exercisable in
whole or in part, nor shall the Company be obligated to acquire or sell any
shares of Common Stock
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subject to any such Option, if such exercise, acquisition and sale would, in
the opinion of counsel for the Company, violate the Act (or other federal or
state statutes having similar requirements), as it may be in effect at that
time. In this regard, the Committee may demand the representations described
in Sections 6(b) and 21.
(b) Each Award shall be subject to the further requirement that, if
at any time the Committee shall determine in its discretion that the listing
or qualification of the shares of Common Stock subject to such Award under
any securities exchange requirements or under any applicable law, or the
consent or approval of any governmental regulatory body, is necessary as a
condition of, or in connection with, the granting of such Award or the issue
of shares thereunder, such Award may not be exercised in whole or in part,
unless such listing, qualification, consent or approval shall have been
affected or obtained free of any conditions not acceptable to the Board.
(c) No person who acquires shares of Common Stock under the Plan
may, during any period of time that such person is an affiliate of the
Company within the meaning of the rules and regulations of the Securities and
Exchange Commission under the Act, sell such shares of Common Stock, unless
such offer and sale is made (i) pursuant to an effective registration
statement under the Act, which is current and includes the shares to be sold,
or (ii) pursuant to an appropriate exemption from the registration
requirement of the Act, such as that set forth in Rule 144 promulgated under
the Act.
(d) With respect to any Reporting Person, transactions under the
Plan are intended to comply with all applicable conditions of Rule 16b-3. To
the extent any provision
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of the Plan or any action by an authority under the Plan fails to so comply,
such provision or action shall, without further action by any person, be
deemed to be automatically amended to the extent necessary to effect
compliance with Rule 16b-3, provided that if such provision or action cannot
be amended to effect such compliance, such provision or action shall be
deemed null and void, to the extent permitted by law and deemed advisable by
the appropriate authority. Each Award to a Reporting Person under the Plan
shall be deemed issued subject to the foregoing qualification.
14. Foreign Participants.
In order to facilitate the making of an Award and to foster and
promote achievement of the purposes of the Plan, the Committee may provide
for such special terms for Awards to Grantees who are foreign nationals, or
who are employed by the Company outside of the United States of America, as
the Committee may consider necessary or appropriate to accommodate
differences in local law, tax policy or custom. Moreover, the Committee may
approve such supplements to, or amendments, restatements or alternative
versions of this Plan as in effect for any other purpose, and the Secretary
or other appropriate officer of the Company may certify any such document as
having been approved and adopted in the same manner as the Plan; provided,
however, that no such supplements, amendments, restatements or alternative
versions shall include any provisions that are inconsistent with the terms of
the Plan, as then in effect, unless the Plan could have been amended to
eliminate the inconsistency without further approval by the stockholders of
the Company.
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15. Amendment or Termination of the Plan.
The Board may amend or terminate the Plan at any time, except that
approval of the holders of a majority of the outstanding voting stock of the
Company is required for amendments which:
(i) decrease the minimum exercise price for ISOs;
(ii) extend the term of the Plan beyond ten (10) years;
(iii) extend the maximum terms of the Awards granted hereunder
beyond (10) ten years;
(iv) withdraw the administration of the Plan from the
Committee appointed pursuant to Section 11;
(v) change the class of eligible employees, officers,
directors and other Grantees;
(vi) increase the aggregate number of shares of Common Stock
which may be issued pursuant to the provisions of the
Plan;
(vii) otherwise require stockholder approval to comply with
Rule 16b-3 or any other applicable law, regulation, or
listing requirement or to qualify for an exemption or
characterization that is deemed desirable by the Board.
Notwithstanding the foregoing, the Board may, without the need for
stockholders' approval, amend the Plan in any respect to qualify ISOs as
incentive stock options under Code Section 422.
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No amendment or termination of the Plan shall, without the written
consent of the Grantee, alter the terms of Options already granted and such
options shall remain in full force and effect as if the Plan had not been
terminated.
Any Award that may be made pursuant to an amendment to the Plan that
shall have been adopted without the approval of the stockholders of the
Company shall be null and void as to persons subject to Section 16(a) of the
Act if it is subsequently determined that such approval was required in order
for the Plan to continue to satisfy the applicable conditions of Rule 16b-3.
Furthermore, technical or clarifying amendments shall be made by the
Committee, not the Board.
16. No Obligation to Exercise Option. The granting of an Award shall
impose no obligation upon the Grantee (or upon a transferee of a Grantee) to
exercise such Award.
17. No Limitation on Rights of the Company. The grant of any Award
shall not in any way affect the right or power of the Company to make
adjustments, reclassification, or changes in its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer
all or any part of its business or assets.
18. Plan Not a Contract of Employment. The Plan is not a contract of
employment, and the terms of employment of any recipient of any Award
hereunder shall not be affected in any way by the Plan or related instruments
except as specifically provided therein. The establishment of the Plan shall
not be construed as conferring any legal rights upon any recipient of any
Award hereunder for a continuation of employment, nor shall it
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interfere with the right of the Company or any subsidiary to discharge any
recipient of any Award hereunder and to treat him or her without regard to
the effect which such treatment might have upon him or her as the recipient
of any Award hereunder.
19. Expenses of the Plan. All of the expenses of the Plan shall be paid
by the Company.
20. Funding. The Plan shall be unfunded and shall not create (or be
construed to create) a trust or a separate fund or funds. The Plan shall not
establish any fiduciary relationship between the Company and any Grantee or
other person. To the extent any person holds any rights by virtue of an
Award granted under the Plan, such rights shall be no greater than the rights
of an unsecured general creditor of the Company.
21. Compliance with Applicable Law. Notwithstanding anything herein to
the contrary, the Company shall not be obligated to cause to be issued or
delivered any certificates for shares of Common Stock pursuant to the
exercise of an Option, unless and until the Company is advised by its counsel
that the issuance and delivery of such certificates is in compliance with all
applicable laws, regulations of governmental authority and the requirements
of any exchange upon which shares of Common Stock are traded including,
without limitation, any legends that are required on such stock certificates.
The Company shall in no event be obligated to register any securities
pursuant to the Act (as now in effect or as hereafter amended) or to take any
other action in order to cause the issuance and delivery of such certificates
to comply with any such law, regulation or requirement.
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The Committee may require, as a condition of the issuance and
delivery of such certificates and in order to ensure compliance with such
laws, regulations and requirements, that the recipient of any Award hereunder
make such covenants, agreements and representations as the Committee, in its
sole discretion, deems necessary or desirable, including, without limitation,
a written representation from a stockholder that the stock is being purchased
for investment and not for distribution, acknowledging that such shares have
not been registered under the Act, as amended and agreeing that such shares
may not be sold or transferred unless there is an effective Registration
Statement for them under the Act, or, in the opinion of counsel to the
Company, that such sale or transfer is not in violation of the Act.
22. Effect Upon Other Compensation. Nothing contained herein shall
prevent the Company or any subsidiary from adopting other or additional
compensation arrangements for its employees or directors. The effect under
any other benefit plan of the Company of an inclusion in income by virtue of
an Award hereunder shall be determined under such other plan.
23. Grantee to Have No Rights as a Stockholder. No Grantee of any
Option shall have any rights as a stockholder with respect to any shares
subject to his or her Option prior to the date on which he or she is recorded
as the holder of such shares on the records of the Company. No Grantee of
any Option shall have the rights of a stockholder until he or she has paid in
full the Option price.
24. Notice. Notice to the Committee shall be deemed given if in writing
and mailed to Howard Finkelstein, President, Metromedia Fiber Network, Inc.,
110 East 42nd Street,
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Suite 1502, New York, N.Y. 10017 by first class, certified mail. Notice to
the Grantee or the Grantee's estate, if applicable, shall be given by
registered mail to such person's last known address.
25. Governing Law. Except to the extent preempted by federal law, this
Plan and all Option agreements entered into pursuant thereto shall be
construed and enforced in accordance with, and governed by, the laws of the
State of New York determined without regard to its conflict of law rules.
26. Successors and Assigns. The Plan shall be binding on and inure to
the benefit of the Company and the employees to whom an Award is granted
hereunder, and such employees' heirs, executors, administrators, legatees,
trustees, personal representatives, assignees and transferees (where
permitted).
27. Delivery of the Plan. A copy of this Plan shall be delivered to the
Secretary of the Company and shall be shown by him to each eligible person
making reasonable inquiry concerning it. A copy of this Plan also shall be
delivered to each Grantee at the time his or her Award is granted.
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EXHIBIT 10.2
Stephen Garofalo
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement"), dated as of February 26,
1997, by and between NATIONAL FIBER NETWORK, INC., a Delaware corporation
("Company"), and STEPHEN GAROFALO ("Executive").
WHEREAS, Company desires to employ Executive as the Chief Executive
Officer of the Company and Chairman of the Board of Directors, and Executive
desires to be so employed by Company, on the terms and conditions herein
provided.
WHEREAS, the Executive is presently employed by the Company pursuant
to an Employment Agreement dated April 15, 1996 (the "1996 Agreement"), which
agreement shall terminate as of the effective date of this Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the
respective covenants and agreements of the parties herein contained, the
parties hereto agree as follows:
It is therefore agreed as follows:
1. Employment. during the term of this Employment Agreement, as
defined in section 2 hereof (the "Term"), Company shall employ Executive,
and Executive shall render services to Company as Chief Executive Officer
and Chairman of the Board of Directors of Company and subject to
consultation with the Chief Operating Officer of the Company, shall report
only to the Board of Directors. Executive shall also be appointed to
serve on the Board of Directors. Executive shall have such duties as are
consistent with the position of Chief Executive Officer. Executive shall
devote his full and exclusive business time and best efforts to the
performance of his duties under this Employment Agreement and shall
perform them faithfully, diligently and competently. The Executive
represents and warrants that neither the execution by him of this
Agreement nor the performance by him of his duties and obligations
hereunder will violate any agreement to which he is a party or by which he
is bound. This Agreement shall supersede the 1996 Agreement and upon the
effective date of this Agreement, the 1996 Agreement shall be of no
further force or effect.
2. Term of Employment. Unless earlier terminated as provided in
this Employment Agreement, the term of Executive's employment under this
Employment Agreement (the "Term") shall commence on the date hereof and
continue until five years from the date hereof.
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3. Compensation.
(a) Base Salary. Company shall pay to Executive throughout
the Term an annual salary (the "Base Salary"), payable in accordance with
the Company's customary policies. The Base Salary shall be at the rate of
$295,000 per year for the first year of the Term; $335,000 per year for
the second year of the Term; and $375,000 per year for the third year of
the Term; $415,000 for the fourth year of the Term; and $455,000 for the
fifth year of the Term.
(b) Bonus. In addition to the Base Salary, Company shall pay
to Executive a bonus, payable quarterly during each year of the Term,
based on appropriate incentives and criteria to be determined jointly with
Executive at the beginning of each year, in good faith, provided that in
no event will the bonus be less than $100,000 for each year.
(c) Stock Options.
(i) Effective on the date of the commencement of
Executive's employment hereunder, Executive shall be granted a stock
option (the "Stock Option") to purchase an aggregate of 250,000 shares
of common stock of the Company, par value $.01 per share, to be issued
under, and pursuant to the terms of, that certain Option Agreement
between the Company and Executive dated as of the date hereof (the
"Stock Plan"). The Stock Option granted hereby will be immediately
exercisable with an exercise price of $3.00 per share. The Stock
Option shall expire ten (10) years from the date of the grant of the
Stock Option, subject to the other terms and conditions of the Stock
Plan:
(ii) Promptly following the consummation of an initial
public offering of the Company's common stock, the Company shall file
a registration statement on Form S-8 (or any successor form for the
registration under the Securities Act of 1933 (the "Securities Act")
of securities to be offered pursuant to employee benefit plans)
registering under the Securities Act the shares of common stock
underlying the Stock Option, subject to then applicable rules and
regulations, in order to permit the public resale thereof by the
Executive. The rights of the Executive set forth in this paragraph
shall apply only to the extent that an effective registration
statement is then required for the Stock underlying the Stock Option.
4. Benefits.
(a) General Fringe Benefits. Executive shall be entitled to
participate in the life, hospitalization, health, accident and disability
insurance plans, health programs, pension plans and other benefit and
compensation plans generally available to senior executives of Company
from time to time. In addition, the
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Company, at its sole expense, shall provide Executive with life insurance
coverage (the beneficiary to be designated by Executive) in an amount not
less than $1,000,000. Without limiting the foregoing, the Company
confirms that it intends to establish a qualified stock option plan for
its senior executives, including Executive, within six (6) months of the
date hereof.
(b) Reimbursements. Company shall pay or reimburse Executive
for all reasonable expenses actually incurred or paid by Executive during
the Term in the performance of Executive's duties to Company upon
presentation by Executive of expense statements or vouchers. In addition,
Company shall pay Executive's legal fees and disbursements incurred in
connection with the preparation and negotiation of this Employment
Agreement, as well as the Option Agreement and other related agreements
being entered into as of the date hereof.
(c) Automobile. Company shall pay Executive $1,500 per month
as full reimbursement for any and all expenses relating to the use of an
automobile during the Term in the performance of Executive's duties to
Company, including insurance, maintenance and garage.
5. Termination of Employment.
(a) Death. Executive's employment shall terminate upon his
death, and in such event, the estate or other legal representative of
Executive shall be entitled to receive Executive's Base Salary for a
period equal to the lesser of (i) one (1) year from the date of death or
(ii) the balance of the Term, in addition to all compensation, bonus and
benefits that are accrued and unpaid as of the date of death.
(b) Termination by Company. Executive's employment may be
terminated at the option of Company by notice to Executive (i) as a result
of Executive's disability as provided in section 5(b)(i) hereof, or (ii)
for "cause" as defined and provided in section 5(b)(ii) hereof.
(i) Disability. As used in this Employment Agreement,
the term "disability" shall mean a physical or mental disability or
incapacity, whether total or partial, of Executive that, in the good
faith determination of Company's Directors or based upon reasonably
competent medical advice, has prevented him from performing
substantially all of his duties under this Employment Agreement during
a period of three (3) consecutive months or for 120 days during any
twelve-month period. If Company shall terminate Executive's
employment pursuant to this section 5(b), Executive shall be entitled
to continue to receive his Base Salary for a period of one (1) year
from the date of termination (but not exceeding the balance of the
Term), as well as all compensation, bonus and benefits that are
accrued and unpaid as of the date of disability.
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(ii) Discharge for "Cause". If Executive (A) neglects his
duties hereunder in a material manner and such neglect shall not be
discontinued within five (5) business days after written notice to
Executive thereof (which notice shall be subject to approval of the
Board of Directors and signed by he Chief Operating Officer or other
designated officer of Company and refer to a specific breach of this
Employment Agreement); (B) is convicted of a felony or other crime
involving fraud, moral turpitude or material loss to the Company; (C)
materially breaches his affirmative or negative covenants or
undertakings hereunder and such breach shall not be remedied within
five (5) business days after written notice to Executive thereof
(which notice shall be signed by the Chief Operating Officer or other
designated officer of Company and refer to a specific breach of the
Employment Agreement); or (D) in bad faith, commits any act or omits
to take any action, to the material detriment of Company; then
Company may at any time by notice terminate Executive's employment
hereunder for "cause"; and Executive shall have no right to receive
any compensation or benefit from Company hereunder on and after the
effective date of such notice, except for compensation and benefits
that are accrued and unpaid as of the date of termination.
(c) Termination by Executive for "Good Reason". In the event
of: (i) a reduction in the nature or scope of Executive's titles,
authorities, powers, duties, or responsibilities hereunder; (ii) a change
in the method or formula for determining the Bonus from that set forth in
section 3(b) hereof which results in a decrease in the amount of the Bonus
payable to the Executive thereunder; (iii) the removal of Executive as a
member of the Board of Directors of Company, unless such removal occurs
after the termination of Executive's employment for "cause"; (iv) a sale
of all or substantially all of the ownership interests or assets of
Company, or a merger or consolidation of the Company with any other
corporation or entity; (v) a "change-in-control" of the Company, defined
as any person or entity (other than the Executive) becoming a "beneficial
owner" (as defined in Rule 13d-3 of the Securities Exchange Act of 1934,
as amended from time to time) directly or indirectly of securities of the
Company representing 50% or more of the combine voting power of the
Company's then outstanding securities; or (vi) Company's materially
breaching its affirmative or negative covenants or undertakings hereunder
and such breach shall not be remedied within fifteen (15) days after
notice to Company thereof (which notice shall be signed by Executive and
refer to a specific breach of this Employment Agreement); then Executive
may at any time by notice terminate Executive's employment hereunder for
"good reason"; and Company shall pay to Executive his Base Salary, bonus
and benefits that are accrued and unpaid as of the date of termination, as
well as the additional amounts described in section 5(e) hereof.
(d) Expiration of Term. Upon the expiration of the Term, and
provided that (i) neither Executive nor Company shall have terminated
Executive's employment hereunder prior thereto, (ii) Executive shall have
observed
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and performed all of his material duties and obligations hereunder, and
shall not have been in default of any of his agreements, covenants or
representations hereunder, in both instances throughout the Term, and
(iii) Executive's employment with Company shall not thereafter be
continued, then Company shall pay to Executive the amounts described in
section 5(e) hereof.
(e) Termination Benefits.
(i) Upon the expiration of the Term or the termination of
Executive's employment for any reason thereunder, the rights and
benefits of Executive under Company's employee benefit plans and
programs shall be determined in accordance with the provisions of such
plans and programs.
(ii) Upon the application of the Term, Company shall pay
to Executive, in addition to any and all amounts which may otherwise
be due to Executive hereunder, an amount equal to one (1) times
Executive's then Base Salary, payable in equal monthly installments,
on the first of each month, during the Non-Compete Period.
(iii) Upon the termination of Executive's employment
during the Term by Company other than for "cause," or the termination
of Executive's employment by Executive with "good reason," Company
shall pay to Executive, in addition to any and all amounts which may
otherwise be due to Executive hereunder, an amount equal to the
greater of (i) the annual Base Salary in effect as of the date of such
termination divided by twelve and multiplied by the number of months
remaining in the Term as of the date of such termination; and (ii)
$1,000,000, which amount shall be paid within 5 business days
following such termination.
6. Prohibited Activities.
(a) Non-Compete Period. For the purposes of this Employment
Agreement, the term "Non-Compete Period" shall mean the Term, and if
Executive's employment is terminated by Company for "cause," by Executive
without "good reason," or so long as Company pays Executive the
termination benefit specified in paragraph 5(e)(ii) above, an additional
period of one (1) year from and after the date of termination.
(b) Non-competition. During the Non-Compete Period, Executive
shall not directly or indirectly compete with, be engaged in the business
of, be employed by, act as a consultant to, or be a director, officer,
employee, owner or partner of, any person or entity which is engaged in
the primary business of the Company at such time and in the territories
served by the Company in such business during the Non-Compete Period.
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(c) Solicitation of Employees. During the Non-Compete Period,
Executive shall not directly or indirectly employ, or solicit to leave
Company's employ, or solicit to join the employ of another person or
entity (including any such person or entity owned or controlled, directly
or indirectly, by Executive) any employee of Company or any person who has
been such an employee during the twelve months preceding Executive's date
of termination.
(d) Confidential Information. During and at all times
subsequent to the Term, Executive shall keep secret and shall not exploit
or disclose or make accessible to any person or entity, except in
furtherance of the business of Company, and except as may be required by
law or legal process, any confidential business information of any type
that was acquired or developed by either Company or any of its
subsidiaries or affiliates, or Executive, prior to or during the Term. In
addition, the term "confidential business information" shall not include
information which (i) is or becomes generally available to the public
other than as a result of a disclosure by Executive; or (ii) was available
to Executive prior to any employment by Company as a result of his general
business experience.
(e) Divisibility. The provisions contained in this section 6
as to the time period and scope of activities restricted shall be deemed
divisible, so that if any provision contained in this section 6 is
determined to be invalid or unenforceable, that provision shall be deemed
modified so as to be valid and enforceable to the full extent lawfully
permitted.
(f) Relief. Executive acknowledges that the provisions of
this section 6 are reasonable and necessary for the protection of Company
and that Company will be irreparably damaged if such covenants are not
specifically enforced. Accordingly, it is agreed that Company will be
entitled to injunctive relief for the purpose of restraining Executive
from violating such covenants (and no bond or other security shall be
required in connection therewith), in addition to any other relief to
which Company may be entitled.
7. Miscellaneous.
(a) Survival. The covenants and agreements set forth in this
Employment Agreement shall survive Executive's termination of employment,
irrespective of any investigation made by or on behalf of any party.
(b) Headings. The section headings of this Employment
Agreement are for reference purposes only and are to be given no effect in
the construction or interpretation of this Employment Agreement.
(c) Assignment. This Employment Agreement shall not be
assignable by Executive without the prior written consent of Company, and
shall inure to the benefit of and be binding upon Executive and his legal
representatives.
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(d) Territory. Executive shall not be required to relocate or
render services hereunder in any geographic area beyond a radius of
forty-five (45) miles from Old Westbury, New York; provided, however, that
Executive may be required to travel for business purposes from time to
time, subject to Executive's reasonable approval.
(e) Governing Law. This Employment Agreement shall be
governed by and construed in accordance with the law of the State of New
York applicable to agreements made and to be performed in that State,
without reference to its principles of conflicts of law.
(f) Arbitration; Consent to Jurisdiction. Any controversy or
claim arising out of or relating to this Employment Agreement including,
without limitation, the interpretation or the breach thereof, shall be
settled by arbitration in the City, County and State of New York in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association then obtaining, and judgment upon the award
rendered by a panel of three (3) Arbitrators may be entered in any court
having jurisdiction thereof. Notwithstanding the foregoing, this agreement
to arbitrate shall not bar either party from seeking temporary or
provisional remedies in any Court having jurisdiction thereof. Company
and Executive hereby consent and submit to the personal jurisdiction of
the United States District Court for the Southern District of New York and
any New York State court of competent jurisdiction located in New York
County, New York in any suit, action or proceeding (other than as provided
in the first sentence of this section) arising out of or relating to this
Employment Agreement.
(g) Notices. All notices, requests, demands and other
communications (collectively, "Notices") that are required or may be given
under this Employment Agreement, shall be in writing, signed by the party
or the attorney for that party. All Notices shall, except as otherwise
specifically provided herein to the contrary, be deemed to have been duly
given or made: if by hand, immediately upon delivery; if by telecopier or
similar device, immediately upon sending, provided notice is sent on a
business day during the hours of 9:00 a.m. and 6:00 p.m. E.S.T., but if
not, then immediately upon the beginning of the first business day after
being sent; if by Federal Express, Express Mail or any other overnight
delivery service, one day after being placed in the exclusive custody and
control of said courier; and if mailed by certified mail, return receipt
requested, five (5) business days after mailing. All notices are to be
given or made to the parties at the following addresses (or to such other
address as either party may designate by notice in accordance with the
provisions of this section:
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If to Company at:
National Fiber Network, Inc.
60 Hudson Street, 15th Floor
New York, New York 10013
Attn: Chief Operating Officer
Telephone: (212) 566-2444
Facsimile: (212) 566-1777
If to Executive at:
10 Red Ground Road
Old Westbury, New York
with a copy to:
Silverman, Collura & Chernis, P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
Telephone: (212) 779-8600
Facsimile: (212) 779-8858
(h) Enforceability. If any provision of this Employment
Agreement is invalid or unenforceable, the balance of this Employment
Agreement shall remain in effect, and if any provision is inapplicable to
any person or circumstance, it shall nevertheless remain applicable to all
other persons and circumstances.
(i) Waiver. The failure of a party to this Employment
Agreement to insist on any occasion upon strict adherence to any term of
this Employment Agreement shall not be considered to be a waiver or
deprive that party of the right thereafter to insist upon strict adherence
to that term or any other term of this Employment Agreement. Any waiver
must be in writing.
(j) Complete Agreement. This Employment Agreement supersedes
any prior or contemporaneous agreements between the parties with respect
to its subject matter, is intended as a complete and exclusive statement
of the terms of
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the agreement between the parties with respect to its subject matter, and
cannot be changed or terminated orally.
IN WITNESS WHEREOF, the parties have executed this Employment
Agreement as of the date first above written.
NATIONAL FIBER NETWORK, INC.
By:
-------------------------------
Its:
------------------------------
----------------------------------
Stephen Garofalo
Executive
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EXHIBIT 10.3
Howard Finkelstein
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of April 30, 1997, by and between
NATIONAL FIBER NETWORK, INC., a Delaware corporation ("Company") and HOWARD
FINKELSTEIN ("Executive").
WHEREAS, Company desires to employ Executive as the President and Chief
Operating Officer of Company, and Executive desires to be so employed by
Company, on the terms and conditions herein provided.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
It is therefore agreed as follows:
1. Employment. During the term of this Employment Agreement, as
defined in section 2 hereof (the "Term"), Company shall employ Executive, and
Executive shall render services to Company as President and Chief Operating
Officer of Company and, subject to consultation with the Chief Executive
Officer of the Company, shall report only to the Board of Directors.
Executive shall also be appointed to serve on the Board of Directors.
Executive shall have such duties as are consistent with such position,
including supervision and control over, and full responsibility for, the
overall management and operation of the Company, strategic planning,
financing, and such additional duties as may from time to time be mutually
agreed upon by Executive and the Directors of the Company. Subject only to
any part-time outside consulting services disclosed to Company in writing
prior to the date hereof, Executive shall devote his full and exclusive
business time and best efforts to the performance of his duties under this
Employment Agreement and shall perform them faithfully, diligently and
competently. The Executive represents and warrants that neither the
execution by him of this Agreement nor the performance by him of his duties
and obligations hereunder will violate any agreement to which he is a party
or by which he is bound.
2. Term of Employment. Unless earlier terminated as provided in this
Employment Agreement, the term of Executive's employment under this
Employment Agreement (the "Term") shall commence on the date hereof and
continue until three years from the date hereof.
3. Compensation.
(a) Base Salary. Company shall pay to Executive throughout the
Term an annual salary (the "Base Salary"), payable in accordance with the
Company's customary policies. The Base Salary shall be at the rate of $295,000
per
<PAGE>
year for the first year of the Term; $335,000 per year for the second year of
the Term; and $375,000 per year for the third year of the Term.
(b) Bonus. In addition to the Base Salary, Company shall pay to
Executive shall pay to Executive a bonus, payable quarterly during each year
of the term, based on appropriate incentives and criteria to be determined
jointly with Executive at the beginning of each year, in good faith, provided
that in no event will the bonus be less than $100,000 for each year.
(c) Stock Options.
(i) Effective on the date of the commencement of Executive's
employment hereunder, Executive shall be granted a stock option (the
"Stock Option") to purchase an aggregate of 1,000,000 shares of common
stock of the Company, par value $.01 per share, to be issued under, and
pursuant to the terms of, that certain Option Agreement between the
Company and Executive dated as of the date hereof (the "Stock Plan").
The Stock Option granted hereby will be immediately exercisable with an
exercise price of $3.00 per share. The Stock Option shall expire ten (10)
years from the date of the grant of the Stock Option, subject to the other
terms and conditions of the Stock Plan;
(ii) Promptly following the consummation of an initial public
offering of the Company's common stock, the Company shall file a
registration statement on Form S-8 (or any successor form for the
registration under the Securities Act of 1933 (the "Securities Act") of
securities to be offered pursuant to employee benefit plans) registering
under the Securities Act the shares of common stock underlying the Stock
Option, subject to then applicable rules and regulations, in order to
permit the public resale thereof by the Executive. The rights of the
Executive set forth in this paragraph shall apply only to the extent that
an effective registration statement is then required for the Stock
underlying the Stock Option. In addition, the Executive shall be afforded
the registration rights, set forth on Schedule A annexed hereto and made a
part hereof.
4. Benefits.
(a) General Fringe Benefits. Executive shall be entitled to
participate in the life, hospitalization, health, accident and disability
insurance plans, health programs, pension plans, and other benefit and
compensation plans generally available to senior executives of the Company
from time to time. In addition, the Company, at its sole expense, shall
provide Executive with life insurance coverage (the beneficiary to be
designated by Executive) in an amount not less than $1,000,000. With respect
to health and hospitalization insurance, until such time as the Company has
provided Executive with effective health and hospitalization
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coverage, the Company shall reimburse Executive for his monthly COBRA
payments to maintain his current health and hospitalization insurance.
Without limiting the foregoing, the Company confirms that it intends to
establish a qualified stock option plan for its senior executives, including
Executive, within six (6) months of the date hereof.
(b) Reimbursements. Company shall pay or reimburse Executive for
all reasonable expenses actually incurred or paid by Executive during the
Term in the performance of Executive's duties to Company upon presentation by
Executive of expense statements or vouchers. In addition, Company shall pay
Executive's legal fees and disbursements incurred in connection with the
preparation and negotiation of this Employment Agreement, as well as the
Option Agreement and other related agreements being entered into as of the
date hereof.
(c) Automobile. Company shall pay Executive $1,500 per month as
full reimbursement for any and all expenses relating to the use of an
automobile during the Term in the performance of Executive's duties to
Company, including insurance, maintenance and garage.
5. Termination of Employment.
(a) Death. Executive's employment shall terminate upon his death,
and in such event, the estate or other legal representative of Executive
shall be entitled to receive Executive's Base Salary for a period equal to
the lesser of (i) one (1) year from the date of death or (ii) the balance of
the Term, in addition to all compensation, bonus and benefits that are
accrued and unpaid as of the date of death.
(b) Termination by Company. Executive's employment may be
terminated at the option of the Company by notice to Executive (i) as a
result of Executive's disability as provided in section 5(b)(i) hereof, or
(ii) for "cause" as defined and provided in section 5(b)(ii) hereof.
(i) Disability. As used in this Employment Agreement, the
term "disability" shall mean a physical or mental disability or
incapacity, whether total or partial, of Executive that, in the good faith
determination of Company's Directors or based upon reasonably competent
medical advice, has prevented him from performing substantially all of his
duties under this Employment Agreement during a period of three (3)
consecutive months or for 120 days during any twelve month period. If
Company shall terminate Executive's employment pursuant to this
section 5(b), Executive shall be entitled to continue to receive his Base
Salary for a period of one (1) year from the date of termination (but not
exceeding the balance of the Term), as well as all compensation, bonus and
benefits that are accrued and unpaid as of the date of disability.
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<PAGE>
(ii) Discharge for "Cause". If Executive (A) neglects his
duties hereunder in a material manner and such neglect shall not be
discontinued within five (5) business days after written notice to
Executive thereof (which notice shall be subject to the approval of the
Board of Directors and signed by the Chief Executive Officer or other
designated officer of Company and refer to a specific breach of this
Employment Agreement); (B) is convicted of a felony or other crime
involving fraud, moral turpitude or material loss to the Company;
(C) materially breaches his affirmative or negative covenants or
undertakings hereunder and such breach shall not be remedied within five
(5) business days after written notice to Executive thereof (which notice
shall be signed by the Chief Executive Officer or other designated officer
of Company and refer to a specific breach of the Employment Agreement); or
(D) in bad faith, commits any act or omits to take any action, to the
material detriment of Company; then Company may at any time by notice
terminate Executive's employment hereunder for "cause"; and Executive
shall have no right to receive any compensation or benefit from Company
hereunder on and after the effective date of such notice, except for
compensation and benefits that are accrued and unpaid as of the date of
termination.
(c) Termination by Executive for "Good Reason". In the event of:
(i) a reduction in the nature or scope of Executive's titles, authorities,
powers, duties, or responsibilities hereunder; (ii) a change in the method or
formula for determining the Bonus from that set forth in section 3(b) hereof
which results in a decrease in the amount of the Bonus payable to the
Executive thereunder; (iii) the removal of Executive as a member of the Board
of Directors of Company, unless such removal occurs after the termination of
Executive's employment for "cause"; (iv) a sale of all or substantially all
of the ownership interests or assets of Company, or a merger or consolidation
of the Company with any other corporation or entity; (v) a
"change-in-control" of the Company, defined as any person or entity (other
than Stephen Garofalo) becoming a "beneficial owner" (as defined in Rule
13d-3 of the Securities Exchange Act of 1934, as amended from time to time)
directly or indirectly of securities of the Company representing 50% or more
of the combined voting power of the Company's then outstanding securities; or
(vi) Company's materially breaching its affirmative or negative covenants or
undertakings hereunder and such breach shall not be remedied within fifteen
(15) days after notice to Company thereof (which notice shall be signed by
Executive and refer to a specific breach of this Employment Agreement); then
Executive may at any time by notice terminate Executive's employment
hereunder for "good reason"; and Company shall pay to Executive his Base
Salary, bonus and benefits that are accrued and unpaid as of the date of
termination, as well as the additional amounts described in section 5(e)
hereof.
(d) Expiration of Term. Upon the expiration of the Term, and
provided that (i) neither Executive or Company shall have terminated
Executive's employment hereunder prior thereto, (ii) Executive shall have
observed and performed
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<PAGE>
all of his material duties and obligations hereunder, and shall not have been
in default of any of his agreements, covenants or representations hereunder,
in both instances throughout the Term, and (iii) Executive's employment with
Company shall not thereafter be continued, then Company shall pay to
Executive the amounts described in section 5(e) hereof.
(e) Termination Benefits.
(i) Upon the expiration of the Term or the termination of
Executive's employment for any reason hereunder, the rights and benefits
of Executive under Company's employee benefit plans and programs shall be
determined in accordance with the provisions of such plans and programs.
(ii) Upon the expiration of the Term, Company shall pay to
Executive, in addition to any and all amounts which may otherwise be due
to Executive hereunder, an amount equal to one (1) times Executive's
then Base Salary, payable in equal monthly installments, on the first of
each month, during the Non-Compete Period.
(iii) Upon the termination of Executive's employment during the
Term by Company other than for "cause," or the termination of
Executive's employment by Executive with "good reason," Company shall pay
to Executive, in addition to any and all amounts which may otherwise be due
to Executive hereunder, an amount equal to one and one-half (1-1/2) times
Executive's then Base Salary, payable in full within thirty (30) days of
the date of termination.
6. Prohibited Activities.
(a) Non-Compete Period. For the purposes of this Employment
Agreement, the term "Non-Compete Period" shall mean the Term, and if
Executive's employment is terminated by Company for "cause," by Executive
without "good reason," or so long as Company pays Executive the termination
benefit specified in paragraph 5(e)(ii) above, an additional period of one
(1) year from and after the date of termination.
(b) Non-competition. During the Non-Compete Period, Executive
shall not directly or indirectly compete with, be engaged in the business of,
be employed by, act as a consultant to, or be a director, officer, employee,
owner or partner of, any person or entity which is engaged in the primary
business of the Company at such time and in the territories served by the
Company in such business during the Non-Compete Period.
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<PAGE>
(c) Solicitation of Employees. During the Non-Compete Period,
Executive shall not directly or indirectly employ, or solicit to leave
Company's employ, or solicit to join the employ of another person or entity
(including any such person or entity owned or controlled, directly or
indirectly, by Executive) any employee of Company or any person who has been
such an employee during the twelve months preceding Executive's date of
termination.
(d) Confidential Information. During and at all times subsequent
to the Term, Executive shall keep secret and shall not exploit or disclose or
make accessible to any person or entity, except in furtherance of the
business of Company, and except as may be required by law or legal process,
any confidential business information of any type that was acquired or
developed by either Company or any of its subsidiaries or affiliates, or
Executive, prior to or during the Term. In addition, the term "confidential
business information" shall not include information which (i) is or becomes
generally available to the public other than as a result of a disclosure by
Executive; or (ii) was available to Executive prior to any employment by
Company as a result of his general business experience.
(e) Divisibility. The provisions contained in this section 6 as
to the time period and scope of activities restricted shall be deemed
divisible, so that if any provision contained in this section 6 is determined
to be invalid or unenforceable, that provision shall be deemed modified so as
to be valid and enforceable to the full extent lawfully permitted.
(f) Relief. Executive acknowledges that the provisions of this
section 6 are reasonable and necessary for the protection of Company and that
Company will be irreparably damaged if such covenants are not specifically
enforced. Accordingly, it is agreed that Company will be entitled to
injunctive relief for the purpose of restraining Executive from violating
such covenants (and no bond or other security shall be required in connection
therewith), in addition to any other relief to which Company may be entitled.
7. Indemnification. Company acknowledges that prior to the
commencement of this Employment Agreement, Employee rendered certain services
to Company in anticipation of entering into this Agreement. Company and
Employee agree that as additional consideration for entering into this
Agreement, Company hereby indemnifies and holds Employee harmless from and
against any charges, claims, damages, settlements, costs, judgments, decrees,
losses, expenses (including reasonable counsel fees and expenses), penalties
and liabilities of any kind or nature whatsoever which may be sustained or
suffered by or secured against Employee based upon, relating to, arising out
of or as a result of Employee's services to, or acts on behalf of, the
Company during the period January 1, 1997 through the date hereof, to the
fullest extent possible and in any event such indemnification shall be no
less than the fullest possible indemnification provided to Company's officers
and directors under the Company's Certificate of Incorporation and the
Company's By-Laws.
6
<PAGE>
8. Miscellaneous.
(a) Survival. The covenants and agreements set forth in this
Employment Agreement shall survive Executive's termination of employment,
irrespective of any investigation made by or on behalf of any party.
(b) Headings. The section headings of this Employment Agreement
are for reference purposes only and are to be given no effect in the
construction or interpretation of this Employment Agreement.
(c) Assignment. This Employment Agreement shall not be assignable
by Executive without the prior written consent of Company, and shall inure to
the benefit of and be binding upon Executive and his legal representatives.
(d) Territory. Executive shall not be required to relocate or
render services hereunder in any geographic area beyond a radius of
thirty-five (35) miles from Greenwich, Connecticut; provided, however, that
Executive may be required to travel for business purposes from time to time,
subject to Executive's reasonable approval.
(e) Governing Law. This Employment Agreement shall be governed by
and construed in accordance with the law of the State of New York applicable
to agreements made and to be performed in that State, without reference to
its principles of conflicts of laws.
(f) Arbitration; Consent to Jurisdiction. Any controversy or
claim arising out of or relating to this Employment Agreement including,
without limitation, the interpretation or the breach thereof, shall be
settled by arbitration in the City, County and State of New York in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then obtaining, and judgment upon the award rendered by a panel
of three (3) Arbitrators may be entered in any court having jurisdiction
thereof. Notwithstanding the foregoing, this agreement to arbitrate shall not
bar either party from seeking temporary or provisional remedies in any Court
having jurisdiction thereof. Company and Executive hereby consent and submit
to the personal jurisdiction of the United States District Court for the
Southern District of New York and any New York State court of competent
jurisdiction located in New York County, New York in any suit, action or
proceeding (other than as provided in the first sentence of this section)
arising out of or relating to this Employment Agreement.
(g) Notices. All notices, requests, demands and other
communications (collectively, "Notices") that are required or may be given
under this Employment Agreement, shall be in writing, signed by the party or
the attorney for that party. All Notices shall, except as otherwise
specifically provided herein to the contrary, be deemed to have been duly
given or made: if by hand, immediately upon
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<PAGE>
delivery; if by telecopier or similar device, immediately upon sending,
provided notice is sent on a business day during the hours of 9:00 a.m. and
6:00 p.m. E.S.T., but if not, then immediately upon the beginning of the
first business day after being sent; if by Federal Express, Express Mail or
any other overnight delivery service, one day after being placed in the
exclusive custody and control of said courier; and if mailed by certified
mail, return receipt requested, five (5) business days after mailing. All
notices are to be given or made to the parties at the following addresses (or
to such other address as either party may designate by notice in accordance
with the provisions of this section):
If to Company at:
National Fiber Network, Inc.
60 Hudson Street, 15th Floor
New York, New York 10013
Attn: Chief Executive Officer
Telephone: (212) 566-2444
Facsimile: (212) 566-1777
with a copy to:
Silverman, Collura & Chernis, P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
Telephone: (212) 779-8600
Facsimile: (212) 779-8858
If to Executive at:
22 Guinea Road
Greenwich, CT 06830
Facsimile: (203) 661-0553
with a copy to:
Pavia & Harcourt
600 Madison Avenue
New York, New York 10022
Attn: Jordan E. Ringel, Esq.
Telephone: (212) 980-3500
Facsimile: (212) 980-3185
(h) Enforceability. If any provision of this Employment Agreement
is invalid or unenforceable, the balance of this Employment Agreement shall
remain in effect, and if any provision is inapplicable to any person or
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<PAGE>
circumstance, it shall nevertheless remain applicable to all other persons
and circumstances.
(i) Waiver. The failure of a party to this Employment Agreement
to insist on any occasion upon strict adherence to any term of this
Employment Agreement shall not be considered to be a waiver or deprive that
party of the right thereafter to insist upon strict adherence to that term or
any other term of this Employment Agreement. Any waiver must be in writing.
(j) Complete Agreement. This Employment Agreement supersedes any
prior or contemporaneous agreements between the parties with respect to its
subject matter, is intended as a complete and exclusive statement of the
terms of the agreement between the parties with respect to its subject
matter, and cannot be changed or terminated orally.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
as of the date first above written.
NATIONAL FIBER NETWORK, INC.
By:_____________________________________
Its:____________________________________
________________________________________
Howard Finkelstein
Executive
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EXHIBIT 10.4
AGREEMENT
This Agreement ("Agreement") is made as of April 30, 1997, by and among:
METROMEDIA COMPANY, a Delaware general partnership with offices
at One Meadowlands Plaza, East Rutherford, New Jersey 07073
("Metromedia");
STUART SUBOTNICK, residing at 425 East 58th Street, New York, New
York 10022 ("Subotnick");
ARNOLD WADLER, residing at 85 School Road East, Marlboro, New
Jersey 07746 ("Wadler");
SILVIA KESSEL, residing at 160 West 66th Street, New York, New
York 10023 ("Kessel");
STEPHEN A. GAROFALO, residing at 10 Red Ground Road, Old
Westbury, New York 11568 ("Garofalo"); and
NATIONAL FIBER NETWORK, INC., a Delaware corporation with offices
at 60 Hudson Street, New York, New York 10013 ("NFN").
W I T N E S S E T H:
WHEREAS, Metromedia, Subotnick, Wadler and Kessel (each a "Buyer" and
collectively "Buyers") desire to purchase, and NFN desires to sell to the
Buyers, the Buyers' Shares (as such term is hereinafter defined), for the
consideration and on the terms set forth in this Agreement; and
WHEREAS, Metromedia, NFN and Garofalo desire to enter into certain
agreements and arrangements in connection with the purchase of the Buyers'
Shares;
NOW, THEREFORE, in consideration of the promises and mutual covenants and
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and confirmed, the
parties hereto agree as follows:
<PAGE>
1. DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"AMENDED AND RESTATED NOTE" -- the amended and restated promissory note
issued by NFN to Metromedia dated March 6, 1997.
"APPLICABLE CONTRACT" -- any Contract (a) under which a Company has or may
acquire any rights, (b) under which a Company has or may become subject to any
obligation or liability, (c) by which a Company or any of the assets owned or
used by it is or may become bound, including, but not limited to, any such
Contract referred to in (a), (b) or (c) above which is related to or affects the
System.
"1996 BALANCE SHEET" -- as defined in Section 3.4.
"BREACH" -- a "Breach" of a representation, warranty, covenant, obligation,
or other provision of this Agreement or any instrument delivered pursuant to
this Agreement will be deemed to have occurred if there is or has been (a) any
material inaccuracy in or breach of, or any failure to perform or comply with,
such representation, warranty, covenant, obligation, or other provision, or (b)
any true and valid claim (by any Person) or other occurrence or circumstance
that is or was inconsistent with such representation, warranty, covenant,
obligation, or other provision, and the term "Breach" means any such inaccuracy,
breach, failure, claim, occurrence, or circumstance.
"BUYERS" -- Metromedia, Subotnick, Wadler and Kessel.
"BUYERS' SHARES" -- an aggregate of 8,403.325 shares of Series B Preferred
Stock, it being understood that if such shares were converted in full
immediately following the Closing, the holders thereof would receive upon such
conversion that number of shares of Common Stock as shall equal 24.528% of the
sum of the number of shares of Common Stock then issued and outstanding (after
giving effect to such conversion) plus the number of shares of Common Stock then
issuable pursuant to warrants and options then outstanding (such sum being
hereinafter referred to as the "Fully-Diluted Common Stock"). If, for any
reason, the sum of the number of shares of Common Stock issued and outstanding
plus the number of shares of Common Stock issuable pursuant to warrants and
options, in each case outstanding immediately prior to the Closing, exceeds
25,856,808, the number of Buyers' Shares shall be adjusted such that the number
of shares of Common Stock that the holders of the Buyers' Shares would receive
upon conversion in full of all Buyers' Shares shall equal 24.528% of the Fully-
Diluted Common Stock.
"CLOSING" -- as defined in Section 2.2.
"CLOSING DATE" -- the date and time as of which the Closing actually takes
place.
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"COMMON STOCK" -- the common stock, $.01 par value per share, of NFN as the
same is constituted from time to time.
"COMPANY" and "COMPANIES" -- respectively, NFN or its Subsidiaries,
individually, and NFN and its Subsidiaries, collectively.
"CONSENT" -- any approval, consent, ratification, waiver, or other
authorization (including, but not limited to, any Governmental Authorization).
"CONTEMPLATED TRANSACTIONS" -- all of the transactions contemplated by
and/or in connection with this Agreement, including:
(a) the authorization, issuance, sale and delivery of the Buyers' Shares
by NFN to Buyers;
(b) the performance by Buyers and NFN of their respective covenants and
obligations under this Agreement;
(c) Buyers' acquisition and ownership of the Buyers' Shares;
(d) The understandings, agreements and arrangements with respect to
governance, voting, registration rights and other matters set forth in this
Agreement.
"CONTRACT" -- any agreement, contract, obligation, promise, or undertaking
(whether written or oral and whether express or implied) that is legally binding
at the time of execution thereof (if applicable, or at any time thereafter).
"DAMAGES" -- as defined in Section 6.2 and 6.3.
"DISCLOSURE LETTER" -- stall mean the letter which shall be delivered by
NFN to the Buyers on the date of execution of this Agreement as modified by the
letter, if any, delivered by NFN to Buyers on the Closing Date, providing the
information and disclosure as provided in Article "3" hereof.
"DOITT" -- the New York City Department of Information, Technology and
Telecommunication.
"ENCUMBRANCE" -- any charge, claim, community property interest, condition,
equitable interest, lien, option, pledge, security interest, right of first
refusal, or restriction of any kind, including any restriction on use, voting,
transfer (other than restrictions imposed by applicable federal or state
securities laws), receipt of income, or exercise of any other attribute of
ownership.
"ENVIRONMENT" -- soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
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<PAGE>
wetlands), groundwaters, drinking water supply, stream sediments, ambient air
(including indoor air), plant and animal life, and any other environmental
medium or natural resource.
"ENVIRONMENTAL, HEALTH, AND SAFETY LIABILITIES" -- any cost, damages,
expense, liability, obligation, or other responsibility arising from or under
Environmental Law or Occupational Safety and Health Law and consisting of or
relating to:
(a) any environmental, health, or safety matters or conditions (including,
but not limited to, on-site or off-site contamination, occupational safety and
health, and regulation of chemical substances or products);
(b) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and response,
investigative, remedial, or inspection costs and expenses arising under
Environmental Law or Occupational Safety and Health Law:
(c) financial responsibility under Environmental Law or Occupational
Safety and Health Law for cleanup costs or corrective action, including any
investigation, cleanup, removal, containment, or other remediation or response
actions ("Cleanup") required by applicable Environmental Law or Occupational
Safety and Health Law (whether or not such Cleanup has been required or
requested by any Governmental Body or any other Person) and for any natural
resource damages; or
(d) any other compliance, corrective, investigative, or remedial measures
required under Environmental Law or Occupational Safety and Heath Law. The
terms "removal," "remedial," and "response action," include the types of
activities covered by the United States Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. 9601 et seq., as amended ("CERCLA").
"ENVIRONMENTAL LAW" -- any Legal Requirement that requires or relates to:
(a) advising and/or notifying appropriate authorities, employees, and the
public of any intended or actual releases of pollutants or hazardous substances
or materials, violations of discharge limits, or other prohibitions and of the
commencements of activities, such as resource extraction or construction, that
could impact on the Environment;
(b) preventing or reducing the release of pollutants or hazardous
substances or materials into the Environment;
(c) reducing the quantities, preventing the release, or minimizing the
hazardous characteristics of wastes that are generated;
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(d) assuring that products are designed, formulated, packaged, and used so
that they do not present risks to health or the Environment when used or
disposed of;
(e) protecting resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the transportation
of hazardous substances, pollutants, oil, or other potentially harmful
substances;
(g) cleaning up pollutants that have been released, preventing the threat
of release, or paying the costs of such clean up or prevention; or
(h) making responsible parties pay private parties, or groups of them, for
damages done to their health or the Environment, or permitting self-appointed
representatives of the public interest to recover for injuries done to public
assets.
"ERISA" -- the Employee Retirement Income Security Act of 1974, as amended,
or any successor law, and any regulations and rules issued thereunder.
"EXECUTIVE EMPLOYMENT AGREEMENTS" -- the agreement between NFN and
Garofalo, employing Garofalo as chief executive officer and chairman of the
board of directors of NFN, and the agreement between NFN and Howard Finkelstein
("Finkelstein"), employing Finkelstein as chief operating officer and president
of NFN to be effective as of the Closing Date (as defined herein), which
agreements are substantially in the form annexed to the disclosure letter.
"FACILITIES" -- any real property, leaseholds, easements, right of ways,
licenses or other interests currently or formerly owned or operated by the
Companies and any and all improvements, buildings, plants, structures, supplies
or equipment (including, but not limited to, fiber optic cable,
telecommunications equipment, motor vehicles, tank cars, and rolling stock)
currently or formerly owned or operated by the Companies, including property,
leaseholds, easements, right of ways, licenses or other interests and buildings,
plants, structures or equipment used in or related to the System.
"FCRC" -- the Franchise and Concession Review Committee of the City of New
York.
"FRANCHISE AGREEMENT" -- that certain Franchise Agreement between the City
of New York and NFN dated December 20, 1993 and all amendments thereto.
"GAAP" -- United States generally accepted accounting principles.
"GOVERNMENTAL AUTHORIZATION" -- any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement,
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including, but not limited to, the Franchise Agreement and the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
"GOVERNMENTAL BODY" -- any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental or quasi-governmental authority of any nature (including
any governmental agency, branch, department, official, or entity and any court
or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority or
power of any nature.
"HAZARDOUS ACTIVITY" -- the distribution, generation, handling, importing,
management, manufacturing, processing, production, refinement, Release, storage,
transfer, transportation, treatment, or use (including any withdrawal or other
use of groundwater) of Hazardous Materials in, on, under, about, or from the
Facilities or any part thereof into the Environment, and any other act,
business, operation, or thing that increases the danger, or risk of danger, or
poses an unreasonable risk of harm to persons or property on or off the
Facilities, or that may affect the value of any of the Facilities or any
Company.
"HAZARDOUS MATERIALS" -- any waste materials, chemicals or other substances
that are listed, defined, designated, or classified as, or otherwise determined
to be, hazardous, radioactive, or toxic or a pollutant or a contaminant under or
pursuant to any Environmental Law or that could result in the imposition of
liabilities under any Environmental Law, including, but not limited to, any
admixture or solution thereof, and specifically including petroleum (including
crude oil or any fraction thereof) and all derivatives thereof or synthetic
substitutes therefor and asbestos or asbestos-containing materials.
"INTELLECTUAL PROPERTY ASSETS" -- as defined in Section 3.19.
"IRC" -- the Internal Revenue Code of 1986, as amended, or any successor
law, and any rules or regulations thereunder.
"IRS" -- the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
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"KNOWLEDGE" -- an individual will be deemed to have "Knowledge" of a
particular fact or other matter if (i) such individual is actually aware of such
fact or other matter; or (ii) if such individual upon the exercise of due
inquiry would be expected to be aware of such fact or matter.
A Person (other than an individual) will be deemed to have "Knowledge" of a
particular fact or other matter if any individual who is serving, or who has at
any time served, as a director, officer, executive, manager, executor, or
trustee of such Person (or in any similar capacity) has, or at any time had,
Knowledge of such fact or matter. Notwithstanding the foregoing, the parties
agree that the Knowledge of Finkelstein shall not be imputed to any of the
parties hereto.
"LEGAL REQUIREMENT" -- any federal, state, local, municipal, foreign,
international, multinational, Order, constitution, law, ordinance, principle of
common law, regulation, statute, or treaty.
"NFN" -- as defined in the first paragraph of this Agreement.
"OCCUPATIONAL SAFETY AND HEALTH LAW" -- any Legal Requirement which are
designed to or in any way otherwise provide for a safe and healthy working
conditions and (ii) the reduction or amelioration of occupational safety and
health hazards, and any program, whether governmental or private (including, but
not limited to, those promulgated or sponsored by industry associations and
insurance companies), designed to or in any other way provide for safe and
healthy working conditions.
"ORDER" -- any award, decision, injunction, writ, judgment, order,
stipulation, ruling, subpoena, or verdict entered, issued, made, or rendered by
any court, administrative agency, or other Governmental Body or by any
arbitrator.
"ORDINARY COURSE OF BUSINESS" -- an action taken by a Person will be deemed
to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person and
is taken in the ordinary course of the normal day-to-day operations of such
Person;
(b) such action is not required to be authorized by the board of directors
of such Person (or by any Person or group of Persons exercising similar
authority) and is not required to be specifically authorized by the parent
company (if any) of such Person; and
(c) such action is similar in nature and magnitude to actions customarily
taken, without any authorization by the board of directors (or by any Person or
group of Persons exercising similar authority), in the ordinary course of the
normal day-to-day operations of other Persons that are in the same line of
business as such Person.
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"ORGANIZATIONAL DOCUMENTS" -- (a) the articles or certificate of
incorporation (or similar organizational documents) and the bylaws (or similar
document) of a corporation; (b) the partnership agreement and any statement of
partnership of a general partnership; (c) the limited partnership agreement and
the certificate of limited partnership of a limited partnership; (d) the
operating agreement and certificate of formation of a limited liability company;
(e) any charter or similar document adopted or filed in connection with the
creation, formation, or organization of a Person; and (f) any amendment to any
of the foregoing.
"PERSON" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
"PREFERRED STOCK" -- the preferred stock of NFN, par value $.01 per share.
"PROCEEDING" -- any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"RELATED PERSON" -- with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
(c) any Person in which such individual or members of such individual's
Family hold (individually or in the aggregate) a Material Interest; and
(d) any Person with respect to which such individual or one or more
members of such individual's Family serves as a director, officer, partner,
member, executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or
indirectly controlled by, or is directly or indirectly under common control with
such specified Person;
(b) any Person that holds a Material Interest in such specified Person;
(c) each Person that serves as a director, officer, partner, member,
executor, or trustee of such specified Person (or in a similar capacity);
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(d) any Person in which such specified Person holds a Material Interest;
(e) any Person with respect to which such specified Person serves as a
partner, manager or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause (b) or (c).
For purposes of this definition, (a) the "Family" of an individual includes (i)
the individual, (ii) the individual's spouse, and (iii) any other natural person
who resides with such individual, other than a natural person employed by or
rendering services for consideration to such individual or his/her family and
(b) "Material Interest" means direct or indirect beneficial ownership (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of
voting securities or other voting interests representing at least 5% of the
outstanding voting power of a Person or equity securities or other equity
interests representing at least 5 % of the outstanding equity securities or
equity interests in a Person.
"RELEASE" -- any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, or other releasing into the Environment, whether
intentional or unintentional.
"REPRESENTATIVE" -- with respect to a particular Person, any director,
officer, manager, employee, agent, consultant, advisor, or other representative
of such Person, including, but not limited to, legal counsel, accountants, and
financial advisors.
"SECURITIES ACT" -- the Securities Act of 1933, as amended, or any
successor law, and any regulations and rules thereunder.
"SERIES A PREFERRED STOCK" -- the 150,000 shares of Series A Convertible
Preferred Stock of NFN, par value $0.01 per share.
"SERIES B PREFERRED STOCK" -- the 8,403.325 shares of Series B Convertible
Preferred Stock of NFN, par value $0.01 per share.
"STERLING NOTE" -- The promissory note made by NFN to Sterling Capital LLC
under date of September 24, 1996, in the principal amount of $550,000.
"SUBSIDIARY" -- with respect to any Person (the "Owner"), any corporation
or other Person of which securities or other interests having the power to elect
(either directly or indirectly) a majority of that corporation's or other
Person's board of directors or similar governing body, or otherwise having the
power to direct (either directly or indirectly) the business and policies of
that corporation or other Person (other than securities or other interests
having such power only upon the happening of a contingency that has not
occurred) are held by the Owner or one or more of its Subsidiaries. When used
without reference to a particular Person, "Subsidiary" means a Subsidiary of
NFN.
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"SYSTEM" -- the telecommunications system which has been and will be
constructed, installed, operated and/or maintained by the Company, including any
and all real property and interests in real property, all tangible and
intangible personal property, buildings, improvements, offices, furniture,
customer lists, cables, wires, optical fibers, amplifiers and all other
electronic devices, equipment, supplies, plans, drawings, tools and facilities
used in connection therewith and all rights, contracts, agreements and
understandings with regard to any matter related thereto.
"TAX" -- any tax however denominated, including any interest, penalties or
other additions to tax that may be payable in respect thereof, imposed by any
Governmental Body, including, without limitation, all income or profit taxes,
payroll and employee withholding taxes, unemployment insurance, social security
taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes,
gross receipts taxes, business license taxes, occupation taxes, real and
personal property taxes, stamp taxes, environmental taxes, transfer taxes,
workers' compensation, Pension Benefit Guaranty Corporation premiums and any
other governmental charges, and other obligations of the same or of a similar
nature to any of the foregoing, required to be paid, withheld or collected.
"TAX RETURN" -- any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.
"THREAT OF RELEASE" -- a likelihood of a Release that may require action in
order to prevent or mitigate damage to the Environment that may result from such
Release.
"US ONE" -- US One Communications of New York, Inc.
"US ONE LEASE" -- the Agreement for the Provision of a Fiber Optic
transmission Network dated April 16, 1996 between NFN and US One Communications
of New York, Inc.
"US ONE LOAN AGREEMENT" -- the agreement entitled "Amended and Restated
Master Agreement" between NFN and US One Communications Corp. dated as of April
16, 1996.
2. SALE AND TRANSFER OF SERIES B PREFERRED STOCK; CLOSING
2.1 PURCHASE PRICE
The aggregate purchase price for all of the Buyers' Shares is $32,500,000
("Aggregate Purchase Price") at a per share price of $3,867.516727 per share
(the "Per
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Share Price"). Each Buyer shall pay a proportionate share of the Aggregate
Purchase Price based upon the product of the number of Buyers' Shares purchased
by each such Buyer multiplied by the Per Share Price. The Buyers shall advise
NFN prior to the Closing Date of the number of Buyers' Shares which shall be
purchased by each Buyer at the Closing.
2.2 CLOSING
The closing with respect to the purchase and sale of the Buyers' Shares
("Closing") shall take place at the offices of Skadden, Arps, Slate, Meagher &
Flom LLP, 919 Third Avenue, New York, New York 10022 at 8:30 a.m. on April 30,
1997.
2.3 CLOSING OBLIGATIONS
(a) At the Closing, NFN will deliver to the Buyer:
(i) a certificate registered in the name of each Buyer for the
number of Buyers' Shares as shall be designated by joint notice from the Buyers
to NFN.
(ii) The opinion of counsel to NFN dated as of the Closing Date
substantially in the form annexed hereto as schedule 2.3(a);
(iii) An amendment to the US One Lease and the US One Loan Agreement
which in substance will provide (a) upon the funding of an equity investment in
NFN for a minimum of $32,500,000, US One shall prepay to NFN additional lease
payments, and reimburse NFN for construction costs, aggregating $3,530,000,
which payments shall be made and satisfied by the simultaneous delivery and
exchange of the following: (x) US One shall deliver to NFN that certain
promissory note (the "Note") from NFN to US One in the principal amount of
$4,900,000 marked "Canceled," and shall deliver and release all security
instruments pledged or filed with respect thereto, and (y) NFN shall pay to US
One $1,370,000 in cash, and (b) a modification of the scope of the buildout of
the NFN Network to eliminate the requirement to build 207 Route Miles (as
defined in the US One Loan Agreement) into Westchester, Nassau and Suffolk
counties and a modification of the lease payments corresponding thereto;
(iv) evidence of the approval of the FCRC under the terms of the
Franchise Agreement granting permission for the Buyers' ownership of an
aggregate of 24.528% of the Common Stock of NFN without conditions materially
adverse to the Buyers;
(v) evidence of the redemption of 150,000 shares of Series A
Preferred Stock;
(vi) documentary evidence of the payment of the Sterling Note and
the delivery and release of all security instruments pledged or filed with
respect thereto; and
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(vii) an estoppel certificate executed by each officer and director
of NFN in form and substance reasonably acceptable to Buyers.
(b) At the Closing each of the Buyers will deliver to NFN the purchase
price for their respective Buyers' Shares which purchase price shall equal the
product of the number of shares purchased by each such Buyer multiplied by the
Per Share Price.
(i) Metromedia (x) shall pay to NFN by wire transfer to one or
more accounts specified by NFN, the purchase price for its Buyers' Shares less
the outstanding principal balance and accrued interest due under the Amended and
Restated Note; (y) shall deliver to NFN the Amended and Restated Note with
an acknowledgment that such note has been satisfied; and (z) shall deliver to
NFN the collateral which was pledged by NFN as security for the performance of
the Amended and Restated Note;
(ii) Subotnick shall pay to NFN the purchase price for his Buyers'
Shares by wire transfer to the account designated by NFN;
(iii) Wadler shall pay to NFN the purchase price for his Buyers'
Shares by wire transfer to the account designated by NFN;
(iv) Kessel shall pay to NFN the purchase price for her Buyers'
Shares by wire transfer to the account designated by NFN.
3. REPRESENTATIONS AND WARRANTIES OF NFN
NFN represents and warrants to Buyers as follows:
3.1 ORGANIZATION AND GOOD STANDING
NFN is a corporation duly organized, validly existing, and in good standing
under the laws of its jurisdiction of incorporation, with full corporate power
and authority to conduct its business as it is now being conducted, to own or
use the properties and assets that it purports to own or use, and to perform all
its obligations under Applicable Contracts. NFN and each of its subsidiaries is
duly qualified to do business as a foreign corporation and is in good standing
under the laws of each state or other jurisdiction in which either the ownership
or use of the properties owned or used by it, or the nature of the activities
conducted by it, requires such qualification. NFN does not own, directly or
indirectly, any interest in or control, directly or indirectly, any other
corporation, company, business trust, partnership, limited partnership, limited
liability company, joint venture, or other entity or association other than (i)
National Fiber Network of New Jersey Inc., a New Jersey corporation of which NFN
owns 100% of the issued and outstanding capital stock; and (ii) Local Fiber,
L.L.C., a New York limited liability company of which NFN owns a 10% equity
interest.
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3.2 AUTHORITY; NO CONFLICT
Neither the execution and delivery by NFN of this Agreement nor the
consummation or performance by NFN of any of the Contemplated Transactions will,
directly or indirectly (with or without notice or lapse of time) contravene,
conflict with, or result in a violation of (A) any provision of the
Organizational Documents of any Company, (B) any resolution adopted by the board
of directors or the stockholders of any Company, (C) any Order, (D) any Legal
Requirement or (D) any Applicable Contract.
3.3 CAPITALIZATION
The authorized equity securities of NFN consist of (i) 60,000,000 shares of
Common Stock, par value $.01 per share; and (ii) 2,000,000 shares of Preferred
Stock, par value $.01 per share. Immediately following the Closing, 18,865,758
shares of Common Stock and 8,403.325 shares of Series B Preferred Stock will be
issued and outstanding. Upon their purchase as contemplated hereunder, the
Buyers' Shares will be duly authorized, validly issued, fully paid and
non-assessable. Other than any Encumbrance arising out of any act of any Buyer,
at the time of issuance and sale by NFN, all of Buyers' Shares will be free and
clear of all Encumbrances. All of the outstanding equity securities and other
securities of each Subsidiary are owned of record and beneficially by NFN, free
and clear of all Encumbrances except as set forth in Part 3.3 of the Disclosure
Letter. All of the outstanding equity securities of each Company have been duly
authorized and validly issued and are fully paid and nonassessable. Except as
set forth in Part 3.3 of the Disclosure Letter (as defined herein), immediately
following the Closing there will be no outstanding options, warrants,
convertible securities (with the exception of Buyers' Shares), other rights to
purchase, or rights to convert any obligation or other instrument into Common
Stock or other Contracts relating to the issuance, sale, or transfer of any
equity securities or other securities of any Company. None of the outstanding
equity securities or other securities of any Company was issued in violation of
or will breach (or with the lapse of time, cause to be breached) the Securities
Act, any Contract, any Organizational Document, or any other Legal Requirement.
Except as disclosed in Part 3.3 of the Disclosure Letter, no Company owns, or
has any Contract to acquire, any equity securities or other securities of any
Person or any direct or indirect equity or ownership interest in any other
business.
3.4 FINANCIAL STATEMENTS
NFN has delivered to Buyers the audited consolidated balance sheet of the
Companies as of September 30, 1996 and the related consolidated statements of
income, changes in stockholders' equity, and cash flow for the nine month period
then ended and a draft of the consolidated balance sheet of the Companies as of
December 31, 1996 and the related drafts of consolidated statements of income,
changes in stockholders' equity and cash flow for the twelve month period then
ended (collectively, the "1996 Balance Sheet"). Such financial statements and
notes fairly present the financial condition and the results of operations,
changes in stockholders' equity, and cash flow of the
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Companies as at the date of and for the period referred to in such financial
statements, all in accordance with GAAP; the financial statement referred to in
this Section 3.4 reflects the consistent application of such accounting
principles throughout the periods involved. No financial statements of any
Person other than the Companies are required by GAAP to be included in the
consolidated financial statements of NFN.
3.5 BOOKS AND RECORDS
The books of account, minute books, stock record books, and other records
of the Companies are complete and correct and have been maintained in accordance
with sound business practices, including the maintenance of an adequate system
of internal controls. The minute books of NFN contain accurate and complete
records of all meetings held of, and corporate action taken by, the
stockholders, the Boards of Directors, and committees of the Boards of Directors
of the Companies, and no meeting of any such stockholders, Board of Directors,
or committees has been held for which minutes have not been prepared and are not
contained in such minute books and which books and records are in the possession
of NFN.
3.6 CONDITION AND SUFFICIENCY OF ASSETS
The System and all other plants, improvements, structures, supplies, tools,
drawings, plans and equipment of each Company are structurally sound, are in
good operating condition and repair, and are adequate for the uses to which they
are being put, and for which they are intended, and no part of the System or
such other plants, improvements, structures, supplies, tools, drawings, plans
and equipment is in need of maintenance or repairs except for ordinary, routine
maintenance and repairs that are not material in nature or cost. The System and
all other plants, improvements, structures, supplies, tools, drawings, plans and
equipment of each Company are sufficient for the continued conduct of the
Companies' businesses after the Closing in substantially the same manner as
conducted prior to the Closing.
3.7 ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
All accounts receivable and accounts payable of each Company that are
reflected on the 1996 Balance Sheet or are reflected in the Companies' books and
records as of the Closing Date ( the "Accounts Receivable" and the "Accounts
Payable", respectively) represent or will with only the passage of time
represent valid obligations arising from, respectively, sales and purchases
actually made or services actually performed or received in the Ordinary Course
of Business. Unless paid prior to the Closing Date, the Accounts Receivable are
or will be as of the Closing Date current and collectible net of the respective
reserves shown on the 1996 Balance Sheet or on the Companies' books and records
as of the Closing Date.
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3.8 NO UNDISCLOSED LIABILITIES
Except as set forth in Part 3.8 of the Disclosure Letter, no Company has
any liabilities or obligations of any nature (whether absolute, accrued,
contingent, or otherwise) except for liabilities or obligations reflected or
reserved against in the 1996 Balance Sheet and current liabilities incurred in
the Ordinary Course of Business since the date thereof.
3.9 TAXES
(a) Except as set forth in Part 3.9 of the Disclosure Letter, NFN has
filed or caused to be filed all Tax Returns that are or were required to be
filed by or with respect to any of them, either separately or as a member of a
group of corporations, pursuant to applicable Legal Requirements.
(b) None of the United States federal and state Tax Returns of any Company
subject to such Taxes has been audited or threatened to be audited by the IRS or
any relevant state or local tax authorities (and none of the companies has
reason to believe that any such audit may be requested) or are closed by the
applicable statute of limitations for all taxable years through 1996.
3.10 COMPLIANCE WITH LEGAL REQUIREMENTS;
GOVERNMENTAL AUTHORIZATIONS
(a) Except as set forth in Part 3.10 of the Disclosure Letter:
(i) NFN has been in full compliance with each Legal Requirement
that is or was applicable to it or to the conduct or operation of its business
or the ownership or use of any of its assets, including, but not limited to, the
System;
(ii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) (A) may constitute or result in a violation by
any Company of. or a failure on the part of any Company to comply with, any
Legal Requirement, or (B) may give rise to any obligation on the part of any
Company to undertake, or to bear all or any portion of the cost, expense or
liability of or for, any remedial action of any nature, including, but not
limited to, any action with respect to the System; and
(iii) No Company has received any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding (A) any actual, alleged, possible, or potential violation of, or
failure to comply with, any Legal Requirement, or (B) any actual, alleged,
possible, or potential obligation on the part of any Company to undertake, or to
bear all or any portion of the cost, expense or responsibility of, any remedial
action of any nature, including, without limitation, any action with respect to
the System.
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3.11 LEGAL PROCEEDINGS; ORDERS
(a) Except as set forth in Part 3.11 of the Disclosure Letter, there is no
pending and/or threatened Proceeding:
(i) that has been commenced by or against any Company or that
otherwise relates to or may affect the business or prospects of, or any of the
assets, including the System, owned or used by, any Company or to which any
Company has any rights whatsoever; or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the Contemplated
Transactions. To the Knowledge of NFN, (1) no such Proceeding has been
threatened, and (2) no event has occurred or circumstance exists that may give
rise to or serve as a basis for the commencement of any such Proceeding.
3.12 ABSENCE OF CERTAIN CHANGES AND EVENTS
Except as set forth in Part 3.12 of the Disclosure Letter, since the date
of the 1996 Balance Sheet, the Companies have conducted their businesses only
in the Ordinary Course of Business and there has not been any:
(a) change in any Company's authorized or issued capital stock; grant of
any stock option or right to purchase shares of capital stock of any Company;
issuance of any security convertible into such capital stock; grant of any
registration rights; purchase, redemption, retirement, or other acquisition by
any Company of any shares of any such capital stock; or declaration or payment
of any dividend or other distribution or payment in respect of shares of capital
stock;
(b) amendment or modification to the Organizational Documents of any
Company;
(c) payment or increase by any Company of any bonuses, salaries, or other
compensation to any stockholder, director, officer, or (except in the Ordinary
Course of Business) employee or entry into any employment, severance, or similar
Contract with any director, officer, or employee;
(d) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of any
Company;
(e) damage to or destruction or loss of any asset or property of any
Company, whether or not covered by insurance, materially and adversely affecting
the properties, assets, business, financial condition, or prospects of any
Company;
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(f) damage to or destruction or loss of all or any portion of the System,
whether or not covered by insurance,
(g) termination of, or receipt of notice of termination of, or receipt of
notice of default under and/or any breach of renegotiation or receipt of notice
of renegotiation of any of the terms of the Franchise Agreement or any
threatened action (whether oral or written) with respect to any potential
termination, default, breach or renegotiation of any of the terms of the
Franchise Agreement, and NFN has no reason to believe that any such action is
likely and/or imminent;
(h) sale (other than sales of inventory in the Ordinary Course of
Business), lease, or other disposition of any asset (including, but not limited
to, any portion of the System and/or any Contract) or property of any Company or
mortgage, pledge, or imposition of any lien or other encumbrance on any asset or
property of any Company, including the System;
(i) material change in the accounting methods used by any Company; or
(j) agreement, whether oral or written, by any Company to do any of the
foregoing.
3.13 CONTRACTS; NO DEFAULTS
(a) NFN has delivered or made available to Buyers true and complete
copies, of:
(i) each Applicable Contract that involves performance of services
or delivery of goods or materials by one or more Companies of an amount or value
in excess of $50,000;
(ii) each Applicable Contract that involves performance of services
or delivery of goods or materials to one or more Companies of an amount or value
in excess of $50,000;
(iii) each Applicable Contract that was not entered into in the
Ordinary Course of Business and that involves expenditures or receipts of one or
more Companies in excess of $50,000;
(iv) each joint venture, partnership, and other Applicable Contract
(however named) involving a sharing of revenues, profits, losses, costs, or
liabilities by any Company with any other Person;
(v) each Applicable Contract containing covenants that in any way
purport to restrict the business activity of any Company or any Affiliate of a
Company or limit the freedom of any Company or any Affiliate of any Company to
engage in any
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line of business, to compete with any Person, to issue securities or to
transfer, sell or otherwise dispose of any equity securities or any material
assets;
(vi) each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance extended by any Company
other than in the Ordinary Course of Business; and
(vii) each amendment, supplement, and modification (whether oral or
written) in respect of any of the foregoing.
(b) Except as set forth in Part 3.14(b) of the Disclosure Letter, no
officer or director, no agent, employee, consultant, or contractor of any
Company is bound by any Contract that purports to limit the ability of such
officer, director, agent, employee, consultant, or contractor to (A) engage in
or continue any conduct, activity, or practice relating to the business of any
Company, or (B) assign to any Company or to any other Person any rights to any
invention, improvement, or discovery;
(c) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any material amounts paid by or payable to any
Company under current or completed Contracts (including, but not limited to, the
Franchise Agreement) with any Person and to the Knowledge of NFN, no such Person
has made written demand for such renegotiation; and
(d) The Contracts relating to the sale, design, manufacture, or provision
of products or services (including the design, construction, maintenance and
operation of the System) by the Companies have been entered into in the Ordinary
Course of Business and have been entered into without the commission of any act
alone or in concert with any other Person, or any consideration having been paid
or promised, that is or would be in violation of any Legal Requirement.
3.14 INSURANCE
(a) Part 3.14 of the Disclosure Letter is a certificate of insurance which
lists and describes all policies of insurance to which any Company is a party or
under which any Company, or any director of any Company, is or has been covered
at any time within the 12 months preceding the date of this Agreement.
3.15 ENVIRONMENTAL MATTERS
Except as set forth in part 3.15 of the Disclosure Letter:
(a) Each Company is, and at all times has been, in full compliance with,
and has not been and is not in violation of or liable under, any Environmental
Law. No Company has any basis to expect, nor has any of them or any other
Person for whose conduct they are or may be held to be responsible received, any
actual or threatened
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Order, notice, or other communication (written or oral) from (i) any
Governmental Body or private citizen acting in the public interest, or (ii) the
current or prior owner or operator of any Facilities, or the System, of any
actual or potential violation or failure to comply with any Environmental Law,
or of any actual or threatened obligation to undertake or bear the cost of any
Environmental, Health, and Safety Liabilities with respect to any of the
Facilities or any other properties or assets.(whether real, personal, or mixed)
in which any Company has had an interest, including, but not limited to, the
System, or with respect to any property or Facility at or to which Hazardous
Materials were generated, manufactured, refined, transferred, imported, used, or
processed by any Company, or any other Person for whose conduct they are or may
be held responsible, or from which Hazardous Materials have been transported,
treated, stored, handled, transferred, disposed, recycled, or received.
(b) There are no pending or, to the Knowledge of NFN, threatened claims,
Encumbrances, or other restrictions of any nature, resulting from any
Environmental, Health, and Safety Liabilities or arising under or pursuant to
any Environmental Law, with respect to or affecting any of the Facilities or any
other properties and assets (whether real, personal, or mixed) in which any
Company has or had an interest, including the System.
(c) No Company has Knowledge or any basis to expect, nor has any of them
or any other Person for whose conduct they are or may be held responsible,
received, any citation, directive, inquiry, notice, Order, summons, warning, or
other communication (written or oral) that relates to Hazardous Activity,
Hazardous Materials, or any alleged, actual, or potential violation or failure
to comply with any Environmental Law, or of any alleged, actual, or potential
obligation to undertake or bear the cost of any Environmental, Health, and
Safety Liabilities with respect to any of the Facilities or any other properties
or assets (whether real, personal, or mixed) in which any Company had an
interest, including the System, or with respect to any property or facility to
which Hazardous Materials generated, manufactured, refined, transferred,
imported, used, or processed by any Company, or any other Person for whose
conduct they are or may be held responsible, have been transported, treated,
stored, handled, transferred, disposed, recycled, or received.
(d) There has been no Release or, to the Knowledge of any of the
Companies, threatened Release, of any Hazardous Materials at or from the
Facilities or at any other locations where any Hazardous Materials are
generated, manufactured, refined, transferred, produced, imported, used, or
processed from or by the Facilities, or from or by any other properties and
assets (whether real, personal, or mixed) in which any Company has or had an
interest, including the System, or to the Knowledge of NFN any adjoining
property, whether by any Company, or any other Person.
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3.16 EMPLOYEES
(a) Part 3.16 of the Disclosure Letter sets forth information regarding
each executive or managerial employee of NFN, including such employee's name;
job title and current compensation;
(b) No employee or director of any Company is a party to, or is otherwise
bound by, any agreement or arrangement, including any confidentiality,
noncompetition, or proprietary rights agreement, between such employee or
director and any other Person ("Proprietary Rights Agreement") that in any way
adversely affects or will affect (i) the performance of his duties as an
employee or director of the Companies, or (ii) the ability of any Company to
conduct its business, including any Proprietary Rights Agreement with the
Companies by any such employee or director. To NFN's Knowledge, no director,
officer, or other key employee of any Company intends to terminate his
employment with such Company.
3.17 LABOR RELATIONS; COMPLIANCE
The Company is not a party to any collective bargaining or other labor
Contract. There has not been, there is not presently pending or existing, and
to any Company's Knowledge there is not threatened, (a) any strike, slowdown,
picketing, work stoppage, or employee grievance process, (b) any material
Proceeding against or affecting any Company relating to the alleged violation of
any Legal Requirement pertaining to labor relations or employment matters,
including any charge or complaint filed by an employee or union with the
National Labor Relations Board, the Equal Employment Opportunity Commission, or
any comparable Governmental Body, organizational activity, or other labor or
employment dispute against or affecting any of the Companies, their premises
and/or any of the Facilities, or (c) any application for certification of a
collective bargaining agent. To NFN's Knowledge, no event has occurred or
circumstance exists that could provide the basis for any work stoppage or other
labor dispute. There is no lockout of any employees by any Company, and no such
action is contemplated by any Company. Each Company has complied in all
respects with all Legal Requirements relating to employment, equal employment
opportunity, nondiscrimination, immigration, wages, hours, benefits, collective
bargaining, the payment of social security and similar taxes, occupational
safety and health, and plant closing. No Company is liable for the payment of
any material compensation, damages, taxes, fines, penalties, or other amounts,
however designated, for failure to comply with any of the foregoing Legal
Requirements.
3.18 INTELLECTUAL PROPERTY
(a) As used in this Agreement, the term "Intellectual Property Assets"
includes:
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(i) NFN's name, all fictional business names, trading names,
registered and unregistered trademarks, service marks, and applications
(collectively, "Marks");
(ii) all patents, patent applications, and inventions and
discoveries that may be patentable (collectively, "Patents");
(iii) all copyrights in both published works and unpublished works
(collectively, "Copyrights");
(iv) all rights in mask works (collectively, "Rights in Mask
Works"); and
(v) all know-how, trade secrets, confidential information,
customer lists, software, technical information, data, process technology,
plans, drawings, and blue prints (collectively, "Trade Secrets") owned, used, or
licensed by any Company as licensee or licensor.
(b) There are no Contracts relating to the Intellectual Property Assets to
which NFN is a party or by which NFN is bound. There are no outstanding and, to
NFN's Knowledge, no threatened disputes or disagreements with respect to any
such agreement.
(c) There are no Contracts and/or claims relating to any patent, and to
NFN's Knowledge, the construction, maintenance and operation of the System does
not infringe upon any Person's Patent or any other proprietary right of any
Person.
(d) TRADEMARKS
(i) To NFN's Knowledge, there is no potentially interfering
trademark or trademark application of any third party.
(e) TRADE SECRETS
(i) With respect to each Trade Secret, the documentation relating
to such Trade Secret is current, accurate, and sufficient in detail and content
to identify and explain it and to allow its full and proper use without reliance
on the knowledge or memory of any individual.
(ii) The Companies have taken all reasonable precautions to protect
the secrecy, confidentiality, and value of their Trade Secrets.
(iii) One or more of the Companies has good title and an absolute
(but not necessarily exclusive) right to use the Trade Secrets. The Trade
Secrets are not part of the public knowledge or literature, and, to NFN's
Knowledge, have not been used, divulged, or appropriated either for the benefit
of any Person (other than one or more
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of the Companies) or to the detriment of the Companies. No Trade Secret is
subject to any adverse claim or has been challenged or threatened in any way.
3.19 CERTAIN PAYMENTS
No Company or director, officer, agent, or employee of any Company, any
other Person associated with or acting for or on behalf of any Company, has
directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff,
influence payment kickback, or other payment to any Person, private or public,
regardless of form, whether in money, property, or services (i) to obtain
favorable treatment in securing business, (ii) to pay for favorable treatment
for business secured, (iii) to obtain special concessions or for special
concessions already obtained, for or in respect of any Company or any Affiliate
of a Company, or (iv) in violation of any Legal Requirement, or (b) established
or maintained any or asset that has not been recorded in the books and records
of the Companies.
3.20 DISCLOSURE
(a) No representation or warranty of NFN in this Agreement or statement or
disclosure in the Disclosure Letter contains any misrepresentation of any
material fact or omits to state a material fact necessary to make the statements
herein or therein, in light of the circumstances in which they were made, not
misleading.
3.21 BROKERS OR FINDERS
NFN has incurred no obligation or liability, contingent or otherwise, for
brokerage or finders' fees or agents' commissions or other similar payment in
connection with this Agreement and will indemnify and hold the Buyer harmless
from any such payment alleged to be payable by Buyer as the result of the action
of NFN or its officers or agents.
3.22 AFFILIATE TRANSACTIONS
All material transactions between NFN and a Related Person of NFN (other
than a wholly owned Subsidiary of NFN) ("Affiliate Transactions") between
January 1, 1995 and December 31, 1996 are disclosed in (i) the audited
consolidated financial statements of NFN as of and for the year ended December
31, 1995, (ii) the audited consolidated financial statements of NFN as of and
for the nine months ended September 30, 1996, (iii) the draft consolidated
financial statements of NFN as of and for the twelve months ended December 31,
1996, or (iv) the Disclosure Letter. Since December 31, 1996, NFN has not
consummated any Affiliate Transactions other than on an arm's-length basis,
except as set forth in the Disclosure Letter.
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4. REPRESENTATIONS AND WARRANTIES OF BUYERS
Buyers represent and warrant to NFN as follows:
4.1 ORGANIZATION AND GOOD STANDING OF METROMEDIA
Metromedia is a general partnership duly organized, and validly existing,
under the laws of the State of Delaware.
4.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding obligation of
Each Buyer, enforceable against each Buyer in accordance with its respective
terms. Each Buyer has the authority to execute and deliver this Agreement to
perform their obligations under this Agreement.
(b) Neither the execution and delivery of this Agreement Buyer nor the
consummation or performance of any of the Contemplated Transactions by any Buyer
in accordance with the terms of this Agreement will give any Person the right to
prevent, delay, or otherwise interfere with any of the Contemplated Transactions
pursuant to:
(i) any provision of Metromedia's Organizational Documents;
(ii) any material Legal Requirement or Order to which any Buyer is
subject; or
(iii) any material Contract to which any Buyer is a party or by
which any Buyer is bound.
No Buyer is, and will not be, required to obtain any Consent from any
Person in connection with the execution and delivery of this Agreement or the
consummation or performance of any of the Contemplated Transactions pursuant to
any Legal Requirement or Order to which any Buyer is subject or any Contract to
which any Buyer is a party or by which any Buyer is bound.
4.3 INVESTMENT INTENT, ETC.
(a) "Buyers Shares", for the purposes of this Section 4.3, shall include
8,403.325 shares of Series B Preferred Stock and the shares of Common Stock
issuable upon conversion thereof. Each Buyer is acquiring their respective
Buyers' Shares for their own account and not with a view to their distribution
within the meaning of Section 2(l1) of the Securities Act. Each Buyer hereby
acknowledges and agrees that Buyers' Shares will not be registered under the
Securities Act or any state securities or "blue sky" laws and may not be sold,
transferred or otherwise disposed of except in compliance with the provisions of
the Securities Act and the rules and regulations promulgated thereunder
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and such state securities or "blue sky" laws. Buyer is an "accredited investor"
as such term is defined in Rule 501 of Regulation D promulgated under the
Securities Act.
(b) Each Buyer understands that the Company has no obligation to register
the Buyers' Shares under the Securities Act or any state securities laws except
as set forth in Article 8 hereof. Each Buyer acknowledges that the Buyers'
Shares must be held indefinitely unless a registration occurs as provided in
Article 8 hereof or an exemption from such registration is available for a
transfer of the Buyers' Shares. Each Buyer understands that no public market
now exists for any of the securities issued by the Company and that the Company
has made no assurances with respect to any secondary market for the Buyers'
Shares. Each Buyer has had an opportunity to discuss the business, management
and financial affairs of the Company and the terms and conditions of an
investment in the Buyers' Shares with, and has had access to, the management of
the Company. Each Buyer understands and acknowledges that the Company will be
relying upon Buyers' representations and warranties set forth herein in offering
and selling the Buyers' Shares. Each Buyer represents that the offering of the
Buyers' Shares was made only through direct, personal communication between each
Buyer and a representative of the Company and not through public solicitation or
advertising. No Buyer has retained or consulted any "Purchaser Representative"
as such term is defined in Rule 501 of Regulation D promulgated under the
Securities Act. Each Buyer has such knowledge, experience and skill in
evaluating and investing in issues of both equity and debt securities, including
securities of new and speculative companies, based on actual based on actual
participation in financial, investment and business matters such that he, she or
it is capable of evaluating the merits and risks of an investment in the Buyers'
Shares, and has such knowledge, experience and skill in financial and business
matters that he, she or it is capable of evaluating the merits and risks of the
prospective investment in the Company and the suitability of the Buyers' Shares
as an investment for itself, himself or herself. No Buyer has received, or is
relying on, any representations or warranties from the Company or any other
person, other than the information in writing as provided herein. Each Buyer is
able to bear the economic risk of an investment in the Buyers' Shares and has
adequate income independent of any income produced from an investment in the
Buyers' Shares and has sufficient net worth to sustain a loss of all of its, his
or her investment in the Buyers' Shares without economic hardship if such a
loss should occur.
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4.4 RESTRICTIONS ON TRANSFERS; CERTAIN PERMITTED TRANSFERS.
(a) Each Buyer agrees that it will not sell, transfer, assign, pledge,
hypothecate or otherwise dispose of (each, a "transfer") any of the Buyers'
Shares, except:
(i) a transfer made in compliance with the federal and all
applicable state securities laws to a trust, the beneficiaries of which, or to a
corporation, partnership or limited liability company, the stockholders, limited
or general partners or equity owners of which, include only the Buyer and its
"affiliates" (within the meaning of the Securities Act); PROVIDED that no
transfer pursuant to subsection (a)(i) of this Section 4.4 shall be given effect
on the books of the Company unless and until the transferee shall agree in
writing, in form and substance satisfactory to the Company, to become, and
becomes, bound by the representations and warranties and restrictions on
transfer applicable to the Buyer contained in this Agreement. Each person to
whom the Buyers' Shares may be transferred pursuant to this Section 4.4(a)(i) is
hereinafter sometimes referred to as a "Permitted Transferee".
(ii) a transfer to a person other than a Permitted Transferee may
be made with the prior written consent of the Company, which consent shall not
be unreasonably withheld, PROVIDED that (A) such transfer is exempt from the
registration requirements of the Securities Act and any applicable state
securities laws, (B) if the Company so requests, the Company receives from the
transferor an unqualified opinion of counsel that such transfer may be effected
without registration under the Securities Act and any applicable state
securities laws, and (C) the transferee shall agree in writing, in form and
substance satisfactory to the Company, to become, and becomes, bound by the
representations and warranties and restrictions on transfer applicable to the
Buyer contained in this Agreement.
(iii) a transfer to the Company.
(b) Each certificate evidencing the Buyers' Shares issued to Buyer or to a
subsequent transferee shall include a legend in substantially the following form
(in addition to any other statements or legends required by law):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER STATE SECURITIES
LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
IS SUBJECT TO THE CONDITIONS SPECIFIED IN AN AGREEMENT DATED APRIL 30,
1997. A COPY OF SUCH CONDITIONS WILL BE FURNISHED BY THE CORPORATION
TO THE HOLDER HEREOF UPON
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WRITTEN REQUEST AND WITHOUT CHARGE. THESE SECURITIES MAY NOT BE
RESOLD OR TRANSFERRED UNLESS SUCH CONDITIONS COMBINED WITH AND UNLESS
REGISTERED OR EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF
1933 AND APPLICABLE STATE SECURITIES LAWS.
(c) Any purported transfer in violation of this Section 4.4 shall be null
and void and of no force or effect.
(d) Anything to the contrary contained in this Section 4.4
notwithstanding, no transfer to or from any Buyer or any Permitted Transferee or
a person other than a Permitted Transferee shall be made or recorded on the
transfer records of the Company, if as a result thereof, the Company would be
required to register the Buyer Shares under the Securities Act or any applicable
state securities or "blue sky' laws.
(e) The restrictions on transfer contained in this Section 4.4 shall not
apply to any transfer pursuant to an effective registration statement, or Rule
144, under the Securities Act and in compliance with all applicable state
securities laws.
4.5 CERTAIN PROCEEDINGS
There is no pending Proceeding that has been commenced against any Buyer
and that challenges, or may have the effect of preventing, delaying, making
illegal, or otherwise interfering with, any of the Contemplated Transactions.
To each Buyer's Knowledge, no such Proceeding has been threatened.
4.6 BROKERS OR FINDERS
No Buyer has incurred any obligation or liability, contingent or otherwise,
for brokerage or finders' fees or agents' commissions or other similar payment
in connection with this Agreement and each Buyer will indemnify and hold NFN
harmless from any such payment alleged to be due by or through a Buyer as a
result of the action of any such Buyer.
5. CERTAIN UNDERSTANDINGS, AGREEMENTS AND
ARRANGEMENTS BETWEEN BUYERS AND GAROFALO
(a) Without the prior written consent of Garofalo, NFN shall not, and
Buyers shall not permit NFN to:
(i) directly or indirectly declare or pay any dividends or make
any distributions in cash, property or securities upon any of its equity
securities;
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(ii) directly or indirectly redeem, cancel, purchase or otherwise
acquire any equity security of NFN or securities convertible into or
exchangeable for any equity security of NFN (other than any redemption,
cancellation, purchase or acquisition of shares of Series B Preferred Stock
that may otherwise be deemed to have occurred upon conversion of the Series
B Preferred Stock in accordance with its terms);
(iii) voluntarily liquidate or dissolve;
(iv) make any payment (in cash or property) to, or enter into any
transaction with, any stockholder of NFN or any Related Person of NFN that
is not on an arms'-length basis unless such action is approved by a
majority of the directors of NFN that are disinterested with respect to
such transaction;
(v) file a petition under the Federal Bankruptcy Code or any other
insolvency law, or admit in writing its bankruptcy, insolvency or general
inability to pay its debts;
(vi) alter, amend or repeal any provision of its By-laws;
(vii) merge or consolidate with any person or entity, acquire a
controlling interest in any other business (whether by stock purchase,
asset purchase or otherwise), or make a disposition of its assets or an
acquisition involving consideration representing 25% or more of NFN's
consolidated stockholders' equity (as set forth in a consolidated balance
sheet of NFN prepared in accordance with GAAP as of the end of the most
recently completed calendar month prior to such disposition or
acquisition), or sell or lease assets constituting all or substantially all
of the assets of NFN;
(viii) issue any shares of its capital stock or any options, warrants
or rights to acquire such shares or securities convertible into or
exchangeable for such shares (other than shares of Common Stock issuable
upon conversion of the Series B Preferred Stock in accordance with its
terms or upon conversion, exchange or exercise of any other securities of
NFN convertible into or exchangeable or exercisable for shares of Common
Stock, in each case in accordance with their respective terms); and
(ix) appoint, employ, engage, change or terminate any legal,
accounting or financial advisors (including, but not limited to, any
underwriter or placement agent with respect to a primary or secondary
offering of securities of NFN) to NFN.
(b) Buyers and NFN shall take all action within their respective power,
including but not limited to, the voting of capital stock of NFN, required to
cause Garofalo to be elected chairman of the board of directors of NFN and to
ensure that Garofalo and two of his designees are members of the board of
directors of NFN.
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(c) Buyers understand, acknowledge and agree that, so long as Garofalo is
employed by NFN, Garofalo has and shall retain, to employ in his sole
discretion, day-to-day operating control of NFN.
(d) The Company hereby grants to Garofalo and his assigns the registration
rights set forth in Exhibit A hereto.
(e) NFN and Garofalo shall take all action within their respective power
required to cause the disposition of NFN's 10% equity interest in Local Fiber,
L.L.C. within 90 days after the Closing Date.
6. INDEMNIFICATION; REMEDIES
6.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY
KNOWLEDGE
All representations, warranties, covenants, and obligations in this
Agreement, will survive the Closing. The right to indemnification, payment of
Damages or other remedy based on such representations, warranties, covenants,
and obligations will not be affected by any investigation conducted with respect
to, or any Knowledge acquired (or capable of being acquired) at any time,
whether before or after the execution and delivery of this Agreement or the
Closing Date, with respect to the accuracy or inaccuracy of or compliance with,
any such representation, warranty, covenant, or obligation. The waiver of any
condition based on the accuracy of any representation or warranty, or on the
performance of or compliance with any covenant or obligation, will not affect
the right to indemnification, payment of Damages, or other remedy based on such
representation, warranty, covenant, and obligation.
6.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY NFN
NFN will indemnify and hold harmless each Buyer, and their respective
Representatives, members, controlling Persons, and affiliates (collectively, the
"Indemnified Persons") for, and will pay to the Indemnified Persons the amount
of, any loss, liability, claim, damage (excluding incidental and consequential
damages), or expense (including costs of investigation and defense and
reasonable attorneys' fees), whether or not involving a third-party claim
(collectively, "Damages"), arising, directly or indirectly, from or in
connection with:
(a) any material Breach of any representation or warranty made by NFN in
this Agreement or in any document delivered by NFN pursuant to this Agreement
including, without limitation, the Disclosure Letter;
(b) and any material Breach by NFN of any covenant or obligation of NFN in
this Agreement.
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The remedies provided in this Section 6.2 will not be exclusive of or limit
any other remedies that may be available to Buyer or the other Indemnified
Persons, including any right of rescission granted under the Securities Act or
any action under Section 10(b) of the Securities Exchange Act of 1934, as
amended, and Rule l0b-5 promulgated thereunder.
6.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER
Each Buyer will indemnify and hold harmless NFN and, its Representatives,
controlling persons and affiliates and will pay to NFN the amount of any Damages
arising, directly or indirectly, from or in connection with (a) any material
Breach of any representation or warranty made by such Buyer in this Agreement;
and (b) any material Breach by Buyer of any covenant or obligation of Buyer in
this Agreement.
6.4 PROCEDURE FOR INDEMNIFICATION-THIRD PARTY CLAIMS
(a) Promptly after receipt by an indemnified party under Section 6.2 or
6.3 ("Indemnified Party") of notice of the commencement of any Proceeding
against it, such Indemnified Party will, if a claim is to be made against an
Indemnifying Party under such Section ("Indemnifying Party"), give notice to the
Indemnifying Party of the commencement of such claim, but the failure to notify
the Indemnifying Party will not relieve the Indemnifying Party of any liability
that it may have to any Indemnified Party, except to the extent that the
Indemnifying Party demonstrates that the defense of such action is materially
prejudiced by the Indemnifying Party's failure to give such notice.
(b) If any Proceeding referred to in Section 6.4(a) is brought against an
Indemnified Party and it gives notice to the Indemnifying Party of the
commencement of such Proceeding, the Indemnifying Party will, unless the claim
only relates to Taxes, be entitled to participate in such Proceeding and, to the
extent that it wishes (unless (i) the Indemnifying Party is also a party to such
Proceeding and the Indemnified Party determines in good faith that joint
representation would be inappropriate, or (ii) the Indemnifying Party fails to
provide reasonable assurance to the Indemnified Party of its financial capacity
to defend such Proceeding and provide indemnification with respect to such
Proceeding), to assume the defense of such Proceeding with counsel reasonably
satisfactory to the Indemnified Party and, after notice from the Indemnifying
Party to the Indemnified Party of its election to assume the defense of such
Proceeding, the Indemnifying Party will not, as long as it diligently conducts
such defense, be liable to the Indemnified Party under this Section 6 for any
fees of other counsel or any other expenses with respect to the defense of such
Proceeding, in each case subsequently incurred by the Indemnified Party in
connection with the defense of such Proceeding, other than reasonable legal fees
incurred by the Indemnified Party due to the Indemnifying Party's reasonable
belief that the Indemnifying Party was not in fact appropriately or diligently
pursuing such defense. If the Indemnifying Party assumes the defense of a
Proceeding, (i) no compromise or settlement of such claims may be effected by
the Indemnifying Party without the Indemnified Party's consent unless (A) there
is no finding or admission of any violation of Legal Requirements or any
violation of the rights of any Person and no effect on any other claims that may
be made against the
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Indemnified Party, and (B) the sole relief provided is monetary damages that are
paid in full by the Indemnifying Party; and (ii) the Indemnified Party will have
no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an Indemnifying Party of
the commencement of any Proceeding and the Indemnifying Party does not, within
ten days after the Indemnified Party's notice is given, give notice to the
Indemnified Party of its election to assume the defense of such Proceeding, the
Indemnifying Party will be bound by and will be liable for any and all costs
and/or liabilities in connection with any determination made in such Proceeding
or any action, defense, compromise or settlement effected by the Indemnified
Party.
(c) Notwithstanding the foregoing, if an Indemnified Party determines in
good faith that there is a reasonable probability that a Proceeding may
adversely affect it or its affiliates other than as a result of monetary damages
for which it would be entitled to indemnification under this Agreement, the
Indemnified Party may, by notice to the Indemnifying Party, assume the exclusive
right to defend, compromise, or settle such Proceeding, but the Indemnifying
Party will not be bound by any determination of a Proceeding so defended or any
compromise or settlement effected without its consent.
(d) NFN hereby consents to the non-exclusive jurisdiction of any court in
which a Proceeding is brought against any Indemnified Person for purposes of any
claim that an Indemnified Person may have under this Agreement with respect to
such Proceeding or the matters alleged therein, and agrees that process may be
served on NFN with respect to such a claim anywhere in the world.
6.5 PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS
A claim for indemnification for any matter not involving a third-party
claim may be asserted by notice to the party from whom indemnification is
sought.
7. DESIGNATION OF DIRECTORS
From and after the time that the voting rights set forth in Section 6(b) of
the Certificate of Designation relating to the Series B Preferred Stock shall
expire, at each annual meeting of stockholders of the Corporation or at any
other meeting of stockholders called for the purpose of electing members of the
Board of Directors of the Corporation, Metromedia shall have the right to
designate the Applicable Number (as defined below), as of the date of such
meeting, of members of the Board of Directors of NFN; provided, that if at any
time following an election of directors the Applicable Number shall decrease due
to a decrease in the number of shares of capital stock of NFN then owned by
Metromedia, then the term of office of that number of directors previously
elected by Metromedia in excess of the number of directors that Metromedia would
have been entitled to elect had the decreased Applicable Number been in effect
on the date of such previous election, shall IPSO FACTO expire and the specific
individuals whose terms so expire shall be designated by Metromedia or, failing
such designation by Metromedia, by the Chairman of the Board of Directors of
NFN. As used herein, the term "Applicable Number" means, as of any date,
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(i) 25% of the number of members of the Board of Directors of NFN if as of such
date Metromedia owns beneficially and of record shares of capital stock of NFN
representing not less than 10% of the issued and outstanding voting stock of
NFN, (ii) one member of the Board of Directors if as of such date Metromedia
owns beneficially and of record shares of shares of capital stock of NFN
representing less than 10% but not less than 5% of the issued and outstanding
voting stock of NFN and (iii) no members of the Board of Directors if as of such
date Metromedia owns beneficially and of record shares of capital stock of NFN
representing less than 5% of the issued and outstanding voting stock of NFN.
8. REGISTRATION RIGHTS
8.1 DEFINITIONS
As used in this Article 8, the following terms have the following
respective meanings:
"COMMISSION" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor federal statute, and the rules and regulations of the Commission
thereunder, all as of the same shall be in effect at the time. References to a
particular section of the Securities Exchange Act of 1934, as amended, shall
include a reference to the comparable section, if any, of any such successor
federal statute.
"HOLDERS" means the Buyers or their Permitted Assigns who are holders of
Registrable Securities.
"MAJORITY HOLDERS" means the Holders of a majority of the Registrable
Securities.
"PERMITTED ASSIGNS" means (i) any "affiliate" (as such term is defined in
Rule 144 under the Securities Act) of any Holder to whom such Holder sells,
transfers, assigns or otherwise disposes of Registrable Securities, (ii) any
other Person to whom any Holder sells, transfers, assigns or otherwise disposes
of Registrable Securities representing at least 75% of such Holder's aggregate
equity interest in NFN, as constituted immediately following the Closing, and
(iii) with respect to any individual, any member of such individual's Family (as
defined in the definition of "Related Person" of Section 1).
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRATION" means either a "Demand Registration" or a "Piggyback
Registration", as such terms are defined in this Article 8.
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"REGISTRABLE SECURITIES" means (i) the shares of Common Stock issuable upon
conversion of the Series B Preferred Stock, (ii) any shares of Common Stock
owned by Holders and (iii) any Related Registrable Securities. As to any
particular Registrable Securities, once issued such securities shall cease to be
Registrable Securities when (a) a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such registration
statement or (b) they shall have been sold pursuant to Rule 144 (or any
successor provision) under the Securities Act, or (c) they shall have been
otherwise transferred, new certificates evidencing them not bearing a legend
restricting further transfer shall have been delivered by NFN and subsequent
public distribution of them shall not, in the opinion of counsel to such Holders
(or in the opinion of counsel to the Company, which opinion is reasonably
satisfactory to such holders), require registration of them under the Securities
Act, or (d) they shall have ceased to be outstanding. All references to
percentages of Registrable Securities shall be calculated based upon the number
of shares of Common Stock represented by the Registrable Securities outstanding
at the time such calculation is made.
"REGISTRATION EXPENSES" means all expenses incident to NFN's performance of
or compliance with Article 8 hereof, including, without limitation, all
registration, filing and NASD fees, all fees and expenses of complying with
securities or blue sky laws, all word processing, duplicating and printing
expenses, messenger and delivery expenses, the fees and disbursements of counsel
for NFN and of its independent public accountants, including the expenses of
"cold comfort" letters required by or incident to such performance and
compliance, any fees and disbursements of underwriters customarily paid by
issuers or sellers of securities (excluding any underwriting discounts or
commissions with respect to the Registrable Securities) and the reasonable fees
and expenses of counsel to the Majority Holders.
"RELATED REGISTRABLE SECURITIES" means any equity securities of NFN issued
or issuable with respect to any of the securities identified in clauses (i)
through (iii) in the definition of Registrable Securities by way of a dividend
or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization of otherwise.
"SECURITIES ACT" means the Securities Act of 1933, or any successor federal
statute, and the rules and regulations of the Commission thereunder, all as
shall be in effect at the time. Reference to a particular section of the
Securities Act of 1933, as amended, shall include a reference to the comparable
section if any, of any such successor federal statute.
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8.2 DEMAND REGISTRATION.
8.2.1 DEMAND BY MAJORITY HOLDERS. At any time, or from time to time, the
Majority Holders may demand that NFN effect the registration under the
Securities Act of all or part of Holders' Registrable Securities ("Demand
Notice"). Thereupon, NFN shall file a registration statement within thirty (30)
days after the date of the Demand Notice and NFN shall use its best efforts to
effect within (30) days after the date of such filing, the registration under
the Securities Act, including by means of a shelf registration pursuant to Rule
415 under the Securities Act ("Shelf Registration") if so requested in the
Demand Notice (but only if NFN is then eligible to use a Shelf Registration), of
the Holders' Registrable Securities which NFN has been so requested to register
by the Majority Holders to the extent requisite to permit the disposition of the
Registrable Securities so to be registered. All registrations requested
pursuant to this Section 8.2.1 are referred to herein as "Demand Registrations."
Unless the Majority Holders consent to such inclusion, in no event shall any
Demand Registration include securities other than (i) Registrable Securities,
(ii) securities owned by the Persons referred to in Section 5(d) hereof or (iii)
Common Stock of Persons who hold or have rights to receive Common Stock pursuant
to agreements with NFN which are in effect on the date of this Agreement and all
of which are listed and described in Section 8.2.1 of the Disclosure Letter,
which agreements provide for registration rights on the part of such Persons by
reason of the exercise by Holders of the registration rights pursuant to this
Section 8.2.1 (the "Other Eligible Holders"). Notwithstanding anything in this
Section 8.2.1 to the contrary: (i) in no event will NFN be required to effect
more than three (3) Demand Registrations in the aggregate, and never more than
two (2) Demand Registrations within any six (6) month period; (ii) the Majority
Holders may not issue a Demand Notice if NFN had a registration statement
declared effective on behalf of the Holders pursuant to a Demand Registration
within the prior six (6) months; (iii) NFN will not be obligated to effect a
Demand Registration within six (6) months after the effectiveness of a
registration by NFN offering its Common Stock (other than a registration on Form
S-8 with respect to an employee benefit plan of NFN), unless NFN has completed
the sale of not less than 80% of the offering pursuant to such registration; and
(iv) NFN shall not be required to effect a Demand Registration for Common Stock
included in such registrations valued at less than $5,000,000, based upon the
then current market price, or fair market value estimated by NFN's
underwriter(s).
8.2.2 REGISTRATION STATEMENT FORM. At the request of the, Majority
Holders in the Demand Notice, all Demand Registrations of all or part of their
Registrable Securities shall be by means of a Shelf Registration (if NFN is then
eligible to use a Shelf Registration), or on Form S-1 or any similar long-form
registration, or on Forms S-2 or S-3 or other comparable short form
registrations, if permitted by applicable law. After an initial public
offering, NFN shall use its best efforts to qualify for use of short-form
registrations. If NFN files a Shelf Registration, it shall use its best efforts
to keep the Shelf Registration continuously effective until such time as all of
the Registrable Securities shall cease to be Registrable Securities.
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8.2.3 EFFECTIVE REGISTRATION STATEMENT. A Demand Registration shall not
be deemed to have been effected until such time as a registration statement with
respect thereto has become effective and remained effective in compliance with
the provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by such registration statement and all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in such
registration statement, except as otherwise provided in this Section 8.2 with
respect to a Shelf Registration.
8.3 PIGGYBACK REGISTRATIONS. Each time NFN proposes to file a
registration statement to register any of its equity securities under the
Securities Act (except for registration on Form S-4 or S-8 or any successor or
similar forms), whether or not for sale for its own account, it will each such
time give prompt written notice to all Holders of its intention to do so and of
such Holders' rights under this Section 8.3. Upon the written request of the
Majority Holders (which request shall specify the amount of Registrable
Securities intended to be disposed of by each Holder) at the earliest possible
date and in any event within 30 days after the receipt of any such notice, NFN
will use its best efforts to effect the registration under the Securities Act of
all Registrable Securities which NFN has been so requested to register by the
Holders. No registration filed or effected under this Section 8.3 ("Piggyback
Registration") shall relieve NFN of its obligation to effect any Demand
Registration. In the case of any Piggyback Registration to be filed or effected
pursuant to this Section 8.3 in connection with a Demand Registration initiated
by Garofalo or Finkelstein (or their respective Permitted Assigns) pursuant to
Exhibit A attached to this Agreement or Finkelstein's Executive Employment
Agreement, respectively, the amount of Registrable Securities to be included in
such Piggyback Registration shall not, without the prior written consent of the
Person initiating such registration, exceed 10 % of the Holders' total equity
interest in NFN as of the filing date of such Piggyback Registration.
Notwithstanding anything in this Section 8.3 to the contrary, if a Piggyback
Registration is an underwritten primary registration on behalf of the Company,
and the Company's underwriter or underwriters advise the Company in writing that
the number of shares of Common Stock to be included in such registration by the
Company and the Holders exceeds the number of shares of Common Stock which in
the estimation of such underwriter or underwriters can reasonably be expected to
be sold in such offering, then the Company shall include in such registration
(i) first, the Common Stock which the Company proposes to sell, and (ii) second,
if additional shares of Common Stock can be included in such registration in the
estimation of the Company's underwriter or underwriters, then the shares of
Common Stock which were requested by the Holders (and the Other Eligible
Holders, if any), on a pro rata basis with respect to each such Holder (and
Other Eligible Holder) based upon its respective ownership percentage of shares
of Common Stock to be included in such registration by all of the shares of
Common Stock to be included in such registration by all Holders (and Other
Eligible Holders).
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8.4 REGISTRATION UNDER SECURITIES ACT, ETC.
8.4.1 REGISTRATION EXPENSES. NFN shall pay all Registration Expenses in
connection with any Registration, whether or not it becomes effective, and
whether all, none or some of the Registrable Securities are sold pursuant to the
Registration.
8.4.2 REGISTRATION PROCEDURES. In connection with any registration
statement filed pursuant to this Article 8 NFN will:
(i) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be required by such form or by the instructions
applicable to such form or by the Securities Act or as reasonably requested by
the Majority Holders or as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with respect
to the disposition of all Registrable Securities covered by such registration
statement until such time as all of such Registrable Securities have been
disposed of;
(ii) furnish to each seller of Registrable Securities covered by
such registration statement, such number of conformed copies of such
registration statement and of each such amendment and supplement thereto (in
each case including all exhibits) and such number of copies of the prospectus
contained in such registration statement (including each preliminary prospectus
and any summary prospectus) and any other prospectus filed under Rule 424 under
the Securities Act, and such other documents, as such seller may reasonably
request;
(iii) use its best efforts (x) to register or qualify all
Registrable Securities and other securities covered by such registration
statement under such other securities or blue sky laws of such States of the
United States of America where an exemption is not available and as the sellers
of Registrable Securities covered by such registration statement shall
reasonably request, (y) to keep such registration or qualification in effect for
so long as such registration statement remains in effect, and (z) to take any
other action which may be reasonably necessary or advisable to enable such
sellers to consummate the disposition in such jurisdictions of the securities to
be sold by such sellers; provided that nothing herein shall require NFN to
submit to general service of process in any such jurisdiction;
(iv) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or approved by such
other federal or state governmental agencies or authorities as may be necessary
in the opinion of counsel to NFN and counsel to the seller or sellers of
Registrable Securities to enable the seller or sellers thereof to dispose of
such Registrable Securities;
(v) use its best efforts to furnish at the effective date of such
registration statement and the date of the closing of the sale of the
Registrable Securities (whether or not such sale is underwritten), to each
seller of Registrable Securities, and each such seller's
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underwriters, if any, a signed counterpart of (x) an opinion of counsel for NFN,
dated the effective date of such registration statement (or such date of sale,
as applicable) and (y) a "comfort" letter signed by the independent public
accountants who have certified the financial statements included or incorporated
by reference in such registration statement, covering substantially the same
matters with respect to such registration statement (and the prospectus included
therein) and, in the case of the accountants' comfort letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' comfort letters
delivered to the underwriters in underwritten public offerings of securities
and, in the case of the accountants' comfort letter, such other financial
matters, and, in the case of the legal opinion, such other legal matters, as the
sellers of the Registrable Securities covered by such registration statement, or
the underwriters, may reasonably request;
(vi) notify each Holder at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon discovery
that, or upon the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein not misleading, in the light of the circumstances under which
they were made, and at the request of any such Holder promptly prepare and
furnish to such Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as amended or
supplemented, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made;
(vii) otherwise use its best efforts to comply with all applicable
miles and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earning statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first full calendar month after the effective date of such registration
statement, which earning statement shall satisfy the provisions of Section 11(a)
of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish
to each holder of Registrable Securities a copy of any amendment or supplement
to such registration statement or prospectus; and
(viii) use its best efforts to have approved for listing, on the date
such Registration becomes effective, subject to official notice of issuance, the
Common Stock being registered pursuant to the Registration on a national
securities exchange on which shares of Common Stock are already listed, or if
not listed, then on a national securities exchange unless the Common Stock is
then quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ").
8.4.3 REQUESTS FOR INFORMATION. NFN may (i) require each Holder of
Registrable Securities as to which any Registration is being effected to furnish
NFN such information regarding such Holder and the intended method of
distribution of such securities as NFN may from time to time reasonably request
in writing and (ii) require each seller of
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Registrable Securities to agree to comply with the Securities Act and the
Exchange Act in connection with the registration and distribution of the
Registrable Securities.
8.4.4 DISCONTINUATION OF DISPOSITION. Each Holder agrees by
acquisition of such Registrable Securities that, upon receipt of any notice from
NFN of the happening of any event of the kind described in subdivision (vi) of
Section 8.4.2, such Holder will forthwith discontinue such Holder's disposition
of Registrable Securities pursuant to the Registration until such Holder's
receipt of the copies of the supplemented or amended prospectus contemplated by
subdivision (vi) of Section 8.4.2 and, if so directed by NFN, will deliver to
NFN (at NFN's expense) all copies, other than permanent file copies, then in
such Holder's possession of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice.
8.4.5 UNDERWRITTEN OFFERINGS. If the Majority Holders so elect for a
Demand Registration, the offering shall be an underwritten offering with an
underwriter or underwriters selected by the Majority Holders. If the offering
is other than pursuant to a Demand Registration, NFN and the Majority Holders
will mutually agree as to the selection of an underwriter or underwriters. If
requested by the underwriter(s) for any underwritten offering by Holders of
Registrable Securities pursuant to a Registration, NFN will enter into an
underwriting agreement with such underwriter(s) for such offering, such
agreement to be reasonably satisfactory in substance and form to Holders and the
underwriter(s) and to contain such representations and warranties by NFN and
such other terms as are generally prevailing in agreements of that type,
including, without limitation, indemnities. The Holders of the Registrable
Securities proposed to be sold by such underwriter(s) will reasonably cooperate
with NFN in the negotiation of the underwriting agreement and will enter into
custody agreements and execute powers of attorney as reasonably required by such
underwriter or underwriters. Such Holders of Registrable Securities to be sold
by such underwriters may be parties to such underwriting agreement and may, at
their option, require that any or all of the representations and warranties by,
and the other agreements on the part of, NFN to and for the benefit of such
Holders and that any or all of the conditions precedent to the obligations of
such precedent to the obligations of such Holders. Any such Holder shall not be
required to make any representations or warranties to or agreements with NFN
other than representations, warranties or agreements regarding such Holder's
intended method of distribution or any other representations required by
applicable law.
8.4.6 PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of a Registration, NFN (i) shall give the Majority
Holders, the underwriter(s), and counsel designated by the Majority Holders the
reasonable opportunity to participate in the preparation of such registration
statement, each prospectus included therein or filed with the Commission, and
each amendment thereof or supplement thereto, (ii) shall give each of them such
reasonable access to its books and records and such opportunities to discuss the
business of NFN with its officers and the independent public accountants who
have certified its financial statements as shall be necessary, in the opinion of
the Majority Holders and such underwriters or such counsel or accountants, to
conduct
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a reasonable investigation within the meaning of the Securities Act and (iii)
shall promptly notify the Majority Holders and its counsel of any stop order
issued or threatened by the Commission and take all reasonable actions required
to prevent the entry of such stop order or to remove it if entered.
8.4.7 HOLDBACK; PRIORITY ON REGISTRATIONS. Notwithstanding any
provision to the contrary contained in Article 8 hereof, if a Registration is an
underwritten offering, and the underwriter or underwriter(s) advise NFN in
writing that the number of Registrable Shares requested (and permitted hereby)
to be included in such Registration by the Holders exceeds the number of shares
of Common Stock which in the reasonable and good faith determination of the
underwriter(s) can reasonably be expected to be sold in such offering, then NFN
will include in such Registration the Registrable Shares which the Holders
propose to sell pursuant to such Registration on a pro rata basis, with respect
to each such Holder (and each of the Other Eligible Holders, if any), based upon
its respective percentage ownership of the aggregate number of shares of Common
Stock to be included in such Registration by all shareholders of NFN
participating in such Registration.
8.4.8 LOCK-UP. In the event that NFN delivers to the Holders a written
Notice (the "Lock-up Notice") stating that such notice is being delivered
pursuant to this Section 8.4.8 and that NFN intends to do a primary or secondary
offering of its equity securities (the "Offering"), then the Holders shall not
sell any Registrable Securities in a public offering until the earlier of (i)
the expiration of such period as may be requested by the underwriters; (ii) 180
days after the effective date of the applicable registration statement; and
(iii) the date upon which the Offering is terminated without having been
consummated. In no event may NFN deliver a Lock-up Notice if it has previously
delivered a Lock-up Notice within the preceding one year period.
8.5 INDEMNIFICATION.
8.5.1 INDEMNIFICATION BY NFN. NFN will, and hereby does, indemnify and
hold harmless, each Holder and each other Person who participates as an
underwriter in the offering or sale of such securities and each other Person, if
any, who controls such Holder or any such underwriter within the meaning of the
Securities Act, and their respective directors, officers, partners, employees
and affiliates against any losses, claims, damages or liabilities, joint or
several, to which such Holder or underwriter or any such director, officer,
partner, employee, affiliate or controlling person may become subject under the
Securities Act or otherwise, including, without limitation, the fees and
expenses of legal counsel, insofar as such losses, claims, damages or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in a registration statement, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances under
which they were made not misleading, and NFN will reimburse such seller or
underwriter and each such director, officer, partner, employee,
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affiliate and controlling Person for any legal or any other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding; provided, that NFN shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability (or action or proceeding in respect thereof) or expense arises out of
or is based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, any such preliminary
prospectus, final prospectus, summary prospectus, amendment or supplement in
reliance upon and in conformity with written information furnished to NFN for
use therein by or on behalf of such Holder or underwriter, as the case may be.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Holder or any such director, officer,
employee, affiliate, partner or controlling Person and shall survive the
transfer of such securities by such Holder.
8.5.2 INDEMNIFICATION BY THE HOLDERS. As a condition to including any
Registrable Securities in a Registration, NFN shall have received an undertaking
satisfactory to it from the Holder to indemnify and hold harmless (in the same
manner and to the same extent as set forth in Section 8.5.1) NFN, and each
director of NFN, each officer of NFN and each other Person who controls NFN
within the meaning of the Securities Act, with respect to any statement or
alleged statement in or omission or alleged omission from a prospectus or
summary prospectus contained therein, or any amendment or supplement thereto, if
such statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to NFN for
use therein; PROVIDED, HOWEVER, that the liability of such indemnifying party
under this Section 8.5.2 shall be limited to the amount of proceeds received by
such indemnifying party in the offering giving rise to such liability. Such
indemnity shall remain in full force and effect, regardless of any investigation
made by or on behalf of NFN or any such director, officer or controlling person
and shall survive the transfer of such securities by such seller.
8.5.3 NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified
party or notice of the commencement of any action or proceeding involving a
claim referred to in the preceding subparagraphs of this Section 8.5, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; PROVIDED, HOWEVER, that the failure of any indemnified party to
give notice as provided herein shall not relieve the indemnifying party of its
obligations under the preceding subparagraphs of this Section 8.5, except to the
extent that the indemnifying party is materially prejudiced by such failure to
give notice. In case any such action is brought against an indemnified party
the indemnified party shall be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified to
the extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party for any legal or other expenses subsequently incurred by a
letter in connection with the defense thereof other than reasonable costs of
investigation; provided however, that if the indemnified party reasonably
believes it is advisable for it to be represented by separate counsel because
there exists or may exist a conflict of interest
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between its interests and those of the indemnifying party with respect to such
claim, or there exist defenses available to such indemnified party which may not
be available to the indemnifying party, or if the indemnifying party shall fail
to assume responsibility for such defense, the indemnified party may retain
counsel satisfactory to it and the indemnifying party shall pay all fees and
expenses of such counsel. No indemnifying party shall be liable for any
settlement of any action or proceeding effected without its written consent,
which consent shall not be unreasonably withheld or delayed. No indemnifying
party shall, without the consent of the indemnified party, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation or which requires action other than the payment of money by the
indemnifying party.
8.5.4 CONTRIBUTION. If the indemnification provided for in this Section
8.5 shall for any reason be held by a court to be unavailable to an indemnified
party under Sections 8.5.1 or 8.5.2 hereof in respect of any loss, claim, damage
or liability, or any action or proceeding in respect thereof, then, in lieu of
the amount paid or payable under Sections 8.5.1 or 8.5.2 hereof, the indemnified
party and the indemnifying party under Sections 8.5.1 or 8.5.2 hereof shall
contribute to the aggregate losses, claims, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating the
same), (i) in such proportion as is appropriate to reflect the relative fault of
NFN and the Holders covered by the Registration which resulted in such loss,
claim, damage or liability, or action in respect thereof, with respect to the
statements or omissions which resulted in such loss, claim, damage or liability,
or action or proceeding in respect thereof, as well as any other relevant
equitable considerations or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as shall be appropriate
to reflect the relative benefits received by NFN and such Holders from the
offering of the securities covered by such registration statement. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation. Each Holder's obligations to
contribute as provided in this Section 8.5.4 are several in proportion to the
relative value of their respective Registrable Securities covered by such
registration statement and not joint. In addition, no Person shall be obligated
to contribute hereunder any amounts in payment for any settlement of any action
or claim effected without such Person's consent, which consent shall not be
unreasonably withheld or delayed.
8.5.5 OTHER INDEMNIFICATION. Indemnification and contribution similar to
that specified in the preceding subsections of this Section 8.5 (with
appropriate modifications) shall be given by NFN and each seller of Registrable
Securities with respect to any required registration or other qualification of
securities under any federal or state law or regulation of any governmental
authority other than the Securities Act.
8.5.6 INDEMNIFICATION PAYMENTS. The indemnification and contribution
required by this Section 8.5 shall be made by periodic payments of the amount
thereof
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during the course of the investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred.
8.6 RULE 144 AND RULE 144A. NFN shall take all actions reasonably
necessary (including, without limiting the generality of the foregoing, filing
on a timely basis all reports required to be filed by the Exchange Act) to
enable Holders to sell Registrable Securities without registration under the
Securities Act pursuant to (a) Rule 144 under the Securities Act, as such Rule
may be amended from time to time, (b) Rule 144A under the Securities Act, as
such Rule may be amended from time to time, or (c) any similar rules or
regulations hereafter adopted by the Commission. Upon the request of any
Holder, NFN will deliver to such Holder a written statement as to whether it has
complied with such requirements.
8.7 NOMINEES FOR BENEFICIAL OWNERS. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election in writing delivered to NFN, be
treated as the Holder for purposes of any request or other action by any Holder
or Holders pursuant to this Agreement or any determination of any number of
percentage of shares of Registrable Securities so elects, may require assurances
reasonably satisfactory to it of such owner's beneficial ownership of such
Registrable Securities.
9. GENERAL PROVISIONS
9.1 EXPENSES
Except as otherwise expressly provided in this Agreement, each party to
this Agreement will bear its respective expenses incurred in connection with the
preparation, execution, and performance of this Agreement and the Contemplated
Transactions, including all fees and expenses of agents, representatives and
accountants.
9.2 PUBLIC ANNOUNCEMENTS
Any public announcement or similar publicity with respect to this Agreement
or the Contemplated Transactions will be issued, if at all, at such time and in
such manner as both parties mutually agree.
9.3 CONFIDENTIALITY
Prior to the Closing Date, Buyers and NFN will maintain in confidence, and
will cause the directors, officers, members, employees, agents, and advisors of
Buyer and the Companies to maintain in confidence, any written, oral, or other
information obtained in confidence from another party or a Company in connection
with this Agreement or the Contemplated Transactions, unless (a) such
information is already known to such party or to others not bound by a duty of
confidentiality or such information becomes publicly available through no fault
of such party, (b) the use of such information is necessary or
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appropriate in making any filing or obtaining any consent or approval required
for the consummation of the Contemplated Transactions, or (c) the furnishing or
use of such information is required by or necessary or appropriate in connection
with legal proceedings.
If the Contemplated Transactions are not consummated, each party will
return or destroy as much of such written information as the other party may
reasonably request.
9.4 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by telecopier
(with written confirmation of receipt), provided that a copy is mailed by
registered mail, return receipt requested, or (c) when received by the
addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
members set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
NFN: National Fiber Network, Inc.
60 Hudson Street
New York, New York 10013
Attention: Stephen Garofalo
Facsimile No.: (212) 566-1777
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: Phyllis G. Korff, Esq. and Gregory A. Fernicola, Esq.
Facsimile No.: (212) 735-2000
Metromedia: Metromedia Company
One Meadowlands Plaza
East Rutherford, NJ 07073
Attn: General Counsel
Facsimile No. (201) 531-2803
Subotnick: Stuart Subotnick
c/o Metromedia Company
215 East 67th Street
New York, New York 10021
Facsimile No. (212) 606-4337
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Wadler: Arnold Wadler
85 School Road East
Marlboro, New Jersey 07746
Facsimile No. (908) 409-6014
Kessel: Silvia Kessel
c/o Metromedia Company
215 East 67th Street
New York, New York 10021
Facsimile No. (212) 606-4337
Garofalo: Stephen Garofalo
10 Redground Road
Old Westbury, New York 11568
Facsimile No. (516) 626-9184
with a copy to:
Silverman, Collura & Chemis, P.C.
381 Park Avenue South
New York, New York 10016
Facsimile No. (212) 779-8858
9.5 JURISDICTION; SERVICE OF PROCESS
Any action or proceeding seeking to enforce any provision of, or based on
any right arising out of, this Agreement may be brought against any of the
parties in the courts of the State of New York, County of New York, or, if it
has or can acquire jurisdiction, in the United States District Court for the
Southern District of New York, and each of the parties consents to the
jurisdiction of such courts (and of the appropriate appellate courts) in any
such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may be
served on any party anywhere in the world.
9.6 FURTHER ASSURANCES
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may reasonably
request for the purpose of carrying out the intent of this Agreement and the
documents referred to in this Agreement.
9.7 WAIVER
The rights and remedies of the parties to this Agreement are cumulative and
not alternative. Neither the failure nor any delay by any party in exercising
any right, power,
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or privilege under this Agreement or the documents referred to in this Agreement
will operate as a waiver of such right, power, or privilege, and no single or
partial exercise of any such right, power, or privilege will preclude any other
or further exercise of such right, power, or privilege or the exercise of any
other right, power, or privilege. To the maximum extent permitted by applicable
law, (a) no claim or right arising out of this Agreement or the documents
referred to in this Agreement can be discharged by one party, in whole or in
part, by a waiver or renunciation of the claim or right unless in writing signed
by the other party; (b) no waiver that may be given by a party will be
applicable except in the specific instance for which it is given; and (c) no
notice to or demand on one party will be deemed to be a waiver of any obligation
of such party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement or the
documents referred to in this Agreement.
9.8 ENTIRE AGREEMENT AND MODIFICATION
This Agreement supersedes all prior agreements between the parties with
respect to its subject matter and constitutes (along with the documents referred
to in this Agreement) a complete and exclusive statement of the terms of the
agreement between the parties with respect to its subject matter. This
Agreement may not be amended except by a written agreement executed by the party
to be charged with the amendment.
9.9 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
Neither party may assign any of its rights under this Agreement without the
prior consent of the other parties. Subject to the preceding sentence, this
Agreement will apply to, be binding in all respects upon, and inure to the
benefit of the successors and permitted assigns of the parties. Nothing
expressed or referred to in this Agreement will be construed to give any Person
other than the parties to this Agreement any legal or equitable right, remedy,
or claim under or with respect to this Agreement or any provision of this
Agreement. This Agreement and all of its provisions and conditions are for the
sole and exclusive benefit of the parties to this Agreement and their successors
and assigns.
9.10 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by any
court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this Agreement held invalid
or unenforceable only in part or degree will remain in full force and effect to
the extent not held invalid or unenforceable.
9.11 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. All references to
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement. All words used in this Agreement will be construed to be of such
gender or number as the circumstances require.
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Unless otherwise expressly provided, the word "including' shall mean "including,
without limitation" and does not limit the preceding words or terms.
9.12 GOVERNING LAW
THIS AGREEMENT WILL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
9.13 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together. will be deemed to constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above by their respective representatives thereunto
duly authorized.
METROMEDIA COMPANY NATIONAL FIBER NETWORK, INC.
By: _________________________ By: ___________________________
Stuart Subotnick Stephen Garofalo
Executive Vice President Chief Executive Officer
_____________________________ ___________________________
Stuart Subotnick Arnold Wadler
_____________________________ ___________________________
Silvia Kessel Stephen A. Garofalo
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above by their respective representatives thereunto
duly authorized.
METROMEDIA COMPANY NATIONAL FIBER NETWORK, INC.
By: _________________________ By: ___________________________
Stuart Subotnick Stephen Garofalo
Executive Vice President Chief Executive Officer
_____________________________ ___________________________
Stuart Subotnick Arnold Wadler
_____________________________ ___________________________
Silvia Kessel Stephen A. Garofalo
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EXHIBIT A
REGISTRATION RIGHTS OF GAROFALO
1. DEFINITIONS. As used in this Exhibit A, the following terms shall
have the following respective meanings:
"COMMISSION" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. References to a
particular section of the Securities Exchange Act of 1934, as amended, shall
include a reference to the comparable section, if any, of any such successor
federal statute.
"HOLDERS" means Garofalo or his Permitted Assigns who are holders of
Registrable Securities.
"MAJORITY HOLDERS" means the Holders of a majority of the Registrable
Securities.
"PERMITTED ASSIGNS" means (i) any "affiliate" (as such term is defined in
Rule 144 under the Securities Act) of any Holder to whom such Holder sells,
transfers, assigns or otherwise disposes of Registrable Securities, (ii) any
other Person to whom any Holder sells, transfers, assigns or otherwise disposes
of Registrable Securities representing at least 75% of such Holder's aggregate
equity interest in NFN, as constituted immediately following the Closing, and
(iii) with respect to any individual, any member of such individual's Family (as
defined in the definition of "Related Person" in Section 1 of the Agreement to
which this Exhibit A is attached).
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRATION" means either a "Demand Registration" or a "Piggyback
Registration", as such terms are defined in this Exhibit A.
"REGISTRABLE SECURITIES" means (i) any shares of Common Stock owned by
Holders and (ii) any Related Registrable Securities. As to any particular
Registrable Securities, once issued such securities shall cease to be
Registrable Securities when (a) a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such registration
statement or (b) they shall have been sold pursuant to Rule 144 (or any
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successor provision) under the Securities Act, or (c) they shall have been
otherwise transferred, new certificates evidencing them not bearing a legend
restricting further transfer shall have been delivered by NFN and subsequent
public distribution of them shall not, in the opinion of counsel to such Holders
(or in the opinion of counsel to the Company, which opinion is reasonably
satisfactory to such holders), require registration of them under the Securities
Act, or (d) they shall have ceased to be outstanding. All references to
percentages of Registrable Securities shall be calculated based upon the number
of shares of Common Stock represented by the Registrable Securities outstanding
at the time such calculation is made.
"REGISTRATION EXPENSES" means all expenses incident to NFN's performance of
or with this Exhibit A, including, without limitation, all registration, filing
and NASD fees, all fees and expenses of complying with securities or blue sky
laws, all word processing, duplicating and printing expenses, messenger and
delivery expenses, the fees and disbursements of counsel for NFN and of its
independent public accountants, including the expenses of "cold comfort" letters
required by or incident to such performance and compliance, any fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities (excluding any underwriting discounts or commissions with respect to
the Registrable Securities) and the reasonable fees and expenses of counsel to
the designated Holders.
"RELATED REGISTRABLE SECURITIES" means any equity securities of NFN issued
or issuable with respect to any of the securities identified in clauses (i) or
(ii) in the definition of Registrable Securities by way of a dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization of otherwise.
"SECURITIES ACT" means the Securities Act of 1933, or any successor federal
statute, and the rules and regulations of the Commission thereunder, all as
shall be in effect at the time. Reference to a particular section of the
Securities Act of 1933, as amended, shall include a reference to the comparable
section if any, of any such successor federal statute.
All other initially capitalized terms used but not otherwise defined in
this Exhibit A shall have the respective meanings ascribed to such terms in the
Agreement to which this Exhibit A is attached.
2. DEMAND REGISTRATION.
2.1 DEMAND BY MAJORITY HOLDERS. At any time, or from time to time,
the Majority Holders may demand that NFN effect the registration under the
Securities Act of all or part of Holders' Registrable Securities ("Demand
Notice"). Thereupon, NFN shall file a registration statement within (30) days
after the date of the Demand Notice and NFN shall use its best efforts to effect
within (30) days after the date of such filing, the registration under the
Securities Act, including by means of a shelf registration pursuant to Rule 415
under the Securities Act ("Shelf Registration") if so requested in the Demand
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Notice (but only if NFN is then eligible to use a Shelf Registration), of the
Holders' Registrable Securities which NFN has been so requested to register by
the Majority Holders to the extent requisite to permit the disposition of the
Registrable Securities so to be registered. All registrations requested
pursuant to this Section 2.1 are referred to herein as "Demand Registrations."
Unless the Majority Holders consent to such inclusion, in no event shall any
Demand Registration include securities other than (i) Registrable Securities,
(ii) securities owned by the Persons entitled to registration rights pursuant to
Section 8 of the Agreement to which this Exhibit A is attached and (iii) Common
Stock of Persons who hold or have rights to receive Common Stock pursuant to any
agreements with NFN which are in effect on the date of this Agreement and all of
which are listed and described in Section 2.1 of the Disclosure Letter, which
agreements provide for registration rights on the part of such Persons by reason
of the exercise by Holders of the registration rights pursuant to this Section
2.1 (the "Other Eligible Holders"). Notwithstanding anything in this Section
2.1 to the contrary: (i) in no event will NFN be required to effect more than
three (3) Demand Registrations in the aggregate, and never more than two (2)
Demand Registrations within any six (6) month period; (ii) the Majority Holders
may not issue a Demand Notice if NFN had a registration statement declared
effective on behalf of the Holders pursuant to a Demand Registration within the
prior six (6) months; (iii) NFN will not be obligated to effect a Demand
Registration within six (6) months after the effectiveness of a registration by
NFN offering its Common Stock (other than a registration on Form S-8 with
respect to an employee benefit plan of NFN), unless NFN has completed the sale
of not less than 80% of the offering pursuant to such registration; and (iv) NFN
shall not be required to effect a Demand Registration for Common Stock included
in such registrations valued at less than $5,000,000, based upon the then
current market price, or fair market value estimated by NFN's underwriter(s).
2.2 REGISTRATION STATEMENT FORM. At the request of the Majority
Holders in the Demand Notice, all Demand Registrations of all or part of their
Registrable Securities shall be by means of a Shelf Registration (if NFN is then
eligible to use a Shelf Registration), or on Form S-1 or any similar long-form
registration, or on Forms S-2 or S-3 or other comparable short form
registrations, if permitted by applicable law. After an initial public
offering, NFN's shall use its best efforts to qualify for use of short-form
registrations. If NFN files a Shelf Registration, it shall use its best efforts
to keep the Shelf Registration continuously effective until such time as all of
the Registrable Securities shall cease to be Registrable Securities.
2.3 EFFECTIVE REGISTRATION STATEMENT. A Demand Registration shall not
be deemed to have been effected until such time as a registration statement with
respect thereto has become effective and remained effective in compliance with
the provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by such registration statement and all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in such
registration statement, except as otherwise provided in this Section 2 with
respect to a Shelf Registration.
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3. PIGGYBACK REGISTRATIONS. Each time NFN proposes to file a
registration statement to register any of its equity securities under the
Securities Act (except for registration on Form S-4 or S-8 or any successor or
similar forms), whether or not for sale for its own account, it will each such
time give prompt written notice to all Holders of its intention to do so and of
such Holders' rights under this Section 3. Upon the written request of the
Majority Holders (which request shall specify the amount of Registrable
Securities intended to be disposed of by each Holder) at the earliest possible
date and in any event within 30 days after the receipt of any such notice, NFN
will use its best efforts to effect the registration under the Securities Act of
all Registrable Securities which NFN has been so requested to register by the
Holders. No registration filed or effected under this Section 3 ("Piggyback
Registration") shall relieve NFN of its obligation to effect any Demand
Registration. In the case of any Piggyback Registration to be filed or effected
pursuant to this Section 3 in connection with a Demand Registration initiated by
the Buyers (or their Permitted Assigns) pursuant to Section 8.3 of the Agreement
to which this Exhibit A is attached, the amount of Registrable Securities to be
included in such Piggyback Registration shall not, without the prior written
consent of the Person initiating such registration, exceed 10% of the Holders'
total equity interest in NFN as of the filing date of such Piggyback
Registration. Notwithstanding anything in this Section 3 to the contrary, if a
Piggyback Registration is an underwritten primary registration on behalf of the
Company, and the Company's underwriter or underwriters advise the Company in
writing that the number of shares of Common Stock to be included in such
registration by the Company and the Holders exceeds the number of shares of
Common Stock which in the estimation of such underwriter or underwriters can
reasonably be expected to be sold in such offering, then the Company shall
include in such registration (i) first, the Common Stock which the Company
proposes to sell, and (ii) second, if additional shares of Common Stock can be
included in such registration in the estimation of the Company's underwriter or
underwriters, then the shares of Common Stock which were requested by the
Holders (and the Other Eligible Holders, if any), on a pro rata basis with
respect to each such Holder (and Other Eligible Holder) based upon its
respective ownership percentage of shares of Common Stock to be included in such
registration by all of the shares of Common Stock to be included in such
registration by all Holders (and Other Eligible Holders).
4. REGISTRATION UNDER SECURITIES ACT, ETC.
4.1 REGISTRATION EXPENSES. NFN shall pay all Registration Expenses in
connection with any Registration, whether or not it becomes effective, and
whether all, none or some of the Registrable Securities are sold pursuant to the
Registration.
4.2 REGISTRATION PROCEDURES. In connection with any registration
statement filed pursuant to this Exhibit A NFN will:
(i) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be required by such form or by the instructions
applicable to such form or by the Securities Act or as reasonably requested by
the Majority Holders or as may be necessary
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to keep such registration statement effective and to comply with the provisions
of the Securities Act with respect to the disposition of all Registrable
Securities covered by such registration statement until such time as all of such
Registrable Securities have been disposed of;
(ii) furnish to each seller of Registrable Securities covered by
such registration statement, such number of conformed copies of such
registration statement and of each such amendment and supplement thereto (in
each case including all exhibits) and such number of copies of the prospectus
contained in such registration statement (including each preliminary prospectus
and any summary prospectus) and any other prospectus filed under Rule 424 under
the Securities Act, and such other documents, as such seller may reasonably
request;
(iii) use its best efforts (x) to register or qualify all
Registrable Securities and other securities covered by such registration
statement under such other securities or blue sky laws of such States of the
United States of America where an exemption is not available and as the sellers
of Registrable Securities covered by such registration statement shall
reasonably request, (y) to keep such registration or qualification in effect for
so long as such registration statement remains in effect, and (z) to take any
other action which may be reasonably necessary or advisable to enable such
sellers to consummate the disposition in such jurisdictions of the securities to
be sold by such sellers; provided that nothing herein shall require NFN to
submit to general service of process in any such jurisdiction;
(iv) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or approved by such
other federal or state governmental agencies or authorities as may be necessary
in the opinion of counsel to NFN and counsel to the seller or sellers of
Registrable Securities to enable the seller or sellers thereof to dispose of
such Registrable Securities;
(v) use its best efforts to furnish at the effective date of such
registration statement and the date of the closing of the sale of the
Registrable Securities (whether or not such sale is underwritten), to each
seller of Registrable Securities and each such seller's underwriters, if any, a
signed counterpart of (x) an opinion of counsel for NFN, dated the effective
date of such registration statement (or such date of sale, as applicable) and
(y) a "comfort" letter signed by the independent public accountants who have
certified the financial statements included or incorporated by reference in such
registration statement, covering substantially the same matters with respect to
such registration statement (and the prospectus included therein) and, in the
case of the accountants' comfort letter, with respect to events subsequent to
the date of such financial statements, as are customarily covered in opinions of
issuer's counsel and in accountants' comfort letters delivered to the
underwriters in underwritten public offerings of securities and, in the case of
the accountants' comfort letter, such other financial matters, and, in the case
of the legal opinion, such other legal matters, as the sellers of the
Registrable Securities covered by such registration statement, or the
underwriters, may reasonably request;
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(vi) notify each Holder at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon discovery
that, or upon the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein not misleading, in the light of the circumstances under which
they were made, and at the request of any such Holder promptly prepare and
furnish to such Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as amended or
supplemented, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made;
(vii) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earning statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first full calendar month after the effective date of such registration
statement, which earning statement shall satisfy the provisions of Section 11(a)
of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish
to each holder of Registrable Securities a copy of any amendment or supplement
to such registration statement or prospectus; and
(viii) use its best efforts to have approved for listing, on the date
such Registration becomes effective, subject to official notice of issuance, the
Common Stock being registered pursuant to the Registration on a national
securities exchange on which shares of Common Stock are already listed, or if
not listed, then on a national securities exchange unless the Common Stock is
then quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ").
4.3 REQUESTS FOR INFORMATION. NFN may (i) require each Holder of
Registrable Securities as to which any Registration is being effected to furnish
NFN such information regarding such Holder and the intended method of
distribution of such securities as NFN may from time to time reasonably request
in writing and (ii) require each seller of Registrable Securities to agree to
comply with the Securities Act and the Exchange Act in connection with the
registration and distribution of the Registrable Securities.
4.4 DISCONTINUATION OF DISPOSITION. Each Holder agrees by acquisition of
such Registrable Securities that, upon receipt of any notice from NFN of the
happening of any event of the kind described in subdivision (vi) of Section 4.2,
such Holder will forthwith discontinue such Holder's disposition of Registrable
Securities pursuant to the Registration until such Holder's receipt of the
copies of the supplemented or amended prospectus contemplated by subdivision
(vi) of Section 4.2 and, if so directed by NFN, will deliver to NFN (at NFN's
expense) all copies, other than permanent file copies, then in such Holder's
possession of the prospectus relating to such Registrable Securities current at
the time of receipt of such notice.
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4.5 UNDERWRITTEN OFFERINGS. If the Majority Holders so elect for a Demand
Registration, the offering shall be an underwritten offering with an underwriter
or underwriters selected by the Majority Holders. If the offering is other than
pursuant to a Demand Registration, NFN and the Majority Holders will mutually
agree as to the selection of an underwriter or underwriters. If requested by
the underwriter(s) for any underwritten offering by Holders of Registrable
Securities pursuant to a Registration, NFN will enter into an underwriting
agreement with such underwriter(s) for such offering, such agreement to be
reasonably satisfactory in substance and form to Holders and the underwriter(s)
and to contain such representations and warranties by NFN and such other terms
as are generally prevailing in agreements of that type, including, without
limitation, indemnities. The Holders of the Registrable Securities proposed to
be sold by such underwriter(s) will reasonably cooperate with NFN in the
negotiation of the underwriting agreement and will enter into custody agreements
and execute powers of attorney as reasonably required by such underwriter or
underwriters. Such Holders of Registrable Securities to be sold by such
underwriters may be parties to such underwriting agreement and may, at their
option, require that any or all of the representations and warranties by, and
the other agreements on the part of, NFN to and for the benefit of such Holders
and that any or all of the conditions precedent to the obligations of such
precedent to the obligations of such Holders. Any such Holder is not be
required to make any representations or warranties to or agreements with NFN
other than representations, warranties or agreements regarding such Holder's
intended method of distribution or any other representations required by
applicable law.
4.6 PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of a Registration, NFN (i) shall give the Majority
Holders, the underwriter(s), and counsel designated by the Majority Holders the
reasonable opportunity to participate in the preparation of such registration
statement, each prospectus included therein or filed with the Commission, and
each amendment thereof or supplement thereto, (ii) shall give each of them such
reasonable access to its books and records and such opportunities to discuss the
business of NFN with its officers and the independent public accountants who
have certified its financial statements as shall be necessary, in the opinion of
the Majority Holders and such underwriters or such counsel or accountants, to
conduct a reasonable investigation within the meaning of the Securities Act and
(iii) shall promptly notify the Majority Holders and its counsel of any stop
order issued or threatened by the Commission and take all reasonable actions
required to prevent the entry of such stop order or to remove it if entered.
4.7 HOLDBACK; PRIORITY ON REGISTRATIONS. Notwithstanding any provision to
the contrary contained in this Exhibit A, if a Registration is an underwritten
offering, and the underwriter or underwriter(s) advise NFN in writing that the
number of Registrable Shares requested (and permitted hereby) to be included in
such Registration by the Holders exceeds the number of shares of Common Stock
which in the reasonable and good faith determination of the underwriter(s) can
reasonably be expected to be sold in such offering, then NFN will include in
such Registration the Registrable Shares which the Holders propose to sell
pursuant to such Registration on a pro rata basis, with respect to
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each such Holder (and each of the Other Eligible Holders, if any), based upon
its respective percentage ownership of the aggregate number of shares of Common
Stock to be included in such Registration by all shareholders of NFN
participating in such Registration.
4.8 LOCK-UP. In the event that NFN delivers to the Holders a written
Notice (the "Lock-up Notice") stating that such notice is being delivered
pursuant to this Section 4.8 and that NFN intends to do a primary or secondary
offering of its equity securities (the "Offering"), then the Holders shall not
sell any Registrable Securities in a public offering until the earlier of (i)
the expiration of such period as may be requested by the underwriters; (ii) 180
days after the effective date of the applicable registration statement; and
(iii) the date upon which the Offering is terminated without having been
consummated. In no event may NFN deliver a Lock-up Notice if it has previously
delivered a Lock-up Notice within the preceding one year period.
5. INDEMNIFICATION.
5.1 INDEMNIFICATION BY NFN. NFN will, and hereby does, indemnify and hold
harmless, each Holder and each other Person who participates as an underwriter
in the offering or sale of such securities and each other Person, if any, who
controls such Holder or any such underwriter within the meaning of the
Securities Act, and their respective directors, officers, partners, employees
and affiliates against any losses, claims, damages or liabilities, joint or
several, to which such Holder or underwriter or any such director, officer,
partner, employee, affiliate or controlling person may become subject under the
Securities Act or otherwise, including, without limitation, the fees and
expenses of legal counsel, insofar as such losses, claims, damages or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in a registration statement, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances under
which they were made not misleading, and NFN will reimburse such seller or
underwriter and each such director, officer, partner, employee, affiliate and
controlling Person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; provided, that NFN shall not be liable in any
such case to the extent that any such loss, claim, damage, liability (or action
or proceeding in respect thereof) or expense arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, any such preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance upon and in
conformity with written information held to NFN for use therein by or on behalf
of such Holder or underwriter, as the case may be. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf of
such Holder or any such director, officer, employee, affiliate, partner or
controlling Person and shall survive the transfer of such securities by such
Holder.
A-8
<PAGE>
5.2 INDEMNIFICATION BY THE HOLDERS. As a condition to including any
Registrable Securities in a Registration, NFN shall have received an undertaking
satisfactory to it from the Holder to indemnify and hold harmless (in the same
manner and to the same extent as set forth in Section 5.1) NFN, and each
director of NFN, each officer of NFN and each other Person who controls NFN
within the meaning of the Securities Act, with respect to any statement or
alleged statement in or omission or alleged omission from a prospectus or
summary prospectus contained therein, or any amendment or supplement thereto, if
such statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to NFN for
use therein; PROVIDED, HOWEVER, that the liability of such indemnifying party
under this Section 5.2. shall be limited to the amount of proceeds received by
such indemnifying party in the offering giving rise to such liability. Such
indemnity shall remain in full force and effect, regardless of any investigation
made by or on behalf of NFN or any such director, officer or controlling person
and shall survive the transfer of such securities by such seller.
5.3 NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified
party or notice of the commencement of any action or proceeding involving a
claim referred to in the preceding subparagraphs of this Section 5, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; PROVIDED, HOWEVER, that the failure of any indemnified party to
give notice as provided herein stall not relieve the indemnifying party of its
obligations under the preceding subparagraphs of this Section 5, except to the
extent that the indemnifying party is materially prejudiced by such failure to
give notice. In case any such action is brought against an indemnified party
the indemnified party shall be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified to
the extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party for any legal or other expenses subsequently incurred by a
letter in connection with the defense thereof other than reasonable costs of
investigation; provided however, that if the indemnified party reasonably
believes it is advisable for it to be represented by separate counsel because
there exists or may exist a conflict of interest between its interests and those
of the indemnifying party with respect to such claim, or there exist defenses
available to such indemnified party which may not be available to the
indemnifying party, or if the indemnifying party shall fail to assume
responsibility for such defense, the indemnified party may retain counsel
satisfactory to it and the indemnifying party shall pay all fees and expenses of
such counsel. No indemnifying party shall be liable for any settlement of any
action or proceeding effected without its written consent, which consent shall
not be unreasonably withheld or delayed. No indemnifying party shall, without
the consent of the indemnified party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release from
all liability in respect to such claim or litigation or which requires action
other than the payment of money by the Indemnification party.
A-9
<PAGE>
5.4 CONTRIBUTION. If the indemnification provided for in this Section 5
shall for any reason be held by a court to be unavailable to an indemnified
party under Sections 5.1 or 5.2 hereof in respect of any loss, claim, damage or
liability, or any action or proceeding in respect thereof, then, in lieu of the
amount paid or payable under Sections 5.1 or 5.2 hereof, the indemnified party
and the indemnifying party under Sections 5.1 or 5.2 hereof shall contribute to
the aggregate losses, claims, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating the same), (i) in
such proportion as is appropriate to reflect the relative fault of NFN and the
Holders covered by the Registration which resulted in such loss, claim, damage
or liability, or action in respect thereof, with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action or
proceeding in respect thereof, as well as any other relevant equitable
considerations or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as shall be appropriate to
reflect the relative benefits received by NFN and such Holders from the offering
of the securities covered by such registration statement. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. Each Holder's obligations to
contribute as provided in this Section 5.4 are several in proportion to the
relative value of their respective Registrable Securities covered by such
registration statement and not joint. In addition, no Person shall be obligated
to contribute hereunder any amounts in payment for any settlement of any action
or claim effected without such Person's consent, which consent shall not be
unreasonably withheld or delayed.
5.5 OTHER INDEMNIFICATION. Indemnification and contribution similar to
that specified in the preceding subsections of this Section 5 (with appropriate
modifications) shall be given by NFN and each seller of Registrable Securities
with respect to any required registration or other qualification of securities
under any federal or state law or regulation of any governmental authority other
than the Securities Act.
5.6 INDEMNIFICATION PAYMENTS. The indemnification and contribution
required by this Section 5 shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred.
6. RULE 144 AND RULE 144A. NFN shall take all actions reasonably
necessary (including, without limiting the generality of the foregoing, filing
on a timely basis all reports required to be filed by the Exchange Act) to
enable Holders to sell Registrable Securities without registration under the
Securities Act pursuant to (a) Rule 144 under the Securities Act, as such Rule
may be amended from time to time, (b) Rule 144A under the Securities Act, as
such Rule may be amended from time to time, or (c) any similar rules or
regulations hereafter adopted by the Commission. Upon the request of any
Holder, NFN will deliver to such Holder a written statement as to whether it has
complied with such requirements.
A-10
<PAGE>
7. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election in writing delivered to NFN, be
treated as the Holder for purposes of any request or other action by any Holder
or Holders pursuant to this Agreement or any determination of any number of
percentage of shares of Registrable Securities so elects, may require assurances
reasonably satisfactory to it of such owner's beneficial ownership of such
Registrable Securities.
A-11
<PAGE>
Schedule 2.3(a)
April 30, 1997
Metromedia Company
Stuart Subotnick
Arnold Wadler
Silvia Kessel
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, New Jersey 07073
Ladies and Gentlemen:
We are counsel to National Fiber Network, Inc. (a Delaware corporation)
(referred to herein as the "Company") in connection with the sale to you of an
aggregate of 8,403.325 shares the "Shares") of the Company's Series B
Convertible Preferred Stock, $.01 par value, pursuant to the terms of an
agreement dated as of the date hereof (the "Agreement"). All capitalized terms
used, but not defined in this letter shall have the meanings set forth in the
Agreement.
We are of the opinion that:
1. The Company is a duly organized and validly existing corporation
in good standing under the laws of the state of Delaware, with perpetual
corporate existence, is duly licensed or qualified to do business and in good
standing in each state in which the conduct of its business requires such
licensing or qualification, and has the corporate power and authority and
governmental licenses to own its properties and to transact the business in
which it is engaged or presently proposes to engage, and having a principal
place of business at 110 E. 42nd Street, New York, New York 10017.
2. The authorized capital stock of the Company consists of
62,000,000 shares of which 60,000,000 shares are designated as common stock, par
value $.01 per share ("Common Stock") and 2,000,000 shares are designated as
preferred stock par value, $.01 per share ("Preferred Stock").
3. All of the outstanding shares of capital stock of National Fiber
Network, of New Jersey, Inc., a New Jersey corporation (the "Subsidiary"), are
owned of record and, to our knowledge, beneficially by the Borrower, free and
clear, to our knowledge, of all liens, claims, limitations on voting rights,
options, security interests and
<PAGE>
Metromedia Company
April 30, 1997
Page 2
other encumbrances and are duly authorized, validly issued fully paid and
nonassessable, and have not been issued in violation of any preemptive rights.
4. The Company has the corporate power to execute, deliver and carry
out the terms and provisions of the Agreement and has duly taken or caused to be
taken all necessary corporate action to authorize the execution, delivery and
performance of the Agreement.
5. The Agreement has been duly and validly executed and delivered by
the Company and constitutes valid and binding obligations of the Company as
applicable, enforceable in accordance with their respective terms, subject to
bankruptcy, reorganization and other similar laws affecting the enforcement of
creditors' rights generally, and except that the remedy of specific enforcement
may not be available in all cases.
6. To our knowledge, after due inquiry there is no suit, action or
proceeding pending or threatened against or affecting the Company in any court,
or by any administrative agency or governmental authority which brings into
question the validity of any of the transactions contemplated by the Agreement.
7. The execution and delivery of the Agreement, the consummation of
the transactions contemplated thereby (subject to the conditions provided
therein) and compliance by the Company with any of the provisions thereof will
not conflict with, constitute a default under or violate (i) any of the terms,
conditions or provisions of the certificate of incorporation or by-laws of the
Company, (ii) any of the terms, conditions or provisions of any document,
agreement or other instrument to which either the Company is a party or by which
it is bound of which we are aware, (iii) any New York, Delaware corporate or
federal law or regulation (other than federal and state securities or blue sky
laws, as to which we express no opinion), or (iv) any judgment, writ,
injunctions, decree, order or ruling of any court or governmental authority
binding on the Company of which we are aware. Notwithstanding the foregoing, we
express no opinion concerning Section 6B of the Company's Certificate of
Designation dated April 29, 1997 as the same relates to the Franchise Agreement.
<PAGE>
April 30, 1997
Metromedia Company
Ms. Silvia Kessel
Mr. Stuart Subotnick
Mr. Arnold Wadler
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, New Jersey 07073
Ladies and Gentlemen:
We have acted as special counsel to National Fiber Network, Inc., a
Delaware corporation (the "Company"), in connection with the issuance and sale
by the Company to Metromedia Company, Stuart Subotnick, Arnold Wadler and Silvia
Kessel (collectively, the "Buyers") of an aggregate of 8,403.325 shares (the
"Shares") of the Company's Series B Convertible Preferred Stock, par value $0.01
per share (the "Series B Preferred Stock"), pursuant to an Agreement dated as of
April 30, 1997 among the Company, the Buyers and Stephen A. Garofalo (the
"Agreement").
This opinion is being furnished pursuant to Section 2.3(a)(ii) of the
Agreement. Capitalized terms used and not otherwise defined herein shall have
the meanings ascribed to them in the Agreement.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) an executed copy
of the Agreement; (ii) the Amended and Restated Certificate of Incorporation of
the Company, as currently in effect (including the Certificate of Amendment
thereof filed with the Secretary of State of the State of Delaware (the
"Secretary of State") on April 28, 1997); (iii) the Certificate of Designation
relating to the Series B Preferred Stock (the "Certificate of Designation")
filed with the Secretary of State on April 29, 1997; (iv) the Bylaws of the
Company, as currently in effect; (v) the certificates representing the Shares;
(vi) the Officers' Certificate dated the date hereof, a copy of which is
attached hereto (the "Officers' Certificate"); and (vii) certain resolutions of
the Board of Directors of the Company relating to, among other things, the
issuance and sale of the Shares and related matters. We have also examined
originals or copies, certified or otherwise identified to our satisfaction, of
such records of the Company and such agreements, certificates of public
officials, certificates of officers or other representatives of the Company and
others and such other documents, certificates and records as we have deemed
necessary or appropriate as a basis for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as
<PAGE>
Metromedia Company
Ms. Silvia Kessel
Mr. Stuart Subotnick
Mr. Arnold Wadler
April 30, 1997
Page 2
originals, the conformity to original documents of all documents submitted to us
as certified, conformed or photostatic copies and the authenticity of the
originals of such latter documents. In making our examination of documents
executed by parties other than the Company, we have assumed that such parties
had the power, corporate or other, to enter into and perform all obligations
thereunder and have also assumed the due authorization by all requisite action,
corporate or other, and the execution and delivery by such parties of such
documents and that such documents constitute valid and binding obligations of
such parties. As to any facts material to the opinions expressed herein which
we did not independently establish or verify, we have relied, without
independent investigation, upon certificates (including the Officers'
Certificate), statements and representations of officers and other
representatives of the Company and others.
<PAGE>
Metromedia Company
Ms. Silvia Kessel
Mr. Stuart Subotnick
Mr. Arnold Wadler
April 30, 1997
Page 3
Members of our firm are admitted to the bar in the State of New York,
and we express no opinion as to the laws of any jurisdiction other than the
General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion that:
1. When delivered to and paid for by the Buyers in accordance with
the terms of the Agreement, the Shares will be validly issued, fully paid and
non-assessable.
2. The Shares will be convertible into shares of the Company's
Common Stock in accordance with the terms of the Certificate of Designation.
The shares of Common Stock initially issuable upon conversion of the Shares (the
"Conversion Shares") have been duly authorized and reserved for issuance by the
Company upon such conversion and, if and when issued upon such conversion in
accordance with the Certificate of Designation, such Conversion Shares will be
validly issued, fully paid and non-assessable.
This opinion is being furnished to you solely for your benefit in
connection with the closing under the Agreement occurring today and is not to be
used, circulated, quoted or otherwise referred to for any other purpose or
relied upon by any other person for any purpose without our express prior
written consent.
Very truly yours,
<PAGE>
FORM OF
MODIFICATION AGREEMENT
Agreement (the "Modification Agreement"), dated September __, 1997 by
and among METROMEDIA COMPANY, a Delaware general partnership with offices at One
Meadowlands Plaza, East Rutherford, New Jersey 07073 ("Metromedia"); STUART
SUBOTNICK, residing at 425 East 58th Street, New York, New York 10022
("Subotnick"); ARNOLD L. WADLER, residing at 55 School Road East, Marlboro, New
Jersey 07746 ("Wadler"); SILVIA KESSEL, residing at 160 West 66th Street, New
York, New York 10023 ("Kessel"); STEPHEN A. GAROFALO, residing at 10 Red Ground
Road, Old Westbury, New York 11568 ("Garofalo"); and METROMEDIA FIBER NETWORK,
INC. (f/k/a NATIONAL FIBER NETWORK, INC. ("NFN")), a Delaware corporation with
offices at 110 East 42nd Street, Suite 1502, New York, New York 10017 ("MFN").
WHEREAS, Metromedia, Subotnick, Wadler, Kessel (each a "Buyer" and
collectively "Buyers"), Garofalo and MFN entered into an Agreement made as of
April 30, 1997 (the "Existing Agreement") pursuant to which the Buyers
purchased, and MFN sold to the Buyers, the Buyers' Shares (as such term is
defined in the Existing Agreement) for the consideration and other terms set
forth in the Existing Agreement and Metromedia, MFN and Garofalo entered into
certain agreements and arrangements in connection with the purchase of the
Buyers' Shares;
WHEREAS, MFN has filed a Registration Statement on Form S-1 (the
"Registration Statement") with the Securities and Exchange Commission to
register shares of the Company's Class A Common Stock, par value $0.01 per share
(the "Class A Common Stock") under the Securities Act of 1933, as amended (the
"Offering");
WHEREAS, it is contemplated that simultaneously with the acceleration
of the effectiveness of the Registration Statement by the United States
Securities and Exchange Commission (the "SEC") the Company intends to adopt and
file with the Delaware Secretary of State an Amended and Restated Certificate of
Incorporation, substantially in the form of Exhibit A hereto (the "Restated
Certificate of Incorporation") that will provide for the Company's existing
Common Stock, par value $.01 per share (the "Common Stock") to be reclassified
into Class A Common Stock and the existing Series B Convertible Preferred Stock,
par value $.01 per share that will also be reclassified into Class B Common, par
value $.01 per share (the "Class B Common Stock") (together the
"Reclassifications");
WHEREAS, it is contemplated that immediately following the
Reclassifications, the Company will declare a reverse stock split whereby each
share of outstanding Class A Common Stock and Class B Common Stock will be
converted into a currently unknown number of shares of Class A Common Stock and
Class B Common Stock, respectively (the "Reverse Stock Split"); and
<PAGE>
2
WHEREAS, the Buyers, Garofalo and MFN wish to set forth their
agreement to approve the Restated Certificate of Incorporation and the Reverse
Stock Split in order to facilitate the Offering and to modify certain provisions
of the Existing Agreement as set forth in this Modification Agreement (the
Existing Agreement, as modified by this Modification Agreement is hereinafter
referred to as the "Agreement");
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the Buyers, Garofalo and MFN hereby agree as follows:
Article I
MODIFICATION OF THE EXISTING AGREEMENT
3. MODIFICATIONS AND AMENDMENTS. Notwithstanding anything to the
contrary contained in the Existing Agreement, as of the date of the declaration
by the SEC of the effectiveness of the Registration Statement (the "Effective
Date") the Existing Agreement is hereby modified and amended as set forth below.
All terms used in this Modification Agreement shall have the same definitions as
set forth in the Existing Agreement unless otherwise indicated herein.
3.1 AMENDMENTS TO PARAGRAPH 4.4 OF THE EXISTING AGREEMENT.
Paragraph 4.4 of the Existing Agreement is hereby replaced in its entirety with
the following:
4.4 INTENTIONALLY OMITTED.
3.2 AMENDMENTS OF PARAGRAPH 5 OF THE EXISTING AGREEMENT.
Paragraph 5 of the Existing Agreement is hereby amended as follows:
1. Paragraph 5(a) is hereby replaced in its entirety with the
following:
5(a). INTENTIONALLY OMITTED.
2. Paragraph 5(b) is hereby replaced in its entirety with the
following:
5(b). INTENTIONALLY OMITTED.
3. Paragraph 5(c) is hereby replaced in its entirety with the
following:
5(c). INTENTIONALLY OMITTED.
<PAGE>
3
3.3 AMENDMENT OF PARAGRAPH 7 OF THE EXISTING AGREEMENT.
Paragraph 7 of the Existing Agreement is deleted in its entirety.
3.4 AMENDMENT OF PARAGRAPH 8 OF THE EXISTING AGREEMENT.
Paragraph 8.1 is amended by replacing the definition of "MAJORITY HOLDERS" with
the following: "MAJORITY HOLDERS means the majority of holders of the
Registrable Securities."
Article II
AGREEMENT REGARDING VOTING OF SHARES
2.1 AGREEMENT TO VOTE SHARES. The Buyers and Garofalo covenant
and agree that, to the extent applicable, they shall take all action within
their respective power, including but not limited to, voting favorably as a
director and voting favorably any and all shares held by them, whether
beneficially or by record ownership, of Series B Preferred Stock, Common Stock
and Class A Common Stock to effect the following:
1. the Restated Certificate of Incorporation including the
Reclassifications;
2. the Reverse Stock Split;
2.2 CONSENTS OF STOCKHOLDERS. To the extent permissible by
Section 228(a) of the Delaware General Corporate Law (the "DGCL") and any other
section of the DGCL, the Buyers and Garofalo shall comply with the requirements
of paragraph 2.1 herein by preparing, signing and delivering to MFN one or more
written consents of stockholder(s) to action taken without a meeting voting in
favor of the items in paragraph 2.1 herein.
2.3 FURTHER ASSURANCES. The Buyers and Garofalo agree (a) to
furnish upon request to each other such further information, (b) to execute and
deliver to each other documents, and (c) to do such other acts and things, all
as the other party may reasonably request, for the purpose of carrying out the
intent of this Article II and the documents referred to in this Article II.
<PAGE>
4
Article III
GENERAL PROVISIONS
3.1 HEADINGS. The various headings of this Modification
Agreement are inserted for convenience only and shall not affect the meaning or
interpretation of this Modification Agreement or any provisions hereof.
3.2 EXECUTION IN COUNTERPARTS, ETC. This Modification Agreement
may be executed by the parties hereto in several counterparts, each of which
shall be deemed to be an original and all of which shall constitute together but
one and the same agreement.
3.3 LIMITATION. Except as amended or modified by this
Modification Agreement, all of the terms, covenants and conditions contained in
the Existing Agreement shall remain unamended and shall continue to be, and
shall remain, in full force and effect in accordance with their respective
terms.
3.4 SUCCESSORS AND ASSIGNS. This Modification Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, representatives, successors and assigns.
<PAGE>
5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
METROMEDIA COMPANY METROMEDIA FIBER NETWORK,
INC.
By: ________________________ By: ____________________________
Stuart Subotnick Stephen A. Garofalo
Executive Vice President Chief Executive Officer
____________________________ _______________________________
Stuart Subotnick Arnold L. Wadler
____________________________ ________________________________
Silvia Kessel Stephen A. Garofalo
<PAGE>
EXHIBIT 10.7
CONSULTING AGREEMENT
AGREEMENT made effective the 1st day of February, 1996, between NATIONAL
FIBER NETWORK, INC., a Delaware corporation, with executive offices at 60
Hudson Street, New York, NY (hereinafter referred to as the "Corporation"),
and REALPROP CAPITAL CORPORATION, a Florida corporation with offices at 324
E. 48 Street, New York, NY (hereinafter referred to as "Consultant").
W I T N E S S E T H :
WHEREAS, the Corporation is desirous of engaging the services of the
Consultant in the capacity hereinafter stated, and the Consultant is desirous
of acting as a consultant to the Corporation in such capacity for the period
and on the terms and conditions set forth herein;
WHEREAS, the services of the Consultant are unique, extraordinary and
not readily replaceable due to its expertise and knowledge of the business
and operations of the Corporation and its position in the business community;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained, the parties hereto do hereby agree as follows:
1 Consulting Services. The Corporation hereby engages Consultant as
an independent contractor, and not as an employee, partner, joint venturer or
agent, to provide consulting services to the Corporation and Consultant
accepts such engagement and agrees to provide to the Corporation the
consulting services described herein, faithfully and to the best of
Consultant's ability.
<PAGE>
2 Term of Employment. The term of this Agreement shall become
effective upon execution of this Agreement and shall end five (5) years
thereafter.
3 Duties. Consultant agrees to provide the services of its employee,
Howard Katz, who agrees to devote as much time per month to the business and
affairs of the Corporation as he shall deem to be reasonably necessary to
effectively provide the Corporation with information concerning its knowledge
and understanding of (i) transactions, and (ii) conduct of the business in
which the Corporation engaged prior to the date hereof, and such other areas
of consultation as Consultant and the Corporation may mutually agree upon.
4 Compensation and Benefits.
4.1 In consideration for all the Services to be performed by
Consultant, the Corporation shall pay to Consultant a fee of Ninety
Thousand Dollars ($90,000.00) per year, payable in equal monthly
installments commencing on June 15, 1996, and continuing on the same day
of each and every consecutive month thereafter for a period of sixty (60)
months.
4.2 In order to secure the obligations of Corporation to
Consultant, the Corporation shall use its best efforts to have its wholly
owned subsidiary, National Fiber Network of New Jersey, Inc., execute the
certain Guaranty, a copy of which is attached hereto as Exhibit "A".
Said Guaranty shall be further secured by a security interest in all of
the assets of National Fiber Network of New Jersey, Inc., in the form as
set forth in the attached Exhibit "B".
4.3 To further secure the obligations of Corporation to Consultant,
the Corporation shall use its best efforts to have Stephen Garafolo
execute the
2
<PAGE>
attached Guaranty and Stock Pledge and Escrow Agreement pledge his 410,000
shares of the Corporation in the form set forth in Exhibit "C".
4.4 National Fiber Network of New Jersey, Inc., and Stephen
Garafolo are sometimes hereafter referred to together as the "Guarantor".
5 Expenses.
5.1 The Corporation agrees to pay or reimburse Consultant for all
pre-approved reasonable, ordinary and necessary business expenses
incurred by Consultant in connection with the business of the
Corporation, including expenditures for pre-approved business travel. In
such regard, Consultant agrees to submit such vouchers and other proof of
payment as the Corporation may require from time to time to support these
expenses as business expenses for Internal Revenue Service purposes.
5.2 The Corporation further agrees to pay or reimburse Consultant
for all rental payments due on Consultants' office located at 300 East
56th Street, payments Unit 21M, New York, NY, for the period commencing
with the January, 1996 rental payment and ending with, but including, the
June, 1997, rental payment in the amount of $3,505. per month. The
rental for January, February and March 1996 shall be paid on or before
June 15, 1996, with interest, from the date of each such rental payment
at the rate of twelve (12%) percent per annum. Commencing on April 1,
1996, the Corporation shall pay or reimburse Consultant for each month's
rent on or before the fifth (5th) day of each month.
6 Disclosure of Information. Consultant shall not, either during the
term of this Agreement or at any time thereafter, use for its own benefit, or
for the benefit
3
<PAGE>
of any other person, corporation, partnership or other entity, or to the
detriment of the Corporation, or disclose to any person, corporation,
partnership or other entity, any secret, private or confidential information
or other proprietary knowledge of and concerning the business or affairs of
the Corporation which Consultant may have acquired in the course of, or as
incident to, performing its consulting Services for the Corporation or
otherwise (including, but not limited to, past, present or prospective
clients, customers, associates and consultants or otherwise).
7 Default and Remedies upon Default.
7.1 A default shall exist under the terms of this Agreement in the
event that
7.1.1 Corporation fails to pay to Consultant, on the due date
thereof, all compensation due and payable to Consultant and all
expenses payable to Consultant under paragraphs 4 and 5
respectively, above;
7.1.2 a default shall occur in the obligations of Corporation
and/or Guarantor under the terms of that certain Security Agreement
and that certain Stock Pledge and Escrow Agreement referenced in
Paragraph 4, above;
7.1.3 a default shall occur in the payment by Corporation to
Consultant pursuant to terms of that certain Promissory Note of even
date herewith, a copy of which is attached hereto as Exhibit "D";
7.1.4 a default by the Corporation of its obligations as more
particularly set forth in that certain letter Agreement of even date
herewith by and among Corporation, Consultant and Howard Katz.
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7.2 In the event of a default as set forth in Paragraph 7.1, above,
and failure of Corporation to cure within ten (10) days of written notice
thereof.
7.2.1 all compensation to be paid by Corporation to Consultant
pursuant to Paragraph 4, above, shall be accelerated and shall
immediately become due and payable;
7.2.2 all sums due and owing to Consultant pursuant to
Paragraph 5, above, shall be accelerated and shall immediately
become due and payable;
7.2.3 all other sums payable to Consultant by Corporation or by
Guarantor shall be accelerated and shall become immediately due and
payable notwithstanding the terms that may be contained in the small
documents evidencing such obligations;
7.2.4 all sums payable to Consultant shall bear interest at the
rate of eighteen percent (18%) per annum from the date of default
until paid in full.
8 Independent Contractor Status Affidavit. Consultant agrees to
execute and deliver to the Corporation, simultaneously with the execution of
this Agreement, the Independent Contractor Status Affidavit in the form set
forth in Exhibit "D".
9 Release of Security for Guarantees. Upon the Corporation's completion
of a proposed IPO for raising no less than Two Million ($2,000,000.00) Dollars,
Consultant agrees to release its lien on the assets of National Fiber Network of
New Jersey, Inc. described in paragraph 4.2 above and all guaranties in
connection therewith; provided, however, that Corporation will, at the time of
such release,
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prepay the last Ninety Thousand ($90,000.00) Dollars due to Consultant
pursuant thereto, and further provided that Corporation is not otherwise in
default hereunder.
10 Other Obligations of Consultant. Consultant shall also comply with
all obligations of Howard Katz under that certain letter agreement between
him and the Corporation.
11 Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and (i) hand delivered, (ii) sent by overnight
courier requiring signature for delivery or (iii) sent by registered or
certified mail to the Corporation or Consultant at the address set forth in
this Agreement or to any other address of which notice of the change is given
to the parties hereto.
12 Assignment. The rights and obligations of the Corporation under
this Agreement are assignable and shall inure to the benefit of and shall be
binding upon any successor and assignee of the Corporation; however,
Consultant's rights and obligations under this Agreement are personal in
nature and may not be assigned.
13 Attorney's Fees. In the event of a dispute between Consultant and
Corporation or between Consultant and Guarantor, the prevailing party shall
be entitled to an award of all attorney's fees and costs incurred in said
dispute through and including trial and all appeals.
14 Modification. This Agreement shall not be changed, modified or
amended in any respect except by a written instrument signed by both parties.
15 Choice of Law. This Agreement shall be governed, interpreted and
construed by the applicable laws of the State of New York.
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16 Entire Understanding. This Agreement constitutes the entire
understanding and agreement between the Corporation and Consultant.
IN WITNESS WHEREOF, this Agreement has been executed by the parties on the
day and year first above written.
WITNESSES: CORPORATION:
NATIONAL FIBER NETWORK,
______________________ By:_________________________
______________________
CONSULTANT:
REALPROP CAPITAL CORPORATION
______________________ By:_________________________
______________________
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EXHIBIT 21.1
LIST OF SUBSIDIARIES OF METROMEDIA FIBER NETWORK, INC.
Metromedia Fiber Network NYC, Inc.
National Fiber Network of Illinois, Inc.
NFN Communications, Inc.
National Fiber Network of New Jersey, Inc.
