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EXHIBIT 10.17
OPERATING AGREEMENT
OF
Telergy East, LLC
OPERATING AGREEMENT
OF
Telergy East, LLC
THIS OPERATING AGREEMENT is made and entered into as of this 10th day of
June, 1998, by and between Telergy Inc. ("Telergy"), a New York corporation, and
Energy East Telecommunications, Inc. ("Energy East"), a Delaware corporation
wholly owned by NYSEG, and is to take effect on the Effective Date.
WHEREAS, Telergy and Energy East desire, by execution and delivery
of this Operating Agreement, to approve the Articles of Organization and form a
limited liability company pursuant to the Act.
WITNESSETH:
In consideration of the mutual covenants contained in this Operating
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
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ARTICLE I
DEFINITIONS
In addition to the terms defined elsewhere in this Operating Agreement,
the following terms shall have the following respective meanings:
1.1 "Act" means the New York Limited Liability Company Law, Chapter 34,
Consolidated Laws '101 et seq., and all amendments thereto.
1.2 "Affiliate" means, with respect to a specified Person, (i) any other
Person directly or indirectly controlling, controlled by, or under common
control with the specified Person, (ii) any other Person owning or controlling
ten percent (10%) or more of the outstanding voting interests of the specified
Person, (iii) any officer, director, general partner, member or trustee of the
specified Person, or (iv) any other Person who is an officer, director, general
partner, member, trustee, or holder of ten percent (10%) or more of the
outstanding voting interests of any Person described in clauses (i) through
(iii) of this sentence. For purposes of this definition, the terms "controls,"
"is controlled by," or "is under common control with" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract, or otherwise.
1.3 "Applicable Federal Rate" means the rate of interest determined each
month by the Secretary of Treasury pursuant to Code Section 1274(d) for debt
instruments having a maturity of over three years but not over nine years as
announced by Revenue Rulings issued monthly by the United States Treasury
Department, compounded annually.
1.4 "Articles of Organization" means the Articles of Organization of the
Company as recorded by the Secretary of State on May 22, 1998, and the Amended
Articles of Organization which changed the name of the Company as recorded by
the Secretary of State on June 5, 1998, and subsequent amendments as may be
filed from time to time as authorized by the unanimous vote or Consent of the
Members.
1.5 "Backbone Network" means the initial path of the Fiber Optic Network
between Binghamton and Auburn, including cable of approximately 100 strands to
be installed overhead pursuant to the ROO Agreement which will connect to the
Ithaca and Binghamton Spurs, primarily using NYSEG poles and towers.
1.6 "Bankruptcy" and "Bankrupt Person" are defined in Section 10.3.
1.7 "Binghamton Spur" means a Spur off the Backbone Network to be
constructed and installed in NYSEG Right-Of-Way to a point at or near [***].
1.8 "Business Plan" means a narrative report articulating the vision and
objectives of the Company, its business focus, market analysis, marketing plan,
financial
CONFIDENTIAL
[***] Confidential treatment has been requested with respect to material
omitted on this page. The omitted portions have been filed separately
with the Securities and Exchange Commission.
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projections, financing plan, contingency analysis, and implementation plan in
order to carry out the purpose and business activities as set forth in Article
III.
1.9 "Capital Account" means, as of any given date, the Capital
Contributions to the Company by a Member as adjusted up to the date in question
pursuant to Article VIII.
1.10 "Capital Contributions" means the total amount of cash, and the Fair
Market Value of all tangible or intangible property or services, which a Member
or its predecessor in interest has contributed or has agreed to contribute to
the Company net of liabilities secured thereby that the Company is considered to
assume or to be subject to under Section 752 of the Code.
1.11 "Code" means the Internal Revenue Code of 1986, as amended.
1.12 "Company" means Telergy East, LLC, the limited liability company
formed pursuant to this Operating Agreement.
1.13 "Conduit" is defined in the ROO Agreement.
1.14 "Consent" means the prior written consent of a Person to do the act
or thing for which the Consent is solicited, or the act of granting the Consent,
as the context may require.
1.15 "Cornell Project" means an ADSL resale application and any necessary
extension off the Backbone Network that may be required to be installed in NYSEG
Right-Of-Way or Facilities in connection with Telergy's provisioning of ADSL
services.
1.16 "Deficit Capital Account" means, with respect to any Member, the
deficit balance, if any, in such Member's Capital Account as of the end of the
taxable year, after giving effect to the following adjustments:
(i) credit to such Capital Account any amount that such Member is
obligated to restore under Section 1.704-1(b)(2)(ii)(c) of the Treasury
Regulations, as well as any addition thereto pursuant to the next to last
sentence of Sections 1.704-2(g)(1) and (i)(5) of the Treasury Regulations,
after taking into account thereunder any changes during such year in
limited liability company minimum gain attributable to any member
non-recourse debt (as determined under Section 1.704-2(i)(3) of the
Treasury Regulations); and
(ii) debit to such Capital Account the items described in Sections
1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Treasury Regulations.
This definition of Deficit Capital Account is intended to comply with the
provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and 1.704-2, and
will be interpreted
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consistently with those provisions.
1.17 "Depreciation" means, for each Fiscal Year, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Fiscal Year, except that if the financial
accounting book value of an asset differs from its adjusted basis for federal
income tax purposes at the beginning of such Fiscal Year, Depreciation shall be
an amount which bears the same ratio to such beginning book value as the federal
income tax depreciation, amortization, or other cost recovery deduction for such
Fiscal Year bears to such beginning adjusted tax basis; provided, however, that
if the adjusted basis for federal income tax purposes of an asset at the
beginning of such Fiscal Year is zero, Depreciation shall be determined with
reference to such beginning book value using any reasonable method selected by
the Manager.
1.18 "Distributable Cash" means all cash, revenues, and funds received by
the Company, other than Capital Contributions, less the sum of the following to
the extent paid, set aside or accrued by the Company: (i) all principal payments
on indebtedness of the Company and all other sums paid to lenders; (ii) all cash
expenditures for capital improvements, additions and replacements (iii) all cash
expenditures for operating expenses incurred incident to the operation of the
Company's business; and (iv) Reserves.
1.19 "Division" means a portion of the business and assets of the Company
which is accounted for separately, including a Segregated Network the capital
costs of which are funded by a Participating Member.
1.20 "Economic Interest" means the interest, either of a Member or a
Permitted Transferee, expressed as a percentage, in the Company's Net Profits,
Net Losses and distributions of the Company's assets (exclusive of the Cornell
Project) and the entire interest in a Division for which a Participating Member
funded the capital costs, all pursuant to this Agreement and the Act, together
with the obligations to comply with the terms and provisions of the Agreement
and the Act, which does not include any right to participate in the management
of the business or affairs of the Company, the right to vote on, Consent to or
otherwise participate in any decision or action of the Members. The initial
Economic Interests shall be 50% for Telergy and 50% for Energy East.
1.21 "Effective Date" means the date that Telergy and Energy East execute
and deliver this Operating Agreement and the ROO Agreement.
1.22 "Entity" means any general partnership, limited partnership, limited
liability company, corporation, joint venture, trust, business trust,
cooperative, or association or any foreign trust or foreign business
organization.
1.23 "Facilities" means when applied to property of or installed by or on
behalf of the Company in, on, upon, under, across, along and through the
Right-of-Occupancy shall mean any transmission systems designed to carry
communications traffic and include Conduit installed by the Company, innerducts,
trace wire, carrier pipes, cables, fibers,
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junctions, regenerators, power sources, fault alarm systems, electronics,
structures or shelters, towers, satellite earth stations and all other personal
property necessary for or useful to the construction, installation, operation,
maintenance, repair, reinstallation, replacement, relocation and removal of the
Fiber Optic Network.
1.24 "Fair Market Value"
(i) for any asset of the Company, whether real, personal or
intangible property, means the value determined from time to time for the
purpose of this Operating Agreement by a majority of the members of the
Management Committee, unless the asset is readily traded and the value is
easily determined, in which case the value shall be such market value. A
determination by the Management Committee shall be binding for a period of
six (6) months following the effective date of the valuation, unless the
value is adjusted during the period or is reaffirmed at the end of the
period by the Management Committee, or unless the valuation shall provide
for a different or longer period during which it shall be effective. If
the Management Committee is unable to agree upon a value or, in the case
of valuation of real estate or unique personal or intangible property, the
value of such property shall be determined from an appraisal of the asset
by a duly qualified appraiser for the type of asset being appraised, which
appraiser shall be selected by the Management Committee. If the interested
parties are unable to agree on an appraiser within ten (10) days after the
written request of either one, each shall select an appraiser and the two
(2) appraisers shall agree on the valuation, but if they are unable to
agree on the valuation, the appraisers shall mutually select a third
appraiser whose decision as to any disputed valuation shall be binding and
conclusive on all interested parties. Any appraisers' fees and costs shall
be borne and paid by the party authorized to select the appraiser, but
where an appraiser is jointly selected or a third appraiser is selected,
such fees and costs of the jointly selected appraiser or third appraiser
shall be borne and paid for by the interested parties in equal shares.
(ii) for an Economic Interest of the Company, means the value
determined from time to time for the purpose of this Operating Agreement
by a duly qualified appraiser knowledgeable about the telecommunications
industry who is jointly selected by the interested parties. If the
interested parties are unable to agree on an appraiser within ten (10)
days after the written request of either one, each shall select an
appraiser and the two (2) appraisers shall agree on the valuation, but if
they are unable to agree on the valuation, the appraisers shall mutually
select a third appraiser whose decision as to any disputed valuation shall
be binding and conclusive on all interested parties. Any appraisers' fees
and costs shall be borne and paid by the party authorized to select the
appraiser, but where an appraiser is jointly selected or a third appraiser
is selected, such fees and costs of the jointly selected appraiser or
third appraiser shall be borne and paid for by the interested parties in
equal shares.
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1.25 "Fiber Optic Network" means the Company's network, including the
Backbone Network, and any spurs, loops or extensions thereto and any additional
path of fiber cable in other NYSEG Right-Of-Way, but excluding the Cornell
Project, whether heretofore or hereafter conceived, invented or developed, which
primarily utilizes optical fiber as the medium for transmitting voice
communications and/or other information or data and which is located within
NYSEG's Right-Of-Way utilized under this Agreement, excluding the Cornell
Project. The Fiber Optic Network shall include the Cornell Project if Energy
East makes the election and its Capital Contribution as provided in Section
8.2(c).
1.26 "Fiscal Year" means the calendar year.
1.27 "Gross Asset Value" means, with respect to any asset of the Company,
its adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed by a
Member to the Company shall be its gross Fair Market Value;
(ii) The Gross Asset Values of all Company assets shall be adjusted
to equal their respective gross Fair Market Values as of the following
times: (a) the acquisition of an additional interest by any new or
existing Member in exchange for more than a de minimis Capital
Contribution; (b) the distribution by the Company to a Member of more than
a de minimis amount of property as consideration for a Membership Interest
or Economic Interest; and (c) the liquidation of the Company within the
meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however,
that adjustments pursuant to clauses (a) and (b) above shall be made only
if a majority of the members of the Management Committee reasonably
determine that such adjustments are necessary or appropriate to reflect
the relative Economic Interests of the Members in the Company;
(iii) The Gross Asset Value of any Company asset distributed to any
Member shall be adjusted to equal its gross Fair Market Value on the date
of distribution; and
(iv) The Gross Asset Values of Company assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the
extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Regulation Section 1.704-1(b)(2)(iv)(m) and Section
8.4 and subparagraph (iv) under the definition of Net Profits and Net
Losses; provided, however, that Gross Asset Values shall not be adjusted
pursuant to this definition to the extent a majority of the members of the
Management Committee determine that an adjustment pursuant to subparagraph
(ii) of this definition is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to this
subparagraph (iv).
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If the Gross Asset Value of an asset has been determined or adjusted pursuant to
subparagraph (i), (ii), or (iv) of this definition, then such Gross Asset Value
shall thereafter be adjusted by the Depreciation taken into account with respect
to such asset for purposes of computing Net Profits and Net Losses.
1.28 "High Yield Notes" means High Yield Notes made by Telergy and
purchased by Persons through an underwritten bond offering, which is anticipated
to be completed by December 31, 1998.
1.29 "Indefeasible Right of Use or IRU" means a communication facility in
which the holder possesses an indefeasible, exclusive and irrevocable right to
use and market the facility, but not the right to control the facility.
1.30 "Ithaca Spur" means an extension off the Backbone Network to be
constructed and installed in NYSEG Right-Of-Way connecting to Cornell and
extending on to connect two points at or near ▇▇▇▇ Atlantic POPs.
1.31 "Management Committee" means a six-person body, three (3) of whom
shall be appointed by Energy East and three (3) of whom shall be appointed by
Telergy. The Initial Management Committee shall be composed of the following
individuals: ▇▇▇▇▇ ▇. ▇▇▇▇▇, J. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇▇▇▇ ▇. ▇▇▇▇▇, who are the
designees of Telergy, and ▇▇▇▇▇▇▇ ▇. German, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇.
▇▇▇▇▇▇▇, who are the designees of Energy East. Telergy shall designate the
Chairman of the Management Committee, and the initial Chairman shall be ▇▇▇▇▇ ▇.
▇▇▇▇▇.
1.32 "Manager" means the individuals initially designated as President and
Vice President in Section 5.6, and their successors upon removal, resignation,
or replacement.
1.33 "Market Interest" means the annual rate of interest, compounded
monthly (applied on a daily basis or such other periodic basis as the Manager
shall determine) which shall equal the greater of (a) the annual rate of
interest being charged from time to time by the primary commercial bank in the
State of New York with which the Company usually does business (but if there by
no such bank, then such commercial bank in the State of New York as is selected
by the Manager for prime credit risk borrowers) plus 1%, or (b) 100% of the
Applicable Federal Rate in effect as of the date of the promissory note or other
indebtedness as determined under Section 1274 of the Code, but only if Section
1274 shall apply).
1.34 "MasTec Financing" means borrowings by Telergy from MasTec North
America, Inc. pursuant to a Financing Agreement dated May 6, 1998 and related
documents.
1.35 "Member" means each of the parties who executes a counterpart of this
Operating Agreement as a Member and each of the parties who may hereafter be
admitted
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as Members or become Substitute Members.
1.36 "Membership Interest" means a Member's entire interest in the Company
including such Member's Economic Interest, Voting Interest and such other rights
and privileges that the Member may enjoy by being a Member.
1.37 "Net Profits" and "Net Losses" mean for each Fiscal Year of the
Company an amount equal to the Company's net taxable income or loss for such
Fiscal Year as determined for federal income tax purposes (including separately
stated items) in accordance with the accounting method and rules used by the
Company and in accordance with Section 703 of the Code with the following
adjustments:
(i) any items of income, gain, loss, and deduction allocated to
Members pursuant to Sections 9.1(b) and 9.2 shall not be taken into
account in computing Net Profits or Net Losses for purposes of this
Operating Agreement;
(ii) any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing Net Profits and Net
Losses (pursuant to this definition) shall be added to such taxable income
or loss;
(iii) any expenditure of the Company described in Section
705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) expenditures
pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(I), and not
otherwise taken into account in computing Net Profits and Net Losses
(pursuant to this definition) shall be subtracted from such taxable income
or loss;
(iv) in the event the Gross Asset Value of any Company asset is
adjusted pursuant to clause (ii) or (iii) of the definition of Gross Asset
Value, the amount of such adjustment shall be taken into account as gain
or loss from the disposition of such asset for purposes of computing Net
Profits and Net Losses;
(v) gain or loss resulting from any disposition of any Company asset
with respect to which gain or loss is recognized for federal income tax
purposes shall be computed with reference to the Gross Asset Value of the
asset disposed of, notwithstanding that the adjusted tax basis of such
asset differs from its Gross Asset Value;
(vi) in lieu of the depreciation, amortization and other cost
recovery deductions taken into account in computing such taxable income or
loss, there shall be taken into account Depreciation for such Fiscal Year;
and
(vii) to the extent an adjustment to the adjusted tax basis of any
Company asset pursuant to Section 734(b) of the Code or Section 743(b) of
the code is required pursuant to Section 1.704-1(b)(2)(iv)(m)(4) of the
Treasury Regulations to be taken into account in determining Capital
Accounts as a result of a
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distribution other than in liquidation of a Membership Interest, the
amount of such adjustment shall be treated as an item of gain (if the
adjustment decreases the basis of the asset) from the disposition of the
asset and shall be taken into account for purposes of computing Net
Profits or Net Losses.
1.38 "NYSEG" means New York State Electric and Gas Corporation, a New York
corporation with a principal office at ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇
▇▇▇▇ ▇▇▇▇▇.
1.39 "Operating Agreement" or "Agreement" means this Operating Agreement
of Telergy East, LLC as the same may be amended from time to time by the
unanimous vote or Consent of the Members.
1.40 "Participating Member" means a Member who causes the Company to
construct a Segregated Network to be operated as a Division.
1.41 "Permitted Transferee" shall mean the holder of an Economic Interest
in the Company who has not been admitted as a Substitute Member, and who
therefore has all of the obligations of a Member, but no right to vote or
participate in the management or affairs of the Company or to exercise any
rights or powers of a Member.
1.42 "Person" shall mean any individual or Entity, and the heirs,
executors, administrators, legal representatives, successors, and assigns of
such Person where the context so permits.
1.43 "PSC" means the Public Service Commission of New York State.
1.44 "Reserves" means, with respect to any Fiscal Year, funds set aside or
amounts allocated during such period which are deemed sufficient by a majority
of the Members of the Management Committee for working capital and to pay taxes,
insurance, debt service, or other costs or expenses incident to the ownership or
operation of the Company's Business.
1.45 "Right-of-Occupancy" is defined in the ROO Agreement.
1.46 "Right-Of-Way" is defined in the ROO Agreement.
1.47 "ROO Agreement" means the Right-of-Occupancy Agreement executed by
the Company and NYSEG simultaneous with this Operating Agreement, which ROO
Agreement provides the terms and conditions under which the Company may use the
conduit, building entrances, poles, towers and other electric gas transmission
and distributions facilities of NYSEG and its Affiliates to construct and
install the Fiber Optic Network, Segregated Networks and extensions thereto.
1.48 "Secretary of State" means the Secretary of State of the State of New
York.
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1.49 "Segregated Network" means the Company's network which primarily
utilizes optic fiber as the medium for transmitting voice communications and/or
other information or data, which is located within NYSEG's Right-of-Way, and
which is operated and accounted for as a Division.
1.50 "Shared Network" means the Backbone Network, the Ithaca and
Binghamton Spurs, and any other portion of the Fiber Optic Network in which both
Members have participated.
1.51 "Selling Member" means any Member which sells all or any portion of
its Economic Interest as described in Section 10.2.
1.52 "Spur" means an extension off the Backbone Network, and shall include
laterals, loops and spurs constructed or installed in NYSEG's Right-Of-Way,
excluding the Cornell Project.
1.53 "Stalemate" means that a matter described in Sections 5.4(a)(i)
through (xii) has been (i) submitted to the Management Committee for its
authorization and it has been unable to obtain the affirmative vote of a
majority of its members, and (ii) submitted to the Chief Executive Officer of
the Members to resolve the stalemate of the Management Committee, but they have
been unable to agree within ten (10) days of submission of the matter to them.
1.54 "Substitute Member" means a Permitted Transferee who has been
admitted as a Member pursuant to Section 10.7.
1.55 "Tax Matters Member" means Telergy, the Member designated to
represent the Company in connection with income tax matters pursuant to Section
6231(a)(7) of the Code.
1.56 "Transferring Member" shall mean a Member who transfers its
Membership Interest or Economic Interest as provided in Article X.
1.57 "Treasury Regulations" shall include proposed, temporary, and final
regulations promulgated under the Code.
1.58 "Voting Interest" means a Member's proportionate rights, as set forth
in this Agreement, to participate in the management of the business or affairs
of the Company and to vote on, Consent to, or otherwise participate in any
decision or action of the Members. The Voting Interests shall be 50% for Telergy
and 50% for Energy East.
1.59 "Withdrawal Date" means the date upon which a Member elects for
Energy East to withdraw from the Company as provided in Section 10.4.
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ARTICLE II
FORMATION OF COMPANY
2.1 Formation. The parties, by execution and delivery of this Operating
Agreement, hereby approve the filing of the Articles of Organization with the
Secretary of State and enter into and join together in and do hereby form the
Company, as of the Effective Date, as a New York Limited Liability Company under
and pursuant to the Act.
2.2 Name. The name of the Company is Telergy East, LLC.
2.3 Principal Place of Business; Principal Executive Office. The Company's
initial principal place of business shall be at ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇,
▇▇▇ ▇▇▇▇ ▇▇▇▇▇. The Company may relocate its principal place of business or its
principal executive office from time to time as a majority of the members of the
Management Committee deems advisable.
2.4 Registered Office and Registered Agent. The address of the Company's
initial registered office shall be ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇
▇▇▇▇▇. The name and address of the Company's registered agent shall be the
Secretary of State, in accordance with Section 301 of the Act. CT Corporation
system, ▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇ shall be the designated agent
for the service of process and shall be the party to whom the Secretary of State
shall forward such process as may be served upon the Company. The registered
office and registered agent may be changed from time to time as the Manager
deems advisable by filing notice of such changes with the Department of State in
accordance with Sections 301 and 302 of the Act.
ARTICLE III
BUSINESS OF COMPANY
The business of the Company is to provide all forms of telecommunications
products and services, including data, voice and video on both a wholesale and
retail basis as well as energy sales, management and marketing and Internet
content and access services in geographic locations where the Company constructs
and installs its Fiber Optic Network, including any spurs, loops or extensions
thereto, using the Rights-of-Way of NYSEG and its Affiliates. The Members may
compete with the Company for all or any portion of its business as provided in
Section 17.2.
The provisions of this Article III shall be applied in any interpretation
of the rights and duties of Members, the Manager or the Management Committee
under Section 409 of the Act or under this Operating Agreement, as provided in
Article V. The authority granted to the Manager and the Management Committee
under this Operating Agreement or the Act to bind the Company shall be limited
to actions necessary or convenient to implement the Business Plan within the
capital and operating budgets, and shall be further
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limited as provided in Article V and the Articles of Organization.
ARTICLE IV
IDENTITY OF MEMBERS
The names and addresses of the Members, their respective Economic
Interests, Voting Interests and their initial Capital Contributions are to be
set forth on a schedule maintained by the Manager at the Company's principal
office. The initial version of such schedule is attached hereto as Exhibit A.
Such schedule shall be modified from time to time to reflect changes thereto
made in accordance with this Operating Agreement and the Act and shall be made
available to any Member upon request.
ARTICLE V
RIGHTS AND DUTIES OF THE MANAGER,
THE MANAGEMENT COMMITTEE AND THE MEMBERS
5.1 Manager. The Manager is charged with the responsibility for, and is
vested with the day-to-day authority to manage the ordinary course of the
Company's business in accordance with the Business Plan, and with the authority
to spend funds of the Company, but only as set forth in the capital and
operating budgets, except as limited by this Operating Agreement or the Articles
of Organization, and except in those cases in which the approval of the Members
or the Management Committee is expressly required by this Operating Agreement or
by the Act.
5.2 Authority of the Manager.
(a) Authorized Actions. The following actions are illustrative of the
Manager's authority on behalf of the Company without first obtaining the
affirmative vote of a majority of the members of the Management Committee:
(i) hire employees of the Company as contemplated by the Business
Plan, discharge employees as may be appropriate, and make recommendations
to the Management Committee for compensation, bonuses and benefit or
incentive plans;
(ii) appoint or remove an officer of the Company, other than the
President and Vice President;
(iii) consummate transactions between the Company and any Member or
an Affiliate of a Member, as expressly contemplated by this Agreement
and/or otherwise approved by the Management Committee;
(iv) perform any actions as specifically directed by the Management
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Committee or the Members.
(b) Prohibited Actions. The Manager shall not have authority to take any
of the following actions on behalf of the Company:
(i) knowingly do any act in contravention of this Operating
Agreement;
(ii) knowingly do any act which would make it impossible to carry on
the ordinary business of the Company, except as otherwise provided in this
Operating Agreement;
(iii) cause the Company to voluntarily take any action that would
cause a Bankruptcy or dissolution of the Company.
(c) Permitted Transactions. The Manager is expressly authorized to
negotiate and execute any agreements necessary to carry out the business
purposes of the Company as authorized by the Management Committee, subject
to the limitations contained in Sections 5.1, 5.2 and 5.8.
5.3 Management Committee. The Management Committee shall have exclusive
authority to manage the Company's business except as limited by this Operating
Agreement or the Articles of Organization, and except in those cases in which
approval of the Members is expressly required by this Operating Agreement or by
the Act.
5.4 Authority of the Management Committee.
(a) Authorized Actions. The Management Committee shall have authority to
take any actions on behalf of the Company which are not specifically reserved to
the Members by this Operating Agreement, the Articles of Organization or the
Act, including, but not limited to:
(i) approve and amend a Business Plan;
(ii) approve and amend annual budgets for capital expenditures and
operating expenses, and the debt or Capital Contributions necessary to
implement such budgets;
(iii) engage in acquisitions related to the business purpose of the
Company;
(iv) purchase, sell or lease real estate;
(v) authorize distributions of property, or restrict distributions
of Distributable Cash to Members with respect to their relative Membership
Interests as provided in Section 9.3;
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(vi) authorize the amount of indebtedness of the Company and its
debt to equity ratio;
(vii) incur indebtedness for borrowed money on behalf of the Company
or refinance any such indebtedness of the Company;
(viii) issue notes, bonds, or other obligations or securing
obligations by mortgage or pledge of any of the Company's property or
income, or assume liabilities in any transaction by the Company;
(ix) confess a judgment against the Company, or release, settle or
compromise any claim or right in favor of the Company;
(x) create Reserves;
(xi) determine the special allocations of revenue and expense of a
Division to the Participating Member of a Segregated Network;
(xii) authorize transactions between the Company and the Members, or
any of their Affiliates;
(xiii) appoint independent auditors of the Company;
(xiv) authorize the construction and installation of Spurs or any
additional path of Fiber Optic Network in the NYSEG Right-Of-Way and the
Capital Contributions necessary to fund the related capital costs;
(xv) determine compensation, pay bonuses, establish or modify
pension, profit sharing, benefit or incentive plans; and
(xvi) determine the Fair Market Value for any assets of the Company.
(b) Prohibited Actions. The Management Committee shall not have authority
to take any of the following actions on behalf of the Company, without the
unanimous vote or Consent of the Members:
(i) admit new Members to the Company or issue any interest in the
Company;
(ii) sell or otherwise transfer all or substantially all of the
assets of the Company;
(iii) merge or consolidate the Company with or into any other
entity;
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(iv) dissolve or liquidate the Company;
(v) require additional Capital Contributions by the Members other
than as may be approved by the Management Committee as provided in Section
5.4(a)(xiv);
(vi) amend this Operating Agreement or the Articles of Organization.
5.5 Authority of the Members. The Members shall have the authority to take
any action for matters on which the Management Committee has failed to act
because of the inability of the Management Committee to get a quorum for a
meeting or to obtain an affirmative vote or Consent of a majority of the members
of the Management Committee. A Member who does not have a Voting Interest shall
not have authority to take any action to bind the Company.
5.6 Number, Tenure, and Qualifications of Manager, Members of the
Management Committee. The initial Manager(s) of the Company shall be ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ (as designated by Telergy) and ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ (as designated by Energy
East) and their titles shall be President and Vice President (hereinafter
collectively referred to as ("Manager"), respectively. The President and Vice
President shall act collectively as Manager and with the aforesaid titles at the
discretion of the Management Committee. In the event the President and Vice
President disagree on any issue within the scope of the Manager's
responsibility, the decision of the President shall be controlling. The Manager
shall hold office until his or her respective successor is appointed by the
Member making the initial appointment as provided in this Section 5.6, unless he
or she resigns or is removed under Section 5.7. The Management Committee shall,
as provided in Section 1.31, initially be comprised of six individuals, each of
whom shall serve until his or her successor is appointed by the Member making
the initial appointment as provided in Section 1.31, unless he or she resigns or
is removed under Section 5.7. The parties agree that the costs associated with
the time Management Committee members expend on the Company shall not be
reimbursed by the Company but that Management Committee members shall be
reimbursed by the Company for all out-of-pocket expenses associated with
Management Committee activities, including, but not limited to, travel expenses.
Any vacancy in the office of President and Vice President or in the Management
Committee created by removal or resignation of any of its members shall promptly
be filled by action of the Member entitled to appoint the President, Vice
President or the member of the Management Committee whose removal or resignation
gave rise to the vacancy.
5.7 Removal and Resignation of the Manager and Members of the Management
Committee.
(a) Removal. The President or Vice President may be removed at any time,
with or without cause, by action of the Member who appointed the individual to
the position. Any member of the Management Committee may be removed at any time,
with or without
16
cause, by action of the Member who appointed such Committee
member.
(b) Resignation. The Manager and any member of the Management Committee
may resign such position by giving written notice to each Member, and shall be
deemed to have resigned upon his or her death.
5.8 Duties of the Manager, Members of the Management Committee, and the
Members.
(a) The Manager, each member of the Management Committee, and each Member
shall exercise its or his or her powers and discharge its or his or her duties
in good faith with a view to the interests of the Company and its Members with
that degree of diligence, care, and skill that ordinarily prudent persons would
exercise under similar circumstances in like positions. The Manager, the members
of the Management Committee, and the Members may in all cases, if acting
reasonably and in good faith, rely upon financial statements of the Company that
were either certified in writing by an independent or certified public
accountant or firm of such accountants fairly to reflect the Company's financial
condition, or reported to such Manager, Management Committee member, or Member
to be correct by the Manager or Member having charge of the books of accounts of
the Company. A Manager, Management Committee member, or Member may not be held
personally liable for monetary damages for failure to discharge any duty as a
Manager, Management Committee member, or Member unless the Manager, Management
Committee member or Member is found not to have acted honestly or in the
reasonable belief that the action was in or not opposed to the best interests of
the Company or its Members.
(b) Every Member, every member of the Management Committee, and the
Manager must account to the Company and hold as trustee for it any profit or
benefit derived by that Person from any transaction connected with the conduct
of the Company's business or winding up of the Company, or any use by the
Manager or any such Management Committee member or Member of the Company's
property, including, but not limited to, confidential or proprietary information
of the Company entrusted to the Person as a result of that Person's status as a
Manager, Management Committee member, or Member, unless that Person has obtained
the Consent of the disinterested Member provided, however, it is not intended
that payments made by the Company to Members pursuant to the Support Services
Agreements (See Exhibits B and C) or payments made by the Company to Telergy for
loans by Telergy pursuant to Section 8.3 are to be accounted to the Company.
(c) Annually before June 30, the Manager shall prepare and submit to the
Management Committee for approval by a majority of its members, capital
expenditures and operating budgets for the next Fiscal Year of the Company, and
shall report to the Management Committee on a quarterly basis with respect to
the Company's actual performance for the preceding fiscal quarter and for the
Fiscal Year to date as compared to the budget then in effect. Each capital
expenditures budget and operating budget shall contain a category for
contingency items which may be spent at the discretion of the
17
Manager.
5.9 The Members of the Management Committee, and the Members Have No
Exclusive Duty to Company. Notwithstanding the provisions of Section 5.8, any
Member and any member of the Management Committee (provided that such activities
do not violate or conflict with the terms of any written agreement between the
Company and a Management Committee member) may have other business interests and
may engage in other activities similar to and in addition to those relating to
the Company. Neither the Company nor any Member shall have any right, by virtue
of this Operating Agreement, to share or participate in such other permitted
investments or activities of any Management Committee member or any Member or to
the income or proceeds derived therefrom. No Management Committee member, or
Member shall incur any liability to the Company or to any of the Members as a
result of engaging in any such other permitted business or venture.
5.10 Bank Accounts. The Manager may from time to time open bank accounts
in the name of the Company, and any officer or other designee of the Manager
shall be a signatory thereon, unless a majority of the members of the Management
Committee determines otherwise.
5.11 Indemnification of the Manager, Members of the Management Committee,
and Other Agents.
(a) General. The Company shall fully indemnify in all circumstances to the
extent not prohibited by law any person made, or threatened to be made, a party
to an action or proceeding whether civil or criminal, including an
investigative, administrative or legislative proceeding, including an action by
or in the right of the Company or any corporation, partnership, joint venture,
limited liability company, trust, employee benefit plan or other enterprise, of
any type or kind, domestic or foreign, by reason of that fact that such person,
his testator or intestate, is or was a Manager or member of the Management
Committee, or with the approval of a majority of the members of the Management
Committee is or was serving at the request of the Company, in any corporation,
partnership, joint venture, limited liability company, trust, employee benefit
plan or other enterprise of any type or kind, domestic or foreign, as a
director, officer or in any other capacity, against any and all judgments,
fines, amounts paid in settlement and expenses, including attorneys' fees,
actually or reasonably incurred as a result of or in connection with any such
action or proceeding or related appeal; provided, however, that no
indemnification shall be made to or on behalf of any Manager or member of the
Management Committee if a judgment or other final adjudication adverse to him
establishes that his acts were committed in bad faith or were the result of
active and deliberate dishonesty and were material to the cause of action so
adjudicated, or that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled; and, the Company shall pay
expenses incurred by or on behalf of such a person in defending such a civil or
criminal action or proceeding (including appeals) in advance of the final
disposition of such action or proceeding promptly upon receipt by the
18
Company, from time to time, of a written demand of such person for such
advancement, together with an undertaking by or on behalf of such person to
repay any expenses so advanced to the extent that the person receiving the
advancement is ultimately found not to be entitled to indemnification for such
expenses; and the right to indemnification and advancement of defense expenses
granted by or pursuant to this Section 5.11 (i) shall not limit or exclude, but
shall be in addition to, any other rights which may be granted by or pursuant to
any statute, certificate of incorporation, by-law, resolution or agreement, (ii)
shall be deemed to constitute a contractual obligation of the Company to any
Manager or member of the Management Committee who serves in such capacity at any
time while this Section 5.11 is in effect, (iii) are intended to be retroactive
and shall be available with respect to events occurring prior to the adoption of
this Section 5.11, and (iv) shall continue to exist after the repeal or
modification hereof with respect to events occurring prior thereto. It is the
intent of this Section 5.11 to require the Company to indemnify the persons
referred to herein for the aforementioned judgments, fines, amounts paid in
settlement and expenses, including attorneys' fees, in each and every
circumstance in which such indemnification could lawfully be permitted by an
express provision, and the indemnification required by this Section 5.11 shall
not be limited by the absence of an express recital of such circumstances.
(b) Insurance. The Company shall purchase and maintain insurance on behalf
of any person who is or was a Manager, or Management Committee member, and shall
have the power to purchase and maintain insurance on behalf of any person who is
or was an employee or agent of the Company, or is or was serving at the request
of the Company as a member, principal, director, officer, trustee, partner,
fiduciary, employee, or agent of another Entity, pension, or other employee
benefit plan or other enterprise, against any liability asserted against that
person and incurred by that person in any such capacity, or arising out of that
person's status as such, whether or not the Company would have the power to
indemnify that person against such liability under this Section 5.11.
ARTICLE VI
LIMITATION OF MEMBERS' LIABILITY AND PRIORITY
6.1 Limitation of Liability. Each Member's liability shall be limited as
set forth in this Operating Agreement, the Act, and other applicable law.
6.2 Deficit Capital Account. No Member shall have any liability to restore
all or any portion of a deficit balance in such Member's Capital Account. A
Member will not be personally liable for any debts or losses of the Company
beyond its respective Capital Contributions and any obligation of the Member
under Section 8.1 or 8.2 to make Capital Contributions, except as otherwise
required by law.
6.3 Priority and Return of Capital. Except as may be expressly provided in
this Agreement, no Member shall have priority over any other Member, either as
to the return of Capital Contributions or as to Net Profits, Net Losses, or
distributions; provided that
19
this Section shall not apply to loans (as distinguished from Capital
Contributions) that a Member has made to the Company.
ARTICLE VII
MEETINGS OF MEMBERS
7.1 Member Meetings. Meetings of the Members may be called for any purpose
by a majority of the members of the Management Committee, or by any Member. The
Members shall meet at least annually during the month of May.
7.2 Place of Member Meetings. The Person(s) calling a meeting pursuant to
Section 7.1 may designate any place, within or outside the State of New York for
any meeting of the Members. If no designation is made, the place of meeting
shall be the principal executive office of the Company. The Members may meet,
act and conduct business through the use of teleconference or other similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation in such teleconference(s) shall
constitute presence in person at a meeting.
7.3 Notice of Member Meetings. Written notice stating the place, day, and
hour of the meeting and the purpose or purposes for which the meeting is called
shall be delivered not less than ten (10) nor more than sixty (60) days before
the date of the meeting, either personally, by mail, or facsimile, by the
Manager at the direction of the Person(s) calling the meeting, to each Member
entitled to vote at such meeting. The business transacted at each meeting of the
Members shall be limited to the purpose(s) stated in the notice of the meeting.
7.4 Meeting of All Members. If all of the Members meet at any time and
place and consent to the holding of a meeting at such time and place, such
meeting shall be valid without call or notice, and at such meeting lawful action
may be taken.
7.5 Quorum for Member Meetings. Members holding at least a majority of the
Voting Interests of all Members, represented in person or by proxy, shall
constitute a quorum at any meeting of Members.
7.6 Members' Manner of Acting. If a quorum is present, the affirmative
vote of Members holding a majority of the Voting Interests represented in person
or by proxy shall be the act of the Members, unless the vote of a greater or
lesser proportion or number is otherwise required by the Act, by the Articles of
Organization, or by this Operating Agreement. Unless otherwise expressly
provided herein or required under applicable law, Members who have an interest
(economic or otherwise) in the outcome of any particular matter presented to the
Members for a vote may vote or Consent upon any such matter and their Voting
Interest, vote or Consent, as the case may be, shall be counted in the
determination of whether the requisite matter was approved by the Members.
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7.7 Member Proxies. At all meetings of Members a Member may vote in person
or by proxy executed in writing by the Member or by a duly authorized
attorney-in-fact. Such proxy shall be filed with the Manager before or at the
time of the meeting. No proxy shall be valid after eleven months from the date
of its execution, unless otherwise provided in the proxy.
7.8 Action by Members Without a Meeting. Action required or permitted to
be taken at a meeting of Members may be taken without a meeting if the action is
evidenced by one or more written Consents describing the action taken, signed by
a sufficient number of Members or Members holding the requisite Voting
Interests, as applicable, whose vote is necessary for the taking of the action
described therein and delivered to the Manager for inclusion in the minutes or
for filing with the Company records. Action taken under this Section is
effective when Members in the requisite number or holding the requisite Voting
Interests, as applicable, have signed the Consent, unless the Consent specifies
a different effective date.
7.9 Waiver of Notice for a Member Meeting. When any notice is required to
be given to any Member, a waiver thereof in writing signed by the Member
entitled to such notice, whether before, at, or after the time stated therein,
shall be equivalent to the giving of such notice. Attendance at any meeting
shall constitute a waiver of notice unless there has been made a proper
objection to the meeting or to the items that are to be discussed.
7.10 Stalemate or Impasse by the Management Committee. In the event the
Management Committee is unable to get a quorum for a meeting or is deadlocked on
any issue, a Member may request that the stalemate or impasse be resolved by
appeal to the Chief Executive Officers of the Members who shall then attempt to
resolve the stalemate or impasse. In the event the Members' Chief Executive
Officers cannot resolve the stalemate or impasse, the matter may be submitted to
the Members for a vote, as provided in Section 5.5, but the matter need not be
submitted to the Members for a vote in order for a Stalemate to exist.
7.11 Management Committee Meetings. Meetings of the Management Committee
may be called for any purpose by one or more members of the Management
Committee. The Management Committee shall meet at least annually during the
month of May, following the annual meeting of Members.
7.12 Notice of Management Committee Meetings. Written notice stating the
date, time, and the purpose or purposes of the meeting shall be delivered to
each member of the Management Committee at least five (5) business days prior to
the meeting. The business transacted at each meeting of the Management Committee
is limited to the purpose(s) stated in the notice of the meeting.
21
7.13 Location and Conduct of the Management Committee Meetings;
Adjournments.
(a) Each meeting of the Management Committee will be held at the Company's
principal executive office or at some other location agreed to by the Management
Committee.
(b) The Chairman of the Management Committee will preside over all
meetings of the Management Committee.
(c) Any meeting of the Management Committee may be adjourned from time to
time to another date and time or to another place. If at the time of adjournment
the Chairman announces the date, time, and place at which the meeting will be
reconvened, it is not necessary to give any further notice of the reconvening.
(d) Any one or more of the members of the Management Committee may
participate in a meeting of the Management Committee by means of a
teleconference or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at a meeting.
7.14 Waiver of Notice for a Management Committee Meeting.
(a) A member of the Management Committee may waive notice of the date,
time, place, and purpose or purposes of a meeting of the Management Committee. A
waiver may be made before, at, or after the meeting, in writing, orally, or by
attendance.
(b) Attendance by a member of the Management Committee at a meeting is a
waiver of notice of that meeting, unless such member objects at the beginning of
the meeting to the transaction of business because the meeting is not properly
called or convened, or objects before a vote on an item of business because the
item may not properly be considered at that meeting and does not participate in
the consideration of the item at that meeting.
7.15 Management Committee Proxies. A member of the Management Committee
may cast or authorize the casting of a vote by filing a written appointment of a
revocable proxy with the Company at or before the meeting at which the
appointment is to be effective. Such member may sign or authorize the written
appointment by facsimile, or other means of electronic transmission stating, or
submitted with information sufficient to determine, that such member authorized
the transmission. Any copy, facsimile, telecommunication, or other reproduction
of the original of either the writing or the transmission may be used in lieu of
the original, if it is a complete and legible reproduction of the entire
original.
7.16 Quorum for Management Committee Meetings. For any meeting of the
Management Committee, a quorum consists of a majority of the members of the
Management Committee present in person or by proxy.
22
7.17 Action by Management Committee Without a Meeting. Any action required
or permitted to be taken at a meeting of the Management Committee may be taken
without a meeting by written Consent signed by a majority of the members of the
Management Committee. The written Consent is effective when signed by a majority
of the members of the Management Committee, unless a different effective time is
provided therein.
ARTICLE VIII
CONTRIBUTIONS TO THE COMPANY AND CAPITAL ACCOUNTS
8.1 Members' Initial Capital Contributions. Each Member shall be obligated
to contribute the amount of capital necessary to fund fifty percent (50%) of the
design, permitting, engineering, construction, installation and testing costs of
the Backbone Network and the Ithaca and Binghamton Spurs, including the cost of
labor, materials, equipment and other charges incurred, as well as the interim
financing costs. These costs will total approximately eight million dollars
($8,000,000), which will be funded through two (2) installments of Capital
Contributions.
(a) Telergy shall loan funds to the Company as provided in Section 8.3 for
the purpose of financing the cost of constructing and installing the fiber cable
along the Backbone Network and the Ithaca and Binghamton Spurs. Once the fiber
cable for the Backbone Network and the Ithaca and Binghamton Spurs is
constructed and installed, the Manager shall give an initial notice to the
Members showing the total costs incurred to date and the amount necessary to
repay the promissory notes issued to Telergy, including accrued but unpaid
interest. Within fifteen (15) days of receiving notification, Energy East shall
be required to make its Capital Contribution of cash for fifty percent (50%) of
such costs to construct and install the fiber cable, and simultaneous therewith,
Telergy shall cancel fifty percent (50%) of the Company's promissory notes,
including accrued but unpaid interest, in satisfaction of its Capital
Contribution. The cash contributed by Energy East to the Company shall be repaid
to Telergy in satisfaction of the remaining one-half of the Company's promissory
notes issued to Telergy.
(b) Upon the earlier of (i) the delivery by the vendor(s) of substantially
all the Facilities for the Backbone Network and the Ithaca and Binghamton Spurs,
or (ii) thirty (30) days after the initial Capital Contributions in satisfaction
of the Company's promissory notes issued to Telergy as provided in Section
8.3(a), Energy East and Telergy shall each be required to make a Capital
Contribution of cash for fifty percent (50%) of the costs of the Facilities.
8.2 Additional Capital Contributions.
(a) No Member shall be required to make any Capital Contribution in
addition to those contemplated by Section 8.1. In the event the Members are
required to make additional Capital Contributions as authorized (i) by the
decision of the Management Committee to construct an additional portion of the
Fiber Optic Network or a new Spur, or (ii) by the Member's unanimous vote or
Consent, the Members shall participate in such
23
additional Capital Contributions on a pro rata basis in accordance with their
Economic Interests. No additional Capital Contributions may be made other than
in cash without the approval of the Members. In the event one Member makes
additional Capital Contributions in accordance with this Agreement and with the
Consent of the other Member, the non-contributing Member's Economic Interest
shall be diluted. Dilution shall be based upon the Capital Account balance at
the time additional Capital Contributions are made. A Member's Economic Interest
shall be adjusted proportionally to the relative positive Capital Accounts of
the Members at the time any additional Capital Contributions are made, but
excluding any portion of a Capital Account attributable to a Division.
(b) Anything to the contrary contained in Section 8.2 notwithstanding, in
the event that the Manager or the Management Committee reasonably determines
that the Company's cash reserves and reasonably anticipated revenues are less
than is needed to satisfy its existing liabilities or its budgeted needs for
capital expenditures and working capital during the succeeding twelve (12)
months, either Member shall be empowered to seek approval from the Members for
additional Capital Contributions, which shall not be unreasonably withheld,
sufficient in the reasonable judgment of the Manager or the Management Committee
to fund the anticipated shortfall.
(c) Energy East may elect to participate in the Cornell Project and have
it become a part of the Fiber Optic Network and the business and assets of the
Company by making a Capital Contribution equal to fifty percent (50%) of the
capital costs incurred by Telergy to construct and install the Cornell Project.
Energy East may make the election by giving written notice to Telergy at any
time within the one (1) year following the Effective Date. Within fifteen (15)
days of the notice from Energy East, Telergy shall notify Energy East in writing
of the amount of the Capital Contribution to be made, and within the next
fifteen (15) days Energy East shall make its Capital Contribution of cash and
simultaneously therewith, Telergy shall make a Capital Contribution of the
business and assets of the Cornell Project. The cash contributed by Energy East
shall be immediately distributed to Telergy. The Cornell Project shall be
accounted for as part of the business and assets of the Company following these
Capital Contributions by the Members.
(d) A Participating Member shall make the Capital Contributions necessary
to fund the capital costs for the Segregated Network of a Division.
8.3 Loans. Telergy shall loan funds to the Company sufficient to install
the fiber cable along the Backbone Network and the Ithaca and Binghamton Spurs.
Telergy may loan funds to the Company to finance costs authorized by the
Company's capital expenditures and/or operating budgets, subject to Section
5.4(a)(vi). All loans by Telergy shall be evidenced by promissory notes given by
the Company, which shall contain an interest rate and maturity date identical to
the terms of the High Yield Note or the MasTec Financing (if either of these
financings were the source of the funds being loaned) and shall require interest
and principal payments which are one business day prior to the corresponding
payment date of the High Yield Note or MasTec Financing. The
24
promissory notes given by the Company shall be secured by a perfected first lien
against the assets of the Company including the Fiber Optic Network. Prior to
the issuance of the High Yield Note or when MasTec Financing is not available,
any loans from Telergy shall be evidenced by secured demand promissory notes
requiring the payment of Market Interest plus 2%.
8.4 Capital Accounts.
(a) A separate Capital Account shall be maintained for each Member in
accordance with the capital accounting rules of Section 704(b) of the Code. The
beginning balance in each Member's Capital Account shall be the amount of such
Member's initial Capital Contribution made pursuant to Section 8.1. Thereafter,
a Member's Capital Account shall be increased by (i) the amount of any
subsequent Capital Contribution to the Company by such Member; (ii) such
Member's distributive share of Net Profit and items in the nature of income or
gain which are allocated pursuant to Section 9.2; and (iii) such other amounts
as may be required for the Capital Account to be determined and maintained in
accordance with the rules of Section 1.704-1(b)(2)(iv) of the Treasury
Regulations (including Section 1.704-1(b)(2)(iv)(g) thereof). A Member's Capital
Account shall be decreased by (i) such Member's distributive share of Net Loss
and items in the nature of loss or deduction allocated pursuant to Section 9.2;
(ii) the amount of cash or the Fair Market Value of any property distributed
from the Company to such Member (reduced by the amount of debt, if any, assumed
by such Member in connection with the distribution); and (iii) such other
amounts as may be required for the Capital Account to be determined and
maintained in accordance with the rules of Section 1.704-1(b)(2)(iv) of the
Treasury Regulations (including Section 1.704-1(b)(2)(iv)(g) thereof). It is the
parties' specific intent that Capital Accounts shall be maintained in accordance
with the capital account maintenance rules contained in section 704(b) of the
Code, including the Treasury Regulations thereunder, and this Section 8.4(a)
shall be construed and applied to achieve such result.
(b) Upon liquidation of the Company (or any Member's Membership Interest),
liquidating distributions will be made in accordance with the positive Capital
Account balances of the Members in accordance with Section 12.3 after taking
into account all Capital Account adjustments for the Company's Fiscal Year
during which the liquidation occurs. The Company may offset damages for breach
of this Operating Agreement by a Member whose interest is liquidated (either
upon the withdrawal of the Member or the liquidation of the Company) against any
other amount otherwise distributable to such Member.
8.5 Withdrawal or Reduction of Members' Contributions to Capital.
(a) A Member shall not receive out of the Company's property any part of
its Capital Contribution until all liabilities of the Company have been paid.
(b) A Member, irrespective of the nature of its Capital Contribution, has
only the right to receive cash in return for its Capital Contribution.
25
(c) A Member may not withdraw from the Company or assign its Membership
Interest or Economic Interest prior to the dissolution and winding up of the
Company, except as provided in Article X. In no event shall a Member who
voluntarily or involuntarily withdraws from the Company be entitled as a
consequence of such withdrawal to receive the benefits of Section 606 of the
Act.
ARTICLE IX
ALLOCATIONS, INCOME TAX, DISTRIBUTIONS,
ELECTIONS, AND REPORTS
9.1 Allocations of Profits and Losses from Operations.
(a) The Net Profits and Net Losses of the Company for each Fiscal Year
shall be allocated between the Members in proportion to the Economic Interests
held by Members.
(b) The items of income, gain, and loss and deduction attributable to a
Division shall be allocated to the Participating Member which funded the capital
costs of the Division.
9.2 Special Allocations to Capital Accounts and Certain Other Income Tax
Allocations. Notwithstanding Section 9.1 hereof:
(a) In the event any Member unexpectedly receives any adjustments,
allocations, or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4),
(5), or (6) of the Treasury Regulations, which create or increase a Deficit
Capital Account of such Member, then items of Company income and gain
(consisting of a pro rata portion of each item of Company income, including
gross income, and gain for such taxable year and, if necessary, for subsequent
years) shall be specially allocated to such Member in an amount and manner
sufficient to eliminate, to the extent required by the Treasury Regulations, the
Deficit Capital Account so created as quickly as possible. It is the parties'
intent that this Section 9.02(a) be interpreted to comply with the alternate
test for economic effect set forth in Section 1.704-1(b)(2)(ii)(d) of the
Treasury Regulations.
(b) In the event any Member would have a Deficit Capital Account at the
end of any Company taxable year which is in excess of the sum of any amount that
such Member is obligated to restore to the Company under Section
1.704-1(b)(2)(ii)(c) of the Treasury Regulations and such Member's share of
minimum gain as defined in Section 1.704-2(g)(1) of the Treasury Regulations
(which is also treated as an obligation to restore in accordance with Section
1.704-1(b)(2)(ii)(d) of the Treasury Regulations), the Capital Account of such
Member shall be specially credited with items of Company income (including gross
income) and gain in the amount of such excess as quickly as possible.
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(c) Notwithstanding any other provision of this Section 9.2, if there is a
net decrease in the Company's minimum gain as defined in Treasury Regulation
Section 1.704-2(d) during a taxable year of the Company, then the Capital
Accounts of each Member shall be allocated items of income (including gross
income) and gain for such taxable year (and if necessary for subsequent years)
equal to that Member's share of the net decrease in Company minimum gain. This
Section 9.2(c) is intended to comply with the minimum gain charge-back
requirement of Section 1.704-2 of the Treasury Regulations and shall be
interpreted consistently therewith. If in any taxable year that the Company has
a net decrease in the Company's minimum gain, if the minimum gain charge-back
requirement would cause a distortion in the economic arrangement among the
Members and it is not expected that the Company will have sufficient other
income to correct that distortion, the Tax Matters Member may in its discretion
(and shall, if requested to do so by a Member) seek to have the Internal Revenue
Service waive the minimum gain charge-back requirement in accordance with
Treasury Regulation Section 1.704-2(f)(4).
(d) Items of Company loss, deduction, and expenditures described in
Section 705(a)(2)(B) of the Code that are attributable to any non-recourse debt
of the Company and are characterized as partner (Member) non-recourse deductions
under Section 1.704-2(i) of the Treasury Regulations shall be allocated to the
Members' Capital Accounts in accordance with said Section 1.704-2(i) of the
Treasury Regulations.
(e) Beginning in the first taxable year in which there are allocations of
"nonrecourse deductions" (as described in Section 1.704-2(b) of the Treasury
Regulations), such deductions shall be allocated to the Members in the same
manner as Net Profit or Net Loss is allocated for such period.
(f) In accordance with Section 704(c)(1)(A) of the Code and Section
1.704(b)(2)(i)(iv) of the Treasury Regulations, if a Member contributes property
with a fair market value that differs from its adjusted basis at the time of
contribution, income, gain, loss, and deductions with respect to the property
shall, solely for federal income tax purposes (and not for Capital Account
purposes), be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the Company and its fair market
value at the time of contribution.
(g) Any credit or charge to the Capital Accounts of the Members pursuant
to Sections 9.2 (a), (b), (c), (d), and/or (e) hereof shall be taken into
account in computing subsequent allocations of Net Profits and Net Losses
pursuant to Section 9.1, so that the net amount of any items charged or credited
to Capital Accounts pursuant to Sections 9.1 and 9.2 (a), (b), (c), (d), and/or
(e) shall to the extent possible, be equal to the net amount that would have
been allocated to the Capital Account of each Member pursuant to the provisions
of this Article IX if the special allocations required by Sections 9.2 (a), (b),
(c), (d), and/or (e) hereof had not occurred.
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9.3 Distributions. All distributions of Distributable Cash and property
shall be made to the Members in proportion to the percentages of their Economic
Interests on the record date of such distribution, except that the Distributable
Cash of a Division shall be paid to the Participating Member which funded the
capital costs of the Division. Except as provided in Section 9.4 and except as
restricted by a majority of the members of the Management Committee as provided
in Section 5.4(a)(v), all Distributable Cash shall be paid to the Members
periodically throughout the Fiscal Year during which it was earned or otherwise
received by the Company. The final payment of Distributable Cash determined for
each Fiscal Year shall be no later than March 30 following the end of such
Fiscal Year. The Management Committee shall use its best efforts to authorize
payments of Distributable Cash at such times as to enable each Member to pay its
federal and state income taxes determined at the highest effective tax rate
attributable to its share of the Company's taxable income. Except as provided in
Section 9.4, all distributions of property shall be made at such time as
determined by a majority of the members of the Management Committee as provided
in Section 5.4(a)(v).
9.4 Limitation Upon Distributions. No distribution shall be declared and
paid if, in the determination of a majority of the members of the Management
Committee after giving effect to the distribution:
(a) the Company would not able to pay its debts as they become due in the
usual course of business; or
(b) all liabilities of the Company, other than liabilities for which the
recourse of creditors is limited to specified property of the Company, would
exceed the fair value of the Company's assets, except that the fair value of
property that is subject to a liability for which the recourse of creditors is
limited shall be included in the Company's assets only to the extent the fair
value of that property exceeds that liability.
As contemplated by Section 508 of the Act, the members of the Management
Committee may base the determination under this Section on either:
(a) financial statements prepared on the basis of accounting practices and
principles that are reasonable under the circumstances; or
(b) a fair valuation or other method that is reasonable under the
circumstances.
The members of the Management Committee shall make their determination under
this Section and authorize any distribution under Section 9.3 in accordance with
the standards of Section 508 of the Act.
9.5 Accounting Principles. The Net Profits and Net Losses of the Company
shall be determined as provided in Section 1.37 using the accrual method of
accounting applied on a consistent basis.
9.6 Interest On Capital Contributions. No Member shall be entitled to
interest on
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its Capital Contribution, except as otherwise specifically provided for in this
Agreement.
9.7 Accounting Period. The Company's accounting period shall be the Fiscal
Year.
9.8 Books of Account and Records. At the expense of the Company, the
Manager shall maintain and preserve records and accounts of all operations and
expenditures of the Company for the length of time thereafter as may be required
to meet the records retention requirements of any taxing or regulatory body
having direct or indirect jurisdiction over all accounts, books, and other
relevant Company documents. The books of account shall accurately reflect all
transactions and other matters relating to the Company's business in such detail
and completeness as is customary and usual for businesses of the type engaged in
by the Company. As contemplated by Section 1102 of the Act, at a minimum the
Company shall keep at its principal place of business the following records and
shall be prepared to make such records available to regulatory agencies as may
be required by law:
(a) a current list and a past list with the full names and last known
mailing addresses of each Member and each member of the Management Committee;
(b) a copy of the Articles of Organization and all amendments thereto;
(c) copies of the Company's federal, state, and local income tax returns
and financial statements for the six most recent years;
(d) copies of the current and all prior Operating Agreements of the
Company, including all amendments thereto;
(e) a writing setting forth the amount of cash and the Fair Market Value
of property or services contributed by each Member;
(f) copies of any separate agreements pertaining to a Member's obligation
to contribute cash, property, or services; and
(g) minutes of meetings of the Members, the Management Committee, or the
Manager and any written consents obtained from Members, the Management
Committee, or the Manager in lieu of a meeting; and
(h) such other records as the Management Committee deems appropriate.
Upon reasonable advance notice to the Manager, each Member shall have the right,
during ordinary business hours, to inspect and copy such Company documents at
the requesting Member's expense, subject to the Confidentiality provision in
Section 17.16; provided, however, that the Manager shall be authorized, in its
discretion, to withhold from or to restrict or condition the access of one or
more Members to information of the Company
29
as and to the extent contemplated by Section 1102 (c) of the Act.
9.9 Returns and other Elections. The Manager shall cause the preparation
and timely filing of all tax returns required to be filed by the Company
pursuant to the Code and all other tax returns deemed necessary and required in
each jurisdiction in which the Company does business. Copies of such returns, or
pertinent information therefrom, shall be furnished to the Members within a
reasonable time after the end of the Company's Fiscal Year. All elections
permitted to be made by the Company under federal or state laws shall be made by
the Tax Matters Member, provided that the Tax Matters Member shall make any tax
election requested by the Management Committee or by a unanimous vote or Consent
of the Members.
ARTICLE X
TRANSFERABILITY
10.1 General. Except as otherwise specifically provided in this Article X,
without the unanimous vote or Consent of the Members, a Member shall not have
the right to sell, assign, transfer, exchange, or otherwise transfer
(collectively, "Transfer"), whether or not by operation of law, all or any part
of its Membership Interest.
Notwithstanding the foregoing, a unanimous vote or Consent of the Members
shall not be required in order for a Member to Transfer all or any part of its
Membership Interest, and it shall be permissible for a Member to Transfer all or
part of its Membership Interest and this Agreement, to any wholly-owned
subsidiary, to any second tier wholly owned subsidiary thereof, or in connection
with any merger or consolidation to which the Member is the surviving and
controlling party. Provided further, in the event of a Transfer by a Member to
any such wholly-owned subsidiary or a Transfer that may occur in connection with
any merger or consolidation where the Member is the surviving and controlling
party, the right of first refusal provisions of Section 10.2 shall not apply.
Each Member hereby acknowledges the reasonableness of the restrictions on
Transfer of Membership Interests imposed by this Operating Agreement in view of
the Company's purposes and the relationship of the Members. Accordingly, the
restrictions on Transfer contained in this Article X shall be specifically
enforceable.
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10.2 Right-of-First Refusal.
(a) A Member (the "Selling Member") that desires to sell all of its
Economic Interest in the Company to a qualified third party purchaser shall
obtain from such third party purchaser a bona fide written offer to purchase
such Economic Interest, stating the terms and conditions upon which the purchase
is to be made and the consideration offered therefor. The Selling Member shall
give written notice to the other Member of its intention to sell such interest,
which other Member shall have the right to purchase all (but not less than all)
of the Economic Interest proposed to be sold by the Selling Member upon the same
terms and conditions as stated in the aforesaid written offer to purchase by
giving written notice to the Selling Member of its intention to do so within
thirty (30) days after receipt by such other Member of written notice from the
Selling Member. The offer to sell shall be irrevocable during the thirty (30)
day period. If the non-selling Member fails to so notify the Selling Member of
its exercise of this right-of-first refusal within said period, the
right-of-first refusal as to such offer shall terminate and the Selling Member
shall be entitled to consummate the Transfer of its Economic Interest in the
Company to such third party purchaser on the terms set forth in the notice given
to the non-selling Member.
In the event the non-selling Member gives written notice to the Selling
Member of its exercise of this right of first refusal to purchase all of the
Selling Member's Economic Interest in the Company, the non-selling Member shall
have the right to designate the time, date, and place of closing, provided that
the date of closing shall be within the later of sixty (60) days after the
written notice of acceptance by the non-selling Member or sixty (60) days of
receipt of any required regulatory approval for such transfer; provided,
however, that the non-selling Member shall be required to file for any such
regulatory approval within five (5) days of its written notice of acceptance. If
the non-selling Member fails to so file for any required regulatory approval
within such five (5) day period or fails to close within such sixty (60) day
period, the right-of-first refusal shall terminate and the Selling Member shall
be entitled to consummate the transfer of its Economic Interest in the Company
to such third party purchaser on the terms set forth in the notice given to the
non-selling Member.
(b) The third party purchaser shall become a Permitted Transferee of the
Selling Member's Economic Interest in the Company and as a condition to
recognizing the effectiveness and binding nature of any such sale as against the
Company or otherwise, the non-transferring Member may require the Selling Member
and the Permitted Transferee to execute, acknowledge, and deliver to the Company
such instruments of transfer, assignment, and assumption and such other
certificates, representations, and documents, and to perform all such other
acts, which the non-transferring Member may reasonably deem necessary or
desirable to:
(i) constitute such purchaser as a Permitted Transferee;
(ii) confirm that the Permitted Transferee has accepted, assumed,
and agreed to be subject to and bound by all of the terms, obligations,
and conditions
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of the Operating Agreement, as the same may have been further amended;
(iii) preserve the status of the Company as a foreign or domestic
limited liability company after the completion of such sale, under the
laws of each jurisdiction in which the Company is qualified, organized, or
does business;
(iv) maintain the status of the Company as a partnership for federal
tax purposes; and
(v) assure compliance with any applicable state and federal laws,
including, without limitation, securities laws and regulations.
10.3 Transfers by Operation of Law.
(a) In the event that a Member or Permitted Transferee (i) files a
voluntary petition under any bankruptcy or insolvency law, or a petition for the
appointment of a receiver, or makes an assignment for the benefit of creditors,
or (ii) is subjected involuntarily to such a petition or assignment, or to an
attachment or other legal or equitable interest with respect to its Membership
Interest, and such involuntary petition or assignment, or attachment or other
legal or equitable interest is not discharged within ninety (90) days after its
date, or (iii) is otherwise subject to a transfer of its Membership Interest by
operation of law or pursuant to judicial decree or settlement of judicial
proceedings, (any of the foregoing being a "Bankruptcy" and the Member or
Permitted Transferee being the "Bankrupt Person"), then in such event the
Bankrupt Person shall have only an Economic Interest in the Company, and shall
have no right to vote or participate in management of the Company or to
designate the President or Vice President, as the case may be, or members of the
Management Committee, and shall be deemed to have offered to sell all of its
Economic Interest to the other Member as provided in this Section 10.3. Such
offer of sale shall be irrevocable for a period of ninety (90) days from the
date on which the other Member first learned of the event which gave rise to the
Bankruptcy, and within said time period the other Member may, by delivering a
written notice of acceptance to the Bankrupt Person, accept the offer in respect
of all, but not less than all, of said Economic Interest. If the other Member
does not notify the Bankrupt Person of its decision to purchase the Economic
Interest within the applicable ninety (90) day offering period, said offer to
sell shall be deemed not to have been accepted by the other Member.
(b) The purchase price at which the other Member may elect to purchase an
Economic Interest in accordance with the provisions of this Section 10.3 shall
be the Fair Market Value of the Bankrupt Person's Economic Interest.
(c) If the other Member elects to purchase an Economic Interest in
accordance with the provisions of this Section 10.3, transfer of the Economic
Interest shall be made at the office of the Company on a mutually satisfactory
business day within the later of thirty (30) days of acceptance of the offer to
sell by the other Member or thirty (30) days of receipt
32
of any required regulatory approvals for such transfer. Delivery of instruments
evidencing such transfer to the other Member, shall be made upon receipt by the
Bankrupt Person of cash representing the aggregate purchase price for the
Economic Interest or, at the option of the purchaser, of a promissory note for
the purchase price.
10.4 Right of Redemption.
(a) Following the earlier of (i) completion of the construction and
installation of the Backbone Network and the Ithaca and Binghamton Spurs, and
(ii) the second annual anniversary of the Effective Date, either Member may
elect for Energy East to withdraw from the Company upon the occurrence of a
Stalemate. Either Member may exercise this election by giving written notice to
the other Member, and effective as of the date of such notice (the "Withdrawal
Date") Energy East shall have only an Economic Interest in the Company and shall
have no right to participate in management of the Company or to designate the
Vice President or members of the Management Committee.
(b) In the event that a Member elects for Energy East to withdraw from the
Company pursuant to this Section 10.4, the Company shall redeem the Membership
Interest of Energy East in accordance with one of the following procedures:
(i) Energy East shall be distributed an IRU for dark fiber strands
in the Shared Network equal to the lesser of (1) such remaining dark fiber
strands in the Shared Network, or (2) one-half of such total fiber strands in
the Shared Network as of the Withdrawal Date. Energy East shall also be
distributed an IRU for dark fiber strands in any Segregated Network(s) for any
Division(s) in which it was the Participating Member. The IRU shall provide for
Energy East to pay the Company an access and management fee for operating and
maintaining the Fiber Optic Network
(ii) If Energy East is a regulated telephone company as of the
Withdrawal Date, then following receipt of any necessary PSC approval received
within nine (9) months of the redemption of the Membership Interest of Energy
East and distribution of the IRU provided for in Section 10.4(b)(i), Energy East
shall be distributed from the Company:
(A) fifty percent (50%) of the customers utilizing the Shared
Network, Facilities, business and assets of the Company attributable to the
Economic Interest of Energy East as of the Withdrawal Date and including access
to the NYSEG Right-of-Way pursuant to the ROO Agreement, and
(B) all of the customers, Facilities, business and assets of
any Division(s) in which Energy East was the Participating Member.
Energy East shall not be distributed any customers, Facilities, business or
assets of any Division(s) in which Telergy was the Participating Member. The IRU
distributed pursuant to
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Section 10.4(b)(i) shall be terminated when the distributions are made pursuant
to Section 10.4(b)(ii). The petition to the PSC required by Section 10.4(b)(ii)
shall be made as soon as possible following the Withdrawal Date. The Company
shall retain the ROO Agreement.
(c) Notwithstanding the foregoing or any other provision of this
Agreement, if Energy East has failed to make its Capital Contribution as and
when required by Section 8.1, Telergy may elect for Energy East to withdraw from
the Company; provided Telergy has given Energy East written notice of such
breach and ten (10) days within which to cure it. Effective on the tenth (10th)
day following such notice if Energy East has not cured its breach and made its
Capital Contribution required by Section 8.1, then the Company shall redeem the
Membership Interest of Energy East upon payment of one dollar ($1) and Energy
East shall withdraw from the Company. The Company shall retain the ROO
Agreement.
10.5 Pledge. Telergy may pledge, hypothecate or mortgage its Economic
Interest to secure obligations or to guarantee indebtedness of the Company, or
of Telergy which is incurred for the benefit of the Company or a portion of
which is to be loaned to the Company pursuant to Section 8.3.
10.6 Effecting a Transfer. The Transferring Member agrees, upon request of
the non-transferring Member, to execute such certificates or other documents and
perform such other acts as may be reasonably requested by the non-transferring
Member from time to time in connection with such Transfer or redemption of a
Membership Interest or Economic Interest. A Member who Transfers or purports to
Transfer a Membership Interest or Economic Interest in violation of this Article
X hereby indemnifies the Company and the remaining Member against any and all
loss, damage, or expense (including, without limitation, tax liabilities or loss
of tax benefits) arising directly or indirectly as a result of such Transfer or
purported Transfer.
10.7 Admission of Substitute Member. The Permitted Transferee of an
Economic Interest may be admitted to the Company as a Substitute Member with the
unanimous approval of the Members. The Substitute Member shall agree in writing
to be bound by the terms of this Agreement and shall have all the rights and
obligations associated with a Membership Interest, including in particular the
right to vote and participate in the management and affairs of the Company as
permitted by this Agreement in accordance with the Voting Interest of the
Transferring Member, the Act and other applicable laws.
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ARTICLE XI
ADDITIONAL MEMBERS OR PERMITTED TRANSFEREES
No new Member, Permitted Transferee or Substitute Member shall be entitled
to any retroactive allocation of losses, income, or expense deductions incurred
by the Company. The Manager may, at its option, close the Company books (as
though the Company's tax year had ended) or make pro rata allocations of loss,
income, and expense deductions to a new Member, Permitted Transferee or
Substitute Member for that portion of the Company's Fiscal Year in which it held
a Membership Interest or Economic Interest in accordance with the provisions of
Section 706(d) of the Code and the Treasury Regulations promulgated thereunder.
ARTICLE XII
DISSOLUTION AND TERMINATION
12.1 Dissolution.
(a) The Company shall be dissolved upon the occurrence of any of the
following events:
(i) the unanimous vote or Consent of Members to dissolve the
Company; or
(ii) the sale or other disposition of all or substantially all of
the assets of the Company, or the permanent cessation of the Company's
business operations; or
(iii) the Bankruptcy of a Member, unless within the next one hundred
eighty (180) days of the Bankruptcy the Company is continued by the
Consent of the other Member.
(b) As soon as possible following the occurrence of any of the
events specified in this Section 12.1 effecting the dissolution of the Company
(and if pursuant to Section 12.1(a)(iii) where the other Member does not Consent
to continue the business activity of the Company), the appropriate
representative of the Company shall execute Articles of Dissolution in such form
as shall be prescribed by the Act and file same with the office of the Secretary
of State.
12.2 Effect of Filing Articles of Dissolution. Upon the filing of Articles
of Dissolution with the Secretary of State, the Company shall cease to carry on
its business, except insofar as may be necessary for the winding up of its
business.
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12.3 Winding Up, Liquidation, and Distribution of Assets.
(a) Upon dissolution, the Manager shall immediately proceed to wind up the
affairs of the Company in accordance with the requirements of the Act and other
applicable law. In furtherance of the winding up of the Company, the Manager
shall:
(i) sell or otherwise liquidate all of the Company's assets as
promptly as practicable (except to the extent the Management Committee may
determine to distribute any assets to the Members in kind);
(ii) discharge or make reasonable provision for all liabilities of
the Company, including liabilities to Members who are also creditors and
establish such Reserves as may be reasonably necessary to provide for
contingent liabilities of the Company (for purposes of determining the
Capital Accounts of the Members, the amounts of such Reserves shall be
deemed to be an expense of the Company);
(iii) distribute the remaining assets of the Company in the
following order of priority:
(1) To each Member, with respect to the cumulative amount of
all accrued but unpaid pre-dissolution distributions for which the
Company is liable to such Member, the amount of such liability;
(2) The balance of any remaining assets shall be distributed
as follows:
(A) to each Participating Member, that portion of its
Capital Account attributable to the Division(s), if any, for which it
funded the capital costs, after giving effect to contributions,
allocations, and distributions for all periods; and then
(B) to each Member in accordance with the Member's
remaining Capital Account balance, after giving effect to contributions,
allocations, and distributions for all periods.
(b) The Members shall cause an accounting to be made by the Company's
independent accountants of the accounts of the Company and of the Company's
assets, liabilities and operations, from the date of the last previous
accounting until the date of dissolution.
(c) Any assets of the Company which are distributed in kind shall be
deemed to have been sold to the Members in proportion to their Economic
Interests as of the date of dissolution for their Fair Market Value, and the
Capital Accounts of the Members shall be adjusted to reflect such deemed sale.
36
(d) Notwithstanding anything to the contrary in this Agreement, upon a
liquidation, if any Member has a Deficit Capital Account (after giving effect to
all contributions, distributions, allocations, and other Capital Account
adjustments for all Fiscal Years, including the year during which such
liquidation occurs), such Member shall have no obligation to make any Capital
Contribution, and the negative balance of such Member's Capital Account shall
not be considered a debt owed by such Member to the Company or to any other
person for any purpose whatsoever.
12.4 Return of Capital Contribution - Nonrecourse. Except as provided by
law or as expressly provided in this Agreement, upon dissolution, each Member
shall look solely to the assets of the Company for the return of its Capital
Contribution. If the Company property remaining after the payment or discharge
of the debts and liabilities of the Company is insufficient to return the
Capital Contribution of a Member, such Member shall have no recourse against any
other Member.
12.5 Breach of Joint Venture and Operating Agreement; Remedies; Survival.
The parties agree and acknowledge that, in addition to any other remedies
specifically set forth herein, in the event of a breach of any provision of this
Operating Agreement by a Member, the Company and the non-breaching Members shall
be entitled to receive from the breaching Member any and all damages suffered by
them as a result of such breach, together with all expenses incurred in
connection with the enforcement of this Operating Agreement and the collection
of such damages, including reasonable attorneys' fees. Without limitation of any
other means of recourse, in order to collect any amounts owing hereunder, the
Company and such non-breaching Members shall be entitled to set off against,
withhold, proceed against, or collect or receive directly from the Company, as
applicable, any amounts payable to the breaching Member pursuant to this
Operating Agreement. The obligations of the Members hereunder shall survive the
withdrawal of any Member and the dissolution or termination of the Company.
ARTICLE XIII
REPRESENTATIONS AND WARRANTIES
Each Member hereby represents and warrants to the other as follows:
(a) It has been duly incorporated and is validly existing and in good
standing under the laws of its state of incorporation, and is duly qualified to
conduct business as a foreign corporation in each jurisdiction in which such
qualification is required.
(b) The execution and delivery by it of this Agreement, and the
performance of its obligations hereunder, have been duly authorized by all
necessary corporation action including its Board of Directors, and will not
conflict with or violate any of its constituent documents or any agreement or
instrument to which it is a party or by which it or its properties are subject
and will not violate, or conflict with, or result in a breach of or
37
constitute a default under, or result in the creation of a right of cancellation
under, or result in the impairment of any right of or result in the creation or
imposition of any lien upon the party under any mortgage, indenture, agreement,
instrument, judgment, statute, law, decree, court order, writ, injunction,
permit, regulation or rule to which it is a party or by which it is bound.
(c) There are no actions, suits, claims, proceedings, investigations or
inquiries pending or, to the best knowledge of the party's knowledge threatened
against it, or against any of its officers or employees which (i) seek to
prevent the acquisition of an interest in the Company or the other transactions
contemplated hereby; or (ii) call into question the validity, or materially
hinder the enforceability or performance of this Agreement. To the best
knowledge of a party, after due inquiry, there are no events or conditions which
would provide the basis for any such litigation, proceeding or investigation.
(d) Neither party has employed any broker or finder or incurred any
liability for any brokerage fees, commissions, or finders' fees in connection
with the acquisition of an interest in the Company or the other transactions
contemplated by this Agreement.
(e) Neither party nor any of its Affiliates is, nor as a result of holding
an interest in the Company be, an "investment company" as defined in, or subject
to regulation under, the Investment Company Act of 1940.
(f) Each party is acquiring its interest in the Company based upon its own
investigation, and the exercise by a party of its rights and the performance of
its obligations under this Agreement will be based upon its own investigation,
analysis and expertise. Each party's acquisition of its interest in the Company
is being made for its own account for investment, and not with a view to the
sale or distribution thereof.
(g) No representation or warranty by a party contained in this Agreement
(including, but not limited to, the Exhibits hereto) contains or will contain
any untrue statement of a material fact, or omits or will omit to state any
material fact required to make the statements contained herein or therein not
misleading.
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ARTICLE XIV
DISPUTE RESOLUTION AND INJUNCTION
Any matters which the Management Committee is unable to authorize by a
majority vote of its members (or such higher percentage as may be required by
this Operating Agreement), and any and all disputes arising out of, under, in
connection with, or relating to this Operating Agreement, the breach or any
alleged breach thereof, including disputes regarding the Economic Interests,
Voting Interests or Capital Accounts may be submitted to the Chief Executive
Officers of the Members who shall then attempt to resolve the dispute. Because
of the unique relationship of the Members in the Company and the unique value of
their interests therein, neither party shall be prevented from applying for and
obtaining injunctive relief in instances where, in the absence thereof, the
rights of such party cannot be otherwise adequately protected.
ARTICLE XV
SEPARATE DIVISION
Section 15.1 - New Projects. In the event a Member wants the Company
to construct a Spur and/or any additional path of the Fiber Optic Network, such
Member shall present the project to the Management Committee for its
consideration. If the Management Committee approves the project and authorizes
the construction and installation of fiber cable and Facilities, it shall also
approve a capital expenditures budget and the Capital Contributions necessary to
fund the capital costs of the project. If the Management Committee does not
approve the project, then the Member which presented the project to the
Management Committee (the "Participating Member") may cause the Company to
construct the Spur and/or the additional path of the Fiber Optic Network (a
"Segregated Network") through a separate Division of the Company to be operated
and accounted for independent of the regular business operations of the Company.
Section 15.2 - Construction. The Company shall construct and install
the Segregated Network, including the fiber optic cable and Facilities, at the
direction of the Participating Member.
Section 15.3 - Management and Allocations. The Division shall be
managed by the Manager and the Management Committee. Revenue and expense
associated with the operation of the Division shall be allocated between the
regular business operations of the Company and those of the Division in the
discretion of the Management Committee on a case-by-case basis, taking into
consideration all relevant factors, including, but not limited to, a customer's
use of the Segregated Network as well as other portions of the Fiber Optic
Network, direct maintenance costs of the Segregated Network, marketing and
related costs attributable to potential customers located along the Segregated
Network.
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Section 15.4 - Special Provisions. Notwithstanding the provisions of
this Operating Agreement, the following special provisions shall apply with
respect to each Division:
(i) The Participating Member will make Capital Contributions
necessary to fund the capital costs of the Segregated Network as provided
in Section 8.2(d), which will be accounted for as assets of the Division.
(ii) The Participating Member's Capital Account and Membership
Interest will reflect its sole ownership rights to the assets and revenue
of the Division.
(iii) The Participating Member will be specially allocated the
revenue and expense associated with the operation of the Division, as
determined by the Management Committee.
(iv) If the Company leases dark fiber to third parties which
involves the Segregated Network, the Participating Member will be
specially allocated (1) all of the lease revenue, if the lease involves
only the Segregated Network, or (2) a portion of the lease revenue based
on the ratio of the number of miles being leased which are comprised of
the Segregated Network to the total miles of the Fiber Optic Network which
are being leased, but only if the lease involves portions of the Fiber
Optic Network in addition to the Segregated Network.
(v) If the Company liquidates and makes an in-kind distribution of
its assets to its Members, the Participating Member would receive the
assets of the Division(s), including the Segregated Network, for which it
funded the capital costs. If the Company sells some or all of its assets,
the portion of the sale proceeds allocable to the assets of a Division(s),
including the Segregated Network, will be the sole property of the
Participating Member which funded the capital costs of the Division, and
will be distributed to the Participating Member. In the event of a merger
of the Company with another Person, the portion of the consideration
received in the transaction which is attributable to the assets of a
Division(s), including the Segregated Network, will be paid to the
Participating Member which funded the capital costs of the Division(s).
The foregoing is not intended to be an exhaustive list, but rather is
intended to be illustrative for how a Participating Member is to receive
the benefits of a Division in which it has funded the capital costs.
ARTICLE XVI
RELATIONSHIP OF THE PARTIES
16.1 Recovery of Costs. The parties' agree to use their best efforts to
obtain
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long-term leases of dark fiber along the Backbone Network and the Ithaca and
Binghamton Spurs, which leases would cover substantially all of the engineering,
development, construction and any related regulatory costs (but not electronics
costs) associated with the Backbone Network and the Ithaca and Binghamton Spurs.
The parties intend to negotiate any such leases of dark fiber prior to
completion of construction of the Backbone Network and the Ithaca and Binghamton
Spurs. However, this provision does not limit the ability of the Company to
obtain the Capital Contributions or the loans from the Members as provided for
in this Operating Agreement.
16.2 Revenue Sharing Procedures. The parties understand and agree that the
Company will interconnect the Fiber Optic Network to networks owned and operated
by local and long distance carriers including telephone companies that are
subsidiaries of Telergy. The parties recognize that such interconnection is
required under the Telecommunications Act of 1996 and by the Federal
Communications Commission and the PSC.
16.3 Solicitation of Employees. Until the expiration of three (3) years
after either party ceases to be a Member of the Company, no party nor their
respective Affiliates will newly employ, engage or seek to employ or engage,
directly or indirectly, any employee of the Company or any employee of the
remaining Members of the Company who are providing services to the Company
without the written consent of the Company, unless such employee has been
discharged by the Company or by such Member or such employee is employed by an
entity that is acquired by a party or one of its Affiliates; provided, however,
that the foregoing provisions shall not apply to any employment or solicitation
of employment by a previous employer (or its Affiliates) of an employee of the
Company.
16.4 Employee Hires. The parties will insure that the Company and its
subsidiaries will not employ, engage or seek to employ or engage, directly or
indirectly, any employee of a Member or its Affiliate, without the written
consent of such Member, unless such employee has been discharged by such Member
or its Affiliate or such employee is employed by an entity that is acquired,
directly or indirectly, by the Company.
16.5 Construction Activity. The parties agree that the Company shall use
MasTec North America, Inc. or its subsidiaries as its prime contractor for all
construction activities of the Fiber Optic Network, Segregated Networks and
extensions thereto.
16.6 Access to Right-of-Way. Subject to and in accordance with the
provisions of the ROO Agreement, the Company intends to construct underground,
buried and aerial fiber optic cables as the Fiber Optic Network, including such
laterals, spurs, loops and extensions in Rights-Of-Way that may be available to
NYSEG and its Affiliates. Such laterals, spurs, loops and extensions shall be
constructed and installed in accordance with the Business Plan as may be amended
from time to time. The parties recognize that the ROO Agreement may require
approval from the PSC and the parties agree to use their best efforts to obtain
such approval once NYSEG files the ROO Agreement with the PSC, which filing
Energy East shall cause to be made within ten (10) days after this Agreement
41
is executed.
16.7 Support Service Agreements. The parties currently contemplate that
certain services will be provided to the Company by employees of both of the
Members or by employees of companies which are subsidiaries of the Members. The
Members agree that Telergy shall provide services to the Company relating to
operating and maintaining a telecommunications business, excluding sales and
marketing services which will be performed by employees of the Company, and
Energy East shall provide services to the Company relating to the sale,
marketing and management of energy. The Manager shall be authorized to enter
into Support Services Agreements with Telergy and Energy East, and their
respective Affiliates, in substantially the same form as set forth in Exhibits B
and C, which establish the cost reimbursement procedures for the use by the
Company of the employees and other assets of the Members. The Manager will have
the responsibility to hire or contract for such other services as may be
appropriate and necessary for the proper functioning of the Company, subject to
the limitations on Manager's authority contained in Sections 5.1 and 5.2.
ARTICLE XVII
MISCELLANEOUS PROVISIONS
17.1 Notices. Any notice, demand, or communication required or permitted
to be given by any provision of this Operating Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally to
the Person or to an executive officer of the Person to whom the same is directed
or, if sent by registered or certified mail, postage and charges prepaid, or by
facsimile, addressed to the Person's and/or Company's address, as appropriate,
which is set forth in this Operating Agreement. Any such notice given by mail
shall be deemed to be given three business days after the date on which the same
was deposited in a regularly maintained receptacle for the deposit of United
States mail, addressed and sent as aforesaid.
17.2 Other Ventures. The Members may, independently or with others, invest
or engage in any business or venture, including telecommunications, data and
information, energy and energy marketing and management activities similar to
that of, or in competition with, the Company. The other Member shall not have
any rights or obligations in and to such independent ventures or the income or
profits derived therefrom.
17.3 Application of New York Law. This Operating Agreement, and the
application and interpretation hereof, shall be governed exclusively by its
terms and by the laws of the State of New York, excluding conflict of laws
principles.
17.4 Amendments. Other than as expressly provided herein, this Operating
Agreement may not be amended except by the unanimous vote or Consent of both
Members.
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17.5 Execution of Additional Instruments. Each Member hereby agrees to
execute such other and further statements of interest and holdings,
designations, powers of attorney, and other instruments necessary to comply with
any laws, rules, or regulations.
17.6 Construction. Whenever used in this Operating Agreement and when
required by the context the singular number shall include the plural and vice
versa, and the masculine gender shall include the feminine and neuter genders
and vice versa.
17.7 Headings and Pronouns. The headings in this Operating Agreement are
inserted for convenience and are in no way intended to describe, interpret,
define, or limit the scope, extent, or intent of this Operating Agreement or any
provision hereof. All pronouns shall be deemed to refer to masculine, feminine,
or neuter, singular or plural as the identity of the Person or Persons may
require.
17.8 Waivers. The failure of any party to seek redress for violation of or
to insist upon the strict performance of any covenant or condition of this
Operating Agreement shall not prevent a subsequent act, which would have
originally constituted a violation, from having the effect of an original
violation.
17.9 Rights and Remedies Cumulative. The rights and remedies provided by
this Operating Agreement are cumulative and the use of any one right or remedy
by any party shall not preclude or waive the right to use any or all other
remedies. Said rights and remedies are given in addition to any other rights the
parties may have by law, statute, ordinance or otherwise.
17.10 Severability. If any provision of this Operating Agreement or the
application thereof to any person or circumstance shall be invalid, illegal, or
unenforceable to any extent, the remainder of this Operating Agreement and the
application thereof shall not be affected and shall be enforceable to the
fullest extent permitted by law.
17.11 Heirs, Successors and Assigns. Each and all of the covenants, terms,
provisions and agreements herein contained shall be binding upon and inure to
the benefit of the Members and, to the extent permitted by this Operating
Agreement, their respective heirs, legal representatives, successors and
assigns.
17.12 Rights of Creditors. This Agreement is expressly not intended for
the benefit of any creditor of the Company or any other person who is not a
Member. No creditor or other Person shall have any rights to the Member's
obligation for Capital Contributions except for a creditor who extended credit
to the Company in reliance on the Member's obligation for a Capital Contribution
as provided in the Act.
17.13 Counterparts. This Agreement may be executed in any number of
counterparts, no one of which needs to be executed by both of the Members, and
this Agreement shall be binding upon both the Members with the same force and
effect as if both the Members had signed the same document, and each such signed
counterpart shall constitute an original of this Agreement.
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17.14 Integration. This Operating Agreement constitutes the Members'
entire agreement with respect to the subject matter hereof, and supersedes any
and all prior oral or written agreements or understandings with respect thereto.
17.15 Public Announcements. The Members agree that before they or any of
their respective Affiliates issue any press releases or otherwise make any
public statements with respect to this Agreement or issue any further press
releases or otherwise make any public statements with respect to the
transactions contemplated hereby, they will obtain the written Consent of the
other party hereto to such press release or public statement. Neither the
Members nor any of their Affiliates shall issue a press release or make any
public statement without such prior written Consent except, in each case, in the
reasonable opinion of counsel to the disclosing party, as may be required by
applicable law, rule, regulation or order or by obligations pursuant to any
listing agreement with any securities exchange on which any of its or their
securities may be listed, upon prior written notice to the other party, where
such notice is practicable.
17.16 Confidentiality. The Members agree as follows with respect to
information (whether in the form of documents, oral communications, visual
examination of facilities, or otherwise) disclosed by any Member to any other
Member in the course of the formation of the Company or in course of the
Company's operations (the "Confidential Information"):
(a) Subject to the exceptions set forth in Sections 17.16 (b), (c) and
(d), the Members (i) will treat all Confidential Information as confidential,
(ii) will not use Confidential Information for any purpose other than in
connection with the business or their Membership Interest, and (iii) will not
disclose any Confidential Information to third parties. Each Member shall, at
all times, be responsible for compliance by its designated Manager, its
designated members of the Management Committee, and its directors, officers,
employees and agents with the obligations under this Section 17.16.
(b) The confidentiality obligations of the Members contained in Section
17.16(a) shall not apply to any Confidential Information which (i) is or becomes
publicly known through no fault of the Person receiving the Confidential
Information, (ii) is disclosed to the Person receiving the Confidential
Information on a non-confidential basis by a third party who such Person
believes after due inquiry is entitled to disclose it, (iii) the Person
receiving the Confidential Information can demonstrate on the basis of written
records was already known to it on a non-confidential basis prior to receipt,
(iv) is subsequently developed by the Person receiving the Confidential
Information independently of Confidential Information, or (v) subject to Section
17.16(c), is required to be disclosed by law or legal process.
(c) Provided circumstances permit, each Member will provide the Company
and the other Members hereto with prior written notice of each instance in which
Confidential Information is required to be disclosed by law or legal process.
Such written notice shall
44
be given as promptly as is practicable under the circumstances.
(d) The Members shall be entitled to disclose Confidential Information to
their agents, financial advisors, representatives, consultants (including,
without limitation, legal counsel and accountants) and lenders as they may
determine to be appropriate in connection with the Company or their interest in
the Company. In addition, the Members shall have the right to discuss the
business of the Company, if required, with the staff or members of regulatory
agencies which would have jurisdiction over the Company's business, and Telergy
shall have the right to discuss the business of the Company in connection with
its borrowing of funds through the offering of the High Yield Notes or the
MasTec Financing.
(e) The obligations of this Section 17.16 shall survive the termination of
this Agreement.
17.17 No Third Party Beneficiaries. Except as expressly provided herein,
nothing in this Agreement shall entitle any Person other than the Members or
their respective successors and assigns permitted hereby to any claim, cause of
action, remedy or right of any kind.
17.18 Equitable Relief. The Members agree that irreparable damage would
occur in the event that any of the provisions of this Agreement, including,
without limitation, Section 17.18 hereof, were not performed in accordance with
their specific terms or were otherwise breached. Accordingly, it is agreed that
the Members shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and, subject to the provisions of Section 17.3, to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
17.19 No Partnership Created. It is the express intention of the Members
that the representations, warranties, covenants and agreement contained in this
Agreement do not create a partnership between them.
17.20 Agreement Jointly Drafted. The Members agree that the Agreement was
jointly drafted and that no interpretive presumption shall exist against either
Member as a result of authorship of this Agreement.
17.21 Further Assurances. The Members agree to use their best efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable to carry out all of their respective
obligations under this Agreement and to make effective the contributions and the
and other transactions contemplated by this Agreement.
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IN WITNESS WHEREOF, the Members have signed this Operating Agreement of
Telergy East, LLC as of the date first written above.
TELERGY, INC.
By:/s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇
-------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇, CEO
ENERGY EAST TELECOMMUNICATIONS, INC.
By:/s/ ▇. ▇▇▇▇▇▇▇
-------------------------
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, President