<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission File No. 333-53467
Pathnet, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 52-1941838
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1015 31st Street, N.W.
Washington, DC 20007
(Address of principal executive offices) (Zip Code)
</TABLE>
(202) 625-7284
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
As of November 4, 1999, there were 2, 977,593 shares of the Issuer's common
stock, par value $.01 per share, outstanding.
<PAGE> 2
PATHNET, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998 3
Unaudited Consolidated Statements of Operations for the three and
nine months ended September 30, 1999 and 1998 and for the period
August 25, 1995 (date of inception) to September 30, 1999 4
Unaudited Consolidated Statements of Comprehensive Income (Loss) for
the three and nine months ended September 30, 1999 and 1998 and for
the period August 25, 1995 (date of inception) to September 30, 1999 5
Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 and for the period August 25, 1995
(date of inception) to September 30, 1999 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibits Index 22
</TABLE>
2
<PAGE> 3
PATHNET, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 98,896,417 $ 57,321,887
Note receivable - 3,206,841
Interest receivable 1,957,216 3,848,753
Marketable securities available for sale, at market 69,420,476 97,895,773
Prepaid expenses and other current assets 453,541 205,505
-------------- --------------
Total current assets 170,727,650 162,478,759
Property and equipment, net 106,123,850 47,971,336
Deferred financing costs, net 9,695,423 10,508,251
Restricted cash 3,952,769 10,731,353
Marketable securities available for sale, at market 5,103,435 71,899,757
Pledged marketable securities held to maturity 42,379,701 61,824,673
Other assets 591,727 -
-------------- --------------
Total assets $ 338,574,555 $ 365,414,129
============== ==============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 12,378,214 $ 10,708,263
Accrued interest 19,651,047 8,932,294
Accrued expenses and other current liabilities 1,093,897 639,688
-------------- --------------
Total current liabilities 33,123,158 20,280,245
12 1/4% Senior Notes, net of unamortized bond discount of $3,480,750 and $3,787,875
respectively 346,519,250 346,212,125
Other non-current liabilities 263,734 -
-------------- --------------
Total liabilities 379,906,142 366,492,370
-------------- --------------
Series A convertible preferred stock, $0.01 par value, 1,000,000 shares authorized, issued
and outstanding at September 30, 1999 and December 31, 1998, respectively (liquidation
preference $1,000,000) 1,000,000 1,000,000
Series B convertible preferred stock, $0.01 par value, 1,651,046 shares authorized, issued
and outstanding at September 30, 1999 and December 31, 1998, respectively (liquidation
preference $5,033,367) 5,008,367 5,008,367
Series C convertible preferred stock, $0.01 par value, 2,819,549 shares authorized, issued
and outstanding at September 30, 1999 and December 31, 1998, respectively (liquidation
preference $30,000,052) 29,961,272 29,961,272
--------------- --------------
Total mandatorily redeemable preferred stock 35,969,639 35,969,639
--------------- --------------
Common stock, $0.01 par value, 60,000,000 shares authorized at June 30, 1999 and
December 31, 1998, respectively; 2,977,593 and 2,902,358 shares issued and
outstanding at September 30, 1999 and December 31, 1998, respectively 29,776 29,024
Deferred compensation (575,836) (978,064)
Additional paid-in capital 6,162,866 6,156,406
Accumulated other comprehensive (loss) income (45,465) 208,211
Deficit accumulated during the development stage (82,872,567) (42,463,457)
-------------- --------------
Total stockholders' equity (deficit) (77,301,226) (37,047,880)
-------------- --------------
Total liabilities, mandatorily redeemable preferred stock and stockholders' equity (deficit) $ 338,574,555 $ 365,414,129
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
PATHNET, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 25, 1995
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED (DATE OF INCEPTION)
SEPTEMBER 30, SEPTEMBER 30, TO SEPTEMBER 30,
--------------------------------- -------------------------------
1999 1998 1999 1998 1999
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue $ 584,084 $ 475,000 $ 2,275,003 $ 1,050,000 $ 4,022,042
------------- ------------- ------------- ------------- -------------
Operating expenses:
Cost of revenue 4,258,609 1,621,211 9,579,064 5,385,718 17,126,684
Selling, general and administrative 3,197,164 2,694,505 9,500,235 6,721,862 25,125,584
Depreciation expense 2,143,238 203,725 3,714,170 315,247 4,503,001
------------- ------------- ------------- ------------- -------------
Total operating expenses 9,599,011 4,519,441 22,793,469 12,422,827 46,755,269
------------- ------------- ------------- ------------- -------------
Net operating loss (9,014,927) (4,044,441) (20,518,466) (11,372,827) (42,733,227)
Interest expense (9,987,494) (11,151,467) (30,318,331) (21,862,169) (63,306,142)
Interest income 3,318,719 4,728,582 10,511,464 9,574,286 24,626,700
Write-off of initial public offering costs - (1,354,534) - (1,354,534) (1,354,534)
Other income (expense), net (243,504) 1,661 (83,777) 500 (86,364)
--------- ------------- ------------- ------------- -------------
Net loss $ (15,927,206) $ (11,820,199) $ (40,409,110) $ (25,014,744) $ (82,853,567)
============= ============= ============= ============= =============
Basic and diluted loss per
common share $ (5.44) $ (4.07) $ (13.88) $ (8.62) $ (28.54)
============= ============= ============= ============= =============
Weighted average number of
common shares outstanding 2,926,081 2,902,358 2,911,512 2,901,917 2,902,594
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
PATHNET, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net loss $ (15,927,206) $ (11,820,199) $ (40,409,110) $ (25,014,744)
Other comprehensive income (loss):
Net unrealized gain (loss) on marketable
securities available for sale 75,759 488,345 (253,676) 436,490
---------------- --------------- --------------- --------------
Comprehensive loss $ (15,851,447) $ (11,331,854) $ (40,662,786) $ (24,578,254)
================ =============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 25, 1995
(DATE OF INCEPTION)
TO SEPTEMBER 30,
1999
----------------
<S> <C>
Net loss $ (82,853,567)
Other comprehensive income (loss):
Net unrealized gain (loss) on marketable
securities available for sale (45,465)
----------------
Comprehensive loss $ (82,899,032)
================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
PATHNET, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 25, 1995
FOR THE NINE MONTHS ENDED (DATE OF INCEPTION)
SEPTEMBER 30, TO SEPTEMBER 30,
--------------------------------
1999 1998 1999
-------------- --------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (40,409,110) $ (25,014,744) $ (82,853,567)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation expense 3,714,170 315,247 4,503,001
Amortization of deferred financing costs 853,563 558,785 1,696,353
Loss on disposal of fixed assets 8,345 - 13,845
Gain on disposal of investments (157,983) - (157,983)
Write-off of deferred financing costs - 613,910 581,334
Interest expense resulting from amortization of discount on the
bonds payable 307,125 204,750 614,250
Amortization of premium on pledged securities (288,643) - (288,643)
Stock based compensation 402,228 489,435 1,103,523
Interest expense for beneficial conversion feature of bridge loan - - 381,990
Accrued interest satisfied by conversion of bridge loan to
Series B convertible preferred stock - - 33,367
Changes in assets and liabilities:
Interest receivable 1,891,537 (3,936,127) (2,955,415)
Prepaid expenses and other assets (839,763) (119,796) (1,045,268)
Accounts payable (2,140,999) 53,711 (1,633,385)
Accrued interest 10,718,753 20,484,724 19,651,047
Accrued expenses and other liabilities 717,943 1,808,548 1,357,630
-------------- --------------- ----------------
Net cash used in operating activities (25,222,834) (4,541,557) (58,997,921)
-------------- --------------- ----------------
Cash flows from investing activities:
Expenditures for network in progress (57,461,993) (9,183,109) (92,821,117)
Expenditures for property and equipment (607,101) (8,548,737) (3,812,994)
Proceeds on disposal of fixed assets 5,015 - 5,015
Sale of marketable securites held for sale 95,175,926 - 95,175,926
Purchase of marketable securities available for sale - (191,232,621) (169,587,319)
Purchase of marketable securities - pledged as collateral - (83,224,243) (83,097,655)
Maturity and sale of marketable securities - pledged as collateral 19,733,615 - 42,004,796
Restricted cash 6,778,584 (9,887,042) (3,952,769)
Repayment of note receivable 3,206,841 9,000 9,000
-------------- --------------- ----------------
Net cash provided by (used in) investing activities 66,830,887 (302,066,752) (216,077,117)
-------------- --------------- ----------------
Cash flows from financing activities:
Issuance of voting and non-voting common stock - - 1,000
Proceeds from sale of preferred stock - 19,999,998 35,000,052
Proceeds from sale of Series B convertible preferred stock representing
the conversion of committed but undrawn portion of bridge loan to Series
B convertible preferred stock - - 300,000
Proceeds from bond offering - 350,000,000 350,000,000
Proceeds from bridge loan - - 700,000
Exercise of employee common stock options 7,212 81 7,293
Payment of issuance costs for preferred stock offerings - - (63,780)
Payment of deferred financing costs (40,735) (11,664,523) (11,973,110)
-------------- --------------- ----------------
Net cash provided by (used in) financing activities (33,523) 358,335,556 373,971,455
-------------- --------------- ----------------
Net increase in cash and cash equivalents 41,574,530 51,727,247 98,896,417
Cash and cash equivalents at the beginning of period 57,321,887 7,831,384 -
-------------- --------------- ----------------
Cash and cash equivalents at the end of period $ 98,896,417 $ 59,558,631 $ 98,896,417
============== =============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
PATHNET, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Pathnet, Inc. (Company) is a facilities based wholesale
telecommunications services provider that targets under-served and second and
third tier U.S. markets. Pathnet offers telecommunications service to
inter-exchange carriers, local exchange carriers, internet service providers,
Regional Bell Operating Companies, cellular operators and resellers.
During the third quarter of 1999, Pathnet continued to construct and
deploy digital networks utilizing both wireless and fiber-optic technologies.
Pursuant to its agreement with Worldwide Fiber USA (WFI), the Company began to
construct and market a multi-conduit fiber-optic network between Chicago,
Illinois and Denver, Colorado during the second quarter. In addition, in August
the Company announced it will co-develop a 400 mile fiber network connecting
Grand Junction, Colorado to Albequerque, New Mexico with Tri State Generation
and Transmission Association, Inc. (See note 9 to these Financial Statements).
As of September 30, 1999, the Company had approximately 6,100 route
miles of completed network and approximately 1,400 route miles of network under
construction.
The Company's business is funded primarily through equity investments
by the Company's stockholders and $350.0 million aggregate principal amount of
12 1/4% Senior Notes due 2008 (Senior Notes) which have been registered under
the Securities Act of 1933, as amended.
A substantial portion of the Company's initial activities involved
developing strategic relationships with co-developers such as railroads,
pipelines and utilities and building its network. Accordingly, a large portion
of its revenues to date reflect only certain consulting and advisory services in
connection with the design, development and construction of digital microwave
infrastructure. The remainder of its revenues to date (approximately 47%) has
been derived from the sale of bandwidth along the Company's digital network. The
Company has experienced significant operating and net losses and negative
operating cash flow to date and expects to continue to experience operating and
net losses and negative operating cash flow until such time as it is able to
generate revenue sufficient to cover its operating expenses.
2. BASIS OF PRESENTATION
The Company recently commenced providing telecommunication services
to customers and recognizing the revenue from the sale of such telecommunication
services, its principal activities to date have been securing contractual
alliances with its co-development partners, designing and constructing
networkpaths, obtaining capital and planning its proposed service. Accordingly,
the Company's consolidated financial statements are presented as a development
stage enterprise, as prescribed by Statement of Financial Accounting Standards
No. 7, "Accounting and Reporting by Development Stage Enterprises." As a
development stage enterprise, the Company has been relying on the issuance of
equity and debt securities, rather than recurring revenues, for its primary
sources of cash since inception.
In June 1997, the Financial Accounting Standards Board issued SFAS
No.131, "Disclosures About Segments of an Enterprise and Related
Information"("SFAS No. 131"). SFAS No. 131 changes
7
<PAGE> 8
PATHNET, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Management believes the Company's current operations
comprise only one segment, the sale of telecommunications capacity, and as such,
adoption of SFAS No. 131 does not impact the disclosures made in the Company's
financial statements.
In the opinion of management, the accompanying unaudited consolidated
financial statements of the Company and its subsidiaries contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
Company's consolidated financial position as of September 30, 1999, and the
results of operations and cash flows for the periods indicated. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These unaudited consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the period ended December 31,
1998 filed with the Securities and Exchange Commission. The results of
operations for the three and nine months ended September 30, 1999 are not
necessarily indicative of the operating results to be expected for the full
year.
3. REVENUE RECOGNITION
The Company earns revenue from the sale of telecommunications
capacity and for project management and consulting services. Revenue from the
sale of telecommunications capacity is earned when the service is provided.
Revenue for project management and consulting services is recognized based on
the percentage of the services completed. The Company defers revenue when
contractual payments are received in advance of the performance of services.
Revenue from the sale of telecommunications capacity includes revenue
earned under indefeasible right of use agreements. The Company recognizes
revenue under such agreements on a straight-line basis over their term.
4. LOSS PER SHARE
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of Common Stock outstanding
during the applicable period. Diluted earnings (loss) per share is computed by
dividing net income (loss) by the weighted average common and potentially
dilutive common equivalent shares outstanding during the applicable period. For
each of the periods presented, basic and diluted loss per share are the same.
The exercise of 3,119,434 employee Common Stock options, the exercise of
warrants to purchase 1,116,500 shares of Common Stock, and the conversion of
5,470,595 shares of Series A, B and C convertible preferred stock into
15,864,715 shares of Common Stock as of September 30, 1999, which could
potentially dilute basic earnings per share in the future, were not included in
the computation of diluted loss per share for the periods presented because to
do so would have been antidilutive in each case.
8
<PAGE> 9
PATHNET, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. MARKETABLE SECURITIES
Certain of the Company's marketable securities are considered
"available for sale," and, as such, are stated at market value. The net
unrealized gains and losses on marketable securities are reported as part of
accumulated other comprehensive income (loss). Realized gains or losses from the
sale of marketable securities are based on the specific identification method.
The following is a summary of the investments in marketable
securities at September 30, 1999:
<TABLE>
<CAPTION>
GROSS UNREALIZED
--------------------------------
COST GAINS LOSSES MARKET VALUE
------------------ ------------- --------------- ------------------
<S> <C> <C> <C> <C>
Available for sale securities:
U.S. Treasury securities and debt securities
of U.S. Government agencies $ 28,398,072 $ -- $ 45,760 $ 28,352,312
Corporate debt securities 44,660,067 43,212 33,750 44,669,529
Debt Securities issued by foreign
governments 1,511,237 -- 9,167 1,502,070
------------------ ------------- --------------- ------------------
$ 74,569,376 $ 43,212 $ 88,677 $ 74,523,911
================== ============= =============== ==================
</TABLE>
Gross realized gains on sales of available for sale securities were
approximately $0 and $158,000 during the three and nine months ended September
30, 1999 respectively. Gross realized gains and gross realized losses on sales
of available for sale securities were immaterial during the three and nine
months ended September 30, 1998.
The amortized cost and estimated fair value of available for sale
securities by contractual maturity at September 30, 1999 is as follows:
<TABLE>
<CAPTION>
COST MARKET VALUE
----------------- ------------------
<S> <C> <C>
Due in one year or less $ 69,428,897 $ 69,420,476
Due after one year through two years 5,140,479 5,103,435
----------------- ------------------
$ 74,569,376 $ 74,523,911
================= ==================
</TABLE>
Expected maturities may differ from contractual maturities because
the issuers of the securities may have the right to prepay obligations without
prepayment penalties.
In addition to marketable securities, the Company has investments in
pledged marketable securities that are pledged as collateral for repayment of
interest on the Company's Senior Notes through April 2000 and are classified as
non-current assets on the consolidated balance sheet. As of September 30, 1999,
pledged marketable securities consisted of U.S. Treasury securities classified
as held to maturity with an amortized cost of approximately $20.9 million and
cash and cash equivalents of approximately $21.5 million. All of the investments
contractually mature by March 31, 2000.
9
<PAGE> 10
PATHNET, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of the following
at September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Network in progress $ 37,793,073 $ 38,669,088
Communications network 68,974,361 6,890,686
Office and computer equipment 2,053,485 2,267,647
Furniture and fixtures 1,484,068 766,013
Leasehold improvements 301,407 166,733
---------------- ----------------
110,606,394 48,760,167
Less: accumulated depreciation (4,482,544) (788,831)
---------------- ----------------
Property and equipment, net $ 106,123,850 $ 47,971,336
================ ================
</TABLE>
Network in progress includes (i) all direct material and labor costs
incurred on the construction of the network together with related allocable
interest costs, necessary to construct components of a high capacity digital
network which is owned and maintained by the Company, and (ii) network related
inventory parts and equipment. The network in progress balance on September 30,
1999 includes approximately $15.2 million for costs incurred under the Company's
agreement with WFI to construct a digital fiber optic network and $2.5 million
for a right of use under a agreement with Northern Border Pipeline for microwave
access. When a portion of the network has been completed and made available for
use by the Company, the accumulated costs are transferred from network in
process to communications network and depreciated over time. As of September 30,
1999, the Company incurred non-cash capital expenditure of approximately $14.0
million.
7. RESTRICTED CASH
Restricted cash comprises amounts held in escrow to secure the
Company's obligations under certain of its Fixed Point Microwave Services
Agreements. The funds in each escrow account are available only to fund the
project to which the escrow is related until such project has been completed, at
which time surplus funds will be returned to the Company. Generally, funds are
released from escrow to pay project costs when such costs are incurred and
agreed upon under the contract. During the three and nine months ended September
30, 1999, approximately $4.0 million and $7.1 million were released from escrow,
respectively.
10
<PAGE> 11
PATHNET, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES
As of September 30, 1999, the Company had commitments of up to
approximately $79.9 million relating to purchases of telecommunication and
transmission equipment and its agreement with WFI. (See note 9 to these
Financial Statements).
9. FIBER AGREEMENTS
On March 31, 1999, the Company signed two agreements with WFI to
construct and market a multi-conduit fiber-optic network between Chicago,
Illinois and Denver, Colorado. The total shared projected cost for this project
is in excess of $100 million. The 1,100-mile network between Chicago and Denver
will pass through Des Moines, Iowa; Omaha, Nebraska; and Lincoln, Nebraska. WFI
will lead-manage the project with construction to be completed in two segments.
The first segment, Chicago to Omaha, is expected to be complete in late 1999
with the second segment, Omaha to Denver, scheduled to be completed in the first
quarter of 2000.
On August 6, 1999, the Company announced a co-development agreement
with Tri-State Generation and Transmission Association, Inc. (Tri-State), to
construct a 400-mile fiber network connecting Grand Junction, Colorado to
Albuquerque, New Mexico. The total projected combined cost for this route is
approximately $40 million. Tri-State and some of its member cooperatives will
contribute up to 50% of the network build costs.
10. SUBSEQUENT EVENT
The Company announced on November 9, 1999 that it had entered into
agreements providing for strategic investments from Colonial Pipeline Company,
Burlington Northern and Sante Fe Corporation and CSX Corporation. Upon the
closing of these investments, the Company will receive the right to develop over
12,000 miles of the investors' rights of way holdings in return for preferred
stock. In addition to providing a portion of the right of way access, Colonial
Pipeline will also make a $64 million cash investment in Pathnet equity, $39
million at closing with an additional $25 million due upon completion of the
Omaha to Denver segment. The new investors collectively will receive an
approximate one-third equity stake in Pathnet, as well as proportionate
representation on the Pathnet Board of Directors. As part of this transaction
and the reconstitution of the Pathnet Board, Dave Schaeffer, former Chairman of
Pathnet and an existing director, resigned from the Company's Board of Directors
effective November 4, 1999.
The terms of the strategic investment transaction require that
consents be obtained from the holders of a majority of the Company's existing
Senior Notes. Pathnet is planning the consent process with its legal and
financial advisors, and expects promptly to take the necessary steps to seek the
required consent. The Company will distribute further information concerning the
consents to the holders of its Senior Notes in the near future. Pathnet expects
to close this transaction immediately following receipt of the required consents
and other required regulatory approvals.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since inception on August 25, 1995, our principal activities have
included:
- Developing and pursuing our business plans;
- developing leading edge products and services;
- entering into strategic relationships with owners of
telecommunications assets and co-development partners;
- raising capital and hiring management and other key personnel;
- negotiating collocation and interconnection agreements and
installing collocations and interconnections off our backbone
network;
- constructing and developing our digital backbone network;
- working on the design and development of our network
architecture and operations support systems, including the
buildout and launch of our 24-hour Network Operations Center;
and
- procuring governmental authorizations.
As of September 30, 1999 we had completed 6,100 route miles of our
digital backbone network and had an additional 1,400 route miles of network
under construction. We began offering wholesale transport services with the
"turn up" of our first route in the first quarter of 1998 and currently offer
wholesale transport services on the operating portion of our digital network.
In addition to wholesale transport services and backbone services including the
sale of dark fiber and conduit, we intend to deploy our other services
including local access services, virtual points of presence, virtual backbone,
DSL-based services and other services in our target second and third tier
markets during 2000.
Pathnet entered into two agreements with Worldwide Fiber USA
(formerly known as Pacific Fiber Link, LLC) ("WFI") in March 1999 to construct
and market a multi-conduit fiber-optic network between Chicago, Illinois and
Denver, Colorado. The 1,100-mile network will pass through Des Moines, Iowa;
Omaha, Nebraska; and Lincoln, Nebraska.
On August 6, 1999, we entered into a co-development agreement with
Tri-State Generation and Transmission Association, Inc. ("Tri-State"), to
construct a 400-mile fiber network connecting Grand Junction, Colorado to
Albuquerque, New Mexico. The total projected combined cost for this route is
approximately $40 million. Pursuant to this agreement, Tri-State and some of its
member cooperatives will contribute up to 50% of the network build costs.
In addition, we announced on November 9, 1999 that we had entered
into agreements providing for strategic investments from Colonial Pipeline
Company, Burlington Northern and Sante Fe Corporation and CSX Corporation. Upon
the closing of these investments, the Company will receive the right to develop
over 12,000 miles of the investors' rights of way holdings. In addition to
providing a portion of the right of way access, Colonial Pipeline will also make
a $64 million cash investment in equity, $39 million at closing with an
additional $25 million due upon completion of the Omaha to Denver segment. The
new investors collectively will receive an approximate one-third equity stake,
as well as proportionate representation on the Board of Directors. The terms of
the strategic investment
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<PAGE> 13
transaction require that consents be obtained from the holders of a majority of
our existing Senior Notes. We expect to close this transaction immediately
following receipt of the required consents and other required regulatory
approvals, although there can be no assurance that we will be able to obtain
these consents and approvals or that this transaction will close on the terms
described above, or at all.
As a result of our development activities, we have experienced
operating losses. We expect to experience continuing operating losses as we
expand our operations and the continued prosecution of our business plan will
require significant capital expenditures. See "--- Liquidity and Capital
Resources."
Financial performance will vary from market to market, and the time
when we will achieve positive EBITDA, if at all, will depend on factors such as:
- the size of the addressable market;
- timely completion of backbone routes, collocations and
interconnections;
- the cost of the necessary infrastructure;
- the timing of market entry; and
- the commercial acceptance of our products and services.
SOURCES OF REVENUE
Backbone Services. We use a "smart build" strategy to identify high
demand routes and develop the fiber portion of our network. Our strategy allows
multiple participants to purchase, obtain indefeasible rights of use or lease
fiber or conduit along a segment of our network at a fixed price. Our dark fiber
and conduit sale business is becoming increasingly competitive as other carriers
build and expand their networks. To expedite route development or decrease
development risk, we have and in the future will continue to seek co-developers,
to share the project construction costs. We have sought and in the future may
also enter into co-marketing arrangements with our co-developers to facilitate
selling the assets along the build.
Management Services. To date we have primarily generated revenues
from services related to the construction of our digital network. We will
continue to construct our digital networks with co-development partners and for
third parties on a contract basis when these networks will allow us to retain
bandwidth, fiber or conduit assets on routes that complement and reduce the
costs of completing our network. We anticipate that, as we proceed with the
development of our network, the percentage of revenues which we receive from the
construction services will decline as we near the completion of our network.
Carrier Services. We provide inter-city and local wholesale transport
services and local access services to our customers on a long-term, individual
circuit, or month-to-month basis. We intend to bundle our wholesale transport
services with local access services to provide low cost, value added, end-to-end
solutions for our customers. Our service agreements with customers are generally
leases of capacity which provide for monthly payments due in advance on a
fixed-rate basis. Contracts are priced according to the capacity, the length of
the circuit used, the term of the contract and the extent of value added
services provided. Nonrecurring revenues include installation and activation
charges for new
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<PAGE> 14
customers. We seek to price our services competitively in relation to those of
the Incumbent Local Exchange Carriers ("ILECs") and other competitive
telecommunications companies in our targeted underserved and second and third
tier markets.
Although pricing will be an important part of our strategy, we
believe that customer relationships, customer care and consistent quality will
be the key to generating customer loyalty. During the past several years, market
prices for many telecommunications services have been declining, which is a
trend that we believe will likely continue. As prices decline for any given
service, we expect that the total number of customers and the proportion of our
customers purchasing our convergent, total solution value added services will
increase.
OPERATING EXPENSES.
Cost of Revenue. The largest components of our cost of revenue to
date have been costs in connection with network engineering, operations and
maintenance. With our expected growth of our telecommunications services, we
expect components such as access costs (including loop fees, rent, power and
other fees charge by ILECs, competitive telecommunications companies and other
providers), and costs associated to the provision of services to comprise a
greater portion of our cost of service.
Selling, Operations and Administration. Our selling, marketing,
general and administrative expenses primarily consist of costs related to
selling, marketing, customer care, billing, regulatory and corporate
administration. Additionally, we incur other costs associated with
administrative overhead and office leases. We expect that our selling,
marketing, general and administrative costs will grow significantly as we expand
our operations and that administrative overhead will be a large portion of these
expenses. However, we expect these expenses to decline as a percentage of our
revenue as we build our customer base and the number of customers connected to
our networks increases.
Depreciation and Amortization. Because we are primarily a
facilities-based wholesale provider, depreciation of property, plant and
equipment will be a significant ongoing expense for us. We expect depreciation
and amortization expense to increase significantly as more of our network
becomes operational and as we increase capital expenditures to expand our
network. Depreciation and amortization expense will include:
- depreciation of network infrastructure equipment;
- depreciation of improvements to central offices and other
collocations and the related equipment;
- amortization of rights of way;
- depreciation of network control center facilities, furniture,
fixtures and corporate facilities;
- and amortization of software.
RESULTS OF OPERATIONS
During the three months ended September 30, 1999, we continued to
focus on (i) developing relationships and strategic alliances with owners of
valuable telecommunications assets such as rights of way and with co-development
partners, (ii) the buildout of our network, (iii) obtaining the regulatory
14
<PAGE> 15
status and entering into interconnection agreements in each of our target
markets so that we can obtain unbundled network elements and central office
space from the ILECs and (iv) the development of our infrastructure including
the hiring of key management personnel.
REVENUE
For the three months ended September 30, 1999 and 1998, we generated
revenues of approximately $584,000 and $475,000, respectively. For the three
months ended September 30, 1999, we generated revenue from the sale of
telecommunications services of approximately $584,000. For the three months
ended September 30, 1998, our revenue consisted primarily of revenue from
consulting and advisory services. For the nine months ended September 30, 1999
and 1998, we generated revenue of approximately $2.3 million and $1.1 million,
respectively. This increase is attributable to revenues from telecommunications
services, which were $1.7 million in 1999 with no corresponding revenue in 1998.
We expect that the majority of future revenue will be generated from the sale of
wholesale transport services and backbone services.
Operating Expenses
For the three months ended September 30, 1999 and 1998, we incurred
operating expenses of approximately $9.6 million and $4.5 million, respectively.
For the nine months ended September 30, 1999 and 1998, we incurred operating
expenses of approximately $22.8 million and $12.4 million, respectively. The
increase in both periods is primarily a result of the continued activity in the
buildout of our network and additional staff costs incurred as part the
development of our infrastructure. Included in operating expenses for the three
months ended September 30, 1999 is a one time provision of approximately $1.9
million related to the sale of radios on one of our wireless backbone routes. We
expect selling, general and administrative expenses to continue to increase in
the remainder of 1999 as additional staff is added. Cost of revenue reflects
direct costs associated with performance of project management and consulting
services and costs incurred in connection with the provision of
telecommunications services.
Interest Expense
Interest expense for the three months ended September 30, 1999 and
1998 was approximately $10.0 million and $11.2 million, respectively. Interest
expense for the nine months ended September 30, 1999 and 1998 was approximately
$30.3 million and $21.9 million, respectively. Interest expense primarily
represents interest on the Senior Notes together with the amortization expense
related to the deferred financing costs of the Senior Notes.
Interest Income
Interest income for the three months ended September 30, 1999 and
1998 was approximately $3.3 million and $4.7 million, respectively. The decrease
in interest income reflects a decrease in cash, cash equivalents and marketable
securities as those funds were used in building our network and funding
operations, and a decrease in pledged marketable securities used in making the
interest payments on the Senior Notes. Interest income for the nine months ended
September 30, 1999 and 1998 was
15
<PAGE> 16
approximately $10.5 million and $9.6 million, respectively. The increase in
interest income is a result of the funds from the Notes generating income over a
nine month period versus a six month period in 1998.
CAPITAL EXPENDITURES
Our operations have required significant capital investment for the
construction and deployment of our digital network. We intend to continue to
expand our network and to add local access services and virtual services to our
existing products such as dark fiber and conduit sales and inter-city and local
wholesale transport services. This will require us to fund our initial operating
losses and we will require significant capital to:
- continue construction and development of our nationwide network
infrastructure;
- install electronics and transmission equipment along the
network;
- procure, design and construct central office and other
collocation sites;
- purchase equipment and other components needed for
interconnection of our network;
- purchase and install electronic and other equipment needed to
establish our products and services platform;
- and continue development of our corporate infrastructure.
Capital expenditures were approximately $24.3 million and $61.8
million for the three and nine months ended September 30, 1999, respectively. We
expect that our capital expenditures will be substantially higher in future
periods in connection with the expansion of our network and our services in our
target markets.
As of September 30, 1999, we had capital commitments of approximately
$79.9 million relating to telecommunications and transmission equipment and our
agreements with our co-development partners.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1999 we financed our operations
primarily through private placements of $36.0 million of equity securities and
$339.5 million of net proceeds raised from the issuance of the Senior Notes in
April 1998. As of September 30, 1999, we had approximately $173.4 million of
cash, cash equivalents and marketable securities to fund future operations.
Pursuant to the recently announced transaction with Burlington
Northern Sante Fe Railway Company, CSX Transportation, Inc. and Colonial
Pipeline, Colonial Pipeline will be contributing $64.0 million in cash to us
bringing our total cash equity investment to $100.0 million.
In addition, we may elect to finance the cost on certain of our
equipment through vendor financing arrangements. In this regard, pursuant to a
Commitment Letter between Lucent Technologies, Inc. ("Lucent") and us that we
executed in connection with the fiber supply agreement between Lucent and the
Company (the "Commitment Letter"), Lucent may provide financing for fiber
purchases for the
16
<PAGE> 17
construction of our network and may provide or arrange financing for future
phases of such network. We have been reviewing with Lucent certain material
terms of our agreements, including the terms of the Commitment Letter. There can
be no assurance that the transactions, including the financing contemplated by
Commitment Letter, will be consummated at all or consummated on the terms
described above. In addition, we may require additional capital in the future to
fund operating deficits and net losses and for potential strategic alliances,
joint ventures and acquisitions.
We estimate that our current available resources will be sufficient
to fund the implementation of our business plan, as currently contemplated,
including the capital commitments described above, operating losses in new
markets and working capital needs into the first quarter of 2001. In the event
the strategic investment from Colonial Pipeline is not consummated or is
consummated on different terms, this projection regarding available resources
may change.
After such time, we expect to be required to procure additional
financing which may include commercial bank borrowings, additional vendor
financing or the sale or issuance of equity or debt securities.
Our expectations of our future capital requirements and cash flows
from operations are based on current estimates. If our plans or assumptions
change or prove to be inaccurate we may be required to seek additional sources
of capital or seek additional capital sooner than anticipated.
YEAR 2000
The Year 2000 issue exists because many computer systems and software
applications use two digits rather than four digits to designate an applicable
year. As a result, the systems and applications may not properly recognize the
Year 2000, or process data that includes that date, potentially causing data
miscalculations or inaccuracies or operational malfunctions or failures.
In the fourth quarter of 1998, we began a corporate-wide program to
ready our technology systems and non-technology systems and software
applications for the Year 2000. Our objective is to target Year 2000 compliance
for all of our systems, including network and customer interfacing systems, and
we have grouped these systems into one of six compliance areas: Network
Architecture, Internal Infrastructure, Software Applications, Financial
Relationships, Supply-Chain Relationships and Customer Relationships. Because we
have operated for only a few years, few legacy systems or applications exist. We
identified all systems and applications that needed to be modified or
reprogrammed in order to achieve Year 2000 compliance and implemented the
necessary changes.
Inventory, assessment and remediation of mission critical hardware
systems and software applications, including network computing and network
systems engineering, is substantially complete. We completed our testing and
deployment of upgrades necessary to complete the remediation of mission-critical
systems on September 30, 1999. We are currently formulating contingency plans in
the event that certain of our suppliers or service providers may not be Year
2000 compliant. We will continue to developed and test these plans throughout
the remainder of 1999.
As part of our Year 2000 plan, we have requested confirmation from
our communications equipment vendors and other key suppliers, financial
institutions and customers that their systems will
17
<PAGE> 18
be Year 2000 compliant. Responses received to date indicate a high level of Year
2000 compliance at these companies, however, there can be no assurance that the
systems of companies with which we do business will be Year 2000 compliant. We
expect to continue to receive additional responses in the next quarter. If the
vendors important to us fail to provide needed products and services, our
network build-out and operations could be affected and thereby have a material
adverse effect on our results of operations, liquidity and financial condition.
Moreover, to the extent that significant customers are not Year 2000 compliant
and that affects their network needs, our sales could be lower than otherwise
anticipated.
We have hired outside consultants to assist us with its Year 2000
compliance, however, we have relied primarily on our existing employees to
develop and implement our Year 2000 compliance strategy. And because its
existing systems are relatively new, we have not had to replace any significant
portion of its of our systems. As a result, our expenditures to implement its
Year 2000 plan have not been material to date and it does not believe its future
expenditures on this matter will be material (remediation costs incurred to date
have been less than $100,000). Such expenditures represent less than 1% of 1999
projected capital expenditures and will be funded out of cash flow from
operations. To the extent we would have had to replace a significant portion of
its technology systems, our expenditures could have material adverse effect on
us. As a result, our expenditures to ensure Year 2000 compliance have not been
material to date. We expect to continue to use existing employees for the
significant part of our Year 2000 compliance efforts.
The discussion of our efforts and management's expectations, relating
to year 2000 compliance are forward-looking statements and the dates on which we
believe it will complete such efforts are based upon management's best
estimates. These estimates were derived using numerous assumptions regarding
future events, including the continued availability of certain resources and
other factors. We cannot assure you that these estimates will prove to be
accurate, and our actual results could differ materially from those currently
anticipated. Specific factors that could cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in year 2000 issues, the ability to identify, assess, remediate and test all
relevant computer codes and embedded technology and similar uncertainties. In
addition, variability of definitions of "compliance with year 2000" relating to
products and services sold by us may lead to claims whose impact on us is
currently not estimable. We cannot assure you that the aggregate cost of
defending and resolving such claims, if any, will not materially adversely
affect our results of operations.
FORWARD-LOOKING STATEMENTS
Certain statements in this Report, in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases and
in oral statements made by or with the approval of an authorized executive
officer of the Company constitute forward-looking statements, including
statements which can be identified by the use of forward-looking terminology
such as "believes," "anticipates," "expects," "may," "will," or "should" or the
negative of such terminology or other variations on such terminology or
comparable terminology, or by discussions of strategies that involve risks and
uncertainties. All statements other than statements of historical fact in this
Report, including, without limitation, such statements under the caption
"Management's Discussion and Analysis
18
<PAGE> 19
of Financial Condition and Results of Operations," regarding the Company or any
of the transactions described in this Report or the timing, financing,
strategies and effects of such transaction, are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Important factors that could cause actual
results to differ materially from expectations include, without limitation,
those described in conjunction with the forward-looking statements in this
Report, as well as the amount of capital needed to deploy the Company's network;
the Company's substantial leverage and its need to service its indebtedness; the
restrictions imposed by the Company's current and possible future financing
arrangements; the ability of the Company to successfully manage the
cost-effective and timely completion of its network and its ability to attract
and retain customers for its products and services; the ability of the Company
to implement its newly expanded business plan; the ability of the Company to
retain and attract relationships with the incumbent owners of the
telecommunications assets with which the Company expects to build its network;
the ability of the Company to obtain and maintain rights-of-way for the
deployment of its network; the Company's ability to retain and attract key
management and other personnel as well as the Company's ability to manage the
rapid expansion of its business and operations; the Company's ability to compete
in the highly competitive telecommunications industry in terms of price,
service, reliability and technology; the Company's dependence on the reliability
of its network equipment, its reliance on key suppliers of network equipment and
the risk that its technology will become obsolete or otherwise not economically
viable; and the Company's ability to conduct its business in a regulated
environment. The Company does not intend to update these forward-looking
statements. These and other risks and uncertainties affecting the Company are
discussed in greater detail in the Company's 1998 Annual Report on Form 10-K and
its Interim Reports on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to minimal market risks. We manage sensitivity of our
results of operations to these risks by maintaining a conservative investment
portfolio, which primarily consists of debt securities, typically maturing
within one year, and entering into long-term debt obligations with appropriate
pricing and terms. We do not hold or issue derivative, derivative commodity or
other financial instruments for trading purposes. Financial instruments held for
other than trading purposes do not impose a material market risk on us.
We are exposed to interest rate risk, as additional debt financing is
periodically needed due to the large operating losses and capital expenditures
associated with establishing and expanding our network coverage. The interest
rate that we will be able to obtain on debt financing will depend on market
conditions at that time, and may differ from the rates we have secured on our
current debt.
While all of our long-term debt bears fixed interest rates, the fair
market value of our fixed rate long-term debt is sensitive to changes in
interest rates. We have no cash flow or earnings exposure due to market interest
rate changes for our fixed long-term debt obligations.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company announced on November 9, 1999 that it had entered into
agreements providing for strategic investments from Colonial Pipeline Company,
Burlington Northern and Sante Fe Corporation and CSX Corporation. In connection
with this contemplated investment, the Company has entered into agreements with
all of its stockholders providing for the exchange of their shares in the
Company for shares of Pathnet Telecommunications, Inc., a Delaware corporation.
The closing of both the new investment and the share exchange transaction are
subject to certain conditions, including a requirement that the Company obtain
consents from the holders of the Senior Notes. Following the closing of the
investment contribution and share exchange transaction, the Company will become
the wholly-owned subsidiary of Pathnet Telecommunications, Inc. In connection
with the closing of this investment contribution and share exchange this
transaction, the Company expects that Pathnet Telecommunications, Inc. will
elect to convert the shares of the Company's Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock, and Series C Convertible Preferred
Stock received in the exchange transaction into shares of the Company's common
stock, in accordance with the Company's certificate of incorporation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Index
(b) REPORTS ON FORM 8-K
None
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PATHNET, INC.,
a Delaware corporation
(Registrant)
Date: November 15, 1999 By: /S/ Richard A. Jalkut
--------------------------------
Richard A. Jalkut
President and Chief Executive Officer
Date: November 15, 1999 By: /S/ James M. Craig
--------------------------------
James M. Craig
Executive Vice-President, Chief
Financial Officer (Principal Accounting
& Financial Officer)
21
<PAGE> 22
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
10.1 Contribution Agreement by and among the Company, Pathnet
Telecommunications, Inc. and The Burlington Northern Sante Fe
Railway, dated November 4, 1999.
10.2 Contribution Agreement by and among the Company, Pathnet
Telecommunications, Inc. and Colonial Pipeline Company, dated
November 4, 1999.
10.3 Contribution Agreement by and among the Company, Pathnet
Telecommunications, Inc. and CSX Transportation, Inc., dated
November 4, 1999.
10.4 Contribution Agreement by and among the Company, Pathnet
Telecommunications, Inc. and The Preferred Stockholders of the
Company, dated November 4, 1999.
10.5 Contribution Agreement by and among the Company, Pathnet
Telecommunications, Inc. and the Common Stockholders of the
Company, dated November 4, 1999.
10.6 Contribution Agreement by and among the Company, Pathnet
Telecommunications, Inc. and David Schaeffer.
10.7* Dark Fiber Agreement between the Company and Tri-State Generator and
Transmission Association, Inc., Empire Electric Association, Inc., La Plata
Electric Association, Inc., Delta-Montrose Electric Association,
Inc., and San Miguel Power Association, Inc., dated August 5, 1999.
27.1 Financial Data Schedule for the nine months ended September 30, 1999.
99.1 Press release dated November 9, 1999 announcing the Company's results
for the third quarter of 1999.
</TABLE>
* Certain portions of this exhibit have been omitted based on a request for
confidential treatment filed separately with the Securities and Exchange
Commission
<PAGE> 1
EXHIBIT 10.1
CONTRIBUTION AGREEMENT
DATED
NOVEMBER 4, 1999
BY AND AMONG
PATHNET TELECOMMUNICATIONS, INC.,
PATHNET, INC.,
AND
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY
<PAGE> 2
CONTRIBUTION AGREEMENT
THIS AGREEMENT is made as of November 4, 1999 (the "Agreement
Date"), by and among PATHNET TELECOMMUNICATIONS, INC., a Delaware corporation
(the "Company"), PATHNET, INC., a Delaware corporation ("Pathnet"), and THE
BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY, a Delaware corporation
("BNSF");
W I T N E S S E T H:
WHEREAS, BNSF has certain ownership interests in certain railroad
corridors covering the western United States; and
WHEREAS, the Company intends to construct, install, operate and
maintain fiber optic telecommunications transmission systems and certain
appurtenant equipment and structures on certain BNSF rail corridors; and
WHEREAS, BNSF intends, subject to the terms and conditions hereof, to
contribute to the Company certain property interests in the form of the right
to own and/or lease certain property interests on the terms and conditions set
forth in the Fiber Optic Access Agreement (as defined below) in exchange for
certain Series D Shares (as defined below); and
WHEREAS, BNSF and the other Contributors (as defined below) intend
that the transfers of their respective property interests to the Company in
exchange for shares of the Company will assist the Company and its subsidiaries
in conducting future operations in an efficient manner; and
NOW THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereby agree as follows:
Section 1 Definitions. For the purposes of this
Agreement, the following terms have the meanings set forth below:
"12 1/4% Senior Notes" shall mean those certain senior notes due 2008
issued by Pathnet pursuant to the terms of the 1998 Indenture.
"1998 Indenture" shall mean that certain Indenture, dated as of April
8, 1998, by Pathnet to the Bank of New York, as Trustee, in respect of
$350,000,000 in aggregate principal amount of 12 1/4% Senior Notes.
"Additional Cash Consideration" shall have the meaning set forth in
Section 2B.
"Affiliate" of any particular person or entity means any other person
or entity controlling, controlled by or under common control with such
particular person or entity. The term "control" for this purpose shall mean the
ability, whether by the ownership of shares or other equity interest, by
contract or otherwise, to elect a majority of the directors of a corporation,
independently to select the managing partner of a partnership or the managing
member of a limited liability company, or otherwise to have the power
independently to remove and then
- 1 -
<PAGE> 3
select a majority of those Persons exercising governing authority over an
entity. Control shall be exclusively presumed in the case of the direct or
indirect ownership of fifty percent (50%) or more of the equity interests in an
entity.
"Agreement" shall mean this Contribution Agreement, as amended,
supplemented or restated from time to time in accordance with its terms.
"Agreement Date" shall have the meaning set forth in the preamble to
this Agreement.
"BNSF" shall have the meaning set forth in the preamble to this
Agreement.
"Closing" shall have the meaning set forth in Section 6A.
"Closing Date" shall have the meaning set forth in Section 6A.
"Common Stock" shall mean Common Stock of the Company, par value $0.01
per share.
"Company" shall have the meaning set forth in the preamble to this
Agreement.
"Company Assets" shall mean substantially all of the assets of the
Company and its Subsidiaries (including, but not limited to, all contractual,
real and personal property rights) as of the date of the Closing and all future
assets acquired by the Company or its Subsidiaries after the Closing.
"Contributors" shall mean the parties to this Agreement and the
Related Contribution Agreements (as defined below), other than the Company and
Pathnet.
"Disclosure Letter" means the disclosure letter of the Company to
BNSF, of even date herewith.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"FCC" shall mean the Federal Communications Commission and any
governmental body or agency succeeding to the functions thereof.
"FCC Consents" means the consents of the FCC, to the extent required
under the Federal Communications Act and the regulations thereunder in order to
effect the transactions contemplated by this Agreement and the Related
Contribution Agreements, to the assignment or transfer of control of all FCC
licenses and authorizations of the Company and the Subsidiaries, or, in lieu
thereof, special temporary authority to operate under such licenses and
authorizations following such assignment or transfer of control; exclusive,
however, of any FCC licenses or authorizations that may be surrendered or
forfeited to the FCC and that are not material to the operation of Pathnet's
existing networks.
"Fiber Optic Access Agreement" means the Fiber Optic Access Agreement
substantially in the form attached hereto as Exhibit A.
- 2 -
<PAGE> 4
"Governing Documents" means, with respect to (i) a limited
partnership, such limited partnership's certificate of limited partnership and
the agreement of limited partnership, and any amendments or modifications of
any of the foregoing; (ii) a corporation, such corporation's articles or
certificate of incorporation, by-laws and any applicable authorizing
resolutions, and any amendments or modifications of any of the foregoing; (iii)
a limited liability company, such limited liability company's articles or
certificate of organization or formation and operating agreement or agreement
of limited liability company, and any amendments or modifications of any of the
foregoing; and (iv) a trust, such trust's declaration of trust, articles
supplementary and by-laws and any amendments or modifications of any of the
foregoing.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Indemnified Person" means the Person or Persons entitled to, or
claiming a right to, indemnification under Section 8.
"Indemnifying Person" means the Person or Persons claimed by the
Indemnified Person to be obliged to provide indemnification under Section 8.
"IRC" means the Internal Revenue Code of 1986, as amended, and any
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"Latest Balance Sheet" shall have the meaning set forth in Section 4G.
"Licenses" means federal, state, local and foreign franchises,
tariffs, licenses, ordinances, certifications, approvals, authorizations and
permits issued or granted by governmental authorities.
"Loss" or "Losses" means any and all loss, cost, claim, damage,
liability, or expense (including attorneys' fees).
"Material Adverse Effect" means a material adverse effect upon the
assets, liabilities, prospects, financial condition or business operations of,
in the case of the Company, the Company and its Subsidiaries, taken as a whole,
and in the case of BNSF, upon BNSF and its affiliates and subsidiaries, taken
as a whole.
"Pathnet" shall have the meaning set forth in the preamble to this
Agreement.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, a limited liability company and a governmental entity or any
department, agency or political subdivision thereof.
"Proprietary Rights" means all (i) patents, patent applications,
patent disclosures and inventions, (ii) trademarks, service marks, trade dress,
trade names and corporate names and registrations and applications for
registration thereof, (iii) copyrights and registrations and applications for
registration thereof, (iv) mask works and registrations and applications for
registration thereof, (v) computer software, data and documentation, (vi) trade
secrets and other
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confidential information (including, without limitation, ideas, formulas,
compositions, inventions (whether patentable or unpatentable and whether or not
reduced to practice), know-how, manufacturing and production processes and
techniques, research and development information, drawings, specifications,
designs, plans, proposals, technical data, copyrightable works, financial and
marketing plans and customer and supplier lists and information), (vii) other
intellectual property rights, and (viii) copies and tangible embodiments
thereof (in whatever form or medium).
"Qualified Public Offering" shall mean the closing of the first firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act covering the offer and sale of Common Stock
to the public (i) in which the proceeds received by the Company, net of
underwriting discounts and commissions, equal or exceed $75,000,000; (ii)
immediately prior to the consummation of which the Company is valued (based on
the per-share price paid in such public offering, but without regard to any
proceeds to be received by the Company in connection with such public offering)
at greater than $600,000,000; and (iii) in which the Company uses a nationally
recognized underwriter acceptable to the Board of Directors.
"Related Contribution Agreements" shall have the meaning set forth in
Section 3A(v).
"SEC" shall mean the Securities and Exchange Commission and any
governmental body or agency succeeding to the functions thereof.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any similar federal law then in force.
"Senior Noteholder Consent" shall mean each and all consents, waivers,
amendments and other action of the holders of the 12 1/4% Senior Notes of
Pathnet in respect of the transactions contemplated herein (and in the Related
Contribution Agreements, all to be closed in connection herewith) that are, in
the reasonable opinion of the Company and its counsel, required to have been
obtained or completed to permit Pathnet to complete such transactions pursuant
to the terms of the 1998 Indenture.
"Senior Noteholder Consent Date" shall mean that date on which the
Senior Noteholder Consent shall have been obtained.
"Series D Shares" shall mean the Series D Convertible Preferred Stock
of the Company, as the terms of such Series D Shares are set forth in the
Certificate of Incorporation of the Company attached as Exhibit C hereto.
"Shares" shall mean the Series D Shares to be issued pursuant to the
terms of this Agreement.
"Stockholders Agreement" shall mean a Stockholders Agreement
substantially in the form of Exhibit D hereto.
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"Subsidiary" means Pathnet and (i) any other corporation of which the
securities having a majority of the ordinary voting power in electing the board
of directors are, at the time as of which any determination is being made,
owned by the Company either directly or through one or more Subsidiaries, (ii)
any partnership, joint venture or similar entity of which or in which such
Person, such Person and one or more of its Subsidiaries, or one or more
Subsidiaries of such Person directly or indirectly own more than 50% of the
capital interest or profits interest, or (iii) any trust, association or other
unincorporated organization of which or in which such Person, such Person and
one or more of its Subsidiaries, or one or more Subsidiaries of such Person
directly or indirectly own more than 50% of the beneficial interest.
"Tax Authority" shall mean any United States federal, foreign,
national, state, county or municipal or other local government, any
subdivision, agency, commission or authority thereof, or any quasi-
governmental body exercising any taxing authority or any other authority
exercising tax regulatory authority.
"Tax Return" shall mean any return, amended return, estimated return,
information return and statement (including any related or supporting
information) filed or to be filed with any Tax Authority in connection with the
determination, assessment, collection or administration of any Tax.
"Taxes" shall mean all taxes, charges, fees, interest, fines,
penalties, additions to tax or other assessments, including without limitation,
income, excise, environmental, property, sales, gross receipts, gains,
transfer, occupation, privilege, employment (including social security and
unemployment), use, value added, capital stock or surplus, franchise taxes,
advance corporate tax and customs duties imposed by any Tax Authority.
"Treasury Regulations" means the United States Treasury Regulations
promulgated under the IRC, and any reference to any particular Treasury
Regulation section shall be interpreted to include any final or temporary
revision of or successor to that section regardless of how numbered or
classified.
Section 2 Contribution by BNSF. At the Closing, BNSF
shall assign, transfer, convey and contribute to the Company certain property
in the form of the right to own and/or lease certain property interests in
designated portions of rail corridors currently used by BNSF, in accordance
with the terms of the Fiber Optic Access Agreement, and in consideration for
the execution by BNSF of such Fiber Optic Access Agreement, the Company will
issue and sell to BNSF 3,413,746 Shares.
Section 3 Conditions to Closing.
3A. Conditions Precedent of the Company at the Closing.
The Company's obligations under this Agreement to issue the Shares and
otherwise consummate the transactions contemplated herein in respect of the
Closing are subject to the satisfaction (or waiver in writing by the Company)
of the following conditions on or before the Closing Date:
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i. No Injunction. No temporary restraining order or preliminary
or permanent injunction of any court or administrative agency of
competent jurisdiction prohibiting the consummation of the
transactions contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and BNSF shall have made
all filings required under the HSR Act for the transactions
contemplated hereby and the applicable waiting period under the HSR
Act shall have elapsed without any second request by the Department of
Justice or Federal Trade Commission with respect to such filings. The
Company shall have obtained all FCC Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of BNSF contained in this Agreement
shall be true and correct in all material respects on the date hereof
and, except for representations and warranties made with respect to a
specified date, at and as of the Closing Date.
iv. Performance of Agreement. BNSF shall have performed or
complied with, in all material respects, all of its respective
agreements, covenants and obligations required by this Agreement to be
performed or complied with by it prior to or at the Closing,
including, without limitation, delivery of the contribution described
in Section 2.
v. Contributions of Other Parties. At or contemporaneously with
the Closing, the Company shall also be closing, as part of the same
overall plan of contribution, upon (a) a Contribution Agreement with
the holders of at least 90% of the outstanding preferred stock of
Pathnet, (b) the Contribution Agreement between the Company and
Colonial Pipeline Company, (c) the Contribution Agreement between the
Company and CSX Transportation, Inc., and (d) one or more Contribution
Agreements with certain holders of shares of the outstanding common
stock of Pathnet, such agreements in substantially the form previously
provided to BNSF (the "Related Contribution Agreements"), such that
immediately after the Closing, the Company will own stock of Pathnet
constituting control within the meaning of IRC Section 368(c).
vi. Senior Noteholder Consent. The Senior Noteholder Consent
shall have been obtained and not revoked.
vii. Delivery of Closing Documents. The Company shall have
received the other closing documents specified in Section 6C.
3B. Conditions Precedent of BNSF at the Closing. BNSF's
obligations under this Agreement to deliver the contributions described in
Section 2 and otherwise consummate the transactions contemplated herein in
respect of the Closing are subject to the satisfaction (or waiver in writing by
BNSF) of the following conditions on or before the Closing Date:
i. No Injunction. No temporary restraining order or preliminary
or permanent injunction of any court or administrative agency of
competent jurisdiction prohibiting the consummation of the
transactions contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and BNSF shall have made
all filings required under the HSR Act for the transactions
contemplated hereby, and the applicable
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waiting period under the HSR Act shall have elapsed without any second
request by the Department of Justice or Federal Trade Commission with
respect to such filings. The Company shall have obtained all FCC
Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of the Company and Pathnet contained in
this Agreement shall be true and correct in all material respects on
the date hereof and, except for representations and warranties made
with respect to a specified date, at and as of the Closing Date.
iv. Performance of Agreement. Each of the Company and Pathnet
shall have performed or complied with, in all material respects, all
of its respective agreements, covenants and obligations required by
this Agreement to be performed or complied with by it prior to or at
the Closing, including, without limitation, issuance of the Shares by
the Company described in Section 2.
v. Contributions of Other Parties. At or contemporaneously with
the Closing, as part of the same overall plan of contribution, the
Company shall also be closing upon the Related Contribution
Agreements, such that immediately after the Closing, the Company will
own stock of Pathnet constituting control within the meaning of IRC
Section 368(c).
vi. Material Adverse Change. Between the Agreement Date and the
Closing there shall not have occurred any event or series of related
events which, individually or in the aggregate, have caused or could
reasonably be anticipated to cause a Material Adverse Effect.
vii. Senior Noteholder Consent. The Senior Noteholder Consent
shall have been obtained and not revoked.
viii. Delivery of Closing Documents. BNSF shall have received the
closing documents specified in Section 6B.
Section 4 Representations and Warranties of the Company
and Pathnet. Each of the Company and Pathnet represents and warrants to BNSF
with respect to each of the following provisions of this Section 4, at and as
of the Agreement Date and (except for those made with reference to a specific
date) again at and as of the Closing Date:
4A. Organization and Corporate Power. The Company is
duly organized, validly existing and in good standing under the laws of
Delaware and is qualified to do business in every jurisdiction in which its
ownership of property or conduct of business requires it to qualify. The
Company has all requisite corporate power and authority and all material
Licenses necessary to own and operate its properties, to carry on its business
as now conducted and presently proposed to be conducted and to carry out the
transactions contemplated by this Agreement. The copies of the Company's
Governing Documents which have been furnished to BNSF reflect all amendments
made thereto at any time prior to the Agreement Date and are correct and
complete.
4B. Authorization. Each of the Company and Pathnet has
all necessary corporate power and has been duly authorized by all necessary and
appropriate action to enter
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into this Agreement and the Fiber Optic Access Agreement and to consummate the
transactions contemplated herein and therein. The officers of the Company and
Pathnet executing this Agreement on behalf of such corporations have been duly
authorized by all necessary and appropriate corporate action. This Agreement
is, and when executed and delivered the Fiber Optic Access Agreement will be, a
valid and binding obligation of each of the Company and Pathnet, enforceable
against it in accordance with its terms, except insofar as enforceability may
be affected by bankruptcy, insolvency or similar laws affecting creditors'
rights generally or by general principles of equity.
4C. Capital Stock and Related Matters.
i. As of the Agreement Date, no shares of capital stock of the
Company are issued and outstanding.
ii. As of the Agreement Date, the authorized capital stock of
Pathnet consists of (a) 10,000,000 shares of preferred stock (of which
zero (0) shares are issued and outstanding); (b) 1,000,000 shares of
Series A Convertible Preferred Stock (all of which are issued and
outstanding); (c) 1,651,046 shares of Series B Convertible Preferred
Stock (all of which are issued and outstanding); (d) 2,819,549 shares
of Series C Convertible Preferred Stock (all of which are issued and
outstanding); and (e) 60,000,000 shares of Common Stock (of which
2,977,593 are issued and outstanding).
iii. As of the Closing and immediately thereafter (assuming that
the Company has completed the closing under each of the Related
Contribution Agreements and under similar contribution agreements with
the holders of common stock of Pathnet) the authorized capital stock
of the Company will consist of (a) 39,620,860 shares of preferred
stock, of which 2,899,999 shares are designated as Series A
Convertible Preferred Stock (all of which will be issued and
outstanding), 4,788,030 shares are designated as Series B Convertible
Preferred Stock (all of which will be issued and outstanding),
8,176,686 shares are designated as Series C Convertible Preferred
Stock (all of which will be issued and outstanding), 9,250,000 shares
will be designated as Series D Convertible Preferred Stock (of which
8,511,607 will be issued and outstanding, allocated among the holders
thereof as set forth in Section 4C of the Disclosure Letter), and
4,506,145 shares of Series E Convertible Preferred Stock (of which
1,729,631 will be issued and outstanding) (collectively, the
"Preferred Stock"), and (b) 60,000,000 shares of Common Stock, of
which 2,977,593 shares will be issued and outstanding and 30,000,000
shares will be reserved for issuance upon conversion of the Preferred
Stock. As of the Closing, neither the Company nor any Subsidiary will
have outstanding any stock or securities convertible or exchangeable
for any shares of its capital stock or containing any profit
participation features, nor shall it have outstanding any rights or
options to subscribe for or to purchase its capital stock or any stock
or securities convertible into or exchangeable for its capital stock
or any stock appreciation rights or phantom stock plans, except for
the Preferred Stock and except as set forth in Section 4C of the
Disclosure Letter. Section 4C of the Disclosure Letter accurately
sets forth the following with respect to all outstanding options and
rights to acquire the Company's and Pathnet's capital stock: the
holder, the number of shares covered, the exercise price and the
expiration date. As of the Closing, neither the Company nor any
Subsidiary will be subject to any obligation (contingent or
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<PAGE> 10
otherwise) to repurchase or otherwise acquire or retire any shares of
its capital stock or any warrants, options or other rights to acquire
its capital stock, except as set forth on the Section 4C of the
Disclosure Letter. As of the Closing and immediately thereafter, all
of the outstanding shares of the Company's capital stock shall be
validly issued, fully paid and nonassessable.
iv. The Company has not violated any applicable federal or state
securities laws in connection with the offer, sale or issuance of any
of its capital stock, including the sale of the Shares pursuant to
this Agreement. There are no agreements between the Company's
stockholders or between Pathnet's stockholders with respect to the
voting or transfer of the Company's or Pathnet's capital stock or with
respect to any other aspect of the Company's or Pathnet's affairs,
except as set forth in Section 4C of the Disclosure Letter.
4D. Subsidiaries, Investments. Section 4D of the
Disclosure Letter correctly sets forth the name of each Subsidiary, the
jurisdiction of its incorporation and the Persons owning the outstanding
capital stock of such Subsidiary. Each Subsidiary is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite corporate power and authority and all material
Licenses necessary to own its properties and to carry on its businesses as now
being conducted and as presently proposed to be conducted, and is qualified to
do business in every jurisdiction in which its ownership of property or the
conduct of business requires it to qualify, except for any jurisdiction with
respect to which the failure to qualify would not have a Material Adverse
Effect. All of the outstanding shares of capital stock of each Subsidiary are
validly issued, fully paid and nonassessable, and all such shares are owned by
the Company or another Subsidiary free and clear of any lien, charge or
encumbrance except as disclosed in Section 4D of the Disclosure Letter. The
copies of each Subsidiary's Governing Documents which have been furnished to
BNSF reflect all amendments made thereto at any time prior to the Agreement
Date and are correct and complete. Except as set forth in Section 4D of the
Disclosure Letter, neither the Company nor any Subsidiary owns or holds the
right to acquire any shares of stock or any other security or interest in any
other Person.
4E. No Breach. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby nor the
fulfillment of or compliance with the terms and conditions hereof (a) conflict
with or will result in a breach of, default under, or triggering of any rights
against the Company or any Subsidiary under any terms, conditions or provisions
of (i) the Governing Documents of the Company or any Subsidiary, (ii) the 1998
Indenture, or (iii) any agreement with shareholders, or any other agreement,
contract, indenture, mortgage, deed, easement, order, judgment, decree,
arbitration award, statute, regulation or instrument to which the Company or
any Subsidiary is a party or by which the assets of the Company or any
Subsidiary are bound, in each case except as to matters that would not be
reasonably expected to have a Material Adverse Effect or affect the ability of
the Company or Pathnet to consummate the transactions contemplated herein, or
(b) constitutes or will constitute a violation or default under, or create a
right to terminate, any of the foregoing, except as to matters that would not
be reasonably expected to have a Material Adverse Effect or affect the ability
of the Company or Pathnet to consummate the transactions contemplated herein;
provided that the foregoing qualifier shall not apply to any document specified
in clause (i) or (ii) above. Except as set forth in Section 4E of the
Disclosure Letter, no consent or approval, authorization, order, registration
or qualification of any governmental entity or any other Person is required for
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<PAGE> 11
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by the Company.
4F. Shares. The issuance or delivery of the Shares
hereunder are not subject to any preemptive right of any Person or to any
contractual right of first refusal or other right in favor of any Person. Upon
delivery of the contributions described in Section 2 to the Company, the Shares
will be validly issued, fully paid and non-assessable.
4G. Financial Statements. The Company has heretofore
delivered to BNSF the following financial statements:
i. the audited consolidated balance sheets of Pathnet as of
December 31 for each of 1996, 1997 and 1998, and the related
statements of income and cash flows (or the equivalent) for the
respective twelve-month periods then ended; and
ii. the unaudited consolidated balance sheet of Pathnet as of
September 30, 1999 (the "Latest Balance Sheet"), and the related
statements of income and cash flows (or the equivalent) for the
nine-month period then ended.
Each of the foregoing financial statements (including in all cases the notes
thereto, if any) and, once delivered, any subsequent quarterly or annual
financial statement delivered by the Company to BNSF prior to the Closing Date,
is accurate and complete in all material respects, consistent with the books
and records of the Company and Pathnet (which, in turn, are accurate and
complete in all material respects), and has been prepared in accordance with
generally accepted accounting principles, consistently applied, and fairly
presents the consolidated financial condition of the Company and Pathnet, as
the case may be, as of the dates thereof and the consolidated results of
operations and cash flows of the Company and Pathnet for the period shown
therein, except that the financial statements in item ii above are subject to
the absence of footnotes and to normal year-end audit adjustments. As of the
Agreement Date, the Company has not engaged in any business, owns no assets and
has incurred no liabilities, other than legal and filing fees in connection
with its incorporation and organization, and has not issued any capital stock.
4H. Absence of Undisclosed Liabilities. Except as set
forth in Section 4H of the Disclosure Letter, the Company and its Subsidiaries
do not, and upon consummation of the transactions contemplated herein, will
not, have any obligation or liability (whether accrued, absolute, contingent,
unliquidated or otherwise, whether or not known to the Company or any
Subsidiary, whether due or to become due and regardless of when asserted)
arising out of transactions entered into at or prior to the Closing, or any
action or inaction at or prior to the Closing, or any state of facts existing
at or prior to the Closing other than: (i) liabilities set forth on the Latest
Balance Sheet (including any notes thereto), (ii) liabilities and obligations
which have arisen after the date of the Latest Balance Sheet in the ordinary
course of business (none of which is a liability resulting from breach of
contract, breach of warranty, tort, infringement, legal claim or lawsuit),
(iii) liabilities and obligations under contracts to which the Company or
Pathnet is then a party that arise or are related to periods after the date of
the Latest Balance Sheet (none of which is a liability resulting from breach of
contract, breach of warranty, tort,
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<PAGE> 12
infringement, legal claim or lawsuit), and (iv) other liabilities and
obligations disclosed in the Disclosure Letter.
4I. No Material Adverse Change. Except as set forth in
Section 4I of the Disclosure Letter, since the date of the Latest Balance
Sheet, there has been no material adverse change in the financial condition,
operating results, assets, business, liabilities, operations, business
prospects, employee relations or customer or supplier relations of the Company
and its Subsidiaries taken as a whole.
4J. Absence of Certain Developments.
i. Except as expressly contemplated by this Agreement or as set
forth in Section 4J of the Disclosure Letter, since the date of the
Latest Balance Sheet, neither the Company nor any Subsidiary has:
(a) issued any notes, bonds or other debt securities or
any equity securities or any securities convertible, exchangeable or
exercisable into any equity securities;
(b) borrowed any amount or incurred or become subject to
any liabilities, except current liabilities incurred in the ordinary
course of business and liabilities under contracts entered into in the
ordinary course of business;
(c) discharged or satisfied any lien or encumbrance or
paid any obligation or liability, other than current liabilities paid
in the ordinary course of business;
(d) declared or made any payment or distribution of cash
or other property to its stockholders with respect to its stock or
purchased or redeemed any shares of its stock or any warrants, options
or other rights to acquire its stock;
(e) mortgaged or pledged any of its properties or assets
or subjected them to any lien, security interest, charge or other
encumbrance, except liens for current property taxes not yet due and
payable;
(f) sold, assigned or transferred any of its tangible
assets, except in the ordinary course of business, or canceled any
debts or claims, except in the ordinary course of business;
(g) sold, assigned or transferred any patents or patent
applications, trademarks, service marks, trade names, corporate names,
copyrights or copyright registrations, trade secrets or other
intangible assets, or disclosed any proprietary confidential
information to any Person, other than pursuant to a license
arrangement or agreement made in the ordinary course of business or
pursuant to a non-disclosure arrangement or agreement made in the
ordinary course of business or in connection with the negotiations
under this Agreement, the Related Contribution Agreements, and the
other agreements entered into pursuant hereto and thereto;
(h) suffered any extraordinary losses or waived any
rights of material value, whether or not in the ordinary course of
business or consistent with past practice;
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<PAGE> 13
(i) made any loans or advances to, guarantees for the
benefit of, or any Investments in, any Persons in excess of $100,000
in the aggregate;
(j) made any capital expenditures or commitments therefor
that aggregate in excess of $5,000,000;
(k) made any charitable contributions or pledges in
excess of $100,000 in the aggregate;
(l) suffered any damage, destruction or casualty loss
exceeding in the aggregate $100,000 not covered by insurance; or
(m) entered into any other transaction other than in the
ordinary course of business.
ii. No officer, director, employee or agent of the Company or any
of its Subsidiaries has been or is authorized to make or receive, and
the Company does not know of any such person making or receiving, any
bribe, kickback or other illegal payment related to the Company or its
Subsidiaries or the conduct of their business.
4K. Assets. Except as set forth in Section 4K of the
Disclosure Letter, the Company and each Subsidiary have, and upon consummation
of the transactions contemplated herein, will have, good and marketable title
to, or a valid leasehold interest, license, or right of way in, the properties
and assets used by them, located on their premises or shown on the Latest
Balance Sheet or acquired thereafter, free and clear of all liens, security
interests, charges and encumbrances, except for properties and assets disposed
of in the ordinary course of business since the date of the Latest Balance
Sheet and except for liens disclosed on the Latest Balance Sheet (including any
notes thereto) and liens for current property taxes not yet due and payable;
provided, however, that neither the Company nor Pathnet makes any
representation or warranty as to the underlying title of any property interest
in which it holds a leasehold interest, license, or right of way, or as to the
effect upon the assets of the Company of any defect in any such title. Except
as described in Section 4K of the Disclosure Letter, the Company's and each
Subsidiary's buildings, equipment and other tangible assets are, in all
material respects, in good operating condition, taking into account normal wear
and tear, and fit for use in the ordinary course of business.
4L. Tax Matters. Except as set forth in Section 4L of
the Disclosure Letter: the Company and each Subsidiary have filed all material
Tax Returns that they are required to file; all such Tax Returns are complete
and correct in all material respects, and no such tax returns contain a
disclosure statement under IRC Section 6662; the Company and each Subsidiary
have paid all Taxes shown on such Tax Returns and have withheld and paid over
all material Taxes that they are obligated to withhold and pay over from
amounts paid or owing to any employee, stockholder, creditor or other third
party; neither the Company nor any Subsidiary has waived any statute of
limitations with respect to Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency; the accrual for current taxes on the
Latest Balance Sheet would be adequate to pay all of Pathnet's current Tax
liabilities as of the Latest Balance Sheet; and no foreign, federal, state or
local Tax audits are pending or being conducted
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<PAGE> 14
with respect to the Company or any Subsidiary and no notice indicating an
intent to open an audit or other review has been received by the Company or any
Subsidiary from any foreign, federal, state or local Taxing Authority. Neither
the Company nor any of its Subsidiaries has made an election under Section
341(f) of the IRC. Neither the Company nor any of its Subsidiaries is a party
to or bound by any obligation under any Tax sharing, Tax allocation or
indemnification agreement to which any Person other than the Company or one or
more of its Subsidiaries is a party.
4M. Contracts and Commitments.
i. Except as expressly contemplated by this Agreement or as set
forth in Section 4M of the Disclosure Letter, as of the Closing,
neither the Company nor any Subsidiary is a party to any written or
oral:
(a) contract for the employment of any officer,
individual employee or other Person on a full-time, part-time,
consulting or other basis providing annual compensation in excess of
$250,000 or contract relating to loans to officers, directors or
affiliates, or any contract with any labor union, or any severance
agreement;
(b) contract under which the Company or any Subsidiary
has loaned any other Person amounts in the aggregate exceeding
$100,000;
(c) agreement or indenture relating to the borrowing of
money or the mortgaging, pledging or otherwise placing a lien on any
material asset or material group of assets of the Company or any of
its Subsidiaries,
(d) guarantee of any obligation in excess of $500,000
(other than a guarantee by the Company of a wholly-owned Subsidiary's
debts or a guarantee by a Subsidiary of the Company's debts or another
Subsidiary's debts, or in respect of any construction performance
bond, letter of credit, surety bond, or other guarantee or liability
in respect of any construction project undertaken by or on behalf of
the Company in connection with the development of its network);
(e) lease or agreement under which the Company or any
Subsidiary is a lessee of or holds or operates any property, real or
personal, owned by any other party, except for any lease of real or
personal property under which the aggregate annual cash rental
payments do not exceed $250,000;
(f) lease or agreement under which the Company or any
Subsidiary is lessor of or permits any third party to hold or operate
any property, real or personal, owned or controlled by the Company or
any Subsidiary;
(g) contract or group of related contracts with the same
party or group of affiliated parties the performance of which requires
the Company or any Subsidiary to pay consideration in excess of
$5,000,000;
(h) assignment, license, indemnification or agreement
with respect to any intangible property (including, without
limitation, any patent, trademark, trade name,
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<PAGE> 15
copyright, know-how, trade secret or confidential information), other
than software license agreements entered into in the ordinary course
of business;
(i) warranty agreement with respect to its services
rendered or its products sold or leased, other than the pass-through
of manufacturers' warranties;
(j) agreement under which it has granted any Person any
registration rights (including piggyback rights);
(k) contract, agreement or other arrangement with any
officer, director, employee or Affiliate, or any Affiliate of any
officer, director or employee;
(l) pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or other
compensation to employees or any other generally applicable employee
benefit plan or arrangement;
(m) contract or agreement prohibiting it from freely
engaging in any business or competing anywhere in the world; or
(n) contract or agreement with any investment bank.
ii. All of the contracts, agreements and instruments set forth in
Section 4M of the Disclosure Letter are valid, binding and enforceable
against the Company or the Subsidiary that is a party thereto in
accordance with their respective terms, except insofar as
enforceability may be affected by bankruptcy, insolvency or similar
laws affecting creditors' rights generally or by general principles of
equity, and except for any invalidity, lack of binding nature or
inability to enforce that would not be reasonably expected to have a
Material Adverse Effect. The Company and each Subsidiary have
performed all obligations required to be performed by them under, and
are not in default under or in breach of nor in receipt of any claim
of default or breach under, any contract, agreement or instrument to
which the Company or any Subsidiary is subject; no event has occurred
which with the passage of time or the giving of notice or both would
result in a default, breach or event of noncompliance under any
contract, agreement or instrument to which the Company or any
Subsidiary is subject; neither the Company nor any Subsidiary has any
present expectation or intention of not fully performing all such
obligations; and neither the Company nor any Subsidiary has knowledge
of any breach or anticipated breach by the other parties to any
contract or commitment to which it is a party; except in each case to
the extent that any such event would not be reasonably expected to
have a Material Adverse Effect.
iii. BNSF has been supplied with a true and correct copy of each of
the written contracts and an accurate description of the oral
contracts which are referred to in Section 4M of the Disclosure
Letter, together with all amendments, waivers or other changes
thereto.
4N. Proprietary Rights. Section 4N of the Disclosure
Letter contains a complete and accurate list of (i) all patented and registered
Proprietary Rights currently owned by the Company or any Subsidiary, (ii) all
pending patent applications and applications for
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<PAGE> 16
registrations of other Proprietary Rights filed by the Company or any
Subsidiary, (iii) all unregistered trade names and corporate names owned or
used by the Company and its Subsidiaries and (iv) all unregistered trademarks,
service marks and copyrights and computer software which are used by the
Company and its Subsidiaries and necessary for the operation of the businesses
of the Company and its Subsidiaries as presently conducted and as presently
proposed to be conducted. Section 4N of the Disclosure Letter also contains a
complete and accurate list of all licenses and other rights granted by the
Company or any Subsidiary to any third party with respect to any Proprietary
Rights and all licenses and other rights granted by any third party to the
Company or any Subsidiary with respect to any Proprietary Rights. Except as set
forth in Section 4N of the Disclosure Letter, the Company or one of its
Subsidiaries owns or has the right to use pursuant to a valid license all
Proprietary Rights necessary for the operation of the businesses of the Company
and its Subsidiaries as presently conducted and as presently proposed to be
conducted. Except as set forth in Section 4N of the Disclosure Letter, the loss
or expiration of any Proprietary Right or related group of Proprietary Rights
would not have a Material Adverse Effect, and no such loss or expiration is, to
the best of the Company's and Pathnet's knowledge, threatened, pending or
reasonably foreseeable. Except as indicated in Section 4N of the Disclosure
Letter, (i) the Company and its Subsidiaries own all right, title, and interest
in and to all of the Proprietary Rights listed on such schedule and all other
Proprietary Rights material to the operation of the businesses of the Company
and its Subsidiaries, (ii) there have been no claims made against the Company
or any Subsidiary asserting the invalidity, misuse or unenforceability of any
of such rights, and, to the Company's and Pathnet's knowledge, there are no
grounds for the same, (iii) neither the Company nor any Subsidiary has received
a notice of conflict with the asserted rights of others within the last five
years, and (iv) to the Company's and Pathnet's knowledge, the conduct of the
Company's and each Subsidiary's business has not infringed or misappropriated
any Proprietary Rights of other Persons, nor would any future conduct as
presently contemplated infringe any Proprietary Rights of other Persons and, to
the Company's and Pathnet's knowledge, the Proprietary Rights owned by the
Company or any Subsidiary have not been infringed or misappropriated by other
Persons.
4O. Litigation, etc. Except as set forth in Section 4O
of the Disclosure Letter, there are no actions, suits, proceedings, orders,
investigations or claims pending or, to the best of the Company's and Pathnet's
knowledge, threatened against or affecting the Company or any Subsidiary (or to
the best of the Company's and Pathnet's knowledge, pending or threatened
against or affecting any of the officers, directors or employees of the Company
or any of its Subsidiaries with respect to their businesses or proposed
business activities) at law or in equity, or before or by any governmental
department, commission, board, bureau, agency or instrumentality (including,
without limitations, any actions, suit, proceedings or investigations with
respect to the transactions contemplated by this Agreement); neither the
Company nor any Subsidiary is subject to any arbitration proceedings under
collective bargaining agreements or otherwise or, to the best of the Company's
and Pathnet's knowledge, any governmental investigations or inquiries
(including inquiries as to the qualification to hold or receive any license or
permit); and, to the Company's and Pathnet's knowledge, there is no basis for
any of the foregoing. Neither the Company nor any Subsidiary is subject to any
judgment, order or decree of any court or other governmental agency. Neither
the Company nor any Subsidiary has received any opinion or memorandum or legal
advice from legal counsel to the effect that it is exposed, from a legal
standpoint, to any liability or disadvantage which is, in the opinion of such
counsel, reasonably likely to have a Material Adverse Effect on its business.
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4P. Brokerage. There are no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement binding upon the Company or any Subsidiary.
4Q. Insurance. Section 4Q of the Disclosure Letter
contains a description of each insurance policy maintained by the Company and
its Subsidiaries with respect to its properties, assets and businesses, and
each such policy is in full force and effect and the Company has no reason to
believe such policies will not remain in full force and effect upon the
consummation of the transactions contemplated hereby. Neither the Company nor
any Subsidiary is in default with respect to its obligations under any
insurance policy maintained by it.
4R. Employees. The Company and each Subsidiary have
complied in all material respects with all laws relating to the employment of
labor, including provisions thereof relating to wages, hours, equal
opportunity, collective bargaining and the payment of social security and other
taxes. To the knowledge of the Company and Pathnet, neither the Company nor
any Subsidiary is the subject of any pending union organization activities, or
any pending, threatened or actual strikes, work stoppages or material
grievances. Neither the Company nor Pathnet is aware that any officer or key
employee of the Company or any Subsidiary or any group of employees of the
Company or any Subsidiary has any plans to terminate employment with the
Company or any Subsidiary. Neither the Company, its Subsidiaries nor, to the
best of the Company's and Pathnet's knowledge after due inquiry, any of their
employees is subject to any noncompete, nondisclosure, confidentiality,
employment, consulting or similar agreements relating to, affecting or in
conflict with the present or proposed business activities of the Company or any
of its Subsidiaries except for agreements between the Company and its present
and former employees.
4S. ERISA. For purposes of this Section 4S, the term
"Company" includes Pathnet and its Subsidiaries and all organizations under
common control with the Company pursuant to Section 414(b) or (c) of the IRC.
Except as set forth in Section 4S of the Disclosure Letter:
(a) Multiemployer Plans. The Company does not have any
obligation to contribute to (or any other liability, including current or
potential withdrawal liability, with respect to) any "multiemployer plan" (as
defined in Section 3(37) of ERISA).
(b) Retiree Welfare Plans. The Company does not
maintain or have any obligation to contribute to (or any other liability with
respect to) any plan or arrangement whether or not terminated, which provides
medical, health, life insurance or other welfare-type benefits for current or
future retired or terminated employees (except for limited continued medical
benefit coverage required to be provided under Section 4980B of the IRC or as
required under applicable state law).
(c) Defined Benefit Plans. The Company does not
maintain, contribute to or have any liability under (or with respect to) any
employee plan which is a tax-qualified "defined benefit plan" (as defined in
Section 3(35) of ERISA), whether or not terminated.
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<PAGE> 18
(d) Defined Contribution Plans. The Company does not
maintain, contribute to or have any liability under (or with respect to) any
employee plan which is a tax-qualified "defined contribution plan" (as defined
in Section 3(34) of ERISA), whether or not terminated.
(e) Other Plans. The Company does not maintain,
contribute to or have any liability under (or with respect to) any plan or
arrangement providing benefits to current or former employees, including any
bonus plan, plan for deferred compensation, employee health or other welfare
benefit plan or other arrangement, whether or not terminated.
4T. Compliance with Laws. Except as set forth in Section
4T of the Disclosure Letter, neither the Company nor any Subsidiary has
violated any law or any governmental regulation or requirement which violation
would reasonably be expected to have a Material Adverse Effect, and neither the
Company nor any Subsidiary has received notice of any such violation. To the
knowledge of the Company and Pathnet, neither the Company nor any Subsidiary is
required under any applicable federal, state or local environmental law or
regulation as currently in effect to remediate any environmental condition or
to pay any fine or penalty with respect thereto.
4U. Affiliated Transactions. Except as set forth in
Section 4U of the Disclosure Letter, no officer, director, shareholder or
Affiliate of the Company or any Subsidiary or any individual related by blood
or marriage to any such Person or any entity in which any such Person or
individual owns any beneficial interest, is a party to any agreement, contract,
commitment or transaction with the Company or any Subsidiary or has any
material interest in any material property used by the Company or any
Subsidiary.
4V. Licenses. Except for (i) licenses set forth in
Section 4V of the Disclosure Letter and (ii) state or local permits necessary
for the construction, maintenance and ownership of fiber optic cable, there are
no Licenses necessary for the Company or its Subsidiaries to conduct the
businesses as currently conducted. All Licenses set forth in Section 4V of the
Disclosure Letter are in full force and effect and no proceeding is pending or
threatened which could have the effect of revoking or limiting any such
Licenses. Section 4V of the Disclosure letter sets forth all consents required
from the FCC with respect to the consummation of the transactions contemplated
in this Agreement and the Related Contribution Agreements.
4W. Reports with the SEC. The Company has furnished or
made available to BNSF complete and accurate copies of Pathnet's annual report
on Form 10-K for its most recent fiscal year, all other reports or documents
required to be filed by Pathnet pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act since the filing of the most recent annual report on
Form 10-K, and all correspondence with the SEC since August 1998. Such filed
reports do not, as of the date hereof, contain any material false statements or
any misstatement of any material fact and do not omit to state any fact
necessary to make the statements set forth therein not misleading. Pathnet has
made all filings with the SEC which it is required to make, and Pathnet has not
received any request from the SEC to file any amendment or supplement to any of
the reports described in this Section 4W.
4X. Transfers of Contributed Properties. There is no
plan or intention by the Company to dispose of any of the contributed
properties described in Section 2 or Section 3A(v),
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<PAGE> 19
except that the Company is contemplating (i) a transfer of certain contributed
properties to Pathnet or another Subsidiary in a transaction that will qualify
as a tax-free transfer pursuant to IRC Section 351, and (ii) the conversion of
certain preferred stock of Pathnet into common stock of Pathnet.
4Y. No Intention to Redeem. There is no current plan or
intention on behalf of the Company to redeem or otherwise reacquire any of the
Shares issued pursuant to the transactions described in Sections 2 and 3A(v)
hereof.
4Z. Disclosure. Neither this Agreement nor the
Disclosure Letter, nor any of the schedules, attachments, written statements,
documents, certificates or other items prepared or supplied to the other
parties hereto by or on behalf of the Company or any Subsidiary with respect to
the transactions contemplated hereby, contain any untrue statement of a
material fact or omit a material fact necessary to make each statement
contained herein or therein not misleading.
4AA. Year 2000 Compliance. The Company and Pathnet have
taken all reasonable steps to ensure that they are Year 2000 Compliant, as that
term is defined below, and there are no foreseeable expenses or other
liabilities associated with the process of becoming Year 2000 Compliant except
for or with respect to any noncompliance or any expenses or liabilities that
would not be reasonably expected to have a Material Adverse Effect on the
Company or Pathnet. "Year 2000 Compliant" means that such hardware or software
produced, used, or provided by the Company or material contractors or vendors,
including, but not limited to, microcode, firmware, system and application
programs, files, databases, computer services, and microcontrollers, including
those embedded in computer and non-computer equipment (the "Computer Systems")
will:
(a) process date data from at least the years 1900
through 2001 without error or interruption;
(b) maintain functionality with respect to the
introduction processing, or output of records
containing dates falling on or after January 1, 2000;
and
(c) be interoperable with other software or hardware
which may deliver records to, receive records from,
or interact with such Computer Systems in the course
of conducting the business of the Company.
Except as noted on the Disclosure Schedule, there are no software, hardware, or
other devices containing or using electronic components reasonably necessary to
the performance of the business and operations of the Company that to the
knowledge of the Company are not Year 2000 Compliant.
Section 5 Representations and Warranties of BNSF. BNSF
represents and warrants to the Company and Pathnet with respect to each of the
following at and as of the Agreement Date:
5A. Organization and Corporate Power. BNSF is duly
organized and validly existing under the laws of the State of Delaware and has
been duly authorized by all necessary
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<PAGE> 20
and appropriate corporate action to enter into this Agreement and the Fiber
Optic Access Agreement and to consummate the transactions contemplated herein
and therein. The officer of BNSF executing this Agreement on behalf of BNSF
has been duly authorized by all necessary and appropriate corporate action.
This Agreement is, and when executed and delivered the Fiber Optic Access
Agreement will be, a valid and binding obligation of BNSF, enforceable against
it in accordance with its terms, except insofar as enforceability may be
affected by bankruptcy, insolvency or similar laws affecting creditors' rights
generally or by general principles of equity.
5B. Authorization; No Breach. Neither the execution and
delivery of this Agreement or the Fiber Optic Access Agreement nor the
consummation of the transactions contemplated hereby and thereby nor the
fulfillment of or compliance with the terms and conditions hereof and thereof
(a) conflicts with or will result in a breach of any of the terms, conditions
or provisions of (i) the Governing Documents of BNSF or (ii) any agreement,
contract, indenture, mortgage, deed, easement, order, judgment, decree,
arbitration award, statute, regulation or instrument to which BNSF is a party
or by which it or its assets are bound, except as to matters that would not
reasonably be expected to have a Material Adverse Effect on BNSF or materially
affect the ability of BNSF to consummate the transactions contemplated herein
or (b) constitutes or will constitute a violation or default or create a right
of termination under any of the foregoing, except as to matters that would not
reasonably be expected to have a Material Adverse Effect on BNSF, taken as a
whole, or materially affect the ability of BNSF to consummate the transactions
contemplated herein. No consent or approval, authorization, order, regulation
or qualification of any governmental entity or any other Person is required for
the execution and delivery of this Agreement and the Fiber Optic Access
Agreement and the consummation of the transactions contemplated hereby and
thereby.
5C. Investment Representations. BNSF acknowledges that
the Shares have not been and will not be registered or qualified under the
Securities Act or any state securities laws and are offered in reliance upon an
exemption from registration under Regulation D of the Securities Act and
similar state law exceptions. The Shares to be received by BNSF hereunder will
be held by such corporation for investment purposes only for its own account,
and not with a view to or for sale in connection with any distribution of the
Shares, and BNSF acknowledges that the Shares cannot be sold or otherwise
disposed of unless they are subsequently registered under the Securities Act or
pursuant to an exemption therefrom; and the Shares may not be sold, assigned or
otherwise transferred except in compliance with the Stockholders Agreement.
BNSF hereby acknowledges receipt of a copy of the Stockholders Agreement and
represents that it has reviewed and understands the provisions thereof which
have a bearing on the representations made in this Section 5C.
5D. Accredited Investor. BNSF is an "accredited investor"
within the meaning of Regulation D under the Securities Act and has the
knowledge and experience in financial and business matters such that it is
capable of evaluating the merits and risks of receiving and owning the Shares
and is able to bear the economic risk of such ownership and understands that an
investment in Shares involves substantial risks.
5E. Availability of Information. There has been made
available to BNSF and its advisors the opportunity to ask questions of, and
receive answers from, the Company concerning the terms and conditions of the
investment in the Shares, and to obtain the financial
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<PAGE> 21
information with respect to the Company's assets, the Stockholders Agreement,
and any additional information, to the extent that the Company possesses such
information or can acquire it without unreasonable effort or expense, necessary
to verify the accuracy of the information given to BNSF, or to otherwise make
an informed investment decision, that BNSF has had an opportunity to consult
with counsel and other advisors about the investment in the Shares, and that
all material document, records and books pertaining to such investment have, on
request, been made available to BNSF and its advisors.
5F. No General Solicitation. Neither BNSF nor any of its
advisors is aware of or has engaged in any form of general solicitation or
advertising with respect to sales of the Shares, including (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio; and
(ii) any seminar or meeting whose attendees were invited by any general
solicitation or general advertising.
5G. Litigation. There is no action, suit, proceeding or
investigation pending or, to BNSF 's knowledge, threatened against BNSF that
questions the validity of this Agreement or the ability of BNSF to consummate
the transactions contemplated hereby.
5H. Brokerage. There are no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement binding upon BNSF.
5I. Disclosure. Neither this Agreement nor any of the
schedules, attachments, written statements, documents, certificates or other
items prepared or supplied to the other parties hereto by or on behalf of BNSF
with respect to the transactions contemplated hereby contain any untrue
statement of a material fact or omit a material fact necessary to make each
statement contained herein or therein not misleading.
5J. No Intention to Transfer Shares. BNSF has no
intention or plan, formally or informally, on the date hereof, to transfer any
of the Shares received by BNSF pursuant to this Agreement.
Section 6 Closing.
6A. Closing Date. The Company shall notify BNSF of the
occurrence of the Senior Noteholder Consent Date within one business day after
such date. The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Covington & Burling, in
Washington, D.C., or at such other place as shall be mutually agreed upon by
the parties, on the date which is five business days following the Senior
Noteholder Consent Date (or, in the event that any other conditions to the
obligations of any party to close as provided hereunder shall not have been met
at such date, then on the date which is three (3) business days following the
date on which such conditions shall have been satisfied or waived by the party
whose obligations are so conditioned), or at such other date and time as to
which the parties may agree (the "Closing Date"). The Closing shall be
effective immediately prior to the close of business on the Closing Date.
6B. Deliveries by the Company at the Closing. At the
Closing, the Company and Pathnet shall deliver the following documents:
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i. The Fiber Optic Access Agreement duly executed and delivered
by the Company or a Subsidiary;
ii. A certificate of the President of each of Pathnet and the
Company, each certifying that its representations and warranties are
true in all material respects as of the Closing Date and that it has
performed or complied, in all material respects, with all of its
respective agreements and obligations required by this Agreement to be
performed or complied with by it prior to or at the Closing;
iii. A certified copy of resolutions of the Board of Directors of
the Company, authorizing the execution and delivery of this Agreement
and the performance of the obligations of the Company hereunder;
iv. A certified copy of resolutions of the Board of Directors of
Pathnet, authorizing the execution and delivery of this Agreement and
the performance of the obligations of Pathnet hereunder;
v. An opinion of Counsel to the Company and Pathnet substantially
in the form set forth on Exhibit F;
vi. The Stockholders Agreement duly executed and delivered by the
Company and each other stockholder of the Company (other than any one
or more stockholders beneficially owning, in the aggregate, not more
than one percent of the outstanding capital stock of the Company);
vii. Certificates representing the Shares to be issued to BNSF;
viii. All third party and governmental consents necessary or
appropriate to consummate the transactions contemplated herein,
including, without limitation, the FCC Consents; and
ix. Those other closing documents required to be executed by it or
as may otherwise be reasonably necessary or appropriate to consummate
the transactions contemplated herein.
6C. Deliveries by BNSF at the Closing. At the Closing,
BNSF shall deliver the following documents:
i. The Fiber Optic Access Agreement duly executed and delivered
by BNSF;
ii. The Stockholders Agreement duly executed and delivered by
BNSF;
iii. An opinion of Counsel to BNSF substantially in the form set
forth on Exhibit G;
iv. A certificate of BNSF certifying that the representations and
warranties of such corporation contained in this Agreement are
true and correct as of the Closing Date and that it has
performed, in all material respects, all of its respective
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<PAGE> 23
agreements and obligations required by this Agreement to be
performed or complied with by it prior to or at the Closing;
v. A certified copy of resolutions of the Board of Directors of
BNSF authorizing the execution and delivery by BNSF of this
Agreement and the performance of the obligations of BNSF
hereunder;
vi. All third party and governmental consents necessary or
appropriate to consummate the transactions contemplated
herein; and
vii. Those other closing documents required to be executed by it or
as may otherwise be reasonably necessary or appropriate to
consummate the transactions contemplated herein.
Section 7 Covenants.
7A. Implementing Agreement. Subject to the terms and
conditions hereof, each party hereto shall use its best efforts to take all
action required of it to fulfill its obligations under the terms of this
Agreement and to facilitate the consummation of the transactions contemplated
hereby.
7B. HSR Act Filings. Each of the Company, Pathnet and
BNSF shall use reasonable efforts to prepare and, as soon as practicable after
the Agreement Date, file with the Federal Trade Commission and the Antitrust
Division of the Department of Justice any materials and information required to
be filed with or provided pursuant to the HSR Act with respect to the
transactions contemplated by this Agreement. Each of the Company, Pathnet and
BNSF shall promptly supply any additional information which may be required or
requested of it in connection with the HSR Act filings.
7C. FCC Filings. Each of the Company and Pathnet shall
use reasonable best efforts to prepare and, as soon as practicable after the
Agreement Date, file with the Federal Communications Commission any
applications necessary to obtain the FCC Consents.
7D. Access to Information. At all times before the
Closing Date, each of the Company and Pathnet shall provide BNSF and its
employees, managers, contractors, consultants, agents and representatives, with
reasonable access to those properties, files, books, records and other
materials relating to the Company and the Subsidiaries and their business and
the right to examine and inspect such materials as BNSF may deem appropriate
(and make copies of the same), subject to the terms of the existing
Non-Disclosure Agreement between the Company and BNSF.
7E. Preservation of Business. From the Agreement Date
until the Closing Date, the Company and Pathnet shall cause the Company and the
Subsidiaries to be operated only in the ordinary and usual course of business
and consistent with past practice, shall preserve intact assets of the Company
and the Subsidiaries, preserve the good will and advantageous relationships of
the Company and the Subsidiaries with customers, suppliers, independent
contractors, employees and other Persons material to the operations of its
business, shall perform its material obligations under all contracts and shall
not permit any action or omission which
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<PAGE> 24
would cause any of the representations or warranties of the Company or Pathnet
contained herein to become inaccurate or any of the covenants of the Company or
Pathnet to be breached. Without any limitation on the foregoing, the Company
and Pathnet agree that, from the Agreement Date until the Closing Date, except
as otherwise consented to or approved by BNSF in writing and except as
otherwise required by this Agreement:
i. The Company and Pathnet shall use, and cause the Subsidiaries
to use, reasonable best efforts to continue to solicit new business
and to offer the Company's services and facilities in the ordinary
course of business subject to obligations imposed by this Agreement.
ii. Neither the Company nor any Subsidiary shall (i) enter into an
agreement for the transfer, lease (as lessor), license, guarantee,
sale, mortgage, pledge, disposition of or encumbrance of any assets or
the incurrence or modification of any indebtedness or other liability
other than in the ordinary course of business and consistent with past
practice; or (ii) make any loans, advances or capital contributions
to, or investments in, any other Person (other than to wholly owned
subsidiaries).
iii. Neither the Company nor any Subsidiary shall (i) declare, set
aside or pay any dividends on, or make any other actual, constructive
or deemed distributions in respect of, any of its capital stock, or
otherwise make any payments to its shareholders in their capacity as
such; (ii) split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock; or
(iii) purchase, redeem or otherwise acquire any shares of its capital
stock or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities.
iv. Neither the Company nor any Subsidiary shall issue, deliver,
sell, pledge, dispose of or otherwise encumber any shares of its
capital stock, any other voting securities or equity equivalent or any
securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting securities, equity equivalent or
convertible securities.
v. The Company shall not amend its Governing Documents.
vi. Neither the Company not any Subsidiary shall acquire or agree
to acquire, by merging or consolidating with, by purchasing a
substantial portion of the assets of or equity in, or by any other
manner, any business or any corporation, partnership, association or
other business organization or division thereof or otherwise acquire
or agree to acquire any assets.
vii. Neither the Company nor any Subsidiary shall sell, lease or
otherwise dispose of or agree to sell, lease or otherwise dispose of
any of its material assets, other than the sale of inventory in the
ordinary course of business.
7F. Consents and Approvals. The Company and Pathnet
shall use their best efforts to obtain all consents, approvals, certificates
and other documents required in connection with its performance under this
Agreement and the consummation of the transactions contemplated hereby. The
Company and Pathnet shall make all filings, applications, statements
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<PAGE> 25
and reports to all governmental authorities and other Persons which are
required to be made by either of them prior to the Closing Date by or on behalf
of the Company or Pathnet or any of their Affiliates pursuant to any applicable
law or contract in connection with this Agreement and the transactions
contemplated hereby.
7G. Maintenance of Insurance. The Company and Pathnet
shall continue to carry and cause the Subsidiaries to carry its and their
existing insurance through the Closing Date and shall not allow any breach,
default, termination or cancellation of such insurance policies or agreements
to occur or exist.
7H. Representations and Warranties, Supplemental
Information. From time to time prior to the Closing, each party shall promptly
disclose in writing to the other any matter hereafter arising which, if
existing, occurring or known at the Agreement Date would have been required to
be disclosed to the other or which would render inaccurate any of the
representations, warranties or statements set forth herein. No information
provided to either party pursuant to this Section 7H shall be deemed to cure
any breach of any representation, warranty or covenant made in this Agreement.
7I. No Actions Inconsistent with Fiber Optic Access
Agreement. From the Agreement Date until the Closing Date, BNSF shall not
grant, or enter into any agreement to grant, any right of way, access, or
easement that would be inconsistent with the rights to be granted to the
Company under the Fiber Optic Access Agreement.
7J. Tax Free Transfers. The parties intend that the
contribution of properties by BNSF and the other contributing Persons described
in Section 3A(v) in respect of the Closing will be part of a single integrated
transaction in which no gain or loss will be recognized to the Company or BNSF
upon the issuance and receipt of the Shares pursuant to IRC Section 351 and, in
the case of Persons who contribute Pathnet stock to the Company, the
contributions will qualify as a tax-free reorganization pursuant to IRC Section
368(a)(1)(B), and the parties agree that they will prepare and file their
Federal and state income tax returns in a manner consistent with such
characterization. Further, BNSF agrees to provide to the Company a statement
setting forth the amount of BNSF's tax basis in the property contributed by
BNSF so that the Company can determine its tax basis in the property in
accordance with IRC Section 362. BNSF agrees to file the information required
by Treasury Regulation Section 1.351-3 for its Federal income tax return for
the taxable year of the contribution, and the Company agrees to furnish to BNSF
information necessary to enable BNSF to comply with the information reporting
requirements of Treasury Regulation Section 1.351-3. The Company agrees that it
will exercise reasonable care not to take any action that would cause the
transactions contemplated hereby not to qualify as tax-free pursuant to IRC
Section 351. The Company has no present intention or plan to transfer all or
substantially all (within the meaning of IRC Section 368(a)(1)(C)) of the
assets of Pathnet to the Company. The Company has no present intention or plan
to issue additional shares of the Company (other than the shares proposed to be
issued in the transactions contemplated by Sections 2 and 3A(v) hereof), or
rights to acquire additional shares, for consideration other than cash or
property, if the result would be that the Contributors would fail to have
"control" of the Company within the meaning of IRC Section 368(c). Shares of
the Company issued after the Closing pursuant to either the Contribution
Agreement or the Option Agreement by and between the Company and Colonial
Pipeline Company will not result in Colonial Pipeline Company (and any other
person
- 24 -
<PAGE> 26
acquiring such shares pursuant to those agreements) acquiring in the aggregate
twenty percent (20%) or more of the total outstanding shares of the Company.
7K. Disclosure Letter. The Company shall supplement
or amend the Disclosure Letter from time to time prior to the Closing,
provided, however, that such supplements or amendments (other than immaterial
updates of matters arising in the ordinary course of business) shall not affect
any rights that BNSF may have with respect to the Disclosure Letter delivered
upon the execution of this Agreement.
7L. Notices. The Company hereby agrees to provide
BNSF with not less than fifteen (15) days' prior written notice of the
Company's filing of a registration statement with the SEC for a Qualified
Public Offering.
7M. Stock Options. In conjunction with or promptly after
the Closing, the Company shall issue, in exchange for any Pathnet stock options
theretofore issued by Pathnet under its stock option plans, stock options with
respect to the Common Stock of the Company, with the same terms and conditions
except that the options will be exercisable for common stock of the Company.
Section 8 Indemnification.
8A. Indemnification by the Company. Subject to the
terms, conditions and limitations of this Section 8, the Company and
Pathnet jointly and severally shall indemnify BNSF and its Affiliates
and their respective officers, directors, trustees, employees, agents
and representatives (the "BNSF Indemnified Parties") against, and
agrees to hold each of them harmless from, any and all Losses incurred
or suffered by them relating to or arising out of or in connection
with any of the following (in each case so long as notice of a claim
for indemnification is made in good faith):
i. any breach of any representation or warranty made by the
Company or Pathnet to BNSF in this Agreement; or
ii. any breach of or failure by the Company or Pathnet to perform
any covenant or obligation of the Company or Pathnet to BNSF under
this Agreement.
No knowledge before the Closing Date by any BNSF Indemnified Party of
any such breach or inaccuracy shall constitute a waiver of any claim hereunder.
8B. Indemnification by BNSF. Subject to the terms,
conditions and limitations of this Section 8, BNSF shall indemnify the Company,
Pathnet and their Affiliates and their respective officers, directors,
trustees, employees, agents and representatives (the "Company Indemnified
Parties") against, and agree to hold each of them harmless from, any and all
Losses incurred or suffered by them relating to or arising out of or in
connection with any of the following (in each case so long as notice of a claim
for indemnification is made in good faith):
i. any breach of any representation or warranty made by BNSF to
Pathnet or the Company in this Agreement; or
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<PAGE> 27
ii. any breach of or failure by BNSF to perform any covenant or
obligation of BNSF to Pathnet or the Company under this
Agreement.
No knowledge before the Closing by any Company Indemnified Party of any such
breach or inaccuracy shall constitute a waiver of any claim hereunder.
8C. Claims. As soon as is reasonably practicable after
becoming aware of a claim for indemnification under this Agreement the
Indemnified Person shall promptly give notice to the Indemnifying Person of
such claim and the amount the Indemnified Person believes it is entitled to
receive hereunder from the Indemnifying Person; provided that the failure of
the Indemnified Person to give notice shall not relieve the Indemnifying Person
of its obligations under this Section 8, except to the extent (if any) that the
Indemnifying Person shall have been materially prejudiced thereby. If the
Indemnifying Person does not object in writing to such indemnification claim
within 30 calendar days of receiving notice thereof, the Indemnified Person
shall be entitled to recover promptly from the Indemnifying Person the amount
of such claim, and no later objection by the Indemnifying Person shall be
permitted. If the Indemnifying Person agrees that it has an indemnification
obligation but objects that it is obligated to pay only a lesser amount, the
Indemnified Person shall nevertheless be entitled to recover promptly from the
Indemnifying Person the lesser amount, without prejudice to the Indemnified
Person's claim for the difference. Any claim under this Section 8 must be made
on or prior to the end of the survival period set forth in Section 9E. No
claim may be made against an Indemnifying Person under this Section 8 until the
aggregate amount of all such claims equals at least $2.5 million, at which time
the Indemnifying Person shall be liable for all claims including the initial
$2.5 million in claims.
8D. Assumption of Defense. The Indemnifying Person may,
at its own expense, (a) participate in the defense of any claim, suit, action
or proceeding and (b) upon notice to the Indemnified Person and the
Indemnifying Person's delivering to the Indemnified Person a written agreement
that the Indemnified Person is entitled to indemnification pursuant to Section
8A or 8B for all Losses arising out of such claim, suit, action or proceeding,
assume the defense thereof; provided, however, that (i) the Indemnifying
Person's counsel is reasonably satisfactory to the Indemnified Person and (ii)
the Indemnifying Person shall thereafter consult with the Indemnified Person
upon the Indemnified Person's reasonable request for such consultation from
time to time with respect to such claim, suit, action or proceeding. If the
Indemnifying Person assumes such defense, the Indemnified Person shall have the
right (but not the duty) to participate in the defense thereof and to employ
counsel, at its own expense, separate from the counsel employed by the
Indemnifying Person. If, however, the Indemnified Person reasonably determines
in its judgment that representation by the Indemnifying Person's counsel of
both the Indemnifying Person and the Indemnified Person would present such
counsel with a conflict of interest, then such Indemnified Person may employ
separate counsel to represent or defend it in any such claim, action, suit or
proceeding and the Indemnifying Person shall pay the fees and disbursements of
such separate counsel. Whether or not the Indemnifying Person chooses to defend
or prosecute any such claim, suit, action or proceeding, all of the parties
hereto shall cooperate in the defense or prosecution thereof.
8E. Settlement or Compromise. Any settlement or
compromise made or caused to be made by the Indemnified Person or the
Indemnifying Person, as the case may be, of
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<PAGE> 28
any such claim, suit, action or proceeding of the kind referred to in Section
8D shall also be binding upon the Indemnifying Person or the Indemnified
Person, as the case may be, in the same manner as if a final judgment or decree
had been entered by a court of competent jurisdiction in the amount of such
settlement or compromise; provided, however, that no obligation, restriction or
Loss shall be imposed on the Indemnified Person as a result of such settlement
without its prior written consent, which consent will not be unreasonably
withheld or delayed. The Indemnified Person will give the Indemnifying Person
at least 30 days' notice of any proposed settlement or compromise of any claim,
suit, action or proceeding it is defending, during which time the Indemnifying
Person may reject such proposed settlement or compromise; provided, however,
that from and after such rejection, the Indemnifying Person shall be obligated
to assume the defense of and full and complete liability and responsibility for
such claim, suit, action or proceeding and any and all Losses in connection
therewith in excess of the amount of unindemnifiable Losses which the
Indemnified Person would have been obligated to pay under the proposed
settlement or compromise.
8F. Failure of Indemnifying Person to Act. In the event
that the Indemnifying Person does not elect to assume the defense of any claim,
suit, action or proceeding, then any failure of the Indemnified Person to
defend or to participate in the defense of any such claim, suit, action or
proceeding or to cause the same to be done, shall not relieve the Indemnifying
Person of its obligations hereunder.
8G. No Set-Off. The indemnification obligations of the
parties hereunder shall be limited as set forth herein and no party shall be
entitled to set-off such indemnification obligations or any other amounts
against any amounts owed to such party by any other party.
Section 9 Miscellaneous.
9A. Transfer and Similar Taxes. Except as otherwise
provided in the Fiber Optic Access Agreement and Fiber Optic Lease, all sales,
use, stock, stamp, transfer, registration or similar taxes or duties, if any,
resulting from the transfer by BNSF of property described in Section 2 hereof
shall be paid one-half by the Company and one-half by BNSF. All HSR Act filing
fees required be made in order to effect the issue of the Shares contemplated
hereby, shall be paid one-half by the Company and one-half by BNSF. All FCC
and other governmental filing fees, other than in connection with the HSR Act
filing fees, required to be made in order to effect the transactions
contemplated hereby shall be paid by the Company.
9B. Complete Agreement. This Agreement (including the
Exhibits hereto and the Disclosure Letter) represents the entire agreement
between BNSF, Pathnet and the Company covering everything agreed upon or
understood in this transaction and all other prior agreements, written or oral
are merged into this Agreement. There are no oral promises, conditions,
representations, understandings, interpretations or terms of any kind as
conditions or inducements to the execution hereof in effect between the
parties.
9C. Authorized Signatories. The persons executing this
Agreement for and on behalf of BNSF, Pathnet and the Company each represent
that they have the requisite authority to bind the entities on whose behalf
they are signing.
- 27 -
<PAGE> 29
9D. Termination. In the event that for any reason the
Closing does not occur on or before the 150th day after the date of this
Agreement, then any party, if not then in breach of its obligations under this
Agreement, may terminate this Agreement by giving written notice thereof to the
other party; provided, however, that no such termination shall relieve either
party of liability for any breach of its obligations hereunder prior to such
termination.
9E. Survival of Representations and Warranties.
Regardless of any investigation made by any party or on its behalf, all
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby for a
period of three years, provided, however, that any representation or warranty
that is subject to a written claim under Section 8A that is received by the
Indemnifying Party prior to the expiration of such three-year period shall
continue to survive, and the representations and warranties made pursuant to
Sections 4L, 4Y and 7J shall survive until the expiration of the applicable
statute of limitations.
9F. Successors and Assigns. This Agreement may not be
assigned by either party without the written consent of the other party.
Except as otherwise expressly provided herein, all covenants and agreements
contained in this Agreement by or on behalf of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not.
9G. Knowledge. As used in this Agreement, the terms
"knowledge" or "aware" with respect to the Company and Pathnet shall mean the
actual knowledge or awareness of any one or more of Richard Jalkut, William
Smedberg, Michael Lubin, James Craig, Joe Mastrogiorgio and Robert Rouse, and
such terms with respect to BNSF shall mean the actual knowledge or awareness of
any one or more of Shelley Venick, Thomas N. Hund, Jeffrey R. Moreland and Roy
Dahl.
9H. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
9I. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Agreement.
9J. Descriptive Headings: Interpretation. The
descriptive headings of this Agreement are inserted for convenience only and do
not constitute a Section of this Agreement. The use of the word "including" in
this Agreement shall be by way of example rather than by limitation.
9K. Governing Law. This Agreement shall be governed by
the laws of the State of Delaware.
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<PAGE> 30
9L. Amendment. No change or addition shall be made to
this Agreement except by a written agreement executed by BNSF, Pathnet and the
Company.
9M. Notices. All notices, demands or other
communications to be given or delivered under or by reason of the provisions of
this Agreement shall be in writing and shall be deemed to have been given when
delivered personally to the recipient, sent to the recipient by reputable
express courier service (charges prepaid) or mailed to the recipient by
certified or registered mail, return receipt requested and postage prepaid.
Such notices, demands and other communications shall be sent to the parties
hereto at the address indicated below:
If to BNSF:
The Burlington Northern and Santa Fe Railway Company
2500 Lou Menk Drive
Fort Worth, Texas 76131
Attn: Chief Financial Officer
Fax: 817-352-4804
With a copy (which shall not constitute notice) to:
Mayer, Brown & Platt
190 S. LaSalle
Chicago, IL 60603
Attn: James J. Junewicz, Esq.
Fax: 312-701-7711
If to the Company to:
Pathnet Telecommunications, Inc.
1015 31st Street, N.W.
Washington, D.C. 20007
Attn: General Counsel
Fax: 202-625-7369
With a copy (which shall not constitute notice) to:
Covington & Burling
1201 Pennsylvania Ave., N.W.
P.O. Box 7566
Washington, D.C. 20044
Attn: Bruce S. Wilson, Esq.
Fax: 202-662-6291
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
[End of text; signature page follows]
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<PAGE> 31
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
PATHNET TELECOMMUNICATIONS, INC.
BY /s/ RICHARD A. JALKUT
-------------------------------------
ITS PRESIDENT AND CEO
-------------------------------------
PATHNET, INC.
BY /s/ RICHARD A. JALKUT
-------------------------------------
ITS PRESIDENT AND CEO
-------------------------------------
THE BURLINGTON NORTHERN AND
SANTA FE RAILWAY COMPANY
BY /s/ ILLEGIBLE
-------------------------------------
ITS
-------------------------------------
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<PAGE> 1
EXHIBIT 10.2
CONTRIBUTION AGREEMENT
DATED
NOVEMBER 4, 1999
BY AND AMONG
PATHNET TELECOMMUNICATIONS, INC.,
PATHNET, INC.
AND
COLONIAL PIPELINE COMPANY
<PAGE> 2
CONTRIBUTION AGREEMENT
THIS AGREEMENT is made as of November 4, 1999 (the "Agreement
Date"), by and among PATHNET TELECOMMUNICATIONS, INC., a Delaware corporation
(the "Company"), PATHNET, INC., a Delaware corporation ("Pathnet"), and
COLONIAL PIPELINE COMPANY, a Delaware and Virginia corporation ("Colonial");
W I T N E S S E T H:
WHEREAS, Colonial has right-of-way interests in certain pipeline
corridors covering the eastern United States; and
WHEREAS, the Company intends to construct, install, operate and
maintain fiber optic telecommunications transmission systems and certain
appurtenant equipment and structures on certain Colonial pipeline corridors;
and
WHEREAS, Colonial intends, subject to the terms and conditions hereof,
to contribute to the Company certain property interests in the form of the
right to own and/or lease certain property interests on the terms and
conditions set forth in the Master Right of Way Lease Agreement (as defined
below) and the Fiber Optic Access and Purchase Agreement (as defined below), in
exchange for certain Series D Shares (as defined below); and
WHEREAS, Colonial intends, subject to the terms and conditions hereof,
to purchase from the Company, and the Company intends to issue and sell to
Colonial, certain Series E Shares (as defined below); and
WHEREAS, the Company intends to grant Colonial an option to purchase
additional Series E Shares subject to the terms and conditions set forth in the
Option Agreement (as defined below); and
WHEREAS, Colonial and the other Contributors (as defined below) intend
that the transfers of their respective property interests to the Company in
exchange for shares of the Company will assist the Company and its subsidiaries
in conducting future operations in an efficient manner; and
NOW THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereby agree as follows:
Section 1 Definitions. For the purposes of this
Agreement, the following terms have the meanings set forth below:
"12 1/4% Senior Notes" shall mean those certain senior notes due 2008
issued by Pathnet pursuant to the terms of the 1998 Indenture.
"1998 Indenture" shall mean that certain Indenture, dated as of April
8, 1998, by Pathnet to the Bank of New York, as Trustee, in respect of
$350,000,000 in aggregate principal amount of 12 1/4% Senior Notes.
<PAGE> 3
"Additional Cash Consideration" shall have the meaning set forth in
Section 2B.
"Affiliate" of any particular person or entity means any other person
or entity controlling, controlled by or under common control with such
particular person or entity. The term "control" for this purpose shall mean
the ability, whether by the ownership of shares or other equity interest, by
contract or otherwise, to elect a majority of the directors of a corporation,
independently to select the managing partner of a partnership or the managing
member of a limited liability company, or otherwise to have the power
independently to remove and then select a majority of those Persons exercising
governing authority over an entity. Control shall be exclusively presumed in
the case of the direct or indirect ownership of fifty percent (50%) or more of
the equity interests in an entity.
"Agreement" shall mean this Contribution Agreement, as amended,
supplemented or restated from time to time in accordance with its terms.
"Agreement Date" shall have the meaning set forth in the preamble to
this Agreement.
"Chicago/Denver Completion Date" shall mean the date on which the
Company has substantially completed construction of the Company's fiber optic
conduit project build from Chicago to Denver which date shall be specified in a
written Notice of Completion to be delivered by the Company to Colonial. For
purposes of this Agreement, "substantially completed" shall mean that Pathnet
has installed a continuous segment of conduits and fiber optic strands that is
capable of carrying telecommunications signals from Joliet, Illinois, to
Aurora, Colorado.
"Colonial" shall have the meaning set forth in the preamble to this
Agreement.
"Common Stock" shall mean Common Stock of the Company, par value $0.01
per share.
"Company" shall have the meaning set forth in the preamble to this
Agreement.
"Company Assets" shall mean substantially all of the assets of the
Company and its Subsidiaries (including, but not limited to, all contractual,
real and personal property rights) as of the date of the Initial Closing and
all future assets acquired by the Company or its Subsidiaries after the Initial
Closing.
"Contributors" shall mean the parties to this Agreement and the
Related Contribution Agreements (as defined below), other than the Company and
Pathnet.
"Disclosure Letter" means the disclosure letter of the Company to
Colonial, of even date herewith.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"FCC" shall mean the Federal Communications Commission and any
governmental body or agency succeeding to the functions thereof.
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<PAGE> 4
"FCC Consents" means the consents of the FCC, to the extent required
under the Federal Communications Act and the regulations thereunder in order to
effect the transactions contemplated by this Agreement and the Related
Contribution Agreements, to the assignment or transfer of control of all FCC
licenses and authorizations of the Company and the Subsidiaries, or, in lieu
thereof, special temporary authority to operate under such licenses and
authorizations following such assignment or transfer of control; exclusive,
however, of any FCC licenses or authorizations that may be surrendered or
forfeited to the FCC and that are not material to the operation of Pathnet's
existing networks.
"Fiber Optic Access and Purchase Agreement" means the Fiber Optic
Access and Purchase Agreement entered into between Colonial and the Company or
its Subsidiary, substantially in the form attached hereto as Exhibit B.
"Final Closing" shall have the meaning set forth in Section 6A(iii).
"Final Closing Date" shall have the meaning set forth in Section
6A(iii).
"Governing Documents" means, with respect to (i) a limited
partnership, such limited partnership's certificate of limited partnership and
the agreement of limited partnership, and any amendments or modifications of
any of the foregoing; (ii) a corporation, such corporation's articles or
certificate of incorporation, by-laws and any applicable authorizing
resolutions, and any amendments or modifications of any of the foregoing; (iii)
a limited liability company, such limited liability company's articles or
certificate of organization or formation and operating agreement or agreement
of limited liability company, and any amendments or modifications of any of the
foregoing; and (iv) a trust, such trust's declaration of trust, articles
supplementary and by-laws and any amendments or modifications of any of the
foregoing.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Indemnified Person" means the Person or Persons entitled to, or
claiming a right to, indemnification under Section 8.
"Indemnifying Person" means the Person or Persons claimed by the
Indemnified Person to be obliged to provide indemnification under Section 8.
"Initial Closing" shall have the meaning set forth in Section 6A(i).
"Initial Closing Date" shall have the meaning set forth in Section
6A(i).
"Interim Closing" shall have the meaning set forth in Section 6A(ii).
"Interim Closing Date" shall have the meaning set forth in Section
6A(ii).
"IRC" means the Internal Revenue Code of 1986, as amended, and any
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
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<PAGE> 5
"Latest Balance Sheet" shall have the meaning set forth in Section 4G.
"Licenses" means federal, state, local and foreign franchises,
tariffs, licenses, ordinances, certifications, approvals, authorizations and
permits issued or granted by governmental authorities.
"Loss" or "Losses" means any and all loss, cost, claim, damage,
liability, or expense (including attorneys' fees).
"Master Right of Way Lease Agreement" means the Master Right of Way
Lease Agreement substantially in the form attached hereto as Exhibit A.
"Material Adverse Effect" means a material adverse effect upon the
assets, liabilities, prospects, financial condition or business operations of,
in the case of the Company, the Company and its Subsidiaries, taken as a whole,
and in the case of Colonial, upon Colonial and its affiliates and subsidiaries,
taken as a whole.
"Option Agreement" means the Option Agreement substantially in the
form attached hereto as Exhibit E.
"Pathnet" shall have the meaning set forth in the preamble to this
Agreement.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, a limited liability company and a governmental entity or any
department, agency or political subdivision thereof.
"Proprietary Rights" means all (i) patents, patent applications,
patent disclosures and inventions, (ii) trademarks, service marks, trade dress,
trade names and corporate names and registrations and applications for
registration thereof, (iii) copyrights and registrations and applications for
registration thereof, (iv) mask works and registrations and applications for
registration thereof, (v) computer software, data and documentation, (vi) trade
secrets and other confidential information (including, without limitation,
ideas, formulas, compositions, inventions (whether patentable or unpatentable
and whether or not reduced to practice), know-how, manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data, copyrightable works,
financial and marketing plans and customer and supplier lists and information),
(vii) other intellectual property rights, and (viii) copies and tangible
embodiments thereof (in whatever form or medium).
"Qualified Public Offering" shall mean the closing of the first firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act covering the offer and sale of Common Stock
to the public (i) in which the proceeds received by the Company, net of
underwriting discounts and commissions, equal or exceed $75,000,000; (ii)
immediately prior to the consummation of which the Company is valued (based on
the per-share price paid in such public offering, but without regard to any
proceeds to be received by the Company in connection with such public offering)
at greater than $600,000,000; and (iii) in which the Company uses a nationally
recognized underwriter acceptable to the Board of Directors.
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<PAGE> 6
"Related Contribution Agreements" shall have the meaning set forth in
Section 3A(v).
"SEC" shall mean the Securities and Exchange Commission and any
governmental body or agency succeeding to the functions thereof.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any similar federal law then in force.
"Senior Noteholder Consent" shall mean each and all consents, waivers,
amendments and other action of the holders of the 12 1/4% Senior Notes of
Pathnet in respect of the transactions contemplated herein (and in the Related
Contribution Agreements, all to be closed in connection herewith) that are, in
the reasonable opinion of the Company and its counsel, required to have been
obtained or completed to permit Pathnet to complete such transactions pursuant
to the terms of the 1998 Indenture.
"Senior Noteholder Consent Date" shall mean that date on which the
Senior Noteholder Consent shall have been obtained.
"Series D Shares" shall mean the Series D Convertible Preferred Stock
of the Company, as the terms of such Series D Shares are set forth in the
Certificate of Incorporation of the Company attached as Exhibit C hereto.
"Series E Shares" shall mean the Series E Convertible Preferred Stock
of the Company, as the terms of such Series E Shares are set forth in the
Certificate of Incorporation of the Company attached as Exhibit C hereto.
"Shares" shall mean the Series D Shares and the Series E Shares to be
issued pursuant to the terms of this Agreement.
"Stockholders Agreement" shall mean a Stockholders Agreement
substantially in the form of Exhibit D hereto.
"Subsidiary" means Pathnet and (i) any other corporation of which the
securities having a majority of the ordinary voting power in electing the board
of directors are, at the time as of which any determination is being made,
owned by the Company either directly or through one or more Subsidiaries, (ii)
any partnership, joint venture or similar entity of which or in which such
Person, such Person and one or more of its Subsidiaries, or one or more
Subsidiaries of such Person directly or indirectly own more than 50% of the
capital interest or profits interest, or (iii) any trust, association or other
unincorporated organization of which or in which such Person, such Person and
one or more of its Subsidiaries, or one or more Subsidiaries of such Person
directly or indirectly own more than 50% of the beneficial interest.
"Tax Authority" shall mean any United States federal, foreign,
national, state, county or municipal or other local government, any
subdivision, agency, commission or authority thereof,
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<PAGE> 7
or any quasi-governmental body exercising any taxing authority or any other
authority exercising tax regulatory authority.
"Tax Return" shall mean any return, amended return, estimated return,
information return and statement (including any related or supporting
information) filed or to be filed with any Tax Authority in connection with the
determination, assessment, collection or administration of any Tax.
"Taxes" shall mean all taxes, charges, fees, interest, fines,
penalties, additions to tax or other assessments, including without limitation,
income, excise, environmental, property, sales, gross receipts, gains,
transfer, occupation, privilege, employment (including social security and
unemployment), use, value added, capital stock or surplus, franchise taxes,
advance corporate tax and customs duties imposed by any Tax Authority.
"Treasury Regulations" means the United States Treasury Regulations
promulgated under the IRC, and any reference to any particular Treasury
Regulation section shall be interpreted to include any final or temporary
revision of or successor to that section regardless of how numbered or
classified.
Section 2 Contributions by Colonial.
2A. Contributions at the Initial Closing. At the Initial
Closing:
i. Colonial shall assign, transfer, convey and contribute to the
Company certain property interests in designated portions of
rights-of-way currently used by Colonial, in accordance with the terms
of the Master Right of Way Lease Agreement, and in consideration for
the execution by Colonial of such Master Right of Way Lease Agreement,
the Company shall issue and sell to Colonial 1,684,115 Series D
Shares; and
ii. Colonial shall pay to the Company the sum of THIRTY-EIGHT
MILLION DOLLARS ($38,000,000) and in consideration therefor the
Company shall (i) issue and sell to Colonial 1,729,631 Series E
Shares.
2B. Contributions at Subsequent Closings. At the Final
Closing:
i. Colonial shall pay to the Company the sum of TWENTY-FIVE
MILLION DOLLARS ($25,000,000) (the "Additional Cash Consideration"),
and in consideration therefor the Company shall issue and sell to
Colonial 1,137,915 Series E Shares; provided, however, that:
(a) Colonial shall have the right, but not the
obligation, to accelerate all or any part of its obligation to pay the
Additional Cash Consideration by paying such Additional Cash
Consideration in an installment of not less than FIVE MILLION DOLLARS
($5,000,000) at an Interim Closing;
(b) if Colonial exercises its right to accelerate the
payment of the Additional Cash Consideration in an installment of less
than the aggregate Additional Cash Consideration, then Series E Shares
will be issued to Colonial at such Interim Closing in a separate
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<PAGE> 8
tranche, and the number of shares in such tranche shall be equal to
the quotient of the amount of such installment payment received from
Colonial divided by $25 million, multiplied by 1,137,915, and
(c) the Additional Cash Consideration due and payable by
Colonial at the Final Closing shall be reduced by the aggregate
amount of any installment payment made to the Company at an Interim
Closing, and the number of Series E Shares to be issued and sold by
the Company at the Final Closing shall be reduced by the aggregate
number of Series E Shares issued and sold to Colonial at such Interim
Closing.
ii. The provisions of Section 2B(i) notwithstanding, the
obligation and right of Colonial to purchase Series E Shares at the
Final Closing or at any Interim Closing shall terminate on the
fifteenth day after the filing by the Company of a registration
statement with the SEC for a Qualified Public Offering.
Section 3 Conditions to Closings
3A. Conditions Precedent of the Company at the Initial
Closing. The Company's obligations under this Agreement to issue the Shares and
otherwise consummate the transactions contemplated herein in respect of the
Initial Closing are subject to the satisfaction (or waiver in writing by the
Company) of the following conditions on or before the Initial Closing Date:
i. No Injunction. No temporary restraining order or preliminary
or permanent injunction of any court or administrative agency of
competent jurisdiction prohibiting the consummation of the
transactions contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and Colonial shall have
made all filings required under the HSR Act for the transactions
contemplated hereby and the applicable waiting period under the HSR
Act shall have elapsed without any second request by the Department of
Justice or Federal Trade Commission with respect to such filings. The
Company shall have obtained all FCC Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of Colonial contained in this Agreement
shall be true and correct in all material respects on the date hereof
and, except for representations and warranties made with respect to a
specified date, at and as of the Initial Closing Date.
iv. Performance of Agreement. Colonial shall have performed or
complied with, in all material respects, all of its respective
agreements, covenants and obligations required by this Agreement to be
performed or complied with by it prior to or at the Initial Closing,
including, without limitation, delivery of the contribution described
in Section 2A.
v. Contributions of Other Parties. At or contemporaneously with
the Initial Closing, the Company shall also be closing, as part of the
same overall plan of contribution, upon (a) a Contribution Agreement
with the holders of at least 90% of the outstanding preferred stock of
Pathnet, (b) the Contribution Agreement between the Company and
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CSX Transportation, Inc., (c) the Contribution Agreement between the
Company and The Burlington Northern and Santa Fe Railway Company, and
(d) one or more Contribution Agreements with certain holders of shares
of the outstanding common stock of Pathnet, such agreements in
substantially the form previously provided to Colonial (the "Related
Contribution Agreements"), such that immediately after the Closing,
the Company will own stock of Pathnet constituting control within the
meaning of IRC Section 368(c).
vi. Senior Noteholder Consent. The Senior Noteholder Consent
shall have been obtained and not revoked.
vii. Delivery of Closing Documents. The Company shall have
received the other closing documents specified in Section 6C.
3B. Conditions Precedent of Colonial at the Initial
Closing. Colonial's obligations under this Agreement to deliver the
contributions described in Section 2A and otherwise consummate the transactions
contemplated herein in respect of the Initial Closing are subject to the
satisfaction (or waiver in writing by Colonial) of the following conditions on
or before the Initial Closing Date:
i. No Injunction. No temporary restraining order or preliminary
or permanent injunction of any court or administrative agency of
competent jurisdiction prohibiting the consummation of the
transactions contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and Colonial shall have
made all filings required under the HSR Act for the transactions
contemplated hereby, and the applicable waiting period under the HSR
Act shall have elapsed without any second request by the Department of
Justice or Federal Trade Commission with respect to such filings. The
Company shall have obtained all FCC Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of the Company and Pathnet contained in
this Agreement shall be true and correct in all material respects on
the date hereof and, except for representations and warranties made
with respect to a specified date, at and as of the Initial Closing
Date.
iv. Performance of Agreement. Each of the Company and Pathnet
shall have performed or complied with, in all material respects, all
of its respective agreements, covenants and obligations required by
this Agreement to be performed or complied with by it prior to or at
the Initial Closing, including, without limitation, issuance of the
Shares by the Company described in Section 2A.
v. Contributions of Other Parties. At or contemporaneously with
the Initial Closing, as part of the same overall plan of contribution,
the Company shall also be closing upon the Related Contribution
Agreements, such that immediately after the Closing, the Company will
own stock of Pathnet constituting control within the meaning of IRC
Section 368(c).
vi. Material Adverse Change. Between the Agreement Date and the
Initial Closing Date, there shall not have occurred any event or
series of related events which,
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<PAGE> 10
individually or in the aggregate, have caused or could reasonably be
anticipated to cause a Material Adverse Effect.
vii. Senior Noteholder Consent. The Senior Noteholder Consent shall
have been obtained and not revoked.
viii. Delivery of Closing Documents. Colonial shall have received
the closing documents specified in Section 6B.
3C. Conditions Precedent of the Company at the Interim
Closing and Final Closing. The Company's obligations under this Agreement to
issue additional Series E Shares and otherwise consummate the transactions
contemplated herein in respect of any Interim Closing and the Final Closing are
subject to the satisfaction (or waiver in writing by the Company) of the
following conditions on or before the Interim Closing Date or the Final Closing
Date, as the case may be:
i. No Injunction. No temporary restraining order or preliminary
or permanent injunction or any court or administrative agency of
competent jurisdiction prohibiting the consummation of the
transactions contemplated herein shall be in effect.
ii. Accuracy of the Representations and Warranties. The
representations and warranties of Colonial set forth in Section 5
shall be true and correct in all material respects at and as of the
Interim Closing Date or the Final Closing Date, as the case may be
(except for representations and warranties made with respect to a
specified date).
iii. Performance of Agreement. Colonial shall have performed, in
all material respects, all of its respective agreements and
obligations required by this Agreement to be performed or complied
with by it prior to or at the Interim Closing Date or the Final
Closing Date, as the case may be, including, without limitation,
delivery of the contribution described in Section 2B.
iv. No Qualified Public Offering. There shall not have occurred a
Qualified Public Offering of the Company, or, if such Qualified Public
Offering shall have occurred, Colonial shall have exercised, by
notification in writing to the Company on or before the fifteenth day
after the Company shall have filed a registration statement with the
SEC in respect of such Qualified Public Offering, its right to
accelerate payment of the Additional Cash Consideration as provided
herein.
v. Delivery of Closing Documents. The Company shall received the
closing documents specified in Section 6E.
3D. Conditions Precedent of Colonial at the Interim
Closing and Final Closing. Colonial's obligations under this Agreement to
deliver the contributions described in Section 2B and otherwise consummate the
transactions contemplated herein in respect of any Interim Closing or the Final
Closing are subject to the satisfaction (or waiver in writing by Colonial) of
the following conditions on or before the Interim Closing Date or the Final
Closing Date, as the case may be:
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<PAGE> 11
i. No Injunction. No temporary restraining order or preliminary
or permanent injunction or any court or administrative agency of
competent jurisdiction prohibiting the consummation of the
transactions contemplated herein shall be in effect.
ii. Accuracy of the Representations and Warranties. The
representations and warranties of the Company set forth in Sections
4A, 4B, 4E, 4F, 4G, 4P and 4Y shall be true and correct in all
material respects at and as of the Interim Closing Date or the Final
Closing Date, as the case may be (except for representations and
warranties made with respect to a specified date).
iii. Completion of Chicago to Denver Fiber Build. The
Chicago/Denver Completion Date shall have occurred.
iv. Initial Closing. The Initial Closing shall have been
completed.
v. Performance of Agreement. Each of the Company and Pathnet
shall have performed, in all material respects, all of its respective
agreements and obligations required by this Agreement to be performed
or complied with by it prior to or at the Interim Closing Date or the
Final Closing Date, as the case may be, including, without limitation,
issuance of the Shares described in Section 2B.
vi. Material Adverse Change. Except as effected pursuant to
business plans or other actions approved by the Board of Directors of
the Company subsequent to the Closing Date, since the date of the
Latest Balance Sheet there has been no event or occurrence that has
had a Material Adverse Effect.
vii. Delivery of Closing Documents. Colonial shall have received
the closing documents specified in Section 6D.
Section 4 Representations and Warranties of the Company
and Pathnet. Each of the Company and Pathnet represents and warrants to
Colonial (i) with respect to each of the following provisions of this Section
4, at and as of the Agreement Date and (except for those made with reference to
a specific date) again at and as of the Initial Closing Date, and (ii) with
respect to Sections 4A, 4B, 4E, 4F, 4G, 4H, 4O, 4P, 4T and 4Y (except for those
made with reference to a specific date) again at and as of any Interim Closing
Date and the Final Closing Date:
4A. Organization and Corporate Power. The Company is
duly organized, validly existing and in good standing under the laws of
Delaware and is qualified to do business in every jurisdiction in which its
ownership of property or conduct of business requires it to qualify. The
Company has all requisite corporate power and authority and all material
Licenses necessary to own and operate its properties, to carry on its business
as now conducted and presently proposed to be conducted and to carry out the
transactions contemplated by this Agreement. The copies of the Company's
Governing Documents which have been furnished to Colonial reflect all
amendments made thereto at any time prior to the Agreement Date and are correct
and complete.
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<PAGE> 12
4B. Authorization. Each of the Company and Pathnet has
all necessary corporate power and has been duly authorized by all necessary and
appropriate action to enter into this Agreement and the Master Right of Way
Lease Agreement and to consummate the transactions contemplated herein and
therein. The officers of the Company and Pathnet executing this Agreement on
behalf of such corporations have been duly authorized by all necessary and
appropriate corporate action. This Agreement is, and when executed and
delivered the Master Right of Way Lease Agreement will be, a valid and binding
obligation of each of the Company and Pathnet, enforceable against it in
accordance with its terms, except insofar as enforceability may be affected by
bankruptcy, insolvency or similar laws affecting creditors' rights generally or
by general principles of equity.
4C. Capital Stock and Related Matters.
i. As of the Agreement Date, no shares of capital stock of the
Company are issued and outstanding.
ii. As of the Agreement Date, the authorized capital stock of
Pathnet consists of (a) 10,000,000 shares of preferred stock (of which
zero (0) shares are issued and outstanding); (b) 1,000,000 shares of
Series A Convertible Preferred Stock (all of which are issued and
outstanding); (c) 1,651,046 shares of Series B Convertible Preferred
Stock (all of which are issued and outstanding); (d) 2,819,549 shares
of Series C Convertible Preferred Stock (all of which are issued and
outstanding); and (e) 60,000,000 shares of Common Stock (of which
2,977,593 are issued and outstanding).
iii. As of the Initial Closing and immediately thereafter (assuming
that the Company has completed the closing under each of the Related
Contribution Agreements and under similar contribution agreements with
the holders of common stock of Pathnet) the authorized capital stock
of the Company will consist of (a) 39,620,860 shares of preferred
stock, of which 2,899,999 shares are designated as Series A
Convertible Preferred Stock (all of which will be issued and
outstanding), 4,788,030 shares are designated as Series B Convertible
Preferred Stock (all of which will be issued and outstanding),
8,176,686 shares are designated as Series C Convertible Preferred
Stock (all of which will be issued and outstanding), 9,250,000 shares
will be designated as Series D Convertible Preferred Stock (of which
8,511,607 will be issued and outstanding, allocated among the holders
thereof as set forth in Section 4C of the Disclosure Letter), and
4,506,145 shares of Series E Convertible Preferred Stock (of which
1,729,631 will be issued and outstanding) (collectively, the
"Preferred Stock"), and (b) 60,000,000 shares of Common Stock, of
which 2,977,593 shares will be issued and outstanding and 30,000,000
shares will be reserved for issuance upon conversion of the Preferred
Stock. As of the Initial Closing, neither the Company nor any
Subsidiary will have outstanding any stock or securities convertible
or exchangeable for any shares of its capital stock or containing any
profit participation features, nor shall it have outstanding any
rights or options to subscribe for or to purchase its capital stock or
any stock or securities convertible into or exchangeable for its
capital stock or any stock appreciation rights or phantom stock plans,
except for the Preferred Stock and except as set forth in Section 4C
of the Disclosure Letter. Section 4C of the Disclosure Letter
accurately sets forth the following with respect to all outstanding
options and rights to acquire the Company's and Pathnet's capital
stock: the
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<PAGE> 13
holder, the number of shares covered, the exercise price and the
expiration date. As of the Initial Closing, neither the Company nor
any Subsidiary will be subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of
its capital stock or any warrants, options or other rights to acquire
its capital stock, except as set forth on the Section 4C of the
Disclosure Letter. As of the Initial Closing and immediately
thereafter, all of the outstanding shares of the Company's capital
stock shall be validly issued, fully paid and nonassessable.
iv. The Company has not violated any applicable federal or state
securities laws in connection with the offer, sale or issuance of any
of its capital stock, including the sale of the Shares pursuant to
this Agreement. There are no agreements between the Company's
stockholders or between Pathnet's stockholders with respect to the
voting or transfer of the Company's or Pathnet's capital stock or with
respect to any other aspect of the Company's or Pathnet's affairs,
except as set forth in Section 4C of the Disclosure Letter.
4D. Subsidiaries, Investments. Section 4D of the
Disclosure Letter correctly sets forth the name of each Subsidiary, the
jurisdiction of its incorporation and the Persons owning the outstanding
capital stock of such Subsidiary. Each Subsidiary is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite corporate power and authority and all material
Licenses necessary to own its properties and to carry on its businesses as now
being conducted and as presently proposed to be conducted, and is qualified to
do business in every jurisdiction in which its ownership of property or the
conduct of business requires it to qualify, except for any jurisdiction with
respect to which the failure to qualify would not have a Material Adverse
Effect. All of the outstanding shares of capital stock of each Subsidiary are
validly issued, fully paid and nonassessable, and all such shares are owned by
the Company or another Subsidiary free and clear of any lien, charge or
encumbrance except as disclosed in Section 4D of the Disclosure Letter. The
copies of each Subsidiary's Governing Documents which have been furnished to
Colonial reflect all amendments made thereto at any time prior to the Agreement
Date and are correct and complete. Except as set forth in Section 4D of the
Disclosure Letter, neither the Company nor any Subsidiary owns or holds the
right to acquire any shares of stock or any other security or interest in any
other Person.
4E. No Breach. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated hereby nor
the fulfillment of or compliance with the terms and conditions hereof (a)
conflict with or will result in a breach of, default under, or triggering of
any rights against the Company or any Subsidiary under any terms, conditions or
provisions of (i) the Governing Documents of the Company or any Subsidiary,
(ii) the 1998 Indenture, or (iii) any agreement with shareholders, or any other
agreement, contract, indenture, mortgage, deed, easement, order, judgment,
decree, arbitration award, statute, regulation or instrument to which the
Company or any Subsidiary is a party or by which the assets of the Company or
any Subsidiary are bound, in each case except as to matters that would not be
reasonably expected to have a Material Adverse Effect or affect the ability of
the Company or Pathnet to consummate the transactions contemplated herein, or
(b) constitutes or will constitute a violation or default under, or create a
right to terminate, any of the foregoing, except as to matters that would not
be reasonably expected to have a Material Adverse Effect or affect the ability
of the Company or Pathnet to consummate the transactions contemplated herein;
provided
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<PAGE> 14
that the foregoing qualifier shall not apply to any document specified in
clause (i) or (ii) above. Except as set forth in Section 4E of the Disclosure
Letter, no consent or approval, authorization, order, registration or
qualification of any governmental entity or any other Person is required for
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by the Company.
4F. Shares. The issuance or delivery of the Shares
hereunder are not subject to any preemptive right of any Person or to any
contractual right of first refusal or other right in favor of any Person. Upon
delivery of the contributions described in Section 2 to the Company, the Shares
will be validly issued, fully paid and non-assessable.
4G. Financial Statements. The Company has heretofore
delivered to Colonial the following financial statements:
i. the audited consolidated balance sheets of Pathnet as of
December 31 for each of 1996, 1997 and 1998, and the related
statements of income and cash flows (or the equivalent) for the
respective twelve-month periods then ended; and
ii. the unaudited consolidated balance sheet of Pathnet as of
September 30, 1999 (the "Latest Balance Sheet"), and the related
statements of income and cash flows (or the equivalent) for the
nine-month period then ended.
Each of the foregoing financial statements (including in all cases the notes
thereto, if any) and, once delivered, any subsequent quarterly or annual
financial statement delivered by the Company to Colonial prior to the Initial
Closing Date, is accurate and complete in all material respects, consistent
with the books and records of the Company and Pathnet (which, in turn, are
accurate and complete in all material respects), and has been prepared in
accordance with generally accepted accounting principles, consistently applied,
and fairly presents the consolidated financial condition of the Company and
Pathnet, as the case may be, as of the dates thereof and the consolidated
results of operations and cash flows of the Company and Pathnet for the period
shown therein, except that the financial statements in item ii above are
subject to the absence of footnotes and to normal year-end audit adjustments.
As of the Agreement Date, the Company has not engaged in any business, owns no
assets and has incurred no liabilities, other than legal and filing fees in
connection with its incorporation and organization, and has not issued any
capital stock.
4H. Absence of Undisclosed Liabilities. Except as set
forth in Section 4H of the Disclosure Letter, the Company and its Subsidiaries
do not, and upon consummation of the transactions contemplated herein, will
not, have any obligation or liability (whether accrued, absolute, contingent,
unliquidated or otherwise, whether or not known to the Company or any
Subsidiary, whether due or to become due and regardless of when asserted)
arising out of transactions entered into at or prior to the Initial Closing, or
any action or inaction at or prior to the Initial Closing, or any state of
facts existing at or prior to the Initial Closing other than: (i) liabilities
set forth on the Latest Balance Sheet (including any notes thereto), (ii)
liabilities and obligations which have arisen after the date of the Latest
Balance Sheet in the ordinary course of business (none of which is a liability
resulting from breach of contract, breach of warranty, tort, infringement,
legal claim or lawsuit), (iii) liabilities and obligations under contracts to
which the
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<PAGE> 15
Company or Pathnet is then a party that arise or are related to periods after
the date of the Latest Balance Sheet (none of which is a liability resulting
from breach of contract, breach of warranty, tort, infringement, legal claim or
lawsuit), and (iv) other liabilities and obligations disclosed in the
Disclosure Letter.
4I. No Material Adverse Change. Except as set forth in
Section 4I of the Disclosure Letter, since the date of the Latest Balance
Sheet, there has been no material adverse change in the financial condition,
operating results, assets, business, liabilities, operations, business
prospects, employee relations or customer or supplier relations of the Company
and its Subsidiaries taken as a whole.
4J. Absence of Certain Developments.
i. Except as expressly contemplated by this Agreement or as set
forth in Section 4J of the Disclosure Letter, since the date of the
Latest Balance Sheet, neither the Company nor any Subsidiary has:
(a) issued any notes, bonds or other debt securities or
any equity securities or any securities convertible, exchangeable or
exercisable into any equity securities;
(b) borrowed any amount or incurred or become subject to
any liabilities, except current liabilities incurred in the ordinary
course of business and liabilities under contracts entered into in the
ordinary course of business;
(c) discharged or satisfied any lien or encumbrance or
paid any obligation or liability, other than current liabilities paid
in the ordinary course of business;
(d) declared or made any payment or distribution of cash
or other property to its stockholders with respect to its stock or
purchased or redeemed any shares of its stock or any warrants, options
or other rights to acquire its stock;
(e) mortgaged or pledged any of its properties or assets
or subjected them to any lien, security interest, charge or other
encumbrance, except liens for current property taxes not yet due and
payable;
(f) sold, assigned or transferred any of its tangible
assets, except in the ordinary course of business, or canceled any
debts or claims, except in the ordinary course of business;
(g) sold, assigned or transferred any patents or patent
applications, trademarks, service marks, trade names, corporate names,
copyrights or copyright registrations, trade secrets or other
intangible assets, or disclosed any proprietary confidential
information to any Person, other than pursuant to a license
arrangement or agreement made in the ordinary course of business or
pursuant to a non-disclosure arrangement or agreement made in the
ordinary course of business or in connection with the negotiations
under this Agreement, the Related Contribution Agreements, and the
other agreements entered into pursuant hereto and thereto;
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<PAGE> 16
(h) suffered any extraordinary losses or waived any
rights of material value, whether or not in the ordinary course of
business or consistent with past practice;
(i) made any loans or advances to, guarantees for the
benefit of, or any Investments in, any Persons in excess of $100,000
in the aggregate;
(j) made any capital expenditures or commitments therefor
that aggregate in excess of $5,000,000;
(k) made any charitable contributions or pledges in
excess of $100,000 in the aggregate;
(l) suffered any damage, destruction or casualty loss
exceeding in the aggregate $100,000 not covered by insurance; or
(m) entered into any other transaction other than in the
ordinary course of business.
ii. No officer, director, employee or agent of the Company or any
of its Subsidiaries has been or is authorized to make or receive, and
the Company does not know of any such person making or receiving, any
bribe, kickback or other illegal payment related to the Company or its
Subsidiaries or the conduct of their business.
4K. Assets. Except as set forth in Section 4K of the
Disclosure Letter, the Company and each Subsidiary have, and upon consummation
of the transactions contemplated herein, will have, good and marketable title
to, or a valid leasehold interest, license, or right of way in, the properties
and assets used by them, located on their premises or shown on the Latest
Balance Sheet or acquired thereafter, free and clear of all liens, security
interests, charges and encumbrances, except for properties and assets disposed
of in the ordinary course of business since the date of the Latest Balance
Sheet and except for liens disclosed on the Latest Balance Sheet (including any
notes thereto) and liens for current property taxes not yet due and payable;
provided, however, that neither the Company nor Pathnet makes any
representation or warranty as to the underlying title of any property interest
in which it holds a leasehold interest, license, or right of way, or as to the
effect upon the assets of the Company of any defect in any such title. Except
as described in Section 4K of the Disclosure Letter, the Company's and each
Subsidiary's buildings, equipment and other tangible assets are, in all
material respects, in good operating condition, taking into account normal wear
and tear, and fit for use in the ordinary course of business.
4L. Tax Matters. Except as set forth in Section 4L of
the Disclosure Letter: the Company and each Subsidiary have filed all material
Tax Returns that they are required to file; all such Tax Returns are complete
and correct in all material respects, and no such tax returns contain a
disclosure statement under IRC Section 6662; the Company and each Subsidiary
have paid all Taxes shown on such Tax Returns and have withheld and paid over
all material Taxes that they are obligated to withhold and pay over from
amounts paid or owing to any employee, stockholder, creditor or other third
party; neither the Company nor any Subsidiary has waived any statute of
limitations with respect to Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency; the accrual for current taxes on the
Latest
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<PAGE> 17
Balance Sheet would be adequate to pay all of Pathnet's current Tax liabilities
as of the Latest Balance Sheet; and no foreign, federal, state or local Tax
audits are pending or being conducted with respect to the Company or any
Subsidiary and no notice indicating an intent to open an audit or other review
has been received by the Company or any Subsidiary from any foreign, federal,
state or local Taxing Authority. Neither the Company nor any of its
Subsidiaries has made an election under Section 341(f) of the IRC. Neither the
Company nor any of its Subsidiaries is a party to or bound by any obligation
under any Tax sharing, Tax allocation or indemnification agreement to which any
Person other than the Company or one or more of its Subsidiaries is a party.
4M. Contracts and Commitments.
i. Except as expressly contemplated by this Agreement or as set
forth in Section 4M of the Disclosure Letter, as of the Initial
Closing, neither the Company nor any Subsidiary is a party to any
written or oral:
(a) contract for the employment of any officer,
individual employee or other Person on a full-time, part-time,
consulting or other basis providing annual compensation in excess of
$250,000 or contract relating to loans to officers, directors or
affiliates, or any contract with any labor union, or any severance
agreement;
(b) contract under which the Company or any Subsidiary
has loaned any other Person amounts in the aggregate exceeding
$100,000;
(c) agreement or indenture relating to the borrowing of
money or the mortgaging, pledging or otherwise placing a lien on any
material asset or material group of assets of the Company or any of
its Subsidiaries,
(d) guarantee of any obligation in excess of $500,000
(other than a guarantee by the Company of a wholly-owned Subsidiary's
debts or a guarantee by a Subsidiary of the Company's debts or another
Subsidiary's debts, or in respect of any construction performance
bond, letter of credit, surety bond, or other guarantee or liability
in respect of any construction project undertaken by or on behalf of
the Company in connection with the development of its network);
(e) lease or agreement under which the Company or any
Subsidiary is a lessee of or holds or operates any property, real or
personal, owned by any other party, except for any lease of real or
personal property under which the aggregate annual cash rental
payments do not exceed $250,000;
(f) lease or agreement under which the Company or any
Subsidiary is lessor of or permits any third party to hold or operate
any property, real or personal, owned or controlled by the Company or
any Subsidiary;
(g) contract or group of related contracts with the same
party or group of affiliated parties the performance of which requires
the Company or any Subsidiary to pay consideration in excess of
$5,000,000;
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<PAGE> 18
(h) assignment, license, indemnification or agreement
with respect to any intangible property (including, without
limitation, any patent, trademark, trade name, copyright, know-how,
trade secret or confidential information), other than software license
agreements entered into in the ordinary course of business;
(i) warranty agreement with respect to its services
rendered or its products sold or leased, other than the pass-through
of manufacturers' warranties;
(j) agreement under which it has granted any Person any
registration rights (including piggyback rights);
(k) contract, agreement or other arrangement with any
officer, director, employee or Affiliate, or any Affiliate of any
officer, director or employee;
(l) pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or other
compensation to employees or any other generally applicable employee
benefit plan or arrangement;
(m) contract or agreement prohibiting it from freely
engaging in any business or competing anywhere in the world; or
(n) contract or agreement with any investment bank.
ii. All of the contracts, agreements and instruments set forth in
Section 4M of the Disclosure Letter are valid, binding and enforceable
against the Company or the Subsidiary that is a party thereto in
accordance with their respective terms, except insofar as
enforceability may be affected by bankruptcy, insolvency or similar
laws affecting creditors' rights generally or by general principles of
equity, and except for any invalidity, lack of binding nature or
inability to enforce that would not be reasonably expected to have a
Material Adverse Effect. The Company and each Subsidiary have
performed all obligations required to be performed by them under, and
are not in default under or in breach of nor in receipt of any claim
of default or breach under, any contract, agreement or instrument to
which the Company or any Subsidiary is subject; no event has occurred
which with the passage of time or the giving of notice or both would
result in a default, breach or event of noncompliance under any
contract, agreement or instrument to which the Company or any
Subsidiary is subject; neither the Company nor any Subsidiary has any
present expectation or intention of not fully performing all such
obligations; and neither the Company nor any Subsidiary has knowledge
of any breach or anticipated breach by the other parties to any
contract or commitment to which it is a party; except in each case to
the extent that any such event would not be reasonably expected to
have a Material Adverse Effect.
iii. Colonial has been supplied with a true and correct copy of
each of the written contracts and an accurate description of the oral
contracts which are referred to in Section 4M of the Disclosure
Letter, together with all amendments, waivers or other changes
thereto.
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<PAGE> 19
4N. Proprietary Rights. Section 4N of the Disclosure
Letter contains a complete and accurate list of (i) all patented and registered
Proprietary Rights currently owned by the Company or any Subsidiary, (ii) all
pending patent applications and applications for registrations of other
Proprietary Rights filed by the Company or any Subsidiary, (iii) all
unregistered trade names and corporate names owned or used by the Company and
its Subsidiaries and (iv) all unregistered trademarks, service marks and
copyrights and computer software which are used by the Company and its
Subsidiaries and necessary for the operation of the businesses of the Company
and its Subsidiaries as presently conducted and as presently proposed to be
conducted. Section 4N of the Disclosure Letter also contains a complete and
accurate list of all licenses and other rights granted by the Company or any
Subsidiary to any third party with respect to any Proprietary Rights and all
licenses and other rights granted by any third party to the Company or any
Subsidiary with respect to any Proprietary Rights. Except as set forth in
Section 4N of the Disclosure Letter, the Company or one of its Subsidiaries
owns or has the right to use pursuant to a valid license all Proprietary Rights
necessary for the operation of the businesses of the Company and its
Subsidiaries as presently conducted and as presently proposed to be conducted.
Except as set forth in Section 4N of the Disclosure Letter, the loss or
expiration of any Proprietary Right or related group of Proprietary Rights
would not have a Material Adverse Effect, and no such loss or expiration is, to
the best of the Company's and Pathnet's knowledge, threatened, pending or
reasonably foreseeable. Except as indicated in Section 4N of the Disclosure
Letter, (i) the Company and its Subsidiaries own all right, title, and interest
in and to all of the Proprietary Rights listed on such schedule and all other
Proprietary Rights material to the operation of the businesses of the Company
and its Subsidiaries, (ii) there have been no claims made against the Company
or any Subsidiary asserting the invalidity, misuse or unenforceability of any
of such rights, and, to the Company's and Pathnet's knowledge, there are no
grounds for the same, (iii) neither the Company nor any Subsidiary has received
a notice of conflict with the asserted rights of others within the last five
years, and (iv) to the Company's and Pathnet's knowledge, the conduct of the
Company's and each Subsidiary's business has not infringed or misappropriated
any Proprietary Rights of other Persons, nor would any future conduct as
presently contemplated infringe any Proprietary Rights of other Persons and, to
the Company's and Pathnet's knowledge, the Proprietary Rights owned by the
Company or any Subsidiary have not been infringed or misappropriated by other
Persons.
4O. Litigation, etc. Except as set forth in Section 4O
of the Disclosure Letter, there are no actions, suits, proceedings, orders,
investigations or claims pending or, to the best of the Company's and Pathnet's
knowledge, threatened against or affecting the Company or any Subsidiary (or to
the best of the Company's and Pathnet's knowledge, pending or threatened
against or affecting any of the officers, directors or employees of the Company
or any of its Subsidiaries with respect to their businesses or proposed
business activities) at law or in equity, or before or by any governmental
department, commission, board, bureau, agency or instrumentality (including,
without limitations, any actions, suit, proceedings or investigations with
respect to the transactions contemplated by this Agreement); neither the
Company nor any Subsidiary is subject to any arbitration proceedings under
collective bargaining agreements or otherwise or, to the best of the Company's
and Pathnet's knowledge, any governmental investigations or inquiries
(including inquiries as to the qualification to hold or receive any license or
permit); and, to the Company's and Pathnet's knowledge, there is no basis for
any of the foregoing. Neither the Company nor any Subsidiary is subject to any
judgment, order or decree of any court or other governmental agency. Neither
the Company nor any Subsidiary has
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<PAGE> 20
received any opinion or memorandum or legal advice from legal counsel to the
effect that it is exposed, from a legal standpoint, to any liability or
disadvantage which is, in the opinion of such counsel, reasonably likely to
have a Material Adverse Effect on its business.
4P. Brokerage. There are no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement binding upon the Company or any Subsidiary.
4Q. Insurance. Section 4Q of the Disclosure Letter
contains a description of each insurance policy maintained by the Company and
its Subsidiaries with respect to its properties, assets and businesses, and
each such policy is in full force and effect and the Company has no reason to
believe such policies will not remain in full force and effect upon the
consummation of the transactions contemplated hereby. Neither the Company nor
any Subsidiary is in default with respect to its obligations under any
insurance policy maintained by it.
4R. Employees. The Company and each Subsidiary have
complied in all material respects with all laws relating to the employment of
labor, including provisions thereof relating to wages, hours, equal
opportunity, collective bargaining and the payment of social security and other
taxes. To the knowledge of the Company and Pathnet, neither the Company nor
any Subsidiary is the subject of any pending union organization activities, or
any pending, threatened or actual strikes, work stoppages or material
grievances. Neither the Company nor Pathnet is aware that any officer or key
employee of the Company or any Subsidiary or any group of employees of the
Company or any Subsidiary has any plans to terminate employment with the
Company or any Subsidiary. Neither the Company, its Subsidiaries nor, to the
best of the Company's and Pathnet's knowledge after due inquiry, any of their
employees is subject to any noncompete, nondisclosure, confidentiality,
employment, consulting or similar agreements relating to, affecting or in
conflict with the present or proposed business activities of the Company or any
of its Subsidiaries except for agreements between the Company and its present
and former employees.
4S. ERISA. For purposes of this Section 4S, the term
"Company" includes Pathnet and its Subsidiaries and all organizations under
common control with the Company pursuant to Section 414(b) or (c) of the IRC.
Except as set forth in Section 4S of the Disclosure Letter:
(a) Multiemployer Plans. The Company does not have any
obligation to contribute to (or any other liability, including current or
potential withdrawal liability, with respect to) any "multiemployer plan" (as
defined in Section 3(37) of ERISA).
(b) Retiree Welfare Plans. The Company does not maintain
or have any obligation to contribute to (or any other liability with respect
to) any plan or arrangement whether or not terminated, which provides medical,
health, life insurance or other welfare-type benefits for current or future
retired or terminated employees (except for limited continued medical benefit
coverage required to be provided under Section 4980B of the IRC or as required
under applicable state law).
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<PAGE> 21
(c) Defined Benefit Plans. The Company does not maintain,
contribute to or have any liability under (or with respect to) any employee
plan which is a tax-qualified "defined benefit plan" (as defined in Section
3(35) of ERISA), whether or not terminated.
(d) Defined Contribution Plans. The Company does not
maintain, contribute to or have any liability under (or with respect to) any
employee plan which is a tax-qualified "defined contribution plan" (as defined
in Section 3(34) of ERISA), whether or not terminated.
(e) Other Plans. The Company does not maintain,
contribute to or have any liability under (or with respect to) any plan or
arrangement providing benefits to current or former employees, including any
bonus plan, plan for deferred compensation, employee health or other welfare
benefit plan or other arrangement, whether or not terminated.
4T. Compliance with Laws. Except as set forth in Section
4T of the Disclosure Letter, neither the Company nor any Subsidiary has
violated any law or any governmental regulation or requirement which violation
would reasonably be expected to have a Material Adverse Effect, and neither the
Company nor any Subsidiary has received notice of any such violation. To the
knowledge of the Company and Pathnet, neither the Company nor any Subsidiary is
required under any applicable federal, state or local environmental law or
regulation as currently in effect to remediate any environmental condition or
to pay any fine or penalty with respect thereto.
4U. Affiliated Transactions. Except as set forth in
Section 4U of the Disclosure Letter, no officer, director, shareholder or
Affiliate of the Company or any Subsidiary or any individual related by blood
or marriage to any such Person or any entity in which any such Person or
individual owns any beneficial interest, is a party to any agreement, contract,
commitment or transaction with the Company or any Subsidiary or has any
material interest in any material property used by the Company or any
Subsidiary.
4V. Licenses. Except for (i) licenses set forth in
Section 4V of the Disclosure Letter and (ii) state or local permits necessary
for the construction, maintenance and ownership of fiber optic cable, there are
no Licenses necessary for the Company or its Subsidiaries to conduct the
businesses as currently conducted. All Licenses set forth in Section 4V of the
Disclosure Letter are in full force and effect and no proceeding is pending or
threatened which could have the effect of revoking or limiting any such
Licenses. Section 4V of the Disclosure letter sets forth all consents required
from the FCC with respect to the consummation of the transactions contemplated
in this Agreement and the Related Contribution Agreements.
4W. Reports with the SEC. The Company has furnished or
made available to Colonial complete and accurate copies of Pathnet's annual
report on Form 10-K for its most recent fiscal year, all other reports or
documents required to be filed by Pathnet pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act since the filing of the most recent annual report
on Form 10-K, and all correspondence with the SEC since August 1998. Such
filed reports do not, as of the date hereof, contain any material false
statements or any misstatement of any material fact and do not omit to state
any fact necessary to make the statements set forth therein not misleading.
Pathnet has made all filings with the SEC which it is required to make,
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<PAGE> 22
and Pathnet has not received any request from the SEC to file any amendment or
supplement to any of the reports described in this Section 4W.
4X. Transfers of Contributed Properties. There is no
plan or intention by the Company to dispose of any of the contributed
properties described in Section 2 or Section 3A(v), except that the Company is
contemplating (i) a transfer of certain contributed properties to Pathnet or
another Subsidiary in a transaction that will qualify as a tax-free transfer
pursuant to IRC Section 351, and (ii) the conversion of certain preferred stock
of Pathnet into common stock of Pathnet.
4Y. No Intention to Redeem. There is no current plan or
intention on behalf of the Company to redeem or otherwise reacquire any of the
Shares issued pursuant to the transactions described in Sections 2 and 3A(v)
hereof.
4Z. Disclosure. Neither this Agreement nor the
Disclosure Letter, nor any of the schedules, attachments, written statements,
documents, certificates or other items prepared or supplied to the other
parties hereto by or on behalf of the Company or any Subsidiary with respect to
the transactions contemplated hereby, contain any untrue statement of a
material fact or omit a material fact necessary to make each statement
contained herein or therein not misleading.
4AA. Year 2000 Compliance. The Company and Pathnet have
taken all reasonable steps to ensure that they are Year 2000 Compliant, as that
term is defined below, and there are no foreseeable expenses or other
liabilities associated with the process of becoming Year 2000 Compliant except
for or with respect to any noncompliance or any expenses or liabilities that
would not be reasonably expected to have a Material Adverse Effect on the
Company or Pathnet. "Year 2000 Compliant" means that such hardware or software
produced, used, or provided by the Company or material contractors or vendors,
including, but not limited to, microcode, firmware, system and application
programs, files, databases, computer services, and microcontrollers, including
those embedded in computer and non-computer equipment (the "Computer Systems")
will:
(a) process date data from at least the years 1900
through 2001 without error or interruption;
(b) maintain functionality with respect to the
introduction processing, or output of records
containing dates falling on or after January 1, 2000;
and
(c) be interoperable with other software or hardware
which may deliver records to, receive records from,
or interact with such Computer Systems in the course
of conducting the business of the Company.
Except as noted on the Disclosure Schedule, there are no software, hardware, or
other devices containing or using electronic components reasonably necessary to
the performance of the business and operations of the Company that to the
knowledge of the Company are not Year 2000 Compliant.
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<PAGE> 23
Section 5 Representations and Warranties of Colonial.
Colonial represents and warrants to the Company and Pathnet with respect to
each of the following at and as of the Agreement Date and (except for those
made with reference to a specific date) again at and as of the Initial Closing
Date, each Interim Closing Date and the Final Closing Date:
5A. Organization and Corporate Power. Colonial is duly
organized and validly existing under the laws of the state of its organization
and has been duly authorized by all necessary and appropriate corporate action
to enter into this Agreement and the Master Right of Way Lease Agreement and to
consummate the transactions contemplated herein and therein. The officer of
Colonial executing this Agreement on behalf of Colonial has been duly
authorized by all necessary and appropriate corporate action. This Agreement
is, and when executed and delivered the Master Right of Way Lease Agreement
will be, a valid and binding obligation of Colonial, enforceable against it in
accordance with its terms, except insofar as enforceability may be affected by
bankruptcy, insolvency or similar laws affecting creditors' rights generally or
by general principles of equity.
5B. Authorization; No Breach. Neither the execution and
delivery of this Agreement or the Master Right of Way Lease Agreement nor the
consummation of the transactions contemplated hereby and thereby nor the
fulfillment of or compliance with the terms and conditions hereof and thereof
(a) conflicts with or will result in a breach of any of the terms, conditions
or provisions of (i) the Governing Documents of Colonial or (ii) any agreement,
contract, indenture, mortgage, deed, easement, order, judgment, decree,
arbitration award, statute, regulation or instrument to which Colonial is a
party or by which it or its assets are bound, except as to matters that would
not reasonably be expected to have a Material Adverse Effect on Colonial or
materially affect the ability of Colonial to consummate the transactions
contemplated herein or (b) constitutes or will constitute a violation or
default or create a right of termination under any of the foregoing, except as
to matters that would not reasonably be expected to have a Material Adverse
Effect on Colonial or materially affect the ability of Colonial to consummate
the transactions contemplated herein. No consent or approval, authorization,
order, regulation or qualification of any governmental entity or any other
Person is required for the execution and delivery of this Agreement and the
Master Right of Way Lease Agreement and the consummation of the transactions
contemplated hereby and thereby.
5C. Investment Representations. Colonial acknowledges
that the Shares have not been and will not be registered or qualified under the
Securities Act or any state securities laws and are offered in reliance upon an
exemption from registration under Regulation D of the Securities Act and
similar state law exceptions. The Shares to be received by Colonial hereunder
will be held by such corporation for investment purposes only for its own
account, and not with a view to or for sale in connection with any distribution
of the Shares, and Colonial acknowledges that the Shares cannot be sold or
otherwise disposed of unless they are subsequently registered under the
Securities Act or pursuant to an exemption therefrom; and the Shares may not be
sold, assigned or otherwise transferred except in compliance with the
Stockholders Agreement. Colonial hereby acknowledges receipt of a copy of the
Stockholders Agreement and represents that it has reviewed and understands the
provisions thereof which have a bearing on the representations made in this
Section 5C.
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<PAGE> 24
5D. Accredited Investor. Colonial is an "accredited
investor" within the meaning of Regulation D under the Securities Act and has
the knowledge and experience in financial and business matters such that it is
capable of evaluating the merits and risks of receiving and owning the Shares
and is able to bear the economic risk of such ownership and understands that an
investment in Shares involves substantial risks.
5E. Availability of Information. There has been made
available to Colonial and its advisors the opportunity to ask questions of, and
receive answers from, the Company concerning the terms and conditions of the
investment in the Shares, and to obtain the financial information with respect
to the Company's assets, the Stockholders Agreement, and any additional
information, to the extent that the Company possesses such information or can
acquire it without unreasonable effort or expense, necessary to verify the
accuracy of the information given to Colonial, or to otherwise make an informed
investment decision, that Colonial has had an opportunity to consult with
counsel and other advisors about the investment in the Shares, and that all
material document, records and books pertaining to such investment have, on
request, been made available to Colonial and its advisors.
5F. No General Solicitation. Neither Colonial nor any of
its advisors is aware of or has engaged in any form of general solicitation or
advertising with respect to sales of the Shares, including (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio; and
(ii) any seminar or meeting whose attendees were invited by any general
solicitation or general advertising.
5G. Litigation. There is no action, suit, proceeding or
investigation pending or, to Colonial's knowledge, threatened against Colonial
that questions the validity of this Agreement or the ability of Colonial to
consummate the transactions contemplated hereby.
5H. Brokerage. There are no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement binding upon Colonial, other than with respect to The Breckenridge
Group, Inc., for which Colonial shall bear the full responsibility for paying
compensation.
5I. Disclosure. Neither this Agreement nor any of the
schedules, attachments, written statements, documents, certificates or other
items prepared or supplied to the other parties hereto by or on behalf of
Colonial with respect to the transactions contemplated hereby contain any
untrue statement of a material fact or omit a material fact necessary to make
each statement contained herein or therein not misleading.
5J. No Intention to Transfer Shares. Colonial has no
intention or plan, formally or informally, on the date hereof, to transfer any
of the Shares received by Colonial pursuant to this Agreement.
Section 6 Closings.
6A. Closing Dates. The closings of the transactions
contemplated by this Agreement shall take place at the offices of Covington &
Burling, in Washington, D.C., or at such other place as shall be mutually
agreed upon by the parties, on the following dates:
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<PAGE> 25
i. Initial Closing. The Company shall notify Colonial of the
occurrence of the Senior Noteholder Consent Date within one business
day after such date. The closing of the transactions contemplated by
Section 2A (the "Initial Closing") shall take place at the offices of
Covington & Burling, in Washington, D.C., or at such other place as
shall be mutually agreed upon by the parties, on the date which is
five business days following the Senior Noteholder Consent Date (or,
in the event that any other conditions to the obligations of any party
to close as provided hereunder shall not have been met at such date,
then on the date which is three (3) business days following the date
on which such conditions shall have been satisfied or waived by the
party whose obligations are so conditioned) or at such other date and
time as to which the parties may agree (the "Initial Closing Date").
The Initial Closing shall be effective immediately prior to the close
of business on the Initial Closing Date.
ii. Interim Closing. If Colonial exercises its right pursuant to
Section 2B(i)(a) to pay all or a part of the Additional Cash
Consideration in an installment and to receive Series E Shares in
tranches, the closing of any such installment transaction (an "Interim
Closing") shall take place at 10:00 a.m. on the date specified (the
"Interim Closing Date") in an irrevocable Notice of Acceleration to be
delivered by Colonial to the Company not less than thirty (30) days
prior to the date so specified, or on such later date as the
conditions to the Company's obligation to close such installment
transaction shall have been satisfied or waived; provided, however,
that in the event that the Company files a registration statement for
a Qualified Public Offering, Colonial may deliver the Notice of
Acceleration up to and including the 15th day after the filing of such
registration statement.
iii. Final Closing. Except as provided in Sections 2B(ii), the
closing of the transactions contemplated by Section 2B (the "Final
Closing") shall take place at 10:00 a.m. on the date which is ten (10)
business days following the delivery of written notice from the
Company to Colonial certifying that the Chicago/Denver Completion Date
has occurred (or, in the event that any other conditions to the
obligations of the any party to close as provided hereunder shall not
have been met at such date, then on the date which is three (3)
business days following the date on which such conditions shall have
been satisfied or waived by the party whose obligations are so
conditioned), or at such other date and time as to which the parties
may agree (the "Final Closing Date").
6B. Deliveries by the Company at the Initial Closing. At
the Initial Closing, the Company and Pathnet shall deliver the following
documents:
i. The Master Right of Way Lease Agreement and the Fiber Optic
Access and Purchase Agreement duly executed and delivered by the
Company or a Subsidiary, as appropriate;
ii. A certificate of the President of each of Pathnet and the
Company, each certifying that its representations and warranties are
true in all material respects as of the Initial Closing Date and that
it has performed or complied, in all material respects, with all of
its respective agreements and obligations required by this Agreement
to be performed or complied with by it prior to or at the Initial
Closing;
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<PAGE> 26
iii. A certified copy of resolutions of the Board of Directors of
the Company, authorizing the execution and delivery of this Agreement
and the performance of the obligations of the Company hereunder;
iv. A certified copy of resolutions of the Board of Directors of
Pathnet, authorizing the execution and delivery of this Agreement and
the performance of the obligations of Pathnet hereunder;
v. An opinion of Counsel to the Company and Pathnet substantially
in the form set forth on Exhibit F;
vi. The Stockholders Agreement duly executed and delivered by the
Company and each other stockholder of the Company (other than any one
or more stockholders beneficially owning, in the aggregate, not more
than one percent of the outstanding capital stock of the Company);
vii. The Option Agreement duly executed and delivered by the
Company;
viii. Certificates representing the Shares to be issued to Colonial;
and
ix. All third party and governmental consents necessary or
appropriate to consummate the transactions contemplated herein,
including, without limitation, the FCC Consents; and
x. Those other closing documents required to be executed by it or
as may otherwise be reasonably necessary or appropriate to consummate
the transactions contemplated herein.
6C. Deliveries by Colonial at the Initial Closing. At the
Initial Closing, Colonial shall deliver the following documents:
i. The Master Right of Way Lease Agreement and the Fiber Optic
Access and Purchase Agreement duly executed and delivered by Colonial;
ii. The Stockholders Agreement duly executed and delivered by
Colonial;
iii. The Option Agreement, duly executed and delivered by Colonial;
iv. An opinion of Counsel to Colonial substantially in the form
set forth on Exhibit G;
v. A certificate of Colonial certifying that the representations
and warranties of such corporation contained in this Agreement are
true and correct as of the Initial Closing Date and that it has
performed, in all material respects, all of its respective agreements
and obligations required by this Agreement to be performed or complied
with by it prior to or at the Initial Closing;
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<PAGE> 27
vi. A certified copy of resolutions of the Board of Directors of
Colonial authorizing the execution and delivery by Colonial of this
Agreement and the performance of the obligations of Colonial
hereunder;
vii. All third party and governmental consents necessary or
appropriate to consummate the transactions contemplated herein; and
viii. Those other closing documents required to be executed by it or
as may otherwise be reasonably necessary or appropriate to consummate
the transactions contemplated herein.
6D. Deliveries by the Company at the Interim Closing and
the Final Closing. At any Interim Closing and at the Final Closing, as the
case may be, the Company shall deliver the following documents:
i. A certificate of the President of the Company certifying that
its representations and warranties set forth in Sections 4A, 4B, 4F,
4G, 4P and 4Y are true in all material respects, and that its
representations as warranties set forth in Sections 4E, 4H, 4O and 4T,
as modified by the Disclosure Letter in accordance with Section 7K are
true in all material respects, as of the Interim Closing Date or the
Final Closing Date, as the case may be, and that it has performed, in
all material respects, all of its agreements and obligations required
by this Agreement to be performed or complied with by it prior to or
at the Interim Closing or the Final Closing, as the case may be;
ii. A certificate representing the Shares to be issued to Colonial;
and
iii. Those other closing documents required to be executed by it or
as may otherwise be reasonably necessary or appropriate to consummate
the transactions contemplated herein.
6E. Deliveries by Colonial at the Interim Closings and
the Final Closing. At any Interim Closing and at the Final Closing, as the
case may be, Colonial shall deliver the following documents:
i. A certificate of Colonial certifying that the representations
and warranties of the Colonial set forth in Section 5 are true and
correct as of the Interim Closing Date or the Final Closing Date, as
the case may be, and that it has performed, in all material respects,
all of its agreements and obligations required by this Agreement to be
performed or complied with by it prior to or at the Interim Closing or
the Final Closing, as the case may be; and
ii. Those other closing documents required to be executed by it or
as may otherwise be reasonably necessary or appropriate to consummate
the transactions contemplated herein.
Section 7 Covenants.
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<PAGE> 28
7A. Implementing Agreement. Subject to the terms and
conditions hereof, each party hereto shall use its best efforts to take all
action required of it to fulfill its obligations under the terms of this
Agreement and to facilitate the consummation of the transactions contemplated
hereby.
7B. HSR Act Filings. Each of the Company, Pathnet and
Colonial shall use reasonable efforts to prepare and, as soon as practicable
after the Agreement Date, file with the Federal Trade Commission and the
Antitrust Division of the Department of Justice any materials and information
required to be filed with or provided pursuant to the HSR Act with respect to
the transactions contemplated by this Agreement. Each of the Company, Pathnet
and Colonial shall promptly supply any additional information which may be
required or requested of it in connection with the HSR Act filings.
7C. FCC Filings. Each of the Company and Pathnet shall
use reasonable best efforts to prepare and, as soon as practicable after the
Agreement Date, file with the Federal Communications Commission any
applications necessary to obtain the FCC Consents.
7D. Access to Information. At all times before the
Initial Closing Date, each of the Company and Pathnet shall provide Colonial
and its employees, managers, contractors, consultants, agents and
representatives, with reasonable access to those properties, files, books,
records and other materials relating to the Company and the Subsidiaries and
their business and the right to examine and inspect such materials as Colonial
may deem appropriate (and make copies of the same), subject to the terms of the
existing Non-Disclosure Agreement between the Company and Colonial.
7E. Preservation of Business. From the Agreement Date
until the Initial Closing Date, the Company and Pathnet shall cause the Company
and the Subsidiaries to be operated only in the ordinary and usual course of
business and consistent with past practice, shall preserve intact assets of the
Company and the Subsidiaries, preserve the good will and advantageous
relationships of the Company and the Subsidiaries with customers, suppliers,
independent contractors, employees and other Persons material to the operations
of its business, shall perform its material obligations under all contracts and
shall not permit any action or omission which would cause any of the
representations or warranties of the Company or Pathnet contained herein to
become inaccurate or any of the covenants of the Company or Pathnet to be
breached. Without any limitation on the foregoing, the Company and Pathnet
agree that, from the Agreement Date until the Initial Closing Date, except as
otherwise consented to or approved by Colonial in writing and except as
otherwise required by this Agreement:
i. The Company and Pathnet shall use, and cause the Subsidiaries
to use, reasonable best efforts to continue to solicit new business
and to offer the Company's services and facilities in the ordinary
course of business subject to obligations imposed by this Agreement.
ii. Neither the Company nor any Subsidiary shall (i) enter into an
agreement for the transfer, lease (as lessor), license, guarantee,
sale, mortgage, pledge, disposition of or encumbrance of any assets or
the incurrence or modification of any indebtedness or other liability
other than in the ordinary course of business and consistent with past
practice; or
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<PAGE> 29
(ii) make any loans, advances or capital contributions to, or
investments in, any other Person (other than to wholly owned
subsidiaries).
iii. Neither the Company nor any Subsidiary shall (i) declare, set
aside or pay any dividends on, or make any other actual, constructive
or deemed distributions in respect of, any of its capital stock, or
otherwise make any payments to its shareholders in their capacity as
such; (ii) split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock; or
(iii) purchase, redeem or otherwise acquire any shares of its capital
stock or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities.
iv. Neither the Company nor any Subsidiary shall issue, deliver,
sell, pledge, dispose of or otherwise encumber any shares of its
capital stock, any other voting securities or equity equivalent or any
securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting securities, equity equivalent or
convertible securities.
v. The Company shall not amend its Governing Documents.
vi. Neither the Company not any Subsidiary shall acquire or agree
to acquire, by merging or consolidating with, by purchasing a
substantial portion of the assets of or equity in, or by any other
manner, any business or any corporation, partnership, association or
other business organization or division thereof or otherwise acquire
or agree to acquire any assets.
vii. Neither the Company nor any Subsidiary shall sell, lease or
otherwise dispose of or agree to sell, lease or otherwise dispose of
any of its material assets, other than the sale of inventory in the
ordinary course of business.
7F. Consents and Approvals. The Company and Pathnet
shall use their best efforts to obtain all consents, approvals, certificates
and other documents required in connection with its performance under this
Agreement and the consummation of the transactions contemplated hereby. The
Company and Pathnet shall make all filings, applications, statements and
reports to all governmental authorities and other Persons which are required to
be made by either of them prior to the Initial Closing Date by or on behalf of
the Company or Pathnet or any of their Affiliates pursuant to any applicable
law or contract in connection with this Agreement and the transactions
contemplated hereby.
7G. Maintenance of Insurance. The Company and Pathnet
shall continue to carry and cause the Subsidiaries to carry its and their
existing insurance through the Initial Closing Date and shall not allow any
breach, default, termination or cancellation of such insurance policies or
agreements to occur or exist.
7H. Representations and Warranties, Supplemental
Information. From time to time prior to the Initial Closing, each party shall
promptly disclose in writing to the other any matter hereafter arising which,
if existing, occurring or known at the Agreement Date would have been required
to be disclosed to the other or which would render inaccurate any of the
representations, warranties or statements set forth herein. No information
provided to either
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<PAGE> 30
party pursuant to this Section 7H shall be deemed to cure any breach of any
representation, warranty or covenant made in this Agreement.
7I. No Actions Inconsistent with Master Right of Way
Lease Agreement. From the Agreement Date until the Initial Closing Date,
Colonial shall not grant, or enter into any agreement to grant, any right of
way, access, or easement that would be inconsistent with the rights to be
granted to the Company under the Master Right of Way Lease Agreement, or that
relate to Rail Corridors (as defined in the Master Right of Way Lease
Agreement).
7J. Tax Free Transfers. The parties intend that the
contribution of properties by Colonial and the other contributing Persons
described in Section 3A(v) in respect of the Initial Closing will be part of a
single integrated transaction in which no gain or loss will be recognized to
the Company or Colonial upon the issuance and receipt of the Shares pursuant to
IRC Section 351 and, in the case of Persons who contribute Pathnet stock to the
Company, the contributions will qualify as a tax-free reorganization pursuant
to IRC Section 368(a)(1)(B), and the parties agree that they will prepare and
file their Federal and state income tax returns in a manner consistent with
such characterization. Further, Colonial agrees to provide to the Company a
statement setting forth the amount of Colonial's tax basis in the property
contributed by Colonial so that the Company can determine its tax basis in the
property in accordance with IRC Section 362. Colonial agrees to file the
information required by Treasury Regulation Section 1.351-3 for its Federal
income tax return for the taxable year of the contribution, and the Company
agrees to furnish to Colonial information necessary to enable Colonial to
comply with the information reporting requirements of Treasury Regulation
Section 1.351-3. The Company agrees that it will exercise reasonable care not
to take any action that would cause the transactions contemplated hereby not to
qualify as tax-free pursuant to IRC Section 351. The Company has no present
intention or plan to transfer all or substantially all (within the meaning of
IRC Section 368(a)(1)(C)) of the assets of Pathnet to the Company. The Company
has no present intention or plan to issue additional shares of the Company
(other than the shares proposed to be issued in the transactions contemplated
by Sections 2 and 3A(v) hereof), or rights to acquire additional shares, for
consideration other than cash or property, if the result would be that the
Contributors would fail to have "control" of the Company within the meaning of
IRC Section 368(c).
7K. Disclosure Letter Prior to Initial Closing. The
Company shall supplement or amend the Disclosure Letter as follows:
i. From time to time prior to the Initial Closing, the Company
shall supplement or amend the Disclosure Letter except with respect to
information contained therein that relates to a representation and
warranty explicitly made in this Agreement with respect to a specific
date. No such supplement or amendment shall affect any rights
(including indemnification rights and rights with respect to
conditions to closing) that Colonial may have with respect to any
errors, inaccuracies or omissions in the Disclosure Letter delivered
upon the execution of this Agreement, or with respect to any material
change from the information set forth in the Disclosure Letter, other
than updates of matters arising in the ordinary course of the Company
and Pathnet's businesses.
ii. From time to time after the Initial Closing and prior to the
Final Closing, the Company shall supplement or amend Sections 4E, 4H,
4O and 4T of the Disclosure
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<PAGE> 31
Letter. No such supplement or amendment shall affect any rights
(including indemnification rights and rights with respect to
conditions to closing) that Colonial may have with respect to any
errors, inaccuracies or omissions in the Disclosure Letter, or any
supplements or amendments thereto, delivered prior to the Initial
Closing. In addition, to the extent that such supplements or
disclosures reveal a Material Adverse Effect as contemplated by
Section 3D(vi) which has arisen since the Initial Closing, such
supplement or amendment shall not affect Colonial's right to refuse to
close as contemplated by Section 3D(vi).
7L. Notices. The Company hereby agrees to provide
Colonial with not less than fifteen (15) days' prior written notice of the:
i. The Company's filing of a registration statement with the SEC
for a Qualified Public Offering; and
ii. the Chicago/Denver Completion Date.
7M. Stock Options. In conjunction with or promptly after
the Initial Closing, the Company shall issue, in exchange for any Pathnet stock
options theretofore issued by Pathnet under its stock option plans, stock
options with respect to the Common Stock of the Company, with the same terms
and conditions except that the options will be exercisable for common stock of
the Company.
Section 8 Indemnification.
8A. Indemnification by the Company. Subject to the terms,
conditions and limitations of this Section 8, the Company and Pathnet jointly
and severally shall indemnify Colonial and its Affiliates and their respective
officers, directors, trustees, employees, agents and representatives (the
"Colonial Indemnified Parties") against, and agrees to hold each of them
harmless from, any and all Losses incurred or suffered by them relating to or
arising out of or in connection with any of the following (in each case so long
as notice of a claim for indemnification is made in good faith):
i. any breach of any representation or warranty made by the
Company or Pathnet in this Agreement or the Option Agreement; or
ii. any breach of or failure by the Company or Pathnet to perform
any covenant or obligation of the Company or Pathnet to Colonial or
its Affiliates under this Agreement or the Option Agreement.
No knowledge before the Closing Date by any Colonial Indemnified Party
of any such breach or inaccuracy shall constitute a waiver of any claim
hereunder.
8B. Indemnification by Colonial. Subject to the terms,
conditions and limitations of this Section 8, Colonial shall indemnify the
Company, Pathnet and their Affiliates and their respective officers, directors,
trustees, employees, agents and representatives (the "Company Indemnified
Parties") against, and agree to hold each of them harmless from, any and all
Losses incurred or suffered by them relating to or arising out of or in
connection with any of
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<PAGE> 32
the following (in each case so long as notice of a claim for indemnification is
made in good faith):
i. any breach of any representation or warranty made by Colonial
in this Agreement or the Option Agreement; or
ii. any breach of or failure by Colonial to perform any covenant
or obligation of Colonial to Pathnet or the Company under this
Agreement or the Option Agreement.
No knowledge before the Initial Closing by any Company Indemnified
Party of any such breach or inaccuracy shall constitute a waiver of any claim
hereunder.
8C. Claims. As soon as is reasonably practicable after
becoming aware of a claim for indemnification under this Agreement the
Indemnified Person shall promptly give notice to the Indemnifying Person of
such claim and the amount the Indemnified Person believes it is entitled to
receive hereunder from the Indemnifying Person; provided that the failure of
the Indemnified Person to give notice shall not relieve the Indemnifying Person
of its obligations under this Section 8, except to the extent (if any) that the
Indemnifying Person shall have been materially prejudiced thereby. If the
Indemnifying Person does not object in writing to such indemnification claim
within 30 calendar days of receiving notice thereof, the Indemnified Person
shall be entitled to recover promptly from the Indemnifying Person the amount
of such claim, and no later objection by the Indemnifying Person shall be
permitted. If the Indemnifying Person agrees that it has an indemnification
obligation but objects that it is obligated to pay only a lesser amount, the
Indemnified Person shall nevertheless be entitled to recover promptly from the
Indemnifying Person the lesser amount, without prejudice to the Indemnified
Person's claim for the difference. Any claim under this Section 8 must be made
on or prior to the end of the survival period set forth in Section 9E. No
claim may be made against an Indemnifying Person under this Section 8 until the
aggregate amount of all such claims equals at least $2.5 million, at which time
the Indemnifying Person shall be liable for all claims including the initial
$2.5 million in claims.
8D. Assumption of Defense. The Indemnifying Person may,
at its own expense, (a) participate in the defense of any claim, suit, action
or proceeding and (b) upon notice to the Indemnified Person and the
Indemnifying Person's delivering to the Indemnified Person a written agreement
that the Indemnified Person is entitled to indemnification pursuant to Section
8A or 8B for all Losses arising out of such claim, suit, action or proceeding,
assume the defense thereof; provided, however, that (i) the Indemnifying
Person's counsel is reasonably satisfactory to the Indemnified Person and (ii)
the Indemnifying Person shall thereafter consult with the Indemnified Person
upon the Indemnified Person's reasonable request for such consultation from
time to time with respect to such claim, suit, action or proceeding. If the
Indemnifying Person assumes such defense, the Indemnified Person shall have the
right (but not the duty) to participate in the defense thereof and to employ
counsel, at its own expense, separate from the counsel employed by the
Indemnifying Person. If, however, the Indemnified Person reasonably determines
in its judgment that representation by the Indemnifying Person's counsel of
both the Indemnifying Person and the Indemnified Person would present such
counsel with a conflict of interest, then such Indemnified Person may employ
separate counsel to represent or defend it in any such claim, action, suit or
proceeding and the Indemnifying Person shall pay the
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<PAGE> 33
fees and disbursements of such separate counsel. Whether or not the
Indemnifying Person chooses to defend or prosecute any such claim, suit, action
or proceeding, all of the parties hereto shall cooperate in the defense or
prosecution thereof.
8E. Settlement or Compromise. Any settlement or
compromise made or caused to be made by the Indemnified Person or the
Indemnifying Person, as the case may be, of any such claim, suit, action or
proceeding of the kind referred to in Section 8D shall also be binding upon the
Indemnifying Person or the Indemnified Person, as the case may be, in the same
manner as if a final judgment or decree had been entered by a court of
competent jurisdiction in the amount of such settlement or compromise;
provided, however, that no obligation, restriction or Loss shall be imposed on
the Indemnified Person as a result of such settlement without its prior written
consent, which consent will not be unreasonably withheld or delayed. The
Indemnified Person will give the Indemnifying Person at least 30 days' notice
of any proposed settlement or compromise of any claim, suit, action or
proceeding it is defending, during which time the Indemnifying Person may
reject such proposed settlement or compromise; provided, however, that from and
after such rejection, the Indemnifying Person shall be obligated to assume the
defense of and full and complete liability and responsibility for such claim,
suit, action or proceeding and any and all Losses in connection therewith in
excess of the amount of unindemnifiable Losses which the Indemnified Person
would have been obligated to pay under the proposed settlement or compromise.
8F. Failure of Indemnifying Person to Act. In the event
that the Indemnifying Person does not elect to assume the defense of any claim,
suit, action or proceeding, then any failure of the Indemnified Person to
defend or to participate in the defense of any such claim, suit, action or
proceeding or to cause the same to be done, shall not relieve the Indemnifying
Person of its obligations hereunder.
8G. No Set-Off. The indemnification obligations of the
parties hereunder shall be limited as set forth herein and no party shall be
entitled to set-off such indemnification obligations or any other amounts
against any amounts owed to such party by any other party.
Section 9 Miscellaneous.
9A. Transfer and Similar Taxes. Except as provided in
Section 9.1(l) of the Master Right of Way Lease Agreement, all sales, use,
stock, stamp, transfer, registration or similar taxes or duties, if any,
resulting from the transfer by Colonial of property described in Section 2
hereof shall be paid one-half by the Company and one-half by Colonial. All HSR
Act filing fees required be made in order to effect the issue of the Shares
contemplated hereby, shall be paid one-half by the Company and one-half by
Colonial. All FCC and other governmental filing fees, other than in connection
with the HSR Act filing fees, required to be made in order to effect the
transactions contemplated hereby shall be paid by the Company.
9B. Complete Agreement. This Agreement (including the
Exhibits hereto and the Disclosure Letter) represents the entire agreement
between Colonial, Pathnet and the Company covering everything agreed upon or
understood in this transaction and all other prior agreements, written or oral
are merged into this Agreement. There are no oral promises,
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<PAGE> 34
conditions, representations, understandings, interpretations or terms of any
kind as conditions or inducements to the execution hereof in effect between the
parties.
9C. Authorized Signatories. The persons executing this
Agreement for and on behalf of Colonial, Pathnet and the Company each represent
that they have the requisite authority to bind the entities on whose behalf
they are signing.
9D. Termination. In the event that for any reason the
Initial Closing does not occur on or before the 150th day after the date of
this Agreement, then any party, if not then in breach of its obligations under
this Agreement, may terminate this Agreement by giving written notice thereof
to the other party; provided, however, that no such termination shall relieve
either party of liability for any breach of its obligations hereunder prior to
such termination.
9E. Survival of Representations and Warranties.
Regardless of any investigation made by any party or on its behalf, all
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby for a
period of three years, provided, however, that any representation or warranty
that is subject to a written claim under Section 8A that is received by the
Indemnifying Party prior to the expiration of such three-year period shall
continue to survive, and the representations and warranties made pursuant to
Sections 4L, 4Y and 7J shall survive until the expiration of the applicable
statute of limitations.
9F. Successors and Assigns. This Agreement may not be
assigned by either party without the written consent of the other party.
Except as otherwise expressly provided herein, all covenants and agreements
contained in this Agreement by or on behalf of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not.
9G. Knowledge. As used in this Agreement, the terms
"knowledge" or "aware" with respect to the Company and Pathnet shall mean the
actual knowledge or awareness of any one or more of Richard Jalkut, William
Smedberg, Michael Lubin, James Craig, Joe Mastrogiorgio and Robert Rouse, and
such terms with respect to Colonial shall mean the actual knowledge or
awareness of any one or more of David Lemmon, William Scott, Kalin Jones, Josh
Akan and David Doudna.
9H. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
9I. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Agreement.
9J. Descriptive Headings: Interpretation. The
descriptive headings of this Agreement are inserted for convenience only and do
not constitute a Section of this Agreement.
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<PAGE> 35
The use of the word "including" in this Agreement shall be by way of example
rather than by limitation.
9K. Governing Law. This Agreement shall be governed by
the laws of the State of Delaware.
9L. Amendment. No change or addition shall be made to
this Agreement except by a written agreement executed by Colonial, Pathnet and
the Company.
9M. Notices. All notices, demands or other
communications to be given or delivered under or by reason of the provisions of
this Agreement shall be in writing and shall be deemed to have been given when
delivered personally to the recipient, sent to the recipient by reputable
express courier service (charges prepaid) or mailed to the recipient by
certified or registered mail, return receipt requested and postage prepaid.
Such notices, demands and other communications shall be sent to the parties
hereto at the address indicated below:
If to Colonial:
Colonial Pipeline Company
945 East Paces Ferry Road, NE
Atlanta, GA 30326-1125
Attn: General Counsel
Fax: 404-841-2315
With a copy to (which shall not constitute notice):
Arnall Golden & Gregory, LLP
Suite 2800
1201 W. Peachtree Street
Atlanta, GA 30309-3450
Attn: Donald I. Hackney, Jr., Esq.
Fax: 404-873-8639
If to the Company to:
Pathnet Telecommunications, Inc.
1015 31st Street, N.W.
Washington, D.C. 20007
Attn: General Counsel
Fax: 202-625-7369
With a copy (which shall not constitute notice) to:
Covington & Burling
1201 Pennsylvania Ave., N.W.
P.O. Box 7566
Washington, D.C. 20044
Attn: Bruce S. Wilson, Esq.
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<PAGE> 36
Fax: 202-662-6291
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
[End of text; signature page follows]
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<PAGE> 37
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
PATHNET TELECOMMUNICATIONS, INC.
BY /s/ RICHARD A. JALKUT
------------------------------
ITS PRESIDENT AND CEO
------------------------------
PATHNET, INC.
BY /s/ RICHARD A. JALKUT
------------------------------
ITS PRESIDENT AND CEO
------------------------------
COLONIAL PIPELINE COMPANY
BY /s/ D. L. LEMMON
------------------------------
ITS PRESIDENT AND CEO
------------------------------
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<PAGE> 1
EXHIBIT 10.3
CONTRIBUTION AGREEMENT
DATED
NOVEMBER 4, 1999
BY AND AMONG
PATHNET TELECOMMUNICATIONS, INC.,
PATHNET, INC.
AND
CSX TRANSPORTATION, INC.
<PAGE> 2
CONTRIBUTION AGREEMENT
THIS AGREEMENT is made as of November 4, 1999 (the "Agreement Date"),
by and among PATHNET TELECOMMUNICATIONS, INC., a Delaware corporation (the
"Company"), PATHNET, INC., a Delaware corporation ("Pathnet"), and CSX
Transportation, Inc., a Virginia corporation ("CSX");
W I T N E S S E T H:
WHEREAS, CSX has right-of-way interests in certain railroad
corridors covering the eastern United States; and
WHEREAS, the Company intends to construct, install, operate and
maintain fiber optic telecommunications transmission systems and certain
appurtenant equipment and structures on certain CSX railroad corridors; and
WHEREAS, CSX intends, subject to the terms and conditions hereof, to
contribute to the Company certain property interests in the form of the right to
own and/or lease certain property interests on the terms and conditions set
forth in the Fiber Optic License Agreement (as defined below) and the Right of
Way Operating Agreement (as defined below) in exchange for certain Series D
Shares (as defined below); and
WHEREAS, CSX and the other Contributors (as defined below) intend that
the transfers of their respective property interests to the Company in exchange
for shares of the Company will assist the Company and its subsidiaries in
conducting future operations in an efficient manner; and
NOW THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
Section 1 Definitions. For the purposes of this
Agreement, the following terms have the meanings set forth below:
"12 1/4% Senior Notes" shall mean those certain senior notes due 2008
issued by Pathnet pursuant to the terms of the 1998 Indenture.
"1998 Indenture" shall mean that certain Indenture, dated as of April
8, 1998, by Pathnet to the Bank of New York, as Trustee, in respect of
$350,000,000 in aggregate principal amount of 12 1/4% Senior Notes.
"Additional Cash Consideration" shall have the meaning set
forth in Section 2B.
"Affiliate" of any particular person or entity means any other person
or entity controlling, controlled by or under common control with such
particular person or entity. The term "control" for this purpose shall mean the
ability, whether by the ownership of shares or other equity interest, by
contract or otherwise, to elect a majority of the directors of a corporation,
independently to select the managing partner of a partnership or the managing
member of a
<PAGE> 3
limited liability company, or otherwise to have the power independently to
remove and then select a majority of those Persons exercising governing
authority over an entity. Control shall be exclusively presumed in the case of
the direct or indirect ownership of fifty percent (50%) or more of the equity
interests in an entity.
"Agreement" shall mean this Contribution Agreement, as amended,
supplemented or restated from time to time in accordance with its terms.
"Agreement Date" shall have the meaning set forth in the preamble to
this Agreement.
"Closing" shall have the meaning set forth in Section 6A.
"Closing Date" shall have the meaning set forth in Section
6A.
"Common Stock" shall mean Common Stock of the Company, par value $0.01
per share.
"Company" shall have the meaning set forth in the preamble to this
Agreement.
"Company Assets" shall mean substantially all of the assets of the
Company and its Subsidiaries (including, but not limited to, all contractual,
real and personal property rights) as of the date of the Closing and all future
assets acquired by the Company or its Subsidiaries after the Closing.
"Contributors" shall mean the parties to this Agreement and the Related
Contribution Agreements (as defined below), other than the Company and Pathnet.
"CSX" shall have the meaning set forth in the preamble to this
Agreement.
"Disclosure Letter" means the disclosure letter of the Company to CSX
of even date herewith.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"FCC" shall mean the Federal Communications Commission and any
governmental body or agency succeeding to the functions thereof.
"FCC Consents" means the consents of the FCC, to the extent required
under the Federal Communications Act and the regulations thereunder in order to
effect the transactions contemplated by this Agreement and the Related
Contribution Agreements, to the assignment or transfer of control of all FCC
licenses and authorizations of the Company and the Subsidiaries, or, in lieu
thereof, special temporary authority to operate under such licenses and
authorizations following such assignment or transfer of control; exclusive,
however, of any FCC licenses or authorizations that may be surrendered or
forfeited to the FCC and that are not material to the operation of Pathnet's
existing networks.
"Fiber Optic License Agreement" means the Fiber Optic Access and
License Agreement substantially in the form attached hereto as Exhibit A.
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<PAGE> 4
"Governing Documents" means, with respect to (i) a limited partnership,
such limited partnership's certificate of limited partnership and the agreement
of limited partnership, and any amendments or modifications of any of the
foregoing; (ii) a corporation, such corporation's articles or certificate of
incorporation, by-laws and any applicable authorizing resolutions, and any
amendments or modifications of any of the foregoing; (iii) a limited liability
company, such limited liability company's articles or certificate of
organization or formation and operating agreement or agreement of limited
liability company, and any amendments or modifications of any of the foregoing;
and (iv) a trust, such trust's declaration of trust, articles supplementary and
by-laws and any amendments or modifications of any of the foregoing.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Indemnified Person" means the Person or Persons entitled to, or
claiming a right to, indemnification under Section 8.
"Indemnifying Person" means the Person or Persons claimed by the
Indemnified Person to be obliged to provide indemnification under Section 8.
"IRC" means the Internal Revenue Code of 1986, as amended, and any
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"Latest Balance Sheet" shall have the meaning set forth in Section 4G.
"Licenses" means federal, state, local and foreign franchises, tariffs,
licenses, ordinances, certifications, approvals, authorizations and permits
issued or granted by governmental authorities.
"Loss" or "Losses" means any and all loss, cost, claim, damage,
liability, or expense (including attorneys' fees).
"Material Adverse Effect" means a material adverse effect upon the
assets, liabilities, prospects, financial condition or business operations of,
in the case of the Company, the Company and its Subsidiaries, taken as a whole,
and in the case of CSX, upon CSX and its affiliates and subsidiaries, taken as a
whole.
"Pathnet" shall have the meaning set forth in the preamble to this
Agreement.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, a limited liability company and a governmental entity or any
department, agency or political subdivision thereof.
"Proprietary Rights" means all (i) patents, patent applications, patent
disclosures and inventions, (ii) trademarks, service marks, trade dress, trade
names and corporate names and registrations and applications for registration
thereof, (iii) copyrights and registrations and applications for registration
thereof, (iv) mask works and registrations and applications for registration
thereof, (v) computer software, data and documentation, (vi) trade secrets and
other
-3-
<PAGE> 5
confidential information (including, without limitation, ideas, formulas,
compositions, inventions (whether patentable or unpatentable and whether or not
reduced to practice), know-how, manufacturing and production processes and
techniques, research and development information, drawings, specifications,
designs, plans, proposals, technical data, copyrightable works, financial and
marketing plans and customer and supplier lists and information), (vii) other
intellectual property rights, and (viii) copies and tangible embodiments thereof
(in whatever form or medium).
"Qualified Public Offering" shall mean the closing of the first firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act covering the offer and sale of Common Stock
to the public (i) in which the proceeds received by the Company, net of
underwriting discounts and commissions, equal or exceed $75,000,000; (ii)
immediately prior to the consummation of which the Company is valued (based on
the per-share price paid in such public offering, but without regard to any
proceeds to be received by the Company in connection with such public offering)
at greater than $600,000,000; and (iii) in which the Company uses a nationally
recognized underwriter acceptable to the Board of Directors.
"Related Contribution Agreements" shall have the meaning set forth in
Section 3A(v).
"Right of Way Operating Agreement" means the Right of Way Operating
Agreement substantially in the form attached hereto as Exhibit B.
"SEC" shall mean the Securities and Exchange Commission and any
governmental body or agency succeeding to the functions thereof.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar federal law then in force.
"Senior Noteholder Consent" shall mean each and all consents, waivers,
amendments and other action of the holders of the 12 1/4% Senior Notes of
Pathnet in respect of the transactions contemplated herein (and in the Related
Contribution Agreements, all to be closed in connection herewith) that are, in
the reasonable opinion of the Company and its counsel, required to have been
obtained or completed to permit Pathnet to complete such transactions pursuant
to the terms of the 1998 Indenture.
"Senior Noteholder Consent Date" shall mean that date on which the
Senior Noteholder Consent shall have been obtained.
"Series D Shares" shall mean the Series D Convertible Preferred Stock
of the Company, as the terms of such Series D Shares are set forth in the
Certificate of Incorporation of the Company attached as Exhibit C hereto.
"Shares" shall mean the Series D Shares to be issued pursuant to the
terms of this Agreement.
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<PAGE> 6
"Stockholders Agreement" shall mean a Stockholders Agreement
substantially in the form of Exhibit D hereto.
"Subsidiary" means Pathnet and (i) any other corporation of which the
securities having a majority of the ordinary voting power in electing the board
of directors are, at the time as of which any determination is being made, owned
by the Company either directly or through one or more Subsidiaries, (ii) any
partnership, joint venture or similar entity of which or in which such Person,
such Person and one or more of its Subsidiaries, or one or more Subsidiaries of
such Person directly or indirectly own more than 50% of the capital interest or
profits interest, or (iii) any trust, association or other unincorporated
organization of which or in which such Person, such Person and one or more of
its Subsidiaries, or one or more Subsidiaries of such Person directly or
indirectly own more than 50% of the beneficial interest.
"Tax Authority" shall mean any United States federal, foreign,
national, state, county or municipal or other local government, any subdivision,
agency, commission or authority thereof, or any quasi-governmental body
exercising any taxing authority or any other authority exercising tax regulatory
authority.
"Tax Return" shall mean any return, amended return, estimated return,
information return and statement (including any related or supporting
information) filed or to be filed with any Tax Authority in connection with the
determination, assessment, collection or administration of any Tax.
"Taxes" shall mean all taxes, charges, fees, interest, fines,
penalties, additions to tax or other assessments, including without limitation,
income, excise, environmental, property, sales, gross receipts, gains, transfer,
occupation, privilege, employment (including social security and unemployment),
use, value added, capital stock or surplus, franchise taxes, advance corporate
tax and customs duties imposed by any Tax Authority.
"Treasury Regulations" means the United States Treasury Regulations
promulgated under the IRC, and any reference to any particular Treasury
Regulation section shall be interpreted to include any final or temporary
revision of or successor to that section regardless of how numbered or
classified.
Section 2 Contribution by CSX. At the Closing, CSX
shall assign, transfer, convey and contribute to the Company certain property
interests in designated portions of rights-of-way currently used by CSX, in
accordance with the terms of the Fiber Optic License Agreement and the Right of
Way Operating Agreement, and in consideration for the execution by CSX of such
Fiber Optic License Agreement and the Right of Way Operating Agreement, the
Company will issue and sell to CSX 3,413,746 Series D Shares.
Section 3 Conditions to Closing.
3A. Conditions Precedent of the Company at the Closing. The
Company's obligations under this Agreement to issue the Shares and otherwise
consummate the transactions contemplated herein in respect of the Closing are
subject to the satisfaction (or waiver in writing by the Company) of the
following conditions on or before the Closing Date:
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i. No Injunction. No temporary restraining order or preliminary
or permanent injunction of any court or administrative agency of
competent jurisdiction prohibiting the consummation of the transactions
contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and CSX shall have made all
filings required under the HSR Act for the transactions contemplated
hereby and the applicable waiting period under the HSR Act shall have
elapsed without any second request by the Department of Justice or
Federal Trade Commission with respect to such filings. The Company
shall have obtained all FCC Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of CSX contained in this Agreement shall
be true and correct in all material respects on the date hereof and,
except for representations and warranties made with respect to a
specified date, at and as of the Closing Date.
iv. Performance of Agreement. CSX shall have performed or complied
with, in all material respects, all of its respective agreements,
covenants and obligations required by this Agreement to be performed or
complied with by it prior to or at the Closing, including, without
limitation, delivery of the contribution described in Section 2.
v. Contributions of Other Parties. At or contemporaneously with
the Closing, the Company shall also be closing, as part of the same
overall plan of contribution, upon (a) a Contribution Agreement with
the holders of at least 90% of the outstanding preferred stock of
Pathnet, (b) the Contribution Agreement between the Company and The
Burlington Northern and Santa Fe Railway Company, (c) the Contribution
Agreement between the Company and Colonial Pipeline Company, and (d)
one or more Contribution Agreements with certain holders of shares of
the outstanding common stock of Pathnet, such agreements in
substantially the form previously provided to CSX (the "Related
Contribution Agreements"), such that immediately after the Closing, the
Company will own stock of Pathnet constituting control within the
meaning of IRC Section 368(c).
vi. Senior Noteholder Consent. The Senior Noteholder Consent shall
have been obtained and not revoked.
vii. Delivery of Closing Documents. The Company shall have
received the other closing documents specified in Section 6C.
3B. Conditions Precedent of CSX at the Closing. CSX's
obligations under this Agreement to deliver the contributions described in
Section 2 and otherwise consummate the transactions contemplated herein in
respect of the Closing are subject to the satisfaction (or waiver in writing by
CSX) of the following conditions on or before the Closing Date:
i. No Injunction. No temporary restraining order or preliminary
or permanent injunction of any court or administrative agency of
competent jurisdiction prohibiting the consummation of the transactions
contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and CSX shall have made all
filings required under the HSR Act for the transactions contemplated
hereby, and the applicable
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waiting period under the HSR Act shall have elapsed without any second
request by the Department of Justice or Federal Trade Commission with
respect to such filings. The Company shall have obtained all FCC
Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of the Company and Pathnet contained in
this Agreement shall be true and correct in all material respects on
the date hereof and, except for representations and warranties made
with respect to a specified date, at and as of the Closing Date.
iv. Performance of Agreement. Each of the Company and Pathnet
shall have performed or complied with, in all material respects, all of
its respective agreements, covenants and obligations required by this
Agreement to be performed or complied with by it prior to or at the
Closing, including, without limitation, issuance of the Shares by the
Company described in Section 2.
v. Contributions of Other Parties. At or contemporaneously with
the Closing, as part of the same overall plan of contribution, the
Company shall also be closing upon the Related Contribution Agreements,
such that immediately after the Closing, the Company will own stock of
Pathnet constituting control within the meaning of IRC Section 368(c).
vi. Material Adverse Change. Between the Agreement Date and the
Closing there shall not have occurred any event or series of related
events which, individually or in the aggregate, have caused or could
reasonably be anticipated to cause a Material Adverse Effect.
vii. Senior Noteholder Consent. The Senior Noteholder Consent shall
have been obtained and not revoked.
viii. Delivery of Closing Documents. CSX shall have received the
closing documents specified in Section 6B.
Section 4 Representations and Warranties of the
Company and Pathnet. Each of the Company and Pathnet represents and warrants to
CSX with respect to each of the following provisions of this Section 4, at and
as of the Agreement Date and (except for those made with reference to a specific
date) again at and as of the Closing Date:
4A. Organization and Corporate Power. The Company is duly
organized, validly existing and in good standing under the laws of Delaware and
is qualified to do business in every jurisdiction in which its ownership of
property or conduct of business requires it to qualify. The Company has all
requisite corporate power and authority and all material Licenses necessary to
own and operate its properties, to carry on its business as now conducted and
presently proposed to be conducted and to carry out the transactions
contemplated by this Agreement. The copies of the Company's Governing Documents
which have been furnished to CSX reflect all amendments made thereto at any time
prior to the Agreement Date and are correct and complete.
4B. Authorization. Each of the Company and Pathnet has all
necessary corporate power and has been duly authorized by all necessary and
appropriate action to enter
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into this Agreement and the Fiber Optic License Agreement and the Right of Way
Operating Agreement and to consummate the transactions contemplated herein and
therein. The officers of the Company and Pathnet executing this Agreement on
behalf of such corporations have been duly authorized by all necessary and
appropriate corporate action. This Agreement is, and when executed and delivered
the Fiber Optic License Agreement and the Right of Way Operating Agreement will
each be, a valid and binding obligation of each of the Company and Pathnet,
enforceable against it in accordance with its terms, except insofar as
enforceability may be affected by bankruptcy, insolvency or similar laws
affecting creditors' rights generally or by general principles of equity.
4C. Capital Stock and Related Matters.
i. As of the Agreement Date, no shares of capital stock of the
Company are issued and outstanding.
ii. As of the Agreement Date, the authorized capital stock of
Pathnet consists of (a) 10,000,000 shares of preferred stock (of which
zero (0) shares are issued and outstanding); (b) 1,000,000 shares of
Series A Convertible Preferred Stock (all of which are issued and
outstanding); (c) 1,651,046 shares of Series B Convertible Preferred
Stock (all of which are issued and outstanding); (d) 2,819,549 shares
of Series C Convertible Preferred Stock (all of which are issued and
outstanding); and (e) 60,000,000 shares of Common Stock (of which
2,977,593 are issued and outstanding).
iii. As of the Closing and immediately thereafter (assuming that
the Company has completed the closing under each of the Related
Contribution Agreements and under similar contribution agreements with
the holders of common stock of Pathnet) the authorized capital stock of
the Company will consist of (a) 39,620,860 shares of preferred stock,
of which 2,899,999 shares are designated as Series A Convertible
Preferred Stock (all of which will be issued and outstanding),
4,788,030 shares are designated as Series B Convertible Preferred Stock
(all of which will be issued and outstanding), 8,176,686 shares are
designated as Series C Convertible Preferred Stock (all of which will
be issued and outstanding), 9,250,000 shares will be designated as
Series D Convertible Preferred Stock (of which 8,511,607 will be issued
and outstanding, allocated among the holders thereof as set forth in
Section 4C of the Disclosure Letter), and 4,506,145 shares of Series E
Convertible Preferred Stock (of which 1,729,631 will be issued and
outstanding) (collectively, the "Preferred Stock"), and (b) 60,000,000
shares of Common Stock, of which 2,977,593 shares will be issued and
outstanding and 30,000,000 shares will be reserved for issuance upon
conversion of the Preferred Stock. As of the Closing, neither the
Company nor any Subsidiary will have outstanding any stock or
securities convertible or exchangeable for any shares of its capital
stock or containing any profit participation features, nor shall it
have outstanding any rights or options to subscribe for or to purchase
its capital stock or any stock or securities convertible into or
exchangeable for its capital stock or any stock appreciation rights or
phantom stock plans, except for the Preferred Stock and except as set
forth in Section 4C of the Disclosure Letter. Section 4C of the
Disclosure Letter accurately sets forth the following with respect to
all outstanding options and rights to acquire the Company's and
Pathnet's capital stock: the holder, the number of shares covered, the
exercise price and the expiration date. As of the Closing,
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<PAGE> 10
neither the Company nor any Subsidiary will be subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire
or retire any shares of its capital stock or any warrants, options or
other rights to acquire its capital stock, except as set forth on the
Section 4C of the Disclosure Letter. As of the Closing and immediately
thereafter, all of the outstanding shares of the Company's capital
stock shall be validly issued, fully paid and nonassessable.
iv. The Company has not violated any applicable federal or state
securities laws in connection with the offer, sale or issuance of any
of its capital stock, including the sale of the Shares pursuant to this
Agreement. There are no agreements between the Company's stockholders
or between Pathnet's stockholders with respect to the voting or
transfer of the Company's or Pathnet's capital stock or with respect to
any other aspect of the Company's or Pathnet's affairs, except as set
forth in Section 4C of the Disclosure Letter.
4D. Subsidiaries, Investments. Section 4D of the Disclosure
Letter correctly sets forth the name of each Subsidiary, the jurisdiction of its
incorporation and the Persons owning the outstanding capital stock of such
Subsidiary. Each Subsidiary is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has all
requisite corporate power and authority and all material Licenses necessary to
own its properties and to carry on its businesses as now being conducted and as
presently proposed to be conducted, and is qualified to do business in every
jurisdiction in which its ownership of property or the conduct of business
requires it to qualify, except for any jurisdiction with respect to which the
failure to qualify would not have a Material Adverse Effect. All of the
outstanding shares of capital stock of each Subsidiary are validly issued, fully
paid and nonassessable, and all such shares are owned by the Company or another
Subsidiary free and clear of any lien, charge or encumbrance except as disclosed
in Section 4D of the Disclosure Letter. The copies of each Subsidiary's
Governing Documents which have been furnished to CSX reflect all amendments made
thereto at any time prior to the Agreement Date and are correct and complete.
Except as set forth in Section 4D of the Disclosure Letter, neither the Company
nor any Subsidiary owns or holds the right to acquire any shares of stock or any
other security or interest in any other Person.
4E. No Breach. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby nor the
fulfillment of or compliance with the terms and conditions hereof (a) conflict
with or will result in a breach of, default under, or triggering of any rights
against the Company or any Subsidiary under any terms, conditions or provisions
of (i) the Governing Documents of the Company or any Subsidiary, (ii) the 1998
Indenture, or (iii) any agreement with shareholders, or any other agreement,
contract, indenture, mortgage, deed, easement, order, judgment, decree,
arbitration award, statute, regulation or instrument to which the Company or any
Subsidiary is a party or by which the assets of the Company or any Subsidiary
are bound, in each case except as to matters that would not be reasonably
expected to have a Material Adverse Effect or affect the ability of the Company
or Pathnet to consummate the transactions contemplated herein, or (b)
constitutes or will constitute a violation or default under, or create a right
to terminate, any of the foregoing, except as to matters that would not be
reasonably expected to have a Material Adverse Effect or affect the ability of
the Company or Pathnet to consummate the transactions contemplated herein;
provided that the foregoing qualifier shall not apply to any document specified
in clause (i) or (ii) above. Except as set forth in Section 4E of the Disclosure
Letter, no consent or approval, authorization,
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order, registration or qualification of any governmental entity or any other
Person is required for the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by the Company.
4F. Shares. The issuance or delivery of the Shares hereunder
are not subject to any preemptive right of any Person or to any contractual
right of first refusal or other right in favor of any Person. Upon delivery of
the contributions described in Section 2 to the Company, the Shares will be
validly issued, fully paid and non-assessable.
4G. Financial Statements. The Company has heretofore
delivered to CSX the following financial statements:
i. the audited consolidated balance sheets of Pathnet as of
December 31 for each of 1996, 1997 and 1998, and the related statements
of income and cash flows (or the equivalent) for the respective
twelve-month periods then ended; and
ii. the unaudited consolidated balance sheet of Pathnet as of
September 30, 1999 (the "Latest Balance Sheet"), and the related
statements of income and cash flows (or the equivalent) for the
nine-month period then ended.
Each of the foregoing financial statements (including in all cases the notes
thereto, if any) and, once delivered, any subsequent quarterly or annual
financial statement delivered by the Company to CSX prior to the Closing Date,
is accurate and complete in all material respects, consistent with the books and
records of the Company and Pathnet (which, in turn, are accurate and complete in
all material respects), and has been prepared in accordance with generally
accepted accounting principles, consistently applied, and fairly presents the
consolidated financial condition of the Company and Pathnet, as the case may be,
as of the dates thereof and the consolidated results of operations and cash
flows of the Company and Pathnet for the period shown therein, except that the
financial statements in item ii above are subject to the absence of footnotes
and to normal year-end audit adjustments. As of the Agreement Date, the Company
has not engaged in any business, owns no assets and has incurred no liabilities,
other than legal and filing fees in connection with its incorporation and
organization, and has not issued any capital stock.
4H. Absence of Undisclosed Liabilities. Except as set forth
in Section 4H of the Disclosure Letter, the Company and its Subsidiaries do not,
and upon consummation of the transactions contemplated herein, will not, have
any obligation or liability (whether accrued, absolute, contingent, unliquidated
or otherwise, whether or not known to the Company or any Subsidiary, whether due
or to become due and regardless of when asserted) arising out of transactions
entered into at or prior to the Closing, or any action or inaction at or prior
to the Closing, or any state of facts existing at or prior to the Closing other
than: (i) liabilities set forth on the Latest Balance Sheet (including any notes
thereto), (ii) liabilities and obligations which have arisen after the date of
the Latest Balance Sheet in the ordinary course of business (none of which is a
liability resulting from breach of contract, breach of warranty, tort,
infringement, legal claim or lawsuit), (iii) liabilities and obligations under
contracts to which the Company or Pathnet is then a party that arise or are
related to periods after the date of the Latest Balance Sheet (none of which is
a liability resulting from breach of contract, breach of warranty, tort,
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infringement, legal claim or lawsuit), and (iv) other liabilities and
obligations disclosed in the Disclosure Letter.
4I. No Material Adverse Change. Except as set forth in
Section 4I of the Disclosure Letter, since the date of the Latest Balance Sheet,
there has been no material adverse change in the financial condition, operating
results, assets, business, liabilities, operations, business prospects, employee
relations or customer or supplier relations of the Company and its Subsidiaries
taken as a whole.
4J. Absence of Certain Developments.
i. Except as expressly contemplated by this Agreement or as set
forth in Section 4J of the Disclosure Letter, since the date of the
Latest Balance Sheet, neither the Company nor any Subsidiary has:
(a) issued any notes, bonds or other debt securities or any
equity securities or any securities convertible, exchangeable or
exercisable into any equity securities;
(b) borrowed any amount or incurred or become subject to any
liabilities, except current liabilities incurred in the ordinary course
of business and liabilities under contracts entered into in the
ordinary course of business;
(c) discharged or satisfied any lien or encumbrance or paid
any obligation or liability, other than current liabilities paid in the
ordinary course of business;
(d) declared or made any payment or distribution of cash or
other property to its stockholders with respect to its stock or
purchased or redeemed any shares of its stock or any warrants, options
or other rights to acquire its stock;
(e) mortgaged or pledged any of its properties or assets or
subjected them to any lien, security interest, charge or other
encumbrance, except liens for current property taxes not yet due and
payable;
(f) sold, assigned or transferred any of its tangible assets,
except in the ordinary course of business, or canceled any debts or
claims, except in the ordinary course of business;
(g) sold, assigned or transferred any patents or patent
applications, trademarks, service marks, trade names, corporate names,
copyrights or copyright registrations, trade secrets or other
intangible assets, or disclosed any proprietary confidential
information to any Person, other than pursuant to a license arrangement
or agreement made in the ordinary course of business or pursuant to a
non-disclosure arrangement or agreement made in the ordinary course of
business or in connection with the negotiations under this Agreement,
the Related Contribution Agreements, and the other agreements entered
into pursuant hereto and thereto;
(h) suffered any extraordinary losses or waived any rights of
material value, whether or not in the ordinary course of business or
consistent with past practice;
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(i) made any loans or advances to, guarantees for the
benefit of, or any Investments in, any Persons in excess of $100,000 in
the aggregate;
(j) made any capital expenditures or commitments therefor
that aggregate in excess of $5,000,000;
(k) made any charitable contributions or pledges in excess of
$100,000 in the aggregate;
(l) suffered any damage, destruction or casualty loss
exceeding in the aggregate $100,000 not covered by insurance; or
(m) entered into any other transaction other than in the
ordinary course of business.
ii. No officer, director, employee or agent of the Company or any
of its Subsidiaries has been or is authorized to make or receive, and
the Company does not know of any such person making or receiving, any
bribe, kickback or other illegal payment related to the Company or its
Subsidiaries or the conduct of their business.
4K. Assets. Except as set forth in Section 4K of the
Disclosure Letter, the Company and each Subsidiary have, and upon consummation
of the transactions contemplated herein, will have, good and marketable title
to, or a valid leasehold interest, license, or right of way in, the properties
and assets used by them, located on their premises or shown on the Latest
Balance Sheet or acquired thereafter, free and clear of all liens, security
interests, charges and encumbrances, except for properties and assets disposed
of in the ordinary course of business since the date of the Latest Balance Sheet
and except for liens disclosed on the Latest Balance Sheet (including any notes
thereto) and liens for current property taxes not yet due and payable; provided,
however, that neither the Company nor Pathnet makes any representation or
warranty as to the underlying title of any property interest in which it holds a
leasehold interest, license, or right of way, or as to the effect upon the
assets of the Company of any defect in any such title. Except as described in
Section 4K of the Disclosure Letter, the Company's and each Subsidiary's
buildings, equipment and other tangible assets are, in all material respects, in
good operating condition, taking into account normal wear and tear, and fit for
use in the ordinary course of business.
4L. Tax Matters. Except as set forth in Section 4L of the
Disclosure Letter: the Company and each Subsidiary have filed all material Tax
Returns that they are required to file; all such Tax Returns are complete and
correct in all material respects, and no such tax returns contain a disclosure
statement under IRC Section 6662; the Company and each Subsidiary have paid all
Taxes shown on such Tax Returns and have withheld and paid over all material
Taxes that they are obligated to withhold and pay over from amounts paid or
owing to any employee, stockholder, creditor or other third party; neither the
Company nor any Subsidiary has waived any statute of limitations with respect to
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency; the accrual for current taxes on the Latest Balance Sheet would be
adequate to pay all of Pathnet's current Tax liabilities as of the Latest
Balance Sheet; and no foreign, federal, state or local Tax audits are pending or
being conducted
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with respect to the Company or any Subsidiary and no notice indicating an intent
to open an audit or other review has been received by the Company or any
Subsidiary from any foreign, federal, state or local Taxing Authority. Neither
the Company nor any of its Subsidiaries has made an election under Section
341(f) of the IRC. Neither the Company nor any of its Subsidiaries is a party to
or bound by any obligation under any Tax sharing, Tax allocation or
indemnification agreement to which any Person other than the Company or one or
more of its Subsidiaries is a party.
4M. Contracts and Commitments.
i. Except as expressly contemplated by this Agreement or as set
forth in Section 4M of the Disclosure Letter, as of the Closing,
neither the Company nor any Subsidiary is a party to any written or
oral:
(a) contract for the employment of any officer, individual
employee or other Person on a full-time, part-time, consulting or other
basis providing annual compensation in excess of $250,000 or contract
relating to loans to officers, directors or affiliates, or any contract
with any labor union, or any severance agreement;
(b) contract under which the Company or any Subsidiary has
loaned any other Person amounts in the aggregate exceeding $100,000;
(c) agreement or indenture relating to the borrowing of money
or the mortgaging, pledging or otherwise placing a lien on any material
asset or material group of assets of the Company or any of its
Subsidiaries,
(d) guarantee of any obligation in excess of $500,000 (other
than a guarantee by the Company of a wholly-owned Subsidiary's debts or
a guarantee by a Subsidiary of the Company's debts or another
Subsidiary's debts, or in respect of any construction performance bond,
letter of credit, surety bond, or other guarantee or liability in
respect of any construction project undertaken by or on behalf of the
Company in connection with the development of its network);
(e) lease or agreement under which the Company or any
Subsidiary is a lessee of or holds or operates any property, real or
personal, owned by any other party, except for any lease of real or
personal property under which the aggregate annual cash rental payments
do not exceed $250,000;
(f) lease or agreement under which the Company or any
Subsidiary is lessor of or permits any third party to hold or operate
any property, real or personal, owned or controlled by the Company or
any Subsidiary;
(g) contract or group of related contracts with the same
party or group of affiliated parties the performance of which requires
the Company or any Subsidiary to pay consideration in excess of
$5,000,000;
(h) assignment, license, indemnification or agreement with
respect to any intangible property (including, without limitation, any
patent, trademark, trade name,
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copyright, know-how, trade secret or confidential information), other
than software license agreements entered into in the ordinary course of
business;
(i) warranty agreement with respect to its services rendered
or its products sold or leased, other than the pass-through of
manufacturers' warranties;
(j) agreement under which it has granted any Person any
registration rights (including piggyback rights);
(k) contract, agreement or other arrangement with any
officer, director, employee or Affiliate, or any Affiliate of any
officer, director or employee;
(l) pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or other
compensation to employees or any other generally applicable employee
benefit plan or arrangement;
(m) contract or agreement prohibiting it from freely engaging
in any business or competing anywhere in the world; or
(n) contract or agreement with any investment bank.
ii. All of the contracts, agreements and instruments set forth in
Section 4M of the Disclosure Letter are valid, binding and enforceable
against the Company or the Subsidiary that is a party thereto in
accordance with their respective terms, except insofar as
enforceability may be affected by bankruptcy, insolvency or similar
laws affecting creditor's rights generally or by general principles of
equity, and except for any invalidity, lack of binding nature or
inability to enforce that would not be reasonably expected to have a
Material Adverse Effect. The Company and each Subsidiary have performed
all obligations required to be performed by them under, and are not in
default under or in breach of nor in receipt of any claim of default or
breach under, any contract, agreement or instrument to which the
Company or any Subsidiary is subject; no event has occurred which with
the passage of time or the giving of notice or both would result in a
default, breach or event of noncompliance under any contract, agreement
or instrument to which the Company or any Subsidiary is subject;
neither the Company nor any Subsidiary has any present expectation or
intention of not fully performing all such obligations; and neither the
Company nor any Subsidiary has knowledge of any breach or anticipated
breach by the other parties to any contract or commitment to which it
is a party; except in each case to the extent that any such event would
not be reasonably expected to have a Material Adverse Effect.
iii. CSX has been supplied with a true and correct copy of each of
the written contracts and an accurate description of the oral contracts
which are referred to in Section 4M of the Disclosure Letter, together
with all amendments, waivers or other changes thereto.
4N. Proprietary Rights. Section 4N of the Disclosure Letter
contains a complete and accurate list of (i) all patented and registered
Proprietary Rights currently owned by the Company or any Subsidiary, (ii) all
pending patent applications and applications for
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<PAGE> 16
registrations of other Proprietary Rights filed by the Company or any
Subsidiary, (iii) all unregistered trade names and corporate names owned or used
by the Company and its Subsidiaries and (iv) all unregistered trademarks,
service marks and copyrights and computer software which are used by the Company
and its Subsidiaries and necessary for the operation of the businesses of the
Company and its Subsidiaries as presently conducted and as presently proposed to
be conducted. Section 4N of the Disclosure Letter also contains a complete and
accurate list of all licenses and other rights granted by the Company or any
Subsidiary to any third party with respect to any Proprietary Rights and all
licenses and other rights granted by any third party to the Company or any
Subsidiary with respect to any Proprietary Rights. Except as set forth in
Section 4N of the Disclosure Letter, the Company or one of its Subsidiaries owns
or has the right to use pursuant to a valid license all Proprietary Rights
necessary for the operation of the businesses of the Company and its
Subsidiaries as presently conducted and as presently proposed to be conducted.
Except as set forth in Section 4N of the Disclosure Letter, the loss or
expiration of any Proprietary Right or related group of Proprietary Rights would
not have a Material Adverse Effect, and no such loss or expiration is, to the
best of the Company's and Pathnet's knowledge, threatened, pending or reasonably
foreseeable. Except as indicated in Section 4N of the Disclosure Letter, (i) the
Company and its Subsidiaries own all right, title, and interest in and to all of
the Proprietary Rights listed on such schedule and all other Proprietary Rights
material to the operation of the businesses of the Company and its Subsidiaries,
(ii) there have been no claims made against the Company or any Subsidiary
asserting the invalidity, misuse or unenforceability of any of such rights, and,
to the Company's and Pathnet's knowledge, there are no grounds for the same,
(iii) neither the Company nor any Subsidiary has received a notice of conflict
with the asserted rights of others within the last five years, and (iv) to the
Company's and Pathnet's knowledge, the conduct of the Company's and each
Subsidiary's business has not infringed or misappropriated any Proprietary
Rights of other Persons, nor would any future conduct as presently contemplated
infringe any Proprietary Rights of other Persons and, to the Company's and
Pathnet's knowledge, the Proprietary Rights owned by the Company or any
Subsidiary have not been infringed or misappropriated by other Persons.
4O. Litigation, etc. Except as set forth in Section 4O of the
Disclosure Letter, there are no actions, suits, proceedings, orders,
investigations or claims pending or, to the best of the Company's and Pathnet's
knowledge, threatened against or affecting the Company or any Subsidiary (or to
the best of the Company's and Pathnet's knowledge, pending or threatened against
or affecting any of the officers, directors or employees of the Company or any
of its Subsidiaries with respect to their businesses or proposed business
activities) at law or in equity, or before or by any governmental department,
commission, board, bureau, agency or instrumentality (including, without
limitations, any actions, suit, proceedings or investigations with respect to
the transactions contemplated by this Agreement); neither the Company nor any
Subsidiary is subject to any arbitration proceedings under collective bargaining
agreements or otherwise or, to the best of the Company's and Pathnet's
knowledge, any governmental investigations or inquiries (including inquiries as
to the qualification to hold or receive any license or permit); and, to the
Company's and Pathnet's knowledge, there is no basis for any of the foregoing.
Neither the Company nor any Subsidiary is subject to any judgment, order or
decree of any court or other governmental agency. Neither the Company nor any
Subsidiary has received any opinion or memorandum or legal advice from legal
counsel to the effect that it is exposed, from a legal standpoint, to any
liability or disadvantage which is, in the opinion of such counsel, reasonably
likely to have a Material Adverse Effect on its business.
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4P. Brokerage. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company or any Subsidiary.
4Q. Insurance. Section 4Q of the Disclosure Letter contains a
description of each insurance policy maintained by the Company and its
Subsidiaries with respect to its properties, assets and businesses, and each
such policy is in full force and effect and the Company has no reason to believe
such policies will not remain in full force and effect upon the consummation of
the transactions contemplated hereby. Neither the Company nor any Subsidiary is
in default with respect to its obligations under any insurance policy maintained
by it.
4R. Employees. The Company and each Subsidiary have complied
in all material respects with all laws relating to the employment of labor,
including provisions thereof relating to wages, hours, equal opportunity,
collective bargaining and the payment of social security and other taxes. To the
knowledge of the Company and Pathnet, neither the Company nor any Subsidiary is
the subject of any pending union organization activities, or any pending,
threatened or actual strikes, work stoppages or material grievances. Neither the
Company nor Pathnet is aware that any officer or key employee of the Company or
any Subsidiary or any group of employees of the Company or any Subsidiary has
any plans to terminate employment with the Company or any Subsidiary. Neither
the Company, its Subsidiaries nor, to the best of the Company's and Pathnet's
knowledge after due inquiry, any of their employees is subject to any
noncompete, nondisclosure, confidentiality, employment, consulting or similar
agreements relating to, affecting or in conflict with the present or proposed
business activities of the Company or any of its Subsidiaries except for
agreements between the Company and its present and former employees.
4S. ERISA. For purposes of this Section 4S, the term
"Company" includes Pathnet and its Subsidiaries and all organizations under
common control with the Company pursuant to Section 414(b) or (c) of the IRC.
Except as set forth in Section 4S of the Disclosure Letter:
(a) Multiemployer Plans. The Company does not have any
obligation to contribute to (or any other liability, including current or
potential withdrawal liability, with respect to) any "multiemployer plan" (as
defined in Section 3(37) of ERISA).
(b) Retiree Welfare Plans. The Company does not maintain or
have any obligation to contribute to (or any other liability with respect to)
any plan or arrangement whether or not terminated, which provides medical,
health, life insurance or other welfare-type benefits for current or future
retired or terminated employees (except for limited continued medical benefit
coverage required to be provided under Section 4980B of the IRC or as required
under applicable state law).
(c) Defined Benefit Plans. The Company does not maintain,
contribute to or have any liability under (or with respect to) any employee plan
which is a tax-qualified "defined benefit plan" (as defined in Section 3(35) of
ERISA), whether or not terminated.
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(d) Defined Contribution Plans. The Company does not
maintain, contribute to or have any liability under (or with respect to) any
employee plan which is a tax-qualified "defined contribution plan" (as defined
in Section 3(34) of ERISA), whether or not terminated.
(e) Other Plans. The Company does not maintain, contribute to
or have any liability under (or with respect to) any plan or arrangement
providing benefits to current or former employees, including any bonus plan,
plan for deferred compensation, employee health or other welfare benefit plan or
other arrangement, whether or not terminated.
4T. Compliance with Laws. Except as set forth in Section 4T
of the Disclosure Letter, neither the Company nor any Subsidiary has violated
any law or any governmental regulation or requirement which violation would
reasonably be expected to have a Material Adverse Effect, and neither the
Company nor any Subsidiary has received notice of any such violation. To the
knowledge of the Company and Pathnet, neither the Company nor any Subsidiary is
required under any applicable federal, state or local environmental law or
regulation as currently in effect to remediate any environmental condition or to
pay any fine or penalty with respect thereto.
4U. Affiliated Transactions. Except as set forth in Section
4U of the Disclosure Letter, no officer, director, shareholder or Affiliate of
the Company or any Subsidiary or any individual related by blood or marriage to
any such Person or any entity in which any such Person or individual owns any
beneficial interest, is a party to any agreement, contract, commitment or
transaction with the Company or any Subsidiary or has any material interest in
any material property used by the Company or any Subsidiary.
4V. Licenses. Except for (i) licenses set forth in Section 4V
of the Disclosure Letter and (ii) state or local permits necessary for the
construction, maintenance and ownership of fiber optic cable, there are no
Licenses necessary for the Company or its Subsidiaries to conduct the businesses
as currently conducted. All Licenses set forth in Section 4V of the Disclosure
Letter are in full force and effect and no proceeding is pending or threatened
which could have the effect of revoking or limiting any such Licenses. Section
4V of the Disclosure letter sets forth all consents required from the FCC with
respect to the consummation of the transactions contemplated in this Agreement
and the Related Contribution Agreements.
4W. Reports with the SEC. The Company has furnished or made
available to CSX complete and accurate copies of Pathnet's annual report on Form
10-K for its most recent fiscal year, all other reports or documents required to
be filed by Pathnet pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act since the filing of the most recent annual report on Form 10-K, and
all correspondence with the SEC since August 1998. Such filed reports do not, as
of the date hereof, contain any material false statements or any misstatement of
any material fact and do not omit to state any fact necessary to make the
statements set forth therein not misleading. Pathnet has made all filings with
the SEC which it is required to make, and Pathnet has not received any request
from the SEC to file any amendment or supplement to any of the reports described
in this Section 4W.
4X. Transfers of Contributed Properties. There is no plan or
intention by the Company to dispose of any of the contributed properties
described in Section 2 or Section 3A(v),
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except that the Company is contemplating (i) a transfer of certain contributed
properties to Pathnet or another Subsidiary in a transaction that will qualify
as a tax-free transfer pursuant to IRC Section 351, and (ii) the conversion of
certain preferred stock of Pathnet into common stock of Pathnet.
4Y. No Intention to Redeem. There is no current plan or
intention on behalf of the Company to redeem or otherwise reacquire any of the
Shares issued pursuant to the transactions described in Sections 2 and 3A(v)
hereof.
4Z. Disclosure. Neither this Agreement nor the Disclosure
Letter, nor any of the schedules, attachments, written statements, documents,
certificates or other items prepared or supplied to the other parties hereto by
or on behalf of the Company or any Subsidiary with respect to the transactions
contemplated hereby, contain any untrue statement of a material fact or omit a
material fact necessary to make each statement contained herein or therein not
misleading.
4AA. Year 2000 Compliance. The Company and Pathnet have taken
all reasonable steps to ensure that they are Year 2000 Compliant, as that term
is defined below, and there are no foreseeable expenses or other liabilities
associated with the process of becoming Year 2000 Compliant except for or with
respect to any noncompliance or any expenses or liabilities that would not be
reasonably expected to have a Material Adverse Effect on the Company or Pathnet.
"Year 2000 Compliant" means that such hardware or software produced, used, or
provided by the Company or material contractors or vendors, including, but not
limited to, microcode, firmware, system and application programs, files,
databases, computer services, and microcontrollers, including those embedded in
computer and non-computer equipment (the "Computer Systems") will:
(a) process date data from at least the years 1900 through
2001 without error or interruption;
(b) maintain functionality with respect to the introduction
processing, or output of records containing dates falling
on or after January 1, 2000; and
(c) be interoperable with other software or hardware which
may deliver records to, receive records from, or interact
with such Computer Systems in the course of conducting
the business of the Company.
Except as noted on the Disclosure Schedule, there are no software, hardware, or
other devices containing or using electronic components reasonably necessary to
the performance of the business and operations of the Company that to the
knowledge of the Company are not Year 2000 Compliant.
Section 5 Representations and Warranties of CSX. CSX
represents and warrants to the Company and Pathnet with respect to each of the
following at and as of the Agreement Date:
5A. Organization and Corporate Power. CSX is duly organized
and validly existing under the laws of the state of its organization and has
been duly authorized by all
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necessary and appropriate corporate action to enter into this Agreement, the
Fiber Optic License Agreement and the Right of Way Operating Agreement and to
consummate the transactions contemplated herein and therein. The officer of CSX
executing this Agreement on behalf of CSX has been duly authorized by all
necessary and appropriate corporate action. This Agreement is, and when executed
and delivered the Fiber Optic License Agreement and the Right of Way Operating
Agreement will each be, a valid and binding obligation of CSX, enforceable
against it in accordance with its terms, except insofar as enforceability may be
affected by bankruptcy, insolvency or similar laws affecting creditors' rights
generally or by general principles of equity.
5B. Authorization; No Breach. Neither the execution and
delivery of this Agreement, the Fiber Optic License Agreement or the Right of
Way Operating Agreement, nor the consummation of the transactions contemplated
hereby and thereby nor the fulfillment of or compliance with the terms and
conditions hereof and thereof (a) conflicts with or will result in a breach of
any of the terms, conditions or provisions of (i) the Governing Documents of CSX
or (ii) any agreement, contract, indenture, mortgage, deed, easement, order,
judgment, decree, arbitration award, statute, regulation or instrument to which
CSX is a party or by which it or its assets are bound, except as to matters that
would not reasonably be expected to have a Material Adverse Effect on CSX or
materially affect the ability of CSX to consummate the transactions contemplated
herein or (b) constitutes or will constitute a violation or default or create a
right of termination under any of the foregoing, except as to matters that would
not reasonably be expected to have a Material Adverse Effect on CSX or
materially affect the ability of CSX to consummate the transactions contemplated
herein. No consent or approval, authorization, order, regulation or
qualification of any governmental entity or any other Person is required for the
execution and delivery of this Agreement and the Fiber Optic License Agreement
and the Right of Way Operating Agreement and the consummation of the
transactions contemplated hereby and thereby.
5C. Investment Representations. CSX acknowledges that the
Shares have not been and will not be registered or qualified under the
Securities Act or any state securities laws and are offered in reliance upon an
exemption from registration under Regulation D of the Securities Act and similar
state law exceptions. The Shares to be received by CSX hereunder will be held by
such corporation for investment purposes only for its own account, and not with
a view to or for sale in connection with any distribution of the Shares, and CSX
acknowledges that the Shares cannot be sold or otherwise disposed of unless they
are subsequently registered under the Securities Act or pursuant to an exemption
therefrom; and the Shares may not be sold, assigned or otherwise transferred
except in compliance with the Stockholders Agreement. CSX hereby acknowledges
receipt of a copy of the Stockholders Agreement and represents that it has
reviewed and understands the provisions thereof which have a bearing on the
representations made in this Section 5C.
5D. Accredited Investor. CSX is an "accredited investor"
within the meaning of Regulation D under the Securities Act and has the
knowledge and experience in financial and business matters such that it is
capable of evaluating the merits and risks of receiving and owning the Shares
and is able to bear the economic risk of such ownership and understands that an
investment in Shares involves substantial risks.
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5E. Availability of Information. There has been made
available to CSX and its advisors the opportunity to ask questions of, and
receive answers from, the Company concerning the terms and conditions of the
investment in the Shares, and to obtain the financial information with respect
to the Company's assets, the Stockholders Agreement, and any additional
information, to the extent that the Company possesses such information or can
acquire it without unreasonable effort or expense, necessary to verify the
accuracy of the information given to CSX, or to otherwise make an informed
investment decision, that CSX has had an opportunity to consult with counsel and
other advisors about the investment in the Shares, and that all material
document, records and books pertaining to such investment have, on request, been
made available to CSX and its advisors.
5F. No General Solicitation. Neither CSX nor any of its
advisors, is aware of or has engaged in any form of general solicitation or
advertising with respect to sales of the Shares, including (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio; and
(ii) any seminar or meeting whose attendees were invited by any general
solicitation or general advertising.
5G. Litigation. There is no action, suit, proceeding or
investigation pending or, to CSX's knowledge, threatened against CSX that
questions the validity of this Agreement or the ability of CSX to consummate the
transactions contemplated hereby, other than the approximately twenty-five (25)
class action lawsuits filed by alleged underlying fee owners of railroad
right-of-ways against other telecommunications companies, including
MCI/WorldCom, Qwest Communications, Inc., and AT&T, including the suit Hord v.
Qwest Commuications, Inc, CSX Tranxportation, Inc., et al., filed in Tennessee.
5H. Brokerage. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon CSX.
5I. Disclosure. Neither this Agreement nor any of the
schedules, attachments, written statements, documents, certificates or other
items prepared or supplied to the other parties hereto by or on behalf of CSX
with respect to the transactions contemplated hereby contain any untrue
statement of a material fact or omit a material fact necessary to make each
statement contained herein or therein not misleading.
5J. No Intention to Transfer Shares. CSX has no intention or
plan, formally or informally, on the date hereof, to transfer any of the Shares
received by CSX pursuant to this Agreement.
Section 6 Closing.
6A. Closing Date. The Company shall notify CSX of the
occurrence of the Senior Noteholder Consent Date within one business day after
such date. The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Covington & Burling, in
Washington, D.C., or at such other place as shall be mutually agreed upon by the
parties, on the date which is five business days following the Senior Noteholder
Consent Date (or, in the event that any other conditions to the obligations of
any party to close as
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provided hereunder shall not have been met at such date, then on the date which
is three (3) business days following the date on which such conditions shall
have been satisfied or waived by the party whose obligations are so
conditioned), or at such other date and time as to which the parties may agree
(the "Closing Date"). The Closing shall be effective immediately prior to the
close of business on the Closing Date.
6B. Deliveries by the Company at the Closing. At the Closing,
the Company and Pathnet shall deliver the following documents:
i. The Fiber Optic License Agreement duly executed and delivered
by the Company or a Subsidiary;
ii. A certificate of the President of each of Pathnet and the
Company, each certifying that its representations and warranties are
true in all material respects as of the Closing Date and that it has
performed or complied, in all material respects, with all of its
respective agreements and obligations required by this Agreement to be
performed or complied with by it prior to or at the Closing;
iii. A certified copy of resolutions of the Board of Directors of
the Company, authorizing the execution and delivery of this Agreement
and the performance of the obligations of the Company hereunder;
iv. A certified copy of resolutions of the Board of Directors of
Pathnet, authorizing the execution and delivery of this Agreement and
the performance of the obligations of Pathnet hereunder;
v. An opinion of Counsel to the Company and Pathnet substantially
in the form set forth on Exhibit F;
vi. The Stockholders Agreement duly executed and delivered by the
Company and each other stockholder of the Company (other than any one
or more stockholders beneficially owning, in the aggregate, not more
than one percent of the outstanding capital stock of the Company);
vii. Certificates representing the Shares to be issued to CSX;
viii. All third party and governmental consents necessary or
appropriate to consummate the transactions contemplated herein,
including, without limitation, the FCC Consents; and
ix. Those other closing documents required to be executed by it or
as may otherwise be reasonably necessary or appropriate to consummate
the transactions contemplated herein.
6C. Deliveries by CSX at the Closing. At the Closing, CSX
shall deliver the following documents:
i. The Fiber Optic License Agreement duly executed and
delivered by CSX;
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ii. The Right of Way Operating Agreement duly executed and
delivered by CSX;
iii. The Stockholders Agreement duly executed and delivered by CSX;
iv. An opinion of Counsel to CSX substantially in the form set
forth on Exhibit G;
v. A certificate of CSX certifying that the representations and
warranties of such corporation contained in this Agreement are true and
correct as of the Closing Date and that it has performed, in all
material respects, all of its respective agreements and obligations
required by this Agreement to be performed or complied with by it prior
to or at the Closing;
vi. A certified copy of resolutions of the Board of Directors of
CSX authorizing the execution and delivery by CSX of this Agreement and
the performance of the obligations of CSX hereunder;
vii. All third party and governmental consents necessary or
appropriate to consummate the transactions contemplated herein; and
viii. Those other closing documents required to be executed by it or
as may otherwise be reasonably necessary or appropriate to consummate
the transactions contemplated herein.
Section 7 Covenants.
7A. Implementing Agreement. Subject to the terms and
conditions hereof, each party hereto shall use its best efforts to take all
action required of it to fulfill its obligations under the terms of this
Agreement and to facilitate the consummation of the transactions contemplated
hereby.
7B. HSR Act Filings. Each of the Company, Pathnet and CSX
shall use reasonable efforts to prepare and, as soon as practicable after the
Agreement Date, file with the Federal Trade Commission and the Antitrust
Division of the Department of Justice any materials and information required to
be filed with or provided pursuant to the HSR Act with respect to the
transactions contemplated by this Agreement. Each of the Company, Pathnet and
CSX shall promptly supply any additional information which may be required or
requested of it in connection with the HSR Act filings.
7C. FCC Filings. Each of the Company and Pathnet shall use
reasonable best efforts to prepare and, as soon as practicable after the
Agreement Date, file with the Federal Communications Commission any applications
necessary to obtain the FCC Consents.
7D. Access to Information. At all times before the Closing
Date, each of the Company and Pathnet shall provide CSX and its employees,
managers, contractors, consultants, agents and representatives, with reasonable
access to those properties, files, books, records and other materials relating
to the Company and the Subsidiaries and their business and the right to examine
and inspect such materials as CSX may deem appropriate (and make copies of the
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same), subject to the terms of the existing Non-Disclosure Agreement between the
Company and CSX.
7E. Preservation of Business. From the Agreement Date until
the Closing Date, the Company and Pathnet shall cause the Company and the
Subsidiaries to be operated only in the ordinary and usual course of business
and consistent with past practice, shall preserve intact assets of the Company
and the Subsidiaries, preserve the good will and advantageous relationships of
the Company and the Subsidiaries with customers, suppliers, independent
contractors, employees and other Persons material to the operations of its
business, shall perform its material obligations under all contracts and shall
not permit any action or omission which would cause any of the representations
or warranties of the Company or Pathnet contained herein to become inaccurate or
any of the covenants of the Company or Pathnet to be breached. Without any
limitation on the foregoing, the Company and Pathnet agree that, from the
Agreement Date until the Closing Date, except as otherwise consented to or
approved by CSX in writing and except as otherwise required by this Agreement:
i. The Company and Pathnet shall use, and cause the Subsidiaries
to use, reasonable best efforts to continue to solicit new business and
to offer the Company's services and facilities in the ordinary course
of business subject to obligations imposed by this Agreement.
ii. Neither the Company nor any Subsidiary shall (i) enter into an
agreement for the transfer, lease (as lessor), license, guarantee,
sale, mortgage, pledge, disposition of or encumbrance of any assets or
the incurrence or modification of any indebtedness or other liability
other than in the ordinary course of business and consistent with past
practice; or (ii) make any loans, advances or capital contributions to,
or investments in, any other Person (other than to wholly owned
subsidiaries).
iii. Neither the Company nor any Subsidiary shall (i) declare, set
aside or pay any dividends on, or make any other actual, constructive
or deemed distributions in respect of, any of its capital stock, or
otherwise make any payments to its shareholders in their capacity as
such; (ii) split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock; or (iii)
purchase, redeem or otherwise acquire any shares of its capital stock
or any other securities thereof or any rights, warrants or options to
acquire any such shares or other securities.
iv. Neither the Company nor any Subsidiary shall issue, deliver,
sell, pledge, dispose of or otherwise encumber any shares of its
capital stock, any other voting securities or equity equivalent or any
securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting securities, equity equivalent or
convertible securities.
v. The Company shall not amend its Governing Documents.
vi. Neither the Company not any Subsidiary shall acquire or agree
to acquire, by merging or consolidating with, by purchasing a
substantial portion of the assets of or equity in, or by any other
manner, any business or any corporation, partnership,
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association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets.
vii. Neither the Company nor any Subsidiary shall sell, lease or
otherwise dispose of or agree to sell, lease or otherwise dispose of
any of its material assets, other than the sale of inventory in the
ordinary course of business.
7F. Consents and Approvals. The Company and Pathnet shall use
their best efforts to obtain all consents, approvals, certificates and other
documents required in connection with its performance under this Agreement and
the consummation of the transactions contemplated hereby. The Company and
Pathnet shall make all filings, applications, statements and reports to all
governmental authorities and other Persons which are required to be made by
either of them prior to the Closing Date by or on behalf of the Company or
Pathnet or any of their Affiliates pursuant to any applicable law or contract in
connection with this Agreement and the transactions contemplated hereby.
7G. Maintenance of Insurance. The Company and Pathnet shall
continue to carry and cause the Subsidiaries to carry its and their existing
insurance through the Closing Date and shall not allow any breach, default,
termination or cancellation of such insurance policies or agreements to occur or
exist.
7H. Representations and Warranties, Supplemental Information.
From time to time prior to the Closing, each party shall promptly disclose in
writing to the other any matter hereafter arising which, if existing, occurring
or known at the Agreement Date would have been required to be disclosed to the
other or which would render inaccurate any of the representations, warranties or
statements set forth herein. No information provided to either party pursuant to
this Section 7H shall be deemed to cure any breach of any representation,
warranty or covenant made in this Agreement.
7I. No Actions Inconsistent with Fiber Optic License
Agreement. From the Agreement Date until the Closing Date, CSX shall not grant,
or enter into any agreement to grant, any right of way, access, or easement that
would be inconsistent with the rights to be granted to the Company under the
Fiber Optic License Agreement, or that relate to Rail Corridors (as defined in
the Fiber Optic License Agreement).
7J. Tax Free Transfers. The parties intend that the
contribution of properties by CSX and the other contributing Persons described
in Section 3A(v) in respect of the Closing will be part of a single integrated
transaction in which no gain or loss will be recognized to the Company or CSX
upon the issuance and receipt of the Shares pursuant to IRC Section 351 and, in
the case of Persons who contribute Pathnet stock to the Company, the
contributions will qualify as a tax-free reorganization pursuant to IRC Section
368(a)(1)(B), and the parties agree that they will prepare and file their
Federal and state income tax returns in a manner consistent with such
characterization. Further, CSX agrees to provide to the Company a statement
setting forth the amount of CSX's tax basis in the property contributed by CSX
so that the Company can determine its tax basis in the property in accordance
with IRC Section 362. CSX agrees to file the information required by Treasury
Regulation Section 1.351-3 for its Federal income tax return for the taxable
year of the contribution, and the Company agrees to furnish to CSX information
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necessary to enable CSX to comply with the information reporting requirements of
Treasury Regulation Section 1.351-3. The Company agrees that it will exercise
reasonable care not to take any action that would cause the transactions
contemplated hereby not to qualify as tax-free pursuant to IRC Section 351. The
Company has no present intention or plan to transfer all or substantially all
(within the meaning of IRC Section 368(a)(1)(C)) of the assets of Pathnet to the
Company. The Company has no present intention or plan to issue additional shares
of the Company (other than the shares proposed to be issued in the transactions
contemplated by Sections 2 and 3A(v) hereof), or rights to acquire additional
shares, for consideration other than cash or property, if the result would be
that the Contributors would fail to have "control" of the Company within the
meaning of IRC Section 368(c).
7K. Disclosure Letter. The Company shall supplement or amend
the Disclosure Letter from time to time prior to the Closing, provided, however,
that such supplements or amendments (other than immaterial updates of matters
arising in the ordinary course of business) shall not affect any rights that CSX
may have with respect to the Disclosure Letter delivered upon the execution of
this Agreement.
7L. Notices. The Company hereby agrees to provide CSX with
not less than fifteen (15) days' prior written notice of the Company's filing of
a registration statement with the SEC for a Qualified Public Offering.
7M. Stock Options. In conjunction with or promptly after the
Closing, the Company shall issue, in exchange for any Pathnet stock options
theretofore issued by Pathnet under its stock option plans, stock options with
respect to the Common Stock of the Company, with the same terms and conditions
except that the options will be exercisable for common stock of the Company.
Section 8 Indemnification.
8A. Indemnification by the Company. Subject to the terms,
conditions and limitations of this Section 8, the Company and Pathnet jointly
and severally shall indemnify CSX and its Affiliates and their respective
officers, directors, trustees, employees, agents and representatives (the "CSX
Indemnified Parties") against, and agrees to hold each of them harmless from,
any and all Losses incurred or suffered by them relating to or arising out of or
in connection with any of the following (in each case so long as notice of a
claim for indemnification is made in good faith):
i. any breach of any representation or warranty made by the
Company or Pathnet to CSX in this Agreement; or
ii. any breach of or failure by the Company or Pathnet to perform
any covenant or obligation of the Company or Pathnet to CSX under this
Agreement.
No knowledge before the Closing Date by any CSX Indemnified Party of
any such breach or inaccuracy shall constitute a waiver of any claim hereunder.
8B. Indemnification by CSX. Subject to the terms, conditions
and limitations of this Section 8, CSX shall indemnify the Company, Pathnet and
their Affiliates and their
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respective officers, directors, trustees, employees, agents and representatives
(the "Company Indemnified Parties") against, and agree to hold each of them
harmless from, any and all Losses incurred or suffered by them relating to or
arising out of or in connection with any of the following (in each case so long
as notice of a claim for indemnification is made in good faith):
i. any breach of any representation or warranty made by CSX to
Pathnet or the Company in this Agreement; or
ii. any breach of or failure by CSX to perform any covenant or
obligation of CSX to Pathnet or the Company under this Agreement.
No knowledge before the Closing by any Company Indemnified Party of any
such breach or inaccuracy shall constitute a waiver of any claim hereunder.
8C. Claims. As soon as is reasonably practicable after
becoming aware of a claim for indemnification under this Agreement the
Indemnified Person shall promptly give notice to the Indemnifying Person of such
claim and the amount the Indemnified Person believes it is entitled to receive
hereunder from the Indemnifying Person; provided that the failure of the
Indemnified Person to give notice shall not relieve the Indemnifying Person of
its obligations under this Section 8, except to the extent (if any) that the
Indemnifying Person shall have been materially prejudiced thereby. If the
Indemnifying Person does not object in writing to such indemnification claim
within 30 calendar days of receiving notice thereof, the Indemnified Person
shall be entitled to recover promptly from the Indemnifying Person the amount of
such claim, and no later objection by the Indemnifying Person shall be
permitted. If the Indemnifying Person agrees that it has an indemnification
obligation but objects that it is obligated to pay only a lesser amount, the
Indemnified Person shall nevertheless be entitled to recover promptly from the
Indemnifying Person the lesser amount, without prejudice to the Indemnified
Person's claim for the difference. Any claim under this Section 8 must be made
on or prior to the end of the survival period set forth in Section 9E. No claim
may be made against an Indemnifying Person under this Section 8 until the
aggregate amount of all such claims equals at least $2.5 million, at which time
the Indemnifying Person shall be liable for all claims including the initial
$2.5 million in claims.
8D. Assumption of Defense. The Indemnifying Person may, at
its own expense, (a) participate in the defense of any claim, suit, action or
proceeding and (b) upon notice to the Indemnified Person and the Indemnifying
Person's delivering to the Indemnified Person a written agreement that the
Indemnified Person is entitled to indemnification pursuant to Section 8A or 8B
for all Losses arising out of such claim, suit, action or proceeding, assume the
defense thereof; provided, however, that (i) the Indemnifying Person's counsel
is reasonably satisfactory to the Indemnified Person and (ii) the Indemnifying
Person shall thereafter consult with the Indemnified Person upon the Indemnified
Person's reasonable request for such consultation from time to time with respect
to such claim, suit, action or proceeding. If the Indemnifying Person assumes
such defense, the Indemnified Person shall have the right (but not the duty) to
participate in the defense thereof and to employ counsel, at its own expense,
separate from the counsel employed by the Indemnifying Person. If, however, the
Indemnified Person reasonably determines in its judgment that representation by
the Indemnifying Person's counsel of both the Indemnifying Person and the
Indemnified Person would present such counsel with a
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<PAGE> 28
conflict of interest, then such Indemnified Person may employ separate counsel
to represent or defend it in any such claim, action, suit or proceeding and the
Indemnifying Person shall pay the fees and disbursements of such separate
counsel. Whether or not the Indemnifying Person chooses to defend or prosecute
any such claim, suit, action or proceeding, all of the parties hereto shall
cooperate in the defense or prosecution thereof.
8E. Settlement or Compromise. Any settlement or compromise
made or caused to be made by the Indemnified Person or the Indemnifying Person,
as the case may be, of any such claim, suit, action or proceeding of the kind
referred to in Section 8D shall also be binding upon the Indemnifying Person or
the Indemnified Person, as the case may be, in the same manner as if a final
judgment or decree had been entered by a court of competent jurisdiction in the
amount of such settlement or compromise; provided, however, that no obligation,
restriction or Loss shall be imposed on the Indemnified Person as a result of
such settlement without its prior written consent, which consent will not be
unreasonably withheld or delayed. The Indemnified Person will give the
Indemnifying Person at least 30 days' notice of any proposed settlement or
compromise of any claim, suit, action or proceeding it is defending, during
which time the Indemnifying Person may reject such proposed settlement or
compromise; provided, however, that from and after such rejection, the
Indemnifying Person shall be obligated to assume the defense of and full and
complete liability and responsibility for such claim, suit, action or proceeding
and any and all Losses in connection therewith in excess of the amount of
unindemnifiable Losses which the Indemnified Person would have been obligated to
pay under the proposed settlement or compromise.
8F. Failure of Indemnifying Person to Act. In the event that
the Indemnifying Person does not elect to assume the defense of any claim, suit,
action or proceeding, then any failure of the Indemnified Person to defend or to
participate in the defense of any such claim, suit, action or proceeding or to
cause the same to be done, shall not relieve the Indemnifying Person of its
obligations hereunder.
8G. No Set-Off. The indemnification obligations of the
parties hereunder shall be limited as set forth herein and no party shall be
entitled to set-off such indemnification obligations or any other amounts
against any amounts owed to such party by any other party.
Section 9 Miscellaneous.
9A. Transfer and Similar Taxes. Except as otherwise provided
in the Fiber Optic License Agreement and the Right of Way Operating Agreement,
all sales, use, stock, stamp, transfer, registration or similar taxes or duties,
if any, resulting from the transfer by CSX of property described in Section 2
hereof shall be paid one-half by the Company and one-half by CSX. All HSR Act
filing fees required be made in order to effect the issue of the Shares
contemplated hereby, shall be paid one-half by the Company and one-half by CSX.
All FCC and other governmental filing fees, other than in connection with the
HSR Act filing fees, required to be made in order to effect the transactions
contemplated hereby shall be paid by the Company.
9B. Complete Agreement. This Agreement (including the
Exhibits hereto and the Disclosure Letter) represents the entire agreement
between CSX, Pathnet and the Company covering everything agreed upon or
understood in this transaction and all other prior agreements,
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<PAGE> 29
written or oral are merged into this Agreement. There are no oral promises,
conditions, representations, understandings, interpretations or terms of any
kind as conditions or inducements to the execution hereof in effect between the
parties.
9C. Authorized Signatories. The persons executing this
Agreement for and on behalf of CSX, Pathnet and the Company each represent that
they have the requisite authority to bind the entities on whose behalf they are
signing.
9D. Termination. In the event that for any reason the Closing
does not occur on or before the 150th day after the date of this Agreement, then
any party, if not then in breach of its obligations under this Agreement, may
terminate this Agreement by giving written notice thereof to the other party;
provided, however, that no such termination shall relieve either party of
liability for any breach of its obligations hereunder prior to such termination.
9E. Survival of Representations and Warranties. Regardless of
any investigation made by any party or on its behalf, all representations and
warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby for a period of three
years, provided, however, that any representation or warranty that is subject to
a written claim under Section 8A that is received by the Indemnifying Party
prior to the expiration of such three-year period shall continue to survive, and
the representations and warranties made pursuant to Sections 4L, 4Y and 7J shall
survive until the expiration of the applicable statute of limitations.
9F. Successors and Assigns. This Agreement may not be
assigned by either party without the written consent of the other party. Except
as otherwise expressly provided herein, all covenants and agreements contained
in this Agreement by or on behalf of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not.
9G. Knowledge. As used in this Agreement, the terms
"knowledge" or "aware" with respect to the Company and Pathnet shall mean the
actual knowledge or awareness of any one or more of Richard Jalkut, William
Smedberg, Michael Lubin, James Craig, Joe Mastrogiorgio and Robert Rouse, and
such terms with respect to CSX shall mean the actual knowledge or awareness of
any one or more of Steven Crosby, Ted Jackson, Judy Vaughn, and Randy Evans.
9H. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
9I. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Agreement.
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<PAGE> 30
9J. Descriptive Headings: Interpretation. The descriptive
headings of this Agreement are inserted for convenience only and do not
constitute a Section of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
9K. Governing Law. This Agreement shall be governed by the
laws of the State of Delaware.
9L. Amendment. No change or addition shall be made to this
Agreement except by a written agreement executed by CSX, Pathnet and the
Company.
9M. Notices. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally to the recipient, sent to the recipient by reputable express courier
service (charges prepaid) or mailed to the recipient by certified or registered
mail, return receipt requested and postage prepaid. Such notices, demands and
other communications shall be sent to the parties hereto at the address
indicated below:
If to CSX:
CSX Real Property, Inc.
301 West Bay Street, J915
Jacksonville, Florida 32202
Attn: Vice President & General Manager
Fax: (904) 633-4531
With a copy to (which shall not constitute notice):
CSX Transportation, Inc.
500 Water Street, J150
Jacksonville, Florida 32202
Attn: Assistant General Counsel - Real Estate
Fax: (904) 359-7518
If to the Company to:
Pathnet Telecommunications, Inc.
1015 31st Street, N.W.
Washington, D.C. 20007
Attn: General Counsel
Fax: 202-625-7369
With a copy (which shall not constitute notice) to:
Covington & Burling
1201 Pennsylvania Ave., N.W.
P.O. Box 7566
Washington, D.C. 20044
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<PAGE> 31
Attn: Bruce S. Wilson, Esq.
Fax: 202-662-6291
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
[End of text; signature page follows]
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<PAGE> 32
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
PATHNET TELECOMMUNICATIONS, INC.
BY /s/ RICHARD A. JALKUT
------------------------------
ITS PRESIDENT AND CEO
------------------------------
PATHNET, INC.
BY /s/ RICHARD A. JALKUT
--------------------------
ITS PRESIDENT AND CEO
--------------------------
CSX TRANSPORTATION, INC.
BY /s/ J. RANDALL
-----------------------------
ITS VICE PRESIDENT REAL ESTATE AND
-----------------------------
INDUSTRIAL DEVELOPMENT
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<PAGE> 1
EXHIBIT 10.4
CONTRIBUTION AGREEMENT
DATED
NOVEMBER 4, 1999
BY AND AMONG
PATHNET TELECOMMUNICATIONS, INC.,
PATHNET, INC.
AND
THE PREFERRED STOCKHOLDERS OF PATHNET, INC.
<PAGE> 2
CONTRIBUTION AGREEMENT
THIS AGREEMENT is made as of November 4, 1999 (the "Agreement Date"),
by and among PATHNET TELECOMMUNICATIONS, INC., a Delaware corporation (the
"Company"); PATHNET, INC., a Delaware corporation ("Pathnet"); SPECTRUM EQUITY
INVESTORS, L.P., NEW ENTERPRISE ASSOCIATES VI, LIMITED PARTNERSHIP, ONSET
ENTERPRISE ASSOCIATES II, L.P., MONTAUK PARTNERS, L.P., PAUL CAPITAL PARTNERS V,
L.P., PAUL CAPITAL PARTNERS (DOMESTIC ANNEX FUND) L.P., PAUL CAPITAL PARTNERS V
INTERNATIONAL, L.P., PAUL CAPITAL PARTNERS VI, L.P., PCP ASSOCIATES, L.P.,
THOMAS DOMENCICH, DENNIS R. PATRICK, the Holders of Series A Preferred Stock of
Pathnet, Inc. (the "A Preferred Stockholders"); SPECTRUM EQUITY INVESTORS, L.P.,
NEW ENTERPRISE ASSOCIATES VI, LIMITED PARTNERSHIP, ONSET ENTERPRISE ASSOCIATES
II, L.P., PAUL CAPITAL PARTNERS V, L.P., PAUL CAPITAL PARTNERS (DOMESTIC ANNEX
FUND) L.P., PAUL CAPITAL PARTNERS V INTERNATIONAL, L.P., PAUL CAPITAL PARTNERS
VI, L.P., PCP ASSOCIATES, L.P., THOMAS DOMENCICH, DENNIS R. PATRICK, TORONTO
DOMINION CAPITAL (U.S.A.), INC., GROTECH PARTNERS IV, L.P., UTECH CLIMATE
CHALLENGE FUND, L.P., the Holders of Series B Preferred Stock of Pathnet, Inc.
(the "B Preferred Stockholders"); SPECTRUM EQUITY INVESTORS, L.P., SPECTRUM
EQUITY INVESTORS II, L.P., NEW ENTERPRISE ASSOCIATES VI, LIMITED PARTNERSHIP,
SHAWN J. COLO, BENJAMIN M. COUGHLIN, MICHAEL J. KENNEALLY, MATTHEW N. MOCHARY,
ROBERT A. NICHOLSON, FRED WANG, TORONTO DOMINION CAPITAL (U.S.A.), INC., GROTECH
PARTNERS IV, L.P., UTECH CLIMATE CHALLENGE FUND, L.P., UTILITY COMPETITIVE
ADVANTAGE FUND, FBR TECHNOLOGY VENTURE PARTNERS L.P., ONSET ENTERPRISE
ASSOCIATES II, L.P., ONSET ENTERPRISE ASSOCIATES III, L.P., DENNIS R. PATRICK,
PAUL CAPITAL PARTNERS V, L.P., PAUL CAPITAL PARTNERS (DOMESTIC ANNEX FUND) L.P.,
PAUL CAPITAL PARTNERS V INTERNATIONAL, L.P., PAUL CAPITAL PARTNERS VI, L.P., and
PCP ASSOCIATES, L.P, the Holders of Series C Preferred Stock of Pathnet, Inc.
(the "C Preferred Stockholders" and, together with the A Preferred Stockholders
and the B Preferred Stockholders, the "Stockholders");
W I T N E S S E T H:
WHEREAS, the Stockholders own shares of preferred stock of
Pathnet; and
WHEREAS, the Company intends to acquire Pathnet as a
subsidiary; and
WHEREAS, the Stockholders intend, subject to the terms and conditions
hereof, to exchange their stock in Pathnet for Shares of the Company; and
WHEREAS, the Stockholders and persons contributing common stock of
Pathnet or other assets to the Company pursuant to the Related Contribution
Agreements (as defined below) intend that the transfers of the stock and other
property interests to the Company in exchange for shares of the Company will
assist the Company and its subsidiaries in conducting future operations in an
efficient manner; and
<PAGE> 3
NOW THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
Section 1 Definitions. For the purposes of this
Agreement, the following terms have the meanings set forth below:
"12 1/4% Senior Notes" shall mean those certain senior notes
due 2008 issued by Pathnet pursuant to the terms of the 1998 Indenture.
"1998 Indenture" shall mean that certain Indenture, dated as of April
8, 1998, by Pathnet to the Bank of New York, as Trustee, in respect of
$350,000,000 in aggregate principal amount of 12 1/4% Senior Notes.
"A Preferred Stockholders" shall have the meaning set forth in the
preamble to this Agreement.
"Affiliate" of any particular person or entity shall mean any other
person or entity controlling, controlled by or under common control with such
particular person or entity. The term "control" for this purpose shall mean the
ability, whether by the ownership of shares or other equity interest, by
contract or otherwise, to elect a majority of the directors of a corporation,
independently to select the managing partner of a partnership or the managing
member of a limited liability company, or otherwise to have the power
independently to remove and then select a majority of those Persons exercising
governing authority over an entity. Control shall be exclusively presumed in the
case of the direct or indirect ownership of fifty percent (50%) or more of the
equity interests in an entity.
"Agreement" shall mean this Contribution Agreement, as amended,
supplemented or restated from time to time in accordance with its terms.
"Agreement Date" shall have the meaning set forth in the preamble to
this Agreement.
"B Preferred Stockholders" shall have the meaning set forth in the
preamble to this Agreement.
"C Preferred Stockholders" shall have the meaning set forth in the
preamble to this Agreement.
"Closing" shall have the meaning set forth in Section 6A.
"Closing Date" shall have the meaning set forth in Section 6A.
"Common Stock" shall mean Common Stock of the Company, par value $0.01
per share.
"Company" shall have the meaning set forth in the preamble to this
Agreement.
"Contributors" shall mean the parties to this Agreement and the Related
Contribution Agreements (as defined below), other than the Company and Pathnet.
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<PAGE> 4
"FCC" shall mean the Federal Communications Commission and any
governmental body or agency succeeding to the functions thereof.
"FCC Consents" shall mean the consents of the FCC, to the extent
required under the Federal Communications Act and the regulations thereunder in
order to effect the transactions contemplated by this Agreement and the Related
Contribution Agreements, to the assignment or transfer of control of all FCC
licenses and authorizations of the Company and the Subsidiaries, or, in lieu
thereof, special temporary authority to operate under such licenses and
authorizations following such assignment or transfer of control; exclusive,
however, of any FCC licenses or authorizations that may be surrendered or
forfeited to the FCC and that are not material to the operation of Pathnet's
existing networks.
"Governing Documents" shall mean, with respect to (i) a limited
partnership, such limited partnership's certificate of limited partnership and
the agreement of limited partnership, and any amendments or modifications of any
of the foregoing; (ii) a corporation, such corporation's articles or certificate
of incorporation, by-laws and any applicable authorizing resolutions, and any
amendments or modifications of any of the foregoing; (iii) a limited liability
company, such limited liability company's articles or certificate of
organization or formation and operating agreement or agreement of limited
liability company, and any amendments or modifications of any of the foregoing;
and (iv) a trust, such trust's declaration of trust, articles supplementary and
by-laws and any amendments or modifications of any of the foregoing.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"IRC" shall mean the Internal Revenue Code of 1986, as amended, and any
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"Licenses" shall mean federal, state, local and foreign franchises,
tariffs, licenses, ordinances, certifications, approvals, authorizations and
permits issued or granted by governmental authorities.
"Loss" or "Losses" shall mean any and all loss, cost, claim, damage,
liability, or expense (including attorneys' fees).
"Material Adverse Effect" shall mean a material adverse effect upon the
assets, liabilities, prospects, financial condition or business operations of
the Company and its Subsidiaries, taken as a whole.
"Pathnet" shall have the meaning set forth in the preamble
to this Agreement.
"Person" shall mean an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, a limited liability company and a governmental entity or any
department, agency or political subdivision thereof.
"Qualified Public Offering" shall mean the closing of the first firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities
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<PAGE> 5
Act covering the offer and sale of Common Stock to the public (i) in which the
proceeds received by the Company, net of underwriting discounts and commissions,
equal or exceed $75,000,000; (ii) immediately prior to the consummation of which
the Company is valued (based on the per-share price paid in such public
offering, but without regard to any proceeds to be received by the Company in
connection with such public offering) at greater than $600,000,000; and (iii) in
which the Company uses a nationally recognized underwriter acceptable to the
Board of Directors.
"Related Contribution Agreements" shall have the meaning set forth in
Section 3A(v).
"SEC" shall mean the Securities and Exchange Commission and any
governmental body or agency succeeding to the functions thereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal law then in force.
"Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, or any similar federal law then in force.
"Senior Noteholder Consent" shall mean each and all consents, waivers,
amendments and other action of the holders of the 12 1/4% Senior Notes of
Pathnet in respect of the transactions contemplated herein (and in the Related
Contribution Agreements, all to be closed in connection herewith) that are, in
the reasonable opinion of the Company and its counsel, to have been obtained or
completed to permit Pathnet to complete such transactions pursuant to the terms
of the 1998 Indenture.
"Senior Noteholder Consent Date" shall mean that date on which the
Senior Noteholder Consent shall have been obtained.
"Shares" shall mean the Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, and Series C Convertible Preferred Stock of the
Company being issued to the A Preferred Stockholders, the B Preferred
Stockholders, and the C Preferred Stockholders, respectively, pursuant to the
terms hereof, as the terms of such Shares are set forth in the Certificate of
Incorporation of the Company attached as Exhibit D hereto.
"Stockholders" shall have the meaning set forth in the preamble to this
Agreement.
"Stockholders Agreement" shall mean a Stockholders' Agreement
substantially in the form of Exhibit E hereto.
"Subsidiary" shall mean Pathnet and (i) any other corporation of which
the securities having a majority of the ordinary voting power in electing the
board of directors are, at the time as of which any determination is being made,
owned by the Company either directly or through one or more Subsidiaries, (ii)
any partnership, joint venture or similar entity of which or in which such
Person, such Person and one or more of its Subsidiaries, or one or more
Subsidiaries of such Person directly or indirectly own more than 50% of the
capital interest or profits interest, or (iii) any trust, association or other
unincorporated organization of which or in which such Person,
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<PAGE> 6
such Person and one or more of its Subsidiaries, or one or more Subsidiaries of
such Person directly or indirectly own more than 50% of the beneficial interest.
"Treasury Regulations" shall mean the United States Treasury
Regulations promulgated under the IRC, and any reference to any particular
Treasury Regulation section shall be interpreted to include any final or
temporary revision of or successor to that section regardless of how numbered or
classified.
Section 2 Contributions by Stockholders in Exchange
for Shares.
At the Closing, each Stockholder shall assign, transfer, convey and
contribute to the Company each of the Stockholder's stock and interest in
Pathnet and in consideration for the stock of Pathnet, the Company shall issue
and sell to each Stockholder Shares, all in the amounts set forth in the
schedule attached as Exhibit A hereto. Each Stockholder shall receive solely
Shares in exchange for such Stockholder's stock and interest in Pathnet.
Section 3 Conditions to Closing.
3A. Conditions Precedent of the Company at the Closing. The
Company's obligations under this Agreement to issue the Shares and otherwise
consummate the transactions contemplated herein in respect of the Closing are
subject to the satisfaction (or waiver in writing by the Company) of the
following conditions on or before the Closing Date:
i. No Injunction. No temporary restraining order or preliminary
or permanent injunction of any court or administrative agency of
competent jurisdiction prohibiting the consummation of the transactions
contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and the other parties to
this Agreement and the Related Contribution Agreements shall have made
all filings required under the HSR Act for the transactions
contemplated hereby and the applicable waiting period under the HSR Act
shall have elapsed without any second request by the Department of
Justice or Federal Trade Commission with respect to such filings. The
Company shall have obtained all FCC Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of the Stockholders contained in this
Agreement shall be true and correct in all material respects on the
date hereof and, except for representations and warranties made with
respect to a specified date, at and as of the Closing Date.
iv. Performance of Agreement. Each Stockholder shall have
performed or complied with, in all material respects, all of its
respective agreements, covenants and obligations required by this
Agreement to be performed or complied with by such Stockholder prior to
or at the Closing, including, without limitation, delivery of the
contribution described in Section 2.
v. Contributions of Other Parties. At or contemporaneously with
the Closing, the Company shall also be closing, as part of the same
overall plan of contribution, upon (a) one or more contribution
agreements between the Company, Pathnet and certain holders
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<PAGE> 7
of shares of the outstanding common stock of Pathnet, (b) the
Contribution Agreement between the Company, Pathnet and Colonial
Pipeline Company, (c) the Contribution Agreement between the Company,
Pathnet and The Burlington Northern and Santa Fe Railroad, and (d) the
Contribution Agreement between the Company, Pathnet and CSX
Transportation, Inc. (the "Related Contribution Agreements"), such that
immediately after the Closing, the Company will own stock of Pathnet
constituting control within the meaning of IRC Section 368(c).
vi. Senior Noteholder Consent. The Senior Noteholder Consent shall
have been obtained and not revoked.
vii. Delivery of Closing Documents. The Company shall have received
the other closing documents specified in Section 6C.
3B. Conditions Precedent of the Stockholders at the Closing.
The Stockholders' obligations under this Agreement to deliver the contributions
described in Section 2 and otherwise consummate the transactions contemplated
herein in respect of the Closing are subject to the satisfaction (or waiver in
writing by each Stockholder) of the following conditions on or before the
Closing Date:
i. No Injunction. No temporary restraining order or preliminary
or permanent injunction of any court or administrative agency of
competent jurisdiction prohibiting the consummation of the transactions
contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and the other parties to
this Agreement and the Related Contribution Agreements shall have made
all filings required under the HSR Act for the transactions
contemplated hereby, and the applicable waiting period under the HSR
Act shall have elapsed without any second request by the Department of
Justice or Federal Trade Commission with respect to such filings. The
Company shall have obtained all FCC Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of the Company and Pathnet contained in
this Agreement shall be true and correct in all material respects on
the date hereof and, except for representations and warranties made
with respect to a specified date, at and as of the Closing Date.
iv. Performance of Agreement. Each of the Company and Pathnet
shall have performed or complied with, in all material respects, all of
its respective agreements, covenants and obligations required by this
Agreement to be performed or complied with by it prior to or at the
Closing, including, without limitation, issuance of the Shares by the
Company described in Section 2.
v. Contributions of Other Parties. At or contemporaneously with
the Closing, as part of the same overall plan of contribution, the
Company shall also be closing upon the Related Contribution Agreements,
such that immediately after the Closing, the Company will own stock of
Pathnet constituting control within the meaning of IRC Section 368(c).
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<PAGE> 8
vi. Material Adverse Change. Between the Agreement Date and the
Closing there shall not have occurred any event or series of related
events which, individually or in the aggregate, have caused or could
reasonably be anticipated to cause a Material Adverse Effect.
vii. Delivery of Closing Documents. The Stockholders shall have
received the closing documents specified in Section 6B.
viii. Senior Noteholder Consent. The Senior Noteholder Consent shall
have been obtained and not revoked.
Section 4 Representations and Warranties of the
Company and Pathnet. Each of the Company and Pathnet represents and warrants to
the Stockholders with respect to each of the following provisions of this
Section 4 at and as of the Agreement Date and (except for those made with
reference to a specific date) again at and as of the Closing Date:
4A. Organization and Corporate Power. The Company is duly
organized, validly existing and in good standing under the laws of Delaware and
is qualified to do business in every jurisdiction in which its ownership of
property or conduct of business requires it to qualify. The Company has all
requisite corporate power and authority and all material Licenses necessary to
own and operate its properties, to carry on its business as now conducted and
presently proposed to be conducted and to carry out the transactions
contemplated by this Agreement. The copies of the Company's Governing Documents
which have been furnished to the Stockholders reflect all amendments made
thereto at any time prior to the Agreement Date and are correct and complete.
4B. Authorization. Each of the Company and Pathnet has all
necessary corporate power and has been duly authorized by all necessary and
appropriate action to enter into this Agreement and to consummate the
transactions contemplated herein. The officers of the Company and Pathnet
executing this Agreement on behalf of such corporations have been duly
authorized by all necessary and appropriate corporate action. This Agreement is
a valid and binding obligation of each of the Company and Pathnet, enforceable
against it in accordance with its terms, except insofar as enforceability may be
affected by bankruptcy, insolvency or similar laws affecting creditors' rights
generally or by general principles of equity.
4C. Capital Stock and Related Matters.
i. As of the Agreement Date, no shares of capital stock of the
Company are issued and outstanding.
ii. As of the Agreement Date, the authorized capital stock of
Pathnet consists of (a) 10,000,000 shares of preferred stock (of which
zero (0) shares are issued and outstanding); (b) 1,000,000 shares of
Series A Convertible Preferred Stock (all of which are issued and
outstanding); (c) 1,651,046 shares of Series B Convertible Preferred
Stock (all of which are issued and outstanding); (d) 2,819,549 shares
of Series C Convertible Preferred Stock (all of which are issued and
outstanding); and (e) 60,000,000 shares of Common Stock (of which
2,977,593 are issued and outstanding).
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<PAGE> 9
iii. As of the Closing and immediately thereafter (assuming that
the Company has completed the closing under each of the Related
Contribution Agreements and under similar contribution agreements with
all holders of the stock of Pathnet) the authorized capital stock of
the Company will consist of (a) 39,620,860 shares of preferred stock,
of which 2,899,999 shares are designated as Series A Convertible
Preferred Stock (all of which will be issued and outstanding),
4,788,030 shares are designated as Series B Convertible Preferred Stock
(all of which will be issued and outstanding), 8,176,686 shares are
designated as Series C Convertible Preferred Stock (all of which will
be issued and outstanding), 9,250,000 shares will be designated as
Series D Convertible Preferred Stock (of which 8,511,607 will be issued
and outstanding, allocated among the holders thereof as set forth on
Exhibit H), and 4,506,145 shares of Series E Convertible Preferred
Stock (of which 1,729,631 will be issued and outstanding)
(collectively, the "Preferred Stock"), and (b) 60,000,000 shares of
Common Stock, of which 2,977,593 shares will be issued and outstanding
and 30,000,000 shares will be reserved for issuance upon conversion of
the Preferred Stock. As of the Closing, neither the Company nor any
Subsidiary will have outstanding any stock or securities convertible or
exchangeable for any shares of its capital stock or containing any
profit participation features, nor shall it have outstanding any rights
or options to subscribe for or to purchase its capital stock or any
stock or securities convertible into or exchangeable for its capital
stock or any stock appreciation rights or phantom stock plans, except
for the Preferred Stock and except as set forth on Exhibit H. Exhibit H
accurately sets forth the following with respect to all outstanding
options and rights to acquire the Company's and Pathnet's capital
stock: the holder, the number of shares covered, the exercise price and
the expiration date. As of the Closing, neither the Company nor any
Subsidiary will be subject to any obligation (contingent or otherwise)
to repurchase or otherwise acquire or retire any shares of its capital
stock or any warrants, options or other rights to acquire its capital
stock, except as set forth on Exhibit H. As of the Closing and
immediately thereafter, all of the outstanding shares of the Company's
capital stock shall be validly issued, fully paid and nonassessable.
iv. The Company has not violated any applicable federal or state
securities laws in connection with the offer, sale or issuance of any
of its capital stock, including the sale of the Shares pursuant to this
Agreement. There are no agreements between the Company's stockholders
or between Pathnet's stockholders with respect to the voting or
transfer of the Company's or Pathnet's capital stock or with respect to
any other aspect of the Company's or Pathnet's affairs, except as set
forth on Exhibit H.
4D. Subsidiaries, Investments. Exhibit H correctly sets forth
the name of each Subsidiary, the jurisdiction of its incorporation and
the Persons owning the outstanding capital stock of such Subsidiary.
Each Subsidiary is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has
all requisite corporate power and authority and all material Licenses
necessary to own its properties and to carry on its businesses as now
being conducted and as presently proposed to be conducted, and is
qualified to do business in every jurisdiction in which its ownership
of property or the conduct of business requires it to qualify, except
for any jurisdiction with respect to which the failure to qualify would
not have a Material Adverse Effect. All of the outstanding shares of
capital stock of each Subsidiary are
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<PAGE> 10
validly issued, fully paid and nonassessable, and all such shares are
owned by the Company or another Subsidiary free and clear of any lien,
charge or encumbrance except as disclosed in Exhibit H. Except as set
forth on Exhibit H, neither the Company nor any Subsidiary owns or
holds the right to acquire any shares of stock or any other security or
interest in any other Person.
4E. No Breach. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby
nor the fulfillment of or compliance with the terms and conditions
hereof (a) conflict with or will result in a breach of, default under,
or triggering of any rights against the Company or any Subsidiary under
any terms, conditions or provisions of (i) the Governing Documents of
the Company or any Subsidiary, (ii) the 1998 Indenture, or (iii) any
agreement with shareholders, or any other agreement, contract,
indenture, mortgage, deed, easement, order, judgment, decree,
arbitration award, statute, regulation or instrument to which the
Company or any Subsidiary is a party or by which the assets of the
Company or any Subsidiary are bound, in each case except as to matters
that would not be reasonably expected to have a Material Adverse Effect
or affect the ability of the Company or Pathnet to consummate the
transactions contemplated herein, or (b) constitutes or will constitute
a violation or default under, or create a right to terminate, any of
the foregoing, except as to matters that would not be reasonably
expected to have a Material Adverse Effect or affect the ability of the
Company or Pathnet to consummate the transactions contemplated herein.
Except as set forth in Exhibit I, no consent or approval,
authorization, order, registration or qualification of any governmental
entity or any other Person is required for the execution and delivery
of this Agreement and the consummation of the transactions contemplated
hereby by the Company.
4F. Shares. The issuance or delivery of the Shares hereunder
are not subject to any preemptive right of any Person or to any
contractual right of first refusal or other right in favor of any
Person except as set forth in the Stockholders Agreement. Upon delivery
of the contributions described in Section 2 to the Company, the Shares
will be validly issued, fully paid and non-assessable.
4G. Related Contribution Agreements. The Company has made
available to the Stockholders true, correct and complete copies of the Related
Contribution Agreements, together with any amendments thereto and modifications
thereof.
4H. Brokerage. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company or any Subsidiary.
4I. Reports with the SEC. The Company has furnished or made
available to the Stockholders complete and accurate copies of Pathnet's annual
report on Form 10-K for its most recent fiscal year, all other reports or
documents required to be filed by Pathnet pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act since the filing of the most recent annual report on
Form 10-K, and all correspondence with the SEC since August 1998. Such filed
reports do not, as of the date hereof, contain any material false statements or
any misstatement of any material fact and do not omit to state any fact
necessary to make the statements set forth
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<PAGE> 11
therein not misleading. Pathnet has made all filings with the SEC which it is
required to make, and Pathnet has not received any request from the SEC to file
any amendment or supplement to any of the reports described in this Section 4I.
4J. Transfers of Contributed Properties. There is no plan or
intention by the Company to dispose of any of the contributed properties
described in Section 2 or Section 3A(v), except that the Company is
contemplating (i) a transfer of certain contributed properties to Pathnet or
another Subsidiary in a transaction that will qualify as a tax-free transfer
pursuant to IRC Section 351, and (ii) the conversion of certain preferred stock
of Pathnet into common stock of Pathnet.
4K. No Intention to Redeem. There is no current plan or
intention on behalf of the Company to redeem or otherwise reacquire any of the
Shares issued pursuant to the transactions described in Sections 2 and 3A(v)
hereof.
Section 5 Representations and Warranties of the
Stockholders. Each Stockholder individually and severally, but not jointly,
represents and warrants to the Company, to Pathnet and to each of the other
Stockholders with respect to each of the following at and as of the Agreement
Date and (except for those made with reference to a specific date) again at and
as of the Closing Date:
5A. Binding Agreement. Such Stockholder, if a partnership or
a corporation, has all required partnership or corporate power and authority to
enter into and perform this Agreement. Such Stockholder, if an individual, has
the capacity to enter into and perform this Agreement. This Agreement has been
duly executed by such Stockholder and constitutes legal, valid and binding
obligations of such Stockholder, enforceable against it in accordance with its
terms, except insofar as enforceability may be affected by bankruptcy,
insolvency or similar laws affecting creditors' rights generally or by general
principles of equity.
5B. Authorization; No Breach. Neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby nor the fulfillment of or compliance with the terms and conditions hereof
(a) conflicts with or will result in a breach of any of the terms, conditions or
provisions of (i) the Governing Documents of any Stockholder which is a
partnership or a corporation, (ii) any agreement, contract, indenture, mortgage,
deed, easement, order, judgment, decree, arbitration award, statute, regulation
or instrument to which such Stockholder, whether such Stockholder is a
partnership, a corporation or an individual, is a party or by which it or its
assets are bound, except as to matters that would not reasonably be expected to
have a Material Adverse Effect on such Stockholder or materially affect the
ability of such Stockholder to consummate the transactions contemplated herein
or (b) constitutes or will constitute a violation or default or create a right
of termination under any of the foregoing, except as to matters that would not
reasonably be expected to have a Material Adverse Effect on such Stockholder or
materially affect the ability of such Stockholder to consummate the transactions
contemplated herein. No consent or approval, authorization, order, regulation or
qualification of any governmental entity or any other third party is required
for the execution and delivery by such Stockholder of this Agreement and the
consummation by such Stockholder of the transactions contemplated hereby, other
than any filings required under the HSR Act.
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<PAGE> 12
5C. Investment Representations. Such Stockholder acknowledges
that the Shares have not been and will not be registered or qualified under the
Securities Act or any state securities laws and are offered in reliance upon an
exemption from registration under Regulation D of the Securities Act and similar
state law exceptions. The Shares to be received by such Stockholder hereunder
will be held by such Stockholder for investment purposes only for such
Stockholder's own account, and not with a view to or for sale in connection with
any distribution of the Shares, and such Stockholder acknowledges that the
Shares cannot be sold or otherwise disposed of unless they are subsequently
registered under the Securities Act or pursuant to an exemption therefrom; and
the Shares may not be sold, assigned or otherwise transferred except in
compliance with the Stockholders Agreement. Such Stockholder hereby acknowledges
receipt of a copy of the Stockholders Agreement and represents that it has
reviewed and understands the provisions thereof which have a bearing on the
representations made in this Section 5C.
5D. Accredited Investor. Unless otherwise indicated on
Exhibit B, such Stockholder is an "accredited investor" within the meaning of
Regulation D under the Securities Act and has the knowledge and experience in
financial and business matters such that it is capable of evaluating the merits
and risks of receiving and owning the Shares and is able to bear the economic
risk of such ownership and understands that an investment in Shares involves
substantial risks.
5E. Availability of Information. There has been made
available to such Stockholder and such Stockholder's advisors the opportunity to
ask questions of, and receive answers from, the Company concerning the terms and
conditions of the investment in the Shares, and to obtain the financial
information with respect to the Company's assets, the Stockholders Agreement,
and any additional information, to the extent that the Company possesses such
information or can acquire it without unreasonable effort or expense, necessary
to verify the accuracy of the information given to such Stockholder, or to
otherwise make an informed investment decision, that such Stockholder has had an
opportunity to consult with counsel and other advisors about the investment in
the Shares, and that all material document, records and books pertaining to such
investment have, on request, been made available to such Stockholder and his or
its advisors.
5F. No General Solicitation. Neither such Stockholder nor any
advisor to such Stockholder is aware of or has engaged in any form of general
solicitation or advertising with respect to sales of the Shares, including (i)
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio; and
(ii) any seminar or meeting whose attendees were invited by any general
solicitation or general advertising.
5G. Litigation. There is no action, suit, proceeding or
investigation pending or, to such Stockholder's knowledge, threatened against
such Stockholder that questions the validity of this Agreement or the ability of
such Stockholder to consummate the transactions contemplated hereby.
5H. Brokerage. Such Stockholder acknowledges that there are
no claims for brokerage commissions, finders' fees or similar compensation in
connection with the transactions
-11-
<PAGE> 13
contemplated by this Agreement based on any arrangement or agreement binding
upon such Stockholder.
5I. No Intention to Transfer Shares. Such Stockholder
acknowledges that there is no intention or plan, formally or informally, on the
date hereof, to transfer any of the Shares received by such Stockholder pursuant
to this Agreement.
Section 6 Closing.
6A. Closing Date. The Company shall notify the Stockholders
of the occurrence of the Senior Noteholder Consent Date within one business day
after such date. The closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Covington & Burling, in
Washington, D.C., or at such other place as shall be mutually agreed upon by the
parties, on the date which is five (5) business days following the Senior
Noteholder Consent Date (or, in the event that any other conditions to the
obligations of any party to close as provided hereunder shall not have been met
at such date, then on the date which is three (3) business days following the
date on which such conditions shall have been satisfied or waived by the party
whose obligations are so conditioned), or at such other date and time as to
which the parties may agree (the "Closing Date"). The Closing shall be effective
immediately prior to the close of business on the Closing Date.
6B. Deliveries by the Company at the Closing. At the Closing,
the Company and Pathnet shall deliver the following documents:
i. A certificate of the President of each of Pathnet and the
Company, each certifying that its representations and warranties are
true in all material respects as of the Closing Date and that it has
performed or complied, in all material respects, with all of its
respective agreements and obligations required by this Agreement to be
performed or complied with by it prior to or at the Closing;
ii. A certified copy of resolutions of the Board of Directors of
the Company, authorizing the execution and delivery of this Agreement
and the performance of the obligations of the Company hereunder;
iii. A certified copy of resolutions of the Board of Directors of
Pathnet, authorizing the execution and delivery of this Agreement and
the performance of the obligations of Pathnet hereunder;
iv. An opinion of Counsel to the Company substantially in the form
set forth on Exhibit G;
v. The Stockholders Agreement duly executed and delivered by the
Company and each other stockholder of the Company (other than any one
or more stockholders beneficially owning, in the aggregate, not more
than one percent of the outstanding capital stock of the Company);
vi. Certificates representing the Shares to be issued to each
Stockholder;
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<PAGE> 14
vii. All third party and governmental consents necessary or
appropriate to consummate the transactions contemplated herein,
including, without limitation, the FCC Consents; and
viii. Those other closing documents required to be executed by it or
as may otherwise be reasonably necessary or appropriate to consummate
the transactions contemplated herein.
6C. Deliveries by each Stockholder at the Closing. At the
Closing, each Stockholder shall deliver the following documents:
i. The Stockholders Agreement duly executed and delivered by such
Stockholder;
ii. A certificate of such Stockholder certifying that the
representations and warranties of such Stockholder contained in this
Agreement are true and correct as of the Closing Date and that it has
performed, in all material respects, all of its respective agreements
and obligations required by this Agreement to be performed or complied
with by such Stockholder prior to or at the Closing;
iii. All third party and governmental consents necessary or
appropriate to consummate the transactions contemplated herein;
iv. If such Stockholder is a corporation, a certified copy of
resolutions of the Board of Directors of such corporation authorizing
the execution and delivery by such corporation of this Agreement and
the performance of the obligations by such corporation hereunder; and
v. Those other closing documents required to be executed by it or
as may otherwise be reasonably necessary or appropriate to consummate
the transactions contemplated herein.
Section 7 Covenants.
7A. Implementing Agreement. Subject to the terms and
conditions hereof, each party hereto shall use its best efforts to take all
action required of it to fulfill its obligations under the terms of this
Agreement and to facilitate the consummation of the transactions contemplated
hereby.
7B. HSR Act Filings. Each of the Company, Pathnet and each
Stockholder shall use reasonable efforts to prepare and, as soon as practicable
after the Agreement Date, file with the Federal Trade Commission and the
Antitrust Division of the Department of Justice any materials and information
required to be filed with or provided pursuant to the HSR Act with respect to
the transactions contemplated by this Agreement. Each of the Company, Pathnet
and such Stockholders shall promptly supply any additional information which may
be required or requested of it in connection with the HSR Act filings.
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<PAGE> 15
7C. FCC Filings. Each of the Company and Pathnet shall use
reasonable best efforts to prepare and, as soon as practicable after the
Agreement Date, file with the Federal Communications Commission any applications
necessary to obtain the FCC Consents.
7D. Consents and Approvals. The Company and Pathnet shall use
their best efforts to obtain all consents, approvals, certificates and other
documents required in connection with its performance under this Agreement and
the consummation of the transactions contemplated hereby. The Company and
Pathnet shall make all filings, applications, statements and reports to all
governmental authorities and other Persons which are required to be made by
either of them prior to the Closing Date by or on behalf of the Company or
Pathnet or any of their Affiliates pursuant to any applicable law or contract in
connection with this Agreement and the transactions contemplated hereby.
7E. Tax Free Transfers. The parties intend that the
contribution of properties by the Stockholders and the other contributing
Persons described in Section 3A(v) in respect of the Closing will be part of a
single integrated transaction in which no gain or loss will be recognized to the
Company or the Stockholders upon the issuance and receipt of the Shares pursuant
to IRC Section 351 and, in the case of Persons who contribute Pathnet stock to
the Company, the contributions will qualify as a tax-free reorganization
pursuant to IRC Section 368(a)(1)(B), and the parties agree that they will
prepare and file their Federal and state income tax returns in a manner
consistent with such characterization. Further, each Stockholder agrees to
provide to the Company a statement setting forth the amount of such
Stockholder's tax basis in the property contributed by such Stockholder so that
the Company can determine its tax basis in the property in accordance with IRC
Section 362. Each Stockholder agrees to file the information required by
Treasury Regulation Section 1.351-3 for its Federal income tax return for the
taxable year of the contribution, and the Company agrees to furnish to each
Stockholder information necessary to enable each Stockholder to comply with the
information reporting requirements of Treasury Regulation Section 1.351-3. The
Company agrees that it will exercise reasonable care not to take any action that
would cause the transactions contemplated hereby not to qualify as tax-free
pursuant to IRC Section 351. The Company has no present intention or plan to
transfer all or substantially all (within the meaning of IRC Section
368(a)(1)(C)) of the assets of Pathnet to the Company. The Company has no
present intention or plan to issue additional shares of the Company (other than
the shares proposed to be issued in the transactions contemplated by Sections 2
and 3A(v) hereof), or rights to acquire additional shares, for consideration
other than cash or property, if the result would be that the Contributors would
fail to have "control" of the Company within the meaning of IRC Section 368(c).
7F. Conversion. On the Closing Date, each Stockholder shall,
except to the extent directed by the Company in writing at least five business
days prior to the Closing Date, provide notice pursuant to Article 5.3.4(j) of
the Pathnet Certificate of Incorporation of exercise of the right to convert the
preferred stock of Pathnet into common stock of Pathnet. The notice provided by
each Stockholder shall be subject to each of the Closing Conditions set forth in
Section 3B of this Agreement, and shall be null and void in the event that any
condition set forth in such section is not satisfied. Pursuant to Article
5.3.4(j) of the Pathnet Articles of Incorporation, the conversion will be
effective immediately prior to the close of business on the Closing Date.
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<PAGE> 16
Miscellaneous.
8A. Complete Agreement. This Agreement (including the
Exhibits hereto) represents the entire agreement between the Stockholders,
Pathnet and the Company covering everything agreed upon or understood in this
transaction and all other prior agreements, written or oral are merged into this
Agreement. There are no oral promises, conditions, representations,
understandings, interpretations or terms of any kind as conditions or
inducements to the execution hereof in effect between the parties.
8B. Authorized Signatories. The persons executing this
Agreement for and on behalf of each Stockholder, Pathnet and the Company each
represent that they have the requisite authority to bind the entities on whose
behalf they are signing.
8C. Termination. In the event that for any reason the Closing
does not occur on or before the 150th day after the date of this Agreement, then
any party, if not then in breach of its obligations under this Agreement, may
terminate this Agreement by giving written notice thereof to the other party;
provided, however, that no such termination shall relieve either party of
liability for any breach of its obligations hereunder prior to such termination.
8D. Survival of Representations and Warranties. Regardless of
any investigation made by any party or on its behalf, all representations and
warranties contained herein or made in writing by any party in connection
herewith shall terminate at the Closing.
8E. Successors and Assigns. This Agreement may not be
assigned by either party without the written consent of the other party. Except
as otherwise expressly provided herein, all covenants and agreements contained
in this Agreement by or on behalf of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not.
8F. Knowledge. As used in this Agreement, the terms
"knowledge" or "aware" with respect to the Company and Pathnet shall mean the
actual knowledge or awareness of any one or more of Richard Jalkut, William
Smedberg, Michael Lubin, James Craig, Joe Mastrogiorgio and Robert Rouse.
8G. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
8H. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Agreement.
8I. Descriptive Headings: Interpretation. The descriptive
headings of this Agreement are inserted for convenience only and do not
constitute a Section of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
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<PAGE> 17
8J. Governing Law. This Agreement shall be governed by the
laws of the State of Delaware.
8K. Amendment. No change or addition shall be made to this
Agreement except by a written agreement executed by the Stockholders, Pathnet
and the Company.
8L. Expenses. The Company, Pathnet and each Stockholder shall
pay their respective expenses, if any, incurred in connection with the exchange
pursuant to this Agreement.
8M. Notices. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally to the recipient, sent to the recipient by reputable express courier
service (charges prepaid) or mailed to the recipient by certified or registered
mail, return receipt requested and postage prepaid. Such notices, demands and
other communications shall be sent to the parties hereto at the address
indicated below:
If to the Stockholder to such Stockholder's address as set forth in Exhibit B
hereto.
If to the Company to:
Pathnet Telecommunications, Inc.
1015 31st Street, N.W.
Washington, D.C. 20007
Attn: General Counsel
Fax: 202-625-7369
With a copy (which shall not constitute notice) to:
Covington & Burling
1201 Pennsylvania Ave., N.W.
P.O. Box 7566
Washington, D.C. 20044
Attn: Bruce S. Wilson, Esq.
Fax: 202-662-6291
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
[End of text; signature page follows]
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<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
-17-
<PAGE> 19
PATHNET TELECOMMUNICATIONS, INC.
By: /s/ RICHARD A. JALKUT
---------------------------------
Name: Richard A. Jalkut
Title: President and CEO
PATHNET, INC.
By: /s/ RICHARD A. JALKUT
---------------------------------
Name: Richard A. Jalkut
Title: President and CEO
STOCKHOLDERS
SPECTRUM EQUITY INVESTORS, L.P.
By: /s/ KEVIN MARONI
---------------------------------
Name: Kevin Maroni
Title: Illegible
SPECTRUM EQUITY INVESTORS II, L.P.
By: /s/ KEVIN MARONI
---------------------------------
Name: Kevin Maroni
Title: Illegible
/s/ SHAWN J. COLO
-------------------------------------
Shawn J. Colo
/s/ BENJAMIN M. COUGHLIN
-------------------------------------
Benjamin M. Coughlin
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<PAGE> 20
/s/ MICHAEL J. KENNEALLY
-------------------------------------
Michael J. Kenneally
/s/ MATTHEW N. MOCHARY
-------------------------------------
Matthew N. Mochary
/s/ ROBERT A. NICHOLSON
-------------------------------------
Robert A. Nicholson
/s/ FRED WANG
-------------------------------------
Fred Wang
NEW ENTERPRISE ASSOCIATES VI,
LIMITED PARTNERSHIP
By: /s/ PETER J. BARRIS
----------------------------------
Name: Peter J. Barris
Title: Managing General Partner
ONSET ENTERPRISE ASSOCIATES II, L.P.
By: /s/ TERRY L. OPDENZYK
----------------------------------
Name: Terry L. Opdenzyk
Title: General Partner
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<PAGE> 21
ONSET ENTERPRISES ASSOCIATES III, L.P.
By: /s/ TERRY L. OPDENZYK
---------------------------------
Name: Terry L. Opdenzyk
Title: General Partner
MONTAUK PARTNERS, L.P.
By: /s/ BRIAN M. SMITH
---------------------------------
Name: Brian M. Smith
Title: General Partner,
Managing Member
PAUL CAPITAL PARTNERS V, L.P.
By: /s/ DAVID E. PARK
---------------------------------
Name: David E. Park
Title: Managing Member and
General Partner
PAUL CAPITAL PARTNERS V (DOMESTIC
ANNEX FUND), L.P.
By: /s/ DAVID E. PARK
---------------------------------
Name: David E. Park
Title: Managing Member and
General Partner
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<PAGE> 22
PAUL CAPITAL PARTNERS V
INTERNATIONAL, L.P.
By: /s/ DAVID E. PARK
---------------------------------
Name: David E. Park
Title: Managing Member and
General Partner
PAUL CAPITAL PARTNERS VI, L.P.
By: /s/ DAVID E. PARK
---------------------------------
Name: David E. Park
Title: Managing Member and
General Partner
PCP ASSOCIATES, L.P.
By: /s/ DAVID E. PARK
---------------------------------
Name: David E. Park
Title: Managing Member and
General Partner
/s/ THOMAS DOMENCICH
-------------------------------------
Thomas Domencich
/s/ DENNIS R. PATRICK
-------------------------------------
Dennis R. Patrick
TORONTO DOMINION CAPITAL (U.S.A.), INC.
By: /s/ MARTHA L. GARIEPY
---------------------------------
Name: Martha L. Gariepy
Title: Secretary and Treasurer
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<PAGE> 23
GROTECH PARTNERS IV, L.P.
By: /s/ PATRICK J. KERINS
---------------------------------
Name: Patrick J. Kerins
Title: Managing Director
UTECH CLIMATE CHALLENGE FUND, L.P.
BY: ARETE CLIMATE CHALLENGE PARTNERS, LLC
By: /s/ ROBERT W. SHAW, JR.
---------------------------------
Name: Robert W. Shaw, Jr.
Title: Managing Member
UTILITY COMPETITIVE ADVANTAGE FUND
By: /s/ WILLIAM T. HEFLIN
---------------------------------
Name: William T. Heflin
Title: Illegible
FBR TECHNOLOGY VENTURE PARTNERS,
L.P.
By: /s/ GENE REICHERS
---------------------------------
Name: Gene Reichers
Title: Illegible
-22-
<PAGE> 1
EXHIBIT 10.5
CONTRIBUTION AGREEMENT
DATED
NOVEMBER 4, 1999
BY AND AMONG
PATHNET TELECOMMUNICATIONS, INC.,
PATHNET, INC.
AND
COMMON STOCKHOLDERS OF PATHNET, INC.
<PAGE> 2
CONTRIBUTION AGREEMENT
THIS AGREEMENT is made as of November 4, 1999 (the "Agreement Date"),
by and among PATHNET TELECOMMUNICATIONS, INC., a Delaware corporation (the
"Company"); PATHNET, INC., a Delaware corporation ("Pathnet"); and CHRIS ROGERS,
an individual resident of Silver Spring, Maryland, JEFFREY LEVITT, an individual
resident of Columbia, Maryland, EDWARD PRINCE an individual resident of Chevy
Chase, Maryland, KEN KLAMM an individual resident of Independence, Kansas, and
ERIC PODIETZ, an individual resident of Dresher, Pennsylvania, Holders of Common
Stock of Pathnet (the "Stockholders").
W I T N E S S E T H:
WHEREAS, the Stockholders own shares of common stock of Pathnet; and
WHEREAS, the Company intends to acquire Pathnet as a subsidiary; and
WHEREAS, the Stockholders intend, subject to the terms and conditions
hereof, to exchange their stock in Pathnet for Shares of the Company; and
WHEREAS, the Stockholders and persons contributing common stock and
preferred stock of Pathnet or other assets to the Company pursuant to the
Related Contribution Agreements (as defined below) intend that the transfers of
the stock and other property interests to the Company in exchange for shares of
the Company will assist the Company and its subsidiaries in conducting future
operations in an efficient manner; and
NOW THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
Section 1 Definitions. For the purposes of this Agreement, the
following terms have the meanings set forth below:
"12 1/4% Senior Notes" shall mean those certain senior notes due 2008
issued by Pathnet pursuant to the terms of the 1998 Indenture.
"1998 Indenture" shall mean that certain Indenture, dated as of April 8,
1998, by Pathnet to the Bank of New York, as Trustee, in respect of $350,000,000
in aggregate principal amount of 12 1/4% Senior Notes.
"Affiliate" of any particular person or entity shall mean any other
person or entity controlling, controlled by or under common control with such
particular person or entity. The term "control" for this purpose shall mean the
ability, whether by the ownership of shares or other equity interest, by
contract or otherwise, to elect a majority of the directors of a corporation,
independently to select the managing partner of a partnership or the managing
member of a limited liability company, or otherwise to have the power
independently to remove
<PAGE> 3
and then select a majority of those Persons exercising governing authority over
an entity. Control shall be exclusively presumed in the case of the direct or
indirect ownership of fifty percent (50%) or more of the equity interests in an
entity.
"Agreement" shall mean this Contribution Agreement, as amended,
supplemented or restated from time to time in accordance with its terms.
"Agreement Date" shall have the meaning set forth in the preamble to this
Agreement.
"Closing" shall have the meaning set forth in Section 6A.
"Closing Date" shall have the meaning set forth in Section 6A.
"Common Stock" shall mean Common Stock of the Company, par value $0.01
per share.
"Company" shall have the meaning set forth in the preamble to this
Agreement.
"Contributors" shall mean the parties to this Agreement and the Related
Contribution Agreements (as defined below), other than the Company and Pathnet.
"FCC" shall mean the Federal Communications Commission and any
governmental body or agency succeeding to the functions thereof.
"FCC Consents" shall mean the consents of the FCC, to the extent required
under the Federal Communications Act and the regulations thereunder in order to
effect the transactions contemplated by this Agreement and the Related
Contribution Agreements, to the assignment or transfer of control of all FCC
licenses and authorizations of the Company and the Subsidiaries, or, in lieu
thereof, special temporary authority to operate under such licenses and
authorizations following such assignment or transfer of control; exclusive,
however, of any FCC licenses or authorizations that may be surrendered or
forfeited to the FCC and that are not material to the operation of Pathnet's
existing networks.
"Governing Documents" shall mean, with respect to (i) a limited
partnership, such limited partnership's certificate of limited partnership and
the agreement of limited partnership, and any amendments or modifications of any
of the foregoing; (ii) a corporation, such corporation's articles or certificate
of incorporation, by-laws and any applicable authorizing resolutions, and any
amendments or modifications of any of the foregoing; (iii) a limited liability
company, such limited liability company's articles or certificate of
organization or formation and operating agreement or agreement of limited
liability company, and any amendments or modifications of any of the foregoing;
and (iv) a trust, such trust's declaration of trust, articles supplementary and
by-laws and any amendments or modifications of any of the foregoing.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"IRC" shall mean the Internal Revenue Code of 1986, as amended, and any
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
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"Licenses" shall mean federal, state, local and foreign franchises,
tariffs, licenses, ordinances, certifications, approvals, authorizations and
permits issued or granted by governmental authorities.
"Loss" or "Losses" shall mean any and all loss, cost, claim, damage,
liability, or expense (including attorneys' fees).
"Material Adverse Effect" shall mean a material adverse effect upon the
assets, liabilities, prospects, financial condition or business operations of
the Company and its Subsidiaries, taken as a whole.
"Pathnet" shall have the meaning set forth in the preamble to this
Agreement.
"Person" shall mean an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, a limited liability company and a governmental entity or any
department, agency or political subdivision thereof.
"Qualified Public Offering" shall mean the closing of the first firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act covering the offer and sale of Common Stock
to the public (i) in which the proceeds received by the Company, net of
underwriting discounts and commissions, equal or exceed $75,000,000; (ii)
immediately prior to the consummation of which the Company is valued (based on
the per-share price paid in such public offering, but without regard to any
proceeds to be received by the Company in connection with such public offering)
at greater than $600,000,000; and (iii) in which the Company uses a nationally
recognized underwriter acceptable to the Board of Directors.
"Related Contribution Agreements" shall have the meaning set forth in
Section 3A(v).
"SEC" shall mean the Securities and Exchange Commission and any
governmental body or agency succeeding to the functions thereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal law then in force.
"Securities Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal law then in force.
"Senior Noteholder Consent" shall mean each and all consents, waivers,
amendments and other action of the holders of the 12 1/4% Senior Notes of
Pathnet in respect of the transactions contemplated herein (and in the Related
Contribution Agreements, all to be closed in connection herewith) that are, in
the reasonable opinion of the Company and its counsel, to have been obtained or
completed to permit Pathnet to complete such transactions pursuant to the terms
of the 1998 Indenture.
"Senior Noteholder Consent Date" shall mean that date on which the Senior
Noteholder Consent shall have been obtained.
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"Shares" shall mean the Common Stock of the Company being issued to the
Stockholders pursuant to the terms hereof as the terms of such Shares are set
forth in the Certificate of Incorporation of the Company attached as Exhibit D
hereto.
"Stockholders" shall have the meaning set forth in the preamble to this
Agreement.
"Stockholders Agreement" shall mean a Stockholders' Agreement
substantially in the form of Exhibit E hereto.
"Subsidiary" shall mean Pathnet and (i) any other corporation of which
the securities having a majority of the ordinary voting power in electing the
board of directors are, at the time as of which any determination is being made,
owned by the Company either directly or through one or more Subsidiaries, (ii)
any partnership, joint venture or similar entity of which or in which such
Person, such Person and one or more of its Subsidiaries, or one or more
Subsidiaries of such Person directly or indirectly own more than 50% of the
capital interest or profits interest, or (iii) any trust, association or other
unincorporated organization of which or in which such Person, such Person and
one or more of its Subsidiaries, or one or more Subsidiaries of such Person
directly or indirectly own more than 50% of the beneficial interest.
"Treasury Regulations" shall mean the United States Treasury Regulations
promulgated under the IRC, and any reference to any particular Treasury
Regulation section shall be interpreted to include any final or temporary
revision of or successor to that section regardless of how numbered or
classified.
Section 2 Contributions by the Stockholders in Exchange for
Shares.
At the Closing, each Stockholder shall assign, transfer, convey and
contribute to the Company each of the Stockholder's stock and interest in
Pathnet and in consideration for the stock of Pathnet, the Company shall issue
and sell to each Stockholder Shares, all in the amounts set forth in the
schedule attached as Exhibit A hereto. Each Stockholder shall receive solely
Shares in exchange for such Stockholder's stock and interest in Pathnet.
Section 3 Conditions to Closing.
3A. Conditions Precedent of the Company at the Closing. The
Company's obligations under this Agreement to issue the Shares and otherwise
consummate the transactions contemplated herein in respect of the Closing are
subject to the satisfaction (or waiver in writing by the Company) of the
following conditions on or before the Closing Date:
i. No Injunction. No temporary restraining order or preliminary or
permanent injunction of any court or administrative agency of competent
jurisdiction prohibiting the consummation of the transactions
contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and the other parties to the
Related Contribution Agreements shall have made all filings required
under the HSR Act for the transactions contemplated hereby and the
applicable waiting period under the HSR Act shall have elapsed without
any second request by the Department of Justice or Federal
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Trade Commission with respect to such filings. The Company shall have
obtained all FCC Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of the Stockholders contained in this
Agreement shall be true and correct in all material respects on the date
hereof and, except for representations and warranties made with respect
to a specified date, at and as of the Closing Date.
iv. Performance of Agreement. Each Stockholder shall have performed or
complied with, in all material respects, all of his respective
agreements, covenants and obligations required by this Agreement to be
performed or complied with by such Stockholder prior to or at the
Closing, including, without limitation, delivery of the contribution
described in Section 2.
v. Contributions of Other Parties. At or contemporaneously with the
Closing, the Company shall also be closing, as part of the same overall
plan of contribution, upon (a) one or more contribution agreements
between the Company, Pathnet and certain holders of shares of the
outstanding common stock of Pathnet, (b) the Contribution Agreement
between the Company, Pathnet and the holders of the issued and
outstanding Preferred Stock of Pathnet, (c) the Contribution Agreement
between the Company, Pathnet and Colonial Pipeline Company, (d) the
Contribution Agreement between the Company, Pathnet and The Burlington
Northern and Santa Fe Railway Company, and (e) the Contribution Agreement
between the Company, Pathnet and CSX Transportation, Inc. (the "Related
Contribution Agreements"), such that immediately after the Closing, the
Company will own stock of Pathnet constituting control within the meaning
of IRC Section 368(c).
vi. Senior Noteholder Consent. The Senior Noteholder Consent shall
have been obtained and not revoked.
vii. Delivery of Closing Documents. The Company shall have received the
other closing documents specified in Section 6C.
3B. Conditions Precedent of the Stockholders at the Closing. The
Stockholders' obligations under this Agreement to deliver the contributions
described in Section 2 and otherwise consummate the transactions contemplated
herein in respect of the Closing are subject to the satisfaction (or waiver in
writing by each Stockholder) of the following conditions on or before the
Closing Date:
i. No Injunction. No temporary restraining order or preliminary or
permanent injunction of any court or administrative agency of competent
jurisdiction prohibiting the consummation of the transactions
contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and the other parties the
Related Contribution Agreements shall have made all filings required
under the HSR Act for the transactions contemplated hereby and the
applicable waiting period under the HSR Act shall have elapsed without
any second request by the Department of Justice or Federal
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Trade Commission with respect to such filings. The Company shall have
obtained all FCC Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of the Company and Pathnet contained in
this Agreement shall be true and correct in all material respects on the
date hereof and, except for representations and warranties made with
respect to a specified date, at and as of the Closing Date.
iv. Performance of Agreement. Each of the Company and Pathnet shall
have performed or complied with, in all material respects, all of its
respective agreements, covenants and obligations required by this
Agreement to be performed or complied with by it prior to or at the
Closing, including, without limitation, issuance of the Shares by the
Company described in Section 2.
v. Contributions of Other Parties. At or contemporaneously with the
Closing, as part of the same overall plan of contribution, the Company
shall also be closing upon the Related Contribution Agreements, such that
immediately after the Closing, the Company will own stock of Pathnet
constituting control within the meaning of IRC Section 368(c).
vi. Material Adverse Change. Between the Agreement Date and the
Closing there shall not have occurred any event or series of related
events which, individually or in the aggregate, have caused or could
reasonably be anticipated to cause a Material Adverse Effect.
vii. Delivery of Closing Documents. The Stockholders shall have
received the closing documents specified in Section 6B.
viii. Senior Noteholder Consent. The Senior Noteholder Consent shall
have been obtained and not revoked.
Section 4 Representations and Warranties of the Company and
Pathnet. Each of the Company and Pathnet represents and warrants to the
Stockholders with respect to each of the following provisions of this Section 4
at and as of the Agreement Date and (except for those made with reference to a
specific date) again at and as of the Closing Date:
4A. Organization and Corporate Power. The Company is duly
organized, validly existing and in good standing under the laws of Delaware and
is qualified to do business in every jurisdiction in which its ownership of
property or conduct of business requires it to qualify. The Company has all
requisite corporate power and authority and all material Licenses necessary to
own and operate its properties, to carry on its business as now conducted and
presently proposed to be conducted and to carry out the transactions
contemplated by this Agreement. The copies of the Company's Governing Documents
which have been furnished to the Stockholders reflect all amendments made
thereto at any time prior to the Agreement Date and are correct and complete.
4B. Authorization. Each of the Company and Pathnet has all
necessary corporate power and has been duly authorized by all necessary and
appropriate action to enter into this Agreement and to consummate the
transactions contemplated herein. The officers of
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the Company and Pathnet executing this Agreement on behalf of such corporations
have been duly authorized by all necessary and appropriate corporate action.
This Agreement is a valid and binding obligation of each of the Company and
Pathnet, enforceable against it in accordance with its terms, except insofar as
enforceability may be affected by bankruptcy, insolvency or similar laws
affecting creditors' rights generally or by general principles of equity.
4C. Capital Stock and Related Matters.
i. As of the Agreement Date, no shares of capital stock of the
Company are issued and outstanding.
ii. As of the Agreement Date, the authorized capital stock of Pathnet
consists of (a) 10,000,000 shares of preferred stock (of which zero (0)
shares are issued and outstanding); (b) 1,000,000 shares of Series A
Convertible Preferred Stock (all of which are issued and outstanding);
(c) 1,651,046 shares of Series B Convertible Preferred Stock (all of
which are issued and outstanding); (d) 2,819,549 shares of Series C
Convertible Preferred Stock (all of which are issued and outstanding);
and (e) 60,000,000 shares of Common Stock (of which 2,977,593 are issued
and outstanding).
iii. As of the Closing and immediately thereafter (assuming that the
Company has completed the closing under each of the Related Contribution
Agreements and under a similar contribution agreement with all holders of
the stock of Pathnet) the authorized capital stock of the Company will
consist of (a) 39,620,860 shares of preferred stock, of which 2,899,999
shares are designated as Series A Convertible Preferred Stock (all of
which will be issued and outstanding), 4,788,030 shares are designated as
Series B Convertible Preferred Stock (all of which will be issued and
outstanding), 8,176,686 shares are designated as Series C Convertible
Preferred Stock (all of which will be issued and outstanding), 9,250,000
shares will be designated as Series D Convertible Preferred Stock (of
which 8,511,607 will be issued and outstanding, allocated among the
holders thereof as set forth on Exhibit H), and 4,506,145 shares of
Series E Convertible Preferred Stock (of which 1,729,631 will be issued
and outstanding) (collectively, the "Preferred Stock"), and (b)
60,000,000 shares of Common Stock, of which 2,977,593 shares will be
issued and outstanding and 30,000,000 shares will be reserved for
issuance upon conversion of the Preferred Stock. As of the Closing,
neither the Company nor any Subsidiary will have outstanding any stock or
securities convertible or exchangeable for any shares of its capital
stock or containing any profit participation features, nor shall it have
outstanding any rights or options to subscribe for or to purchase its
capital stock or any stock or securities convertible into or exchangeable
for its capital stock or any stock appreciation rights or phantom stock
plans, except for the Preferred Stock and except as set forth on Exhibit
H. Exhibit H accurately sets forth the following with respect to all
outstanding options and rights to acquire the Company's and Pathnet's
capital stock: the holder, the number of shares covered, the exercise
price and the expiration date. As of the Closing, neither the Company nor
any Subsidiary will be subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any warrants, options or other rights to acquire its
capital stock, except as set forth on Exhibit H. As of the Closing and
immediately thereafter, all of the
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outstanding shares of the Company's capital stock shall be validly
issued, fully paid and nonassessable.
iv. The Company has not violated any applicable federal or state
securities laws in connection with the offer, sale or issuance of any of
its capital stock, including the sale of the Shares pursuant to this
Agreement. There are no agreements between the Company's stockholders or
between Pathnet's stockholders with respect to the voting or transfer of
the Company's or Pathnet's capital stock or with respect to any other
aspect of the Company's or Pathnet's affairs, except as set forth on
Exhibit H.
4D. Subsidiaries, Investments. Exhibit H correctly sets forth the
name of each Subsidiary, the jurisdiction of its incorporation and the
Persons owning the outstanding capital stock of such Subsidiary. Each
Subsidiary is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, has all requisite
corporate power and authority and all material Licenses necessary to own
its properties and to carry on its businesses as now being conducted and
as presently proposed to be conducted, and is qualified to do business in
every jurisdiction in which its ownership of property or the conduct of
business requires it to qualify, except for any jurisdiction with respect
to which the failure to qualify would not have a Material Adverse Effect.
All of the outstanding shares of capital stock of each Subsidiary are
validly issued, fully paid and nonassessable, and all such shares are
owned by the Company or another Subsidiary free and clear of any lien,
charge or encumbrance except as disclosed in Exhibit H. Except as set
forth on Exhibit H, neither the Company nor any Subsidiary owns or holds
the right to acquire any shares of stock or any other security or
interest in any other Person.
4E. No Breach. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby
nor the fulfillment of or compliance with the terms and conditions hereof
(a) conflict with or will result in a breach of, default under, or
triggering of any rights against the Company or any Subsidiary under any
terms, conditions or provisions of (i) the Governing Documents of the
Company or any Subsidiary, (ii) the 1998 Indenture, or (iii) any
agreement with shareholders, or any other agreement, contract, indenture,
mortgage, deed, easement, order, judgment, decree, arbitration award,
statute, regulation or instrument to which the Company or any Subsidiary
is a party or by which the assets of the Company or any Subsidiary are
bound, in each case except as to matters that would not be reasonably
expected to have a Material Adverse Effect or affect the ability of the
Company or Pathnet to consummate the transactions contemplated herein, or
(b) constitutes or will constitute a violation or default under, or
create a right to terminate, any of the foregoing, except as to matters
that would not be reasonably expected to have a Material Adverse Effect
or affect the ability of the Company or Pathnet to consummate the
transactions contemplated herein. Except as set forth in Exhibit I, no
consent or approval, authorization, order, registration or qualification
of any governmental entity or any other Person is required for the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by the Company.
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4F. Shares. The issuance or delivery of the Shares hereunder are
not subject to any preemptive right of any Person or to any contractual
right of first refusal or other right in favor of any Person except as
set forth in the Stockholders Agreement. Upon delivery of the
contributions described in Section 2 to the Company, the Shares will be
validly issued, fully paid and non-assessable.
4G. Related Contribution Agreements. The Company has made
available to the Stockholders true, correct and complete copies of the
Related Contribution Agreements, together with any amendments thereto and
modifications thereof.
4H. Brokerage. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement
binding upon the Company or any Subsidiary.
4I. Reports with the SEC. The Company has furnished or made
available to the Stockholders complete and accurate copies of Pathnet's
annual report on Form 10-K for its most recent fiscal year, all other
reports or documents required to be filed by Pathnet pursuant to Section
13(a) or 15(d) of the Securities Exchange Act since the filing of the
most recent annual report on Form 10-K, and all correspondence with the
SEC since August 1998. Such filed reports do not, as of the date hereof,
contain any material false statements or any misstatement of any material
fact and do not omit to state any fact necessary to make the statements
set forth therein not misleading. Pathnet has made all filings with the
SEC which it is required to make, and Pathnet has not received any
request from the SEC to file any amendment or supplement to any of the
reports described in this Section 4I.
4J. Transfers of Contributed Properties. There is no plan or
intention by the Company to dispose of any of the contributed properties
described in Section 2 or Section 3A(v), except that the Company is
contemplating (i) a transfer of certain contributed properties to Pathnet
or another Subsidiary in a transaction that will qualify as a tax-free
transfer pursuant to IRC Section 351, and (ii) the conversion of certain
preferred stock of Pathnet into common stock of Pathnet.
4K. No Intention to Redeem. There is no current plan or intention
on behalf of the Company to redeem or otherwise reacquire any of the
Shares issued pursuant to the transactions described in Sections 2 and
3A(v) hereof.
Section 5 Representations and Warranties of the Stockholders. Each
Stockholder individually and severally, but not jointly, represents and warrants
to the Company, to Pathnet and to each of the other Stockholders with respect to
each of the following at and as of the Agreement Date and (except for those made
with reference to a specific date) again at and as of the Closing Date:
5A. Binding Agreement. Such Stockholder has the capacity to enter
into and perform this Agreement. This Agreement has been duly executed by such
Stockholder and constitutes legal, valid and binding obligations of such
Stockholder, enforceable against it in
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accordance with its terms, except insofar as enforceability may be affected by
bankruptcy, insolvency, or similar laws affecting creditors' rights generally or
by general principles of equity.
5B. Authorization; No Breach. Neither the execution and delivery
of this Agreement nor the consummation of the transactions contemplated hereby
nor the fulfillment of or compliance with the terms and conditions hereof (a)
conflicts with or will result in a breach of any of the terms, conditions or
provisions of any agreement, contract, indenture, mortgage, deed, easement,
order, judgment, decree, arbitration award, statute, regulation or instrument to
which such Stockholder is a party or by which his or its assets are bound,
except as to matters that would not reasonably be expected to have a Material
Adverse Effect on such Stockholder or materially affect the ability of such
Stockholder to consummate the transactions contemplated herein or (b)
constitutes or will constitute a violation or default or create a right of
termination under any of the foregoing, except as to matters that would not
reasonably be expected to have a Material Adverse Effect on such Stockholder or
materially affect the ability of such Stockholder to consummate the transactions
contemplated herein. No consent or approval, authorization, order, regulation or
qualification of any governmental entity or any other third party is required
for the execution and delivery by such Stockholder of this Agreement and the
consummation by such Stockholder of the transactions contemplated hereby.
5C. Investment Representations. Such Stockholder acknowledges that
the Shares have not been and will not be registered or qualified under the
Securities Act or any state securities laws and are offered in reliance upon an
exemption from registration under Regulation D of the Securities Act and similar
state law exceptions. The Shares to be received by such Stockholder hereunder
will be held by such Stockholder for investment purposes only for such
Stockholder's own account, and not with a view to or for sale in connection with
any distribution of the Shares, and such Stockholder acknowledges that the
Shares cannot be sold or otherwise disposed of unless they are subsequently
registered under the Securities Act or pursuant to an exemption therefrom; and
the Shares may not be sold, assigned or otherwise transferred except in
compliance with the Stockholders Agreement. Such Stockholder hereby acknowledges
receipt of a copy of the Stockholders Agreement and represents that it has
reviewed and understands the provisions thereof which have a bearing on the
representations made in this Section 5C.
5D. Accredited Investor. Unless otherwise indicated on Exhibit B,
such Stockholder is an "accredited investor" within the meaning of Regulation D
under the Securities Act and has the knowledge and experience in financial and
business matters such that it is capable of evaluating the merits and risks of
receiving and owning the Shares and is able to bear the economic risk of such
ownership and understands that an investment in Shares involves substantial
risks.
5E. Availability of Information. There has been made available to
such Stockholder and such Stockholder's advisors the opportunity to ask
questions of, and receive answers from, the Company concerning the terms and
conditions of the investment in the Shares, and to obtain the financial
information with respect to the Company's assets, the Stockholders Agreement,
and any additional information, to the extent that the Company possesses such
information or can acquire it without unreasonable effort or expense, necessary
to verify the accuracy of the information given to such Stockholder, or to
otherwise make an informed investment decision, that such Stockholder has had an
opportunity to consult with counsel and
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other advisors about the investment in the Shares, and that all material
document, records and books pertaining to such investment have, on request, been
made available to such Stockholder and his advisors.
5F. No General Solicitation. Neither such Stockholder nor any
advisor to such Stockholder is aware of or has engaged in any form of general
solicitation or advertising with respect to sales of the Shares, including (i)
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio; and
(ii) any seminar or meeting whose attendees were invited by any general
solicitation or general advertising.
5G. Litigation. There is no action, suit, proceeding or
investigation pending or, to such Stockholder's knowledge, threatened against
such Stockholder that questions the validity of this Agreement or the ability of
such Stockholder to consummate the transactions contemplated hereby.
5H. Brokerage. Such Stockholder acknowledges that there are no
claims for brokerage commissions, finders' fees or similar compensation in
connection with the transactions contemplated by this Agreement based on any
arrangement or agreement binding upon such Stockholder.
5I. No Intention to Transfer Shares. Such Stockholder acknowledges
that there is no intention or plan, formally or informally, on the date hereof,
to transfer any of the Shares received by such Stockholder pursuant to this
Agreement.
Section 6 Closing.
6A. Closing Date. The Company shall notify the Stockholders of the
occurrence of the Senior Noteholder Consent Date within one business day after
such date. The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Covington & Burling, in
Washington, D.C., or at such other place as shall be mutually agreed upon by the
parties, on the date which is five (5) business days following the Senior
Noteholder Consent Date (or, in the event that any other conditions to the
obligations of any party to close as provided hereunder shall not have been met
at such date, then on the date which is three (3) business days following the
date on which such conditions shall have been satisfied or waived by the party
whose obligations are so conditioned), or at such other date and time as to
which the parties may agree (the "Closing Date"). The Closing shall be effective
immediately prior to the close of business on the Closing Date.
6B. Deliveries by the Company at the Closing. At the Closing, the
Company and Pathnet shall deliver the following documents:
i. A certificate of the President of each of Pathnet and the Company,
each certifying that its representations and warranties are true in all
material respects as of the Closing Date and that it has performed or
complied, in all material respects, with all of its respective agreements
and obligations required by this Agreement to be performed or complied
with by it prior to or at the Closing;
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ii. A certified copy of resolutions of the Board of Directors of the
Company, authorizing the execution and delivery of this Agreement and the
performance of the obligations of the Company hereunder;
iii. A certified copy of resolutions of the Board of Directors of
Pathnet, authorizing the execution and delivery of this Agreement and the
performance of the obligations of Pathnet hereunder;
iv. An opinion of Counsel to the Company substantially in the form set
forth on Exhibit G;
v. The Stockholders Agreement duly executed and delivered by the
Company and each other stockholder of the Company (other than any one or
more stockholders beneficially owning, in the aggregate, not more than
one percent of the outstanding capital stock of the Company);
vi. Certificates representing the Shares to be issued to each
Stockholder;
vii. All third party and governmental consents necessary or appropriate
to consummate the transactions contemplated herein, including, without
limitation, the FCC Consents; and
viii. Those other closing documents required to be executed by it or as
may otherwise be reasonably necessary or appropriate to consummate the
transactions contemplated herein.
6C. Deliveries by each Stockholder at the Closing. At the Closing,
each Stockholder shall deliver the following documents:
i. A certificate of such Stockholder certifying that the
representations and warranties of such Stockholder contained in this
Agreement are true and correct as of the Closing Date and that it has
performed, in all material respects, all of its respective agreements and
obligations required by this Agreement to be performed or complied with
by such Stockholder prior to or at the Closing;
ii. All third party and governmental consents necessary or appropriate
to consummate the transactions contemplated herein; and
iii. Those other closing documents required to be executed by it or as
may otherwise be reasonably necessary or appropriate to consummate the
transactions contemplated herein.
Section 7 Covenants.
7A. Implementing Agreement. Subject to the terms and conditions
hereof, each party hereto shall use its best efforts to take all action required
of it to fulfill its obligations under the terms of this Agreement and to
facilitate the consummation of the transactions contemplated hereby.
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7B. FCC Filings. Each of the Company and Pathnet shall use
reasonable best efforts to prepare and, as soon as practicable after the
Agreement Date, file with the Federal Communications Commission any applications
necessary to obtain the FCC Consents.
7C. Consents and Approvals. The Company and Pathnet shall use
their best efforts to obtain all consents, approvals, certificates and other
documents required in connection with its performance under this Agreement and
the consummation of the transactions contemplated hereby. The Company and
Pathnet shall make all filings, applications, statements and reports to all
governmental authorities and other Persons which are required to be made by
either of them prior to the Closing Date by or on behalf of the Company or
Pathnet or any of their Affiliates pursuant to any applicable law or contract in
connection with this Agreement and the transactions contemplated hereby.
7D. Tax Free Transfers. The parties intend that the contribution
of properties by the Stockholders and the other contributing Persons described
in Section 3A(v) in respect of the Closing will be part of a single integrated
transaction in which no gain or loss will be recognized to the Company or the
Stockholders upon the issuance and receipt of the Shares pursuant to IRC Section
351 and, in the case of Persons who contribute Pathnet stock to the Company, the
contributions will qualify as a tax-free reorganization pursuant to IRC Section
368(a)(1)(B), and the parties agree that they will prepare and file their
Federal and state income tax returns in a manner consistent with such
characterization. Further, each Stockholder agrees to provide to the Company a
statement setting forth the amount of such Stockholder's tax basis in the
property contributed by such Stockholder so that the Company can determine its
tax basis in the property in accordance with IRC Section 362. Each Stockholder
agrees to file the information required by Treasury Regulation Section 1.351-3
for its Federal income tax return for the taxable year of the contribution, and
the Company agrees to furnish to each Stockholder information necessary to
enable each Stockholder to comply with the information reporting requirements of
Treasury Regulation Section 1.351-3. The Company agrees that it will exercise
reasonable care not to take any action that would cause the transactions
contemplated hereby not to qualify as tax-free pursuant to IRC Section 351. The
Company has no present intention or plan to transfer all or substantially all
(within the meaning of IRC Section 368(a)(1)(C)) of the assets of Pathnet to the
Company. The Company has no present intention or plan to issue additional shares
of the Company (other than the shares proposed to be issued in the transactions
contemplated by Sections 2 and 3A(v) hereof), or rights to acquire additional
shares, for consideration other than cash or property, if the result would be
that the Contributors would fail to have "control" of the Company within the
meaning of IRC Section 368(c).
Section 8 Miscellaneous.
8A. Complete Agreement. This Agreement (including the Exhibits
hereto) represents the entire agreement between the Stockholders, Pathnet and
the Company covering everything agreed upon or understood in this transaction
and all other prior agreements, written or oral are merged into this Agreement.
There are no oral promises, conditions, representations, understandings,
interpretations or terms of any kind as conditions or inducements to the
execution hereof in effect between the parties.
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<PAGE> 15
8B. Authorized Signatories. The persons executing this Agreement
for and on behalf of each Stockholder, Pathnet and the Company each represent
that they have the requisite authority to bind the entities on whose behalf they
are signing.
8C. Termination. In the event that for any reason the Closing does
not occur on or before the 150th day after the date of this Agreement, then any
party, if not then in breach of its obligations under this Agreement, may
terminate this Agreement by giving written notice thereof to the other party;
provided, however, that no such termination shall relieve either party of
liability for any breach of its obligations hereunder prior to such termination.
8D. Survival of Representations and Warranties. Regardless of any
investigation made by any party or on its behalf, all representations and
warranties contained herein or made in writing by any party in connection
herewith shall terminate at the Closing.
8E. Successors and Assigns. This Agreement may not be assigned by
either party without the written consent of the other party. Except as otherwise
expressly provided herein, all covenants and agreements contained in this
Agreement by or on behalf of the parties hereto shall bind and inure to the
benefit of the respective successors and assigns of the parties hereto whether
so expressed or not.
8F. Knowledge. As used in this Agreement, the terms "knowledge" or
"aware" with respect to the Company and Pathnet shall mean the actual knowledge
or awareness of any one or more of Richard Jalkut, William Smedberg, Michael
Lubin, James Craig, Joe Mastrogiorgio and Robert Rouse.
8G. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
8H. Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
8I. Descriptive Headings: Interpretation. The descriptive headings
of this Agreement are inserted for convenience only and do not constitute a
Section of this Agreement. The use of the word "including" in this Agreement
shall be by way of example rather than by limitation.
8J. Governing Law. This Agreement shall be governed by the laws of
the State of Delaware.
8K. Amendment. No change or addition shall be made to this
Agreement except by a written agreement executed by the Stockholders, Pathnet
and the Company.
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<PAGE> 16
8L. Expenses. The Company, Pathnet and each Stockholder shall pay
their respective expenses, if any, incurred in connection with the exchange
pursuant to this Agreement.
8M. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable express courier service
(charges prepaid) or mailed to the recipient by certified or registered mail,
return receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the parties hereto at the address indicated
below:
If to the Stockholders to such Stockholders' addresses as set forth in Exhibit B
hereto.
If to the Company to:
Pathnet Telecommunications, Inc.
1015 31st Street, N.W.
Washington, D.C. 20007
Attn: General Counsel
Fax: 202-625-7369
With a copy (which shall not constitute notice) to:
Covington & Burling
1201 Pennsylvania Ave., N.W.
P.O. Box 7566
Washington, D.C. 20044
Attn: Bruce S. Wilson, Esq.
Fax: 202-662-6291
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
[End of text; signature page follows]
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<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
PATHNET TELECOMMUNICATIONS, INC.
By: /s/ RICHARD A. JALKUT
---------------------------------
Name: Richard A. Jalkut
Title: President and CEO
PATHNET, INC.
By: /s/ RICHARD A. JALKUT
---------------------------------
Name: Richard A. Jalkut
Title: President and CEO
STOCKHOLDERS
/s/ CHRIS ROGERS
--------------------------------
Chris Rogers
/s/ JEFFREY LEVITT
--------------------------------
Jeffrey Levitt
/s/ EDWARD PRINCE
--------------------------------
Edward Prince
/s/ ERIC PODIETZ
--------------------------------
Eric Podietz
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<PAGE> 18
/s/ KEN KLAMM
--------------------------------
Ken Klamm
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<PAGE> 1
EXHIBIT 10.6
CONTRIBUTION AGREEMENT
DATED
NOVEMBER 4, 1999
BY AND AMONG
PATHNET TELECOMMUNICATIONS, INC.,
PATHNET, INC.
AND
DAVID SCHAEFFER
<PAGE> 2
CONTRIBUTION AGREEMENT
THIS AGREEMENT is made as of November 4, 1999 (the "Agreement Date"), by
and among PATHNET TELECOMMUNICATIONS, INC., a Delaware corporation (the
"Company"), PATHNET, INC., a Delaware corporation ("Pathnet"), and DAVID
SCHAEFFER, an individual residing in Potomac, Maryland, and a Holder of Common
Stock of Pathnet (the "Stockholder").
W I T N E S S E T H:
WHEREAS, the Stockholder owns shares of common stock of Pathnet; and
WHEREAS, the Company intends to acquire Pathnet as a subsidiary; and
WHEREAS, the Stockholder intends, subject to the terms and conditions
hereof, to exchange his stock in Pathnet for Shares of the Company; and
WHEREAS, the Stockholder and persons contributing common stock and
preferred stock of Pathnet or other assets to the Company pursuant to the
Related Contribution Agreements (as defined below) intend that the transfers of
the stock and other property interests to the Company in exchange for shares of
the Company will assist the Company and its subsidiaries in conducting future
operations in an efficient manner; and
NOW THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
Section 1 Definitions. For the purposes of this Agreement, the
following terms have the meanings set forth below:
"12 1/4% Senior Notes" shall mean those certain senior notes due 2008
issued by Pathnet pursuant to the terms of the 1998 Indenture.
"1998 Indenture" shall mean that certain Indenture, dated as of April 8,
1998, by Pathnet to the Bank of New York, as Trustee, in respect of $350,000,000
in aggregate principal amount of 12 1/4% Senior Notes.
"Affiliate" of any particular person or entity shall mean any other
person or entity controlling, controlled by or under common control with such
particular person or entity. The term "control" for this purpose shall mean the
ability, whether by the ownership of shares or other equity interest, by
contract or otherwise, to elect a majority of the directors of a corporation,
independently to select the managing partner of a partnership or the managing
member of a limited liability company, or otherwise to have the power
independently to remove and then select a majority of those Persons exercising
governing authority over an entity. Control shall be exclusively presumed in the
case of the direct or indirect ownership of fifty percent (50%) or more of the
equity interests in an entity.
<PAGE> 3
"Agreement" shall mean this Contribution Agreement, as amended,
supplemented or restated from time to time in accordance with its terms.
"Agreement Date" shall have the meaning set forth in the preamble to this
Agreement.
"Closing" shall have the meaning set forth in Section 6A.
"Closing Date" shall have the meaning set forth in Section 6A.
"Common Stock" shall mean Common Stock of the Company, par value $0.01
per share.
"Company" shall have the meaning set forth in the preamble to this
Agreement.
"Contributors" shall mean the parties to this Agreement and the Related
Contribution Agreements (as defined below), other than the Company and Pathnet.
"FCC" shall mean the Federal Communications Commission and any
governmental body or agency succeeding to the functions thereof.
"FCC Consents" shall mean the consents of the FCC, to the extent required
under the Federal Communications Act and the regulations thereunder in order to
effect the transactions contemplated by this Agreement and the Related
Contribution Agreements, to the assignment or transfer of control of all FCC
licenses and authorizations of the Company and the Subsidiaries, or, in lieu
thereof, special temporary authority to operate under such licenses and
authorizations following such assignment or transfer of control; exclusive,
however, of any FCC licenses or authorizations that may be surrendered or
forfeited to the FCC and that are not material to the operation of Pathnet's
existing networks.
"Governing Documents" shall mean, with respect to (i) a limited
partnership, such limited partnership's certificate of limited partnership and
the agreement of limited partnership, and any amendments or modifications of any
of the foregoing; (ii) a corporation, such corporation's articles or certificate
of incorporation, by-laws and any applicable authorizing resolutions, and any
amendments or modifications of any of the foregoing; (iii) a limited liability
company, such limited liability company's articles or certificate of
organization or formation and operating agreement or agreement of limited
liability company, and any amendments or modifications of any of the foregoing;
and (iv) a trust, such trust's declaration of trust, articles supplementary and
by-laws and any amendments or modifications of any of the foregoing.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"IRC" shall mean the Internal Revenue Code of 1986, as amended, and any
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"Licenses" shall mean federal, state, local and foreign franchises,
tariffs, licenses, ordinances, certifications, approvals, authorizations and
permits issued or granted by governmental authorities.
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<PAGE> 4
"Loss" or "Losses" shall mean any and all loss, cost, claim, damage,
liability, or expense (including attorneys' fees).
"Material Adverse Effect" shall mean a material adverse effect upon the
assets, liabilities, prospects, financial condition or business operations of
the Company and its Subsidiaries, taken as a whole.
"Pathnet" shall have the meaning set forth in the preamble to this
Agreement.
"Person" shall mean an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, a limited liability company and a governmental entity or any
department, agency or political subdivision thereof.
"Qualified Public Offering" shall mean the closing of the first firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act covering the offer and sale of Common Stock
to the public (i) in which the proceeds received by the Company, net of
underwriting discounts and commissions, equal or exceed $75,000,000; (ii)
immediately prior to the consummation of which the Company is valued (based on
the per-share price paid in such public offering, but without regard to any
proceeds to be received by the Company in connection with such public offering)
at greater than $600,000,000; and (iii) in which the Company uses a nationally
recognized underwriter acceptable to the Board of Directors.
"Related Contribution Agreements" shall have the meaning set forth in
Section 3A(v).
"SEC" shall mean the Securities and Exchange Commission and any
governmental body or agency succeeding to the functions thereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal law then in force.
"Securities Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal law then in force.
"Senior Noteholder Consent" shall mean each and all consents, waivers,
amendments and other action of the holders of the 12 1/4% Senior Notes of
Pathnet in respect of the transactions contemplated herein (and in the Related
Contribution Agreements, all to be closed in connection herewith) that are, in
the reasonable opinion of the Company and its counsel, to have been obtained or
completed to permit Pathnet to complete such transactions pursuant to the terms
of the 1998 Indenture.
"Senior Noteholder Consent Date" shall mean that date on which the Senior
Noteholder Consent shall have been obtained.
"Shares" shall mean the Common Stock of the Company being issued to the
Stockholder pursuant to the terms hereof as the terms of such Shares are set
forth in the Certificate of Incorporation of the Company attached as Exhibit D
hereto.
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<PAGE> 5
"Stockholder" shall have the meaning set forth in the preamble to this
Agreement.
"Stockholders Agreement" shall mean a Stockholders' Agreement
substantially in the form of Exhibit E hereto.
"Subsidiary" shall mean Pathnet and (i) any other corporation of which
the securities having a majority of the ordinary voting power in electing the
board of directors are, at the time as of which any determination is being made,
owned by the Company either directly or through one or more Subsidiaries, (ii)
any partnership, joint venture or similar entity of which or in which such
Person, such Person and one or more of its Subsidiaries, or one or more
Subsidiaries of such Person directly or indirectly own more than 50% of the
capital interest or profits interest, or (iii) any trust, association or other
unincorporated organization of which or in which such Person, such Person and
one or more of its Subsidiaries, or one or more Subsidiaries of such Person
directly or indirectly own more than 50% of the beneficial interest.
"Treasury Regulations" shall mean the United States Treasury Regulations
promulgated under the IRC, and any reference to any particular Treasury
Regulation section shall be interpreted to include any final or temporary
revision of or successor to that section regardless of how numbered or
classified.
Section 2 Contributions by the Stockholder in Exchange for
Shares.
At the Closing, the Stockholder shall assign, transfer, convey and
contribute to the Company the Stockholder's stock and interest in Pathnet and in
consideration for the stock of Pathnet, the Company shall issue and sell to the
Stockholder Shares, all in the amounts set forth in the schedule attached as
Exhibit A hereto. The Stockholder shall receive solely Shares in exchange for
such Stockholder's stock and interest in Pathnet.
Section 3 Conditions to Closing.
3A. Conditions Precedent of the Company at the Closing. The
Company's obligations under this Agreement to issue the Shares and otherwise
consummate the transactions contemplated herein in respect of the Closing are
subject to the satisfaction (or waiver in writing by the Company) of the
following conditions on or before the Closing Date:
i. No Injunction. No temporary restraining order or preliminary or
permanent injunction of any court or administrative agency of competent
jurisdiction prohibiting the consummation of the transactions
contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and the other parties to this
Agreement and the Related Contribution Agreements shall have made all
filings required under the HSR Act for the transactions contemplated
hereby and the applicable waiting period under the HSR Act shall have
elapsed without any second request by the Department of Justice or
Federal Trade Commission with respect to such filings. The Company shall
have obtained all FCC Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of the Stockholder contained in this
Agreement shall be true and correct in all
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<PAGE> 6
material respects on the date hereof and, except for representations and
warranties made with respect to a specified date, at and as of the
Closing Date.
iv. Performance of Agreement. The Stockholder shall have performed or
complied with, in all material respects, all of his respective
agreements, covenants and obligations required by this Agreement to be
performed or complied with by such Stockholder prior to or at the
Closing, including, without limitation, delivery of the contribution
described in Section 2.
v. Contributions of Other Parties. At or contemporaneously with the
Closing, the Company shall also be closing, as part of the same overall
plan of contribution, upon (a) one or more contribution agreements
between the Company, Pathnet and certain holders of the outstanding
common stock of Pathnet, (b) the Contribution Agreement between the
Company, Pathnet and the holders of the issued and outstanding preferred
stock of Pathnet, (c) the Contribution Agreement between the Company,
Pathnet and Colonial Pipeline Company, (d) the Contribution Agreement
between the Company, Pathnet and The Burlington Northern and Santa Fe
Railway Company, and (e) the Contribution Agreement between the Company,
Pathnet and CSX Transportation, Inc. (the "Related Contribution
Agreements"), such that immediately after the Closing, the Company will
own stock of Pathnet constituting control within the meaning of IRC
Section 368(c).
vi. Senior Noteholder Consent. The Senior Noteholder Consent shall
have been obtained and not revoked.
vii. Delivery of Closing Documents. The Company shall have received the
other closing documents specified in Section 6C.
3B. Conditions Precedent of the Stockholder at the Closing. The
Stockholder's obligations under this Agreement to deliver the contributions
described in Section 2 and otherwise consummate the transactions contemplated
herein in respect of the Closing are subject to the satisfaction (or waiver in
writing by the Stockholder) of the following conditions on or before the Closing
Date:
i. No Injunction. No temporary restraining order or preliminary or
permanent injunction of any court or administrative agency of competent
jurisdiction prohibiting the consummation of the transactions
contemplated herein shall be in effect or pending.
ii. Governmental Consents. The Company and the other parties to this
Agreement and the Related Contribution Agreements shall have made all
filings required under the HSR Act for the transactions contemplated
hereby, and the applicable waiting period under the HSR Act shall have
elapsed without any second request by the Department of Justice or
Federal Trade Commission with respect to such filings. The Company shall
have obtained all FCC Consents.
iii. Accuracy of the Representations and Warranties. The
representations and warranties of the Company and Pathnet contained in
this Agreement shall be true and correct in all material respects on the
date hereof and, except for representations and warranties made with
respect to a specified date, at and as of the Closing Date.
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<PAGE> 7
iv. Performance of Agreement. Each of the Company and Pathnet shall
have performed or complied with, in all material respects, all of its
respective agreements, covenants and obligations required by this
Agreement to be performed or complied with by it prior to or at the
Closing, including, without limitation, issuance of the Shares by the
Company described in Section 2.
v. Contributions of Other Parties. At or contemporaneously with the
Closing, as part of the same overall plan of contribution, the Company
shall also be closing upon the Related Contribution Agreements, such that
immediately after the Closing, the Company will own stock of Pathnet
constituting control within the meaning of IRC Section 368(c).
vi. Material Adverse Change. Between the Agreement Date and the
Closing there shall not have occurred any event or series of related
events which, individually or in the aggregate, have caused or could
reasonably be anticipated to cause a Material Adverse Effect.
vii. Delivery of Closing Documents. The Stockholder shall have received
the closing documents specified in Section 6B.
viii. Senior Noteholder Consent. The Senior Noteholder Consent shall
have been obtained and not revoked.
Section 4 Representations and Warranties of the Company and
Pathnet. Each of the Company and Pathnet represents and warrants to the
Stockholder with respect to each of the following provisions of this Section 4
at and as of the Agreement Date and (except for those made with reference to a
specific date) again at and as of the Closing Date:
4A. Organization and Corporate Power. The Company is duly
organized, validly existing and in good standing under the laws of Delaware and
is qualified to do business in every jurisdiction in which its ownership of
property or conduct of business requires it to qualify. The Company has all
requisite corporate power and authority and all material Licenses necessary to
own and operate its properties, to carry on its business as now conducted and
presently proposed to be conducted and to carry out the transactions
contemplated by this Agreement. The copies of the Company's Governing Documents
which have been furnished to the Stockholder reflect all amendments made thereto
at any time prior to the Agreement Date and are correct and complete.
4B. Authorization. Each of the Company and Pathnet has all
necessary corporate power and has been duly authorized by all necessary and
appropriate action to enter into this Agreement and to consummate the
transactions contemplated herein. The officers of the Company and Pathnet
executing this Agreement on behalf of such corporations have been duly
authorized by all necessary and appropriate corporate action. This Agreement is
a valid and binding obligation of each of the Company and Pathnet, enforceable
against it in accordance with its terms, except insofar as enforceability may be
affected by bankruptcy, insolvency or similar laws affecting creditors' rights
generally or by general principles of equity.
4C. Capital Stock and Related Matters.
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<PAGE> 8
i. As of the Agreement Date, no shares of capital stock of the
Company are issued and outstanding.
ii. As of the Agreement Date, the authorized capital stock of Pathnet
consists of (a) 10,000,000 shares of preferred stock (of which zero (0)
shares are issued and outstanding); (b) 1,000,000 shares of Series A
Convertible Preferred Stock (all of which are issued and outstanding);
(c) 1,651,046 shares of Series B Convertible Preferred Stock (all of
which are issued and outstanding); (d) 2,819,549 shares of Series C
Convertible Preferred Stock (all of which are issued and outstanding);
and (e) 60,000,000 shares of Common Stock (of which 2,977,593 are issued
and outstanding).
iii. As of the Closing and immediately thereafter (assuming that the
Company has completed the closing under each of the Related Contribution
Agreements and under a similar contribution agreement with all holders of
the stock of Pathnet) the authorized capital stock of the Company will
consist of (a) 39,620,860 shares of preferred stock, of which 2,899,999
shares are designated as Series A Convertible Preferred Stock (all of
which will be issued and outstanding), 4,788,030 shares are designated as
Series B Convertible Preferred Stock (all of which will be issued and
outstanding), 8,176,686 shares are designated as Series C Convertible
Preferred Stock (all of which will be issued and outstanding), 9,250,000
shares will be designated as Series D Convertible Preferred Stock (of
which 8,511,607 will be issued and outstanding, allocated among the
holders thereof as set forth on Exhibit H), and 4,506,145 shares of
Series E Convertible Preferred Stock (of which 1,729,631 will be issued
and outstanding) (collectively, the "Preferred Stock"), and (b)
60,000,000 shares of Common Stock, of which 2,977,593 shares will be
issued and outstanding and 30,000,000 shares will be reserved for
issuance upon conversion of the Preferred Stock. As of the Closing,
neither the Company nor any Subsidiary will have outstanding any stock or
securities convertible or exchangeable for any shares of its capital
stock or containing any profit participation features, nor shall it have
outstanding any rights or options to subscribe for or to purchase its
capital stock or any stock or securities convertible into or exchangeable
for its capital stock or any stock appreciation rights or phantom stock
plans, except for the Preferred Stock and except as set forth on Exhibit
H. Exhibit H accurately sets forth the following with respect to all
outstanding options and rights to acquire the Company's and Pathnet's
capital stock: the holder, the number of shares covered, the exercise
price and the expiration date. As of the Closing, neither the Company nor
any Subsidiary will be subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any warrants, options or other rights to acquire its
capital stock, except as set forth on Exhibit H. As of the Closing and
immediately thereafter, all of the outstanding shares of the Company's
capital stock shall be validly issued, fully paid and nonassessable.
iv. The Company has not violated any applicable federal or state
securities laws in connection with the offer, sale or issuance of any of
its capital stock, including the sale of the Shares pursuant to this
Agreement. There are no agreements between the Company's stockholders or
between Pathnet's stockholders with respect to the voting or transfer of
the Company's or Pathnet's capital stock or with respect to any other
aspect of the Company's or Pathnet's affairs, except as set forth on
Exhibit H.
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<PAGE> 9
4D. Subsidiaries, Investments. Exhibit H correctly sets forth the
name of each Subsidiary, the jurisdiction of its incorporation and the Persons
owning the outstanding capital stock of such Subsidiary. Each Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has all requisite corporate power and
authority and all material Licenses necessary to own its properties and to carry
on its businesses as now being conducted and as presently proposed to be
conducted, and is qualified to do business in every jurisdiction in which its
ownership of property or the conduct of business requires it to qualify, except
for any jurisdiction with respect to which the failure to qualify would not have
a Material Adverse Effect. All of the outstanding shares of capital stock of
each Subsidiary are validly issued, fully paid and nonassessable, and all such
shares are owned by the Company or another Subsidiary free and clear of any
lien, charge or encumbrance except as disclosed in Exhibit H. Except as set
forth on Exhibit H, neither the Company nor any Subsidiary owns or holds the
right to acquire any shares of stock or any other security or interest in any
other Person.
4E. No Breach. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby nor the
fulfillment of or compliance with the terms and conditions hereof (a) conflict
with or will result in a breach of, default under, or triggering of any rights
against the Company or any Subsidiary under any terms, conditions or provisions
of (i) the Governing Documents of the Company or any Subsidiary, (ii) the 1998
Indenture, or (iii) any agreement with shareholders, or any other agreement,
contract, indenture, mortgage, deed, easement, order, judgment, decree,
arbitration award, statute, regulation or instrument to which the Company or any
Subsidiary is a party or by which the assets of the Company or any Subsidiary
are bound, in each case except as to matters that would not be reasonably
expected to have a Material Adverse Effect or affect the ability of the Company
or Pathnet to consummate the transactions contemplated herein, or (b)
constitutes or will constitute a violation or default under, or create a right
to terminate, any of the foregoing, except as to matters that would not be
reasonably expected to have a Material Adverse Effect or affect the ability of
the Company or Pathnet to consummate the transactions contemplated herein.
Except as set forth in Exhibit I, no consent or approval, authorization, order,
registration or qualification of any governmental entity or any other Person is
required for the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby by the Company.
4F. Shares. The issuance or delivery of the Shares hereunder are
not subject to any preemptive right of any Person or to any contractual right of
first refusal or other right in favor of any Person except as set forth in the
Stockholders Agreement. Upon delivery of the contributions described in Section
2 to the Company, the Shares will be validly issued, fully paid and
non-assessable.
4G. Related Contribution Agreements. The Company has made
available to the Stockholder true, correct and complete copies of the Related
Contribution Agreements, together with any amendments thereto and modifications
thereof.
4H. Brokerage. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company or any Subsidiary.
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4I. Reports with the SEC. The Company has furnished or made
available to the Stockholder complete and accurate copies of Pathnet's annual
report on Form 10-K for its most recent fiscal year, all other reports or
documents required to be filed by Pathnet pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act since the filing of the most recent annual report on
Form 10-K, and all correspondence with the SEC since August 1998. Such filed
reports do not, as of the date hereof, contain any material false statements or
any misstatement of any material fact and do not omit to state any fact
necessary to make the statements set forth therein not misleading. Pathnet has
made all filings with the SEC which it is required to make, and Pathnet has not
received any request from the SEC to file any amendment or supplement to any of
the reports described in this Section 4I.
4J. Transfers of Contributed Properties. There is no plan or
intention by the Company to dispose of any of the contributed properties
described in Section 2 or Section 3A(v), except that the Company is
contemplating (i) a transfer of certain contributed properties to Pathnet or
another Subsidiary in a transaction that will qualify as a tax-free transfer
pursuant to IRC Section 351, and (ii) the conversion of certain preferred stock
of Pathnet into common stock of Pathnet.
4K. No Intention to Redeem. There is no current plan or intention
on behalf of the Company to redeem or otherwise reacquire any of the Shares
issued pursuant to the transactions described in Sections 2 and 3A(v) hereof.
Section 5 Representations and Warranties of the Stockholder. The
Stockholder represents and warrants to the Company and to Pathnet, with respect
to each of the following at and as of the Agreement Date and (except for those
made with reference to a specific date) again at and as of the Closing Date:
5A. Binding Agreement. The Stockholder has the capacity to enter
into and perform this Agreement. This Agreement has been duly executed by such
Stockholder and constitutes legal, valid and binding obligations of such
Stockholder, enforceable against him in accordance with its terms, except
insofar as enforceability may be affected by bankruptcy, insolvency, or similar
laws affecting creditors' rights generally or by general principles of equity.
5B. Authorization; No Breach. Neither the execution and delivery
of this Agreement nor the consummation of the transactions contemplated hereby
nor the fulfillment or compliance with the terms and conditions hereof (a)
conflicts with or will result in a breach of any of the terms, conditions or
provisions of any agreement, contract, indenture, mortgage, deed, easement,
order, judgment, decree, arbitration award, statute, regulation or instrument to
which the Stockholder is a party or by which his assets are bound, except as to
matters that would not reasonably be expected to have a Material Adverse Effect
on such Stockholder or materially affect the ability of such Stockholder to
consummate the transactions contemplated herein or (b) constitutes or will
constitute a violation or default or create a right of termination under any of
the foregoing, except as to matters that would not reasonably be expected to
have a Material Adverse Effect on the Stockholder or materially affect the
ability of the Stockholder to consummate the transactions contemplated herein.
No consent or approval, authorization, order, regulation or qualification of any
governmental entity or any other third party is required for the
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execution and delivery by such Stockholder of this Agreement and the
consummation by such Stockholder of the transactions contemplated hereby.
5C. Investment Representations. The Stockholder acknowledges that
the Shares have not been and will not be registered or qualified under the
Securities Act or any state securities laws and are offered in reliance upon an
exemption from registration under Regulation D of the Securities Act and similar
state law exceptions. The Shares to be received by the Stockholder hereunder
will be held by such Stockholder for investment purposes only for such
Stockholder's own account, and not with a view to or for sale in connection with
any distribution of the Shares, and such Stockholder acknowledges that the
Shares cannot be sold or otherwise disposed of unless they are subsequently
registered under the Securities Act or pursuant to an exemption therefrom; and
the Shares may not be sold, assigned or otherwise transferred except in
compliance with the Stockholders Agreement. The Stockholder hereby acknowledges
receipt of a copy of the Stockholders Agreement and represents that he has
reviewed and understands the provisions thereof which have a bearing on the
representations made in this Section 5C.
5D. Accredited Investor. Unless otherwise indicated on Exhibit B,
the Stockholder is an "accredited investor" within the meaning of Regulation D
under the Securities Act and has the knowledge and experience in financial and
business matters such that he is capable of evaluating the merits and risks of
receiving and owning the Shares and is able to bear the economic risk of such
ownership and understands that an investment in Shares involves substantial
risks.
5E. Availability of Information. There has been made available to
the Stockholder and such Stockholder's advisors the opportunity to ask questions
of, and receive answers from, the Company concerning the terms and conditions of
the investment in the Shares, and to obtain the financial information with
respect to the Company's assets, the Stockholders Agreement, and any additional
information, to the extent that the Company possesses such information or can
acquire it without unreasonable effort or expense, necessary to verify the
accuracy of the information given to such Stockholder, or to otherwise make an
informed investment decision, that such Stockholder has had an opportunity to
consult with counsel and other advisors about the investment in the Shares, and
that all material document, records and books pertaining to such investment
have, on request, been made available to such Stockholder and his advisors.
5F. No General Solicitation. Neither the Stockholder nor any
advisor to such Stockholder is aware of or has engaged in any form of general
solicitation or advertising with respect to sales of the Shares, including (i)
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio; and
(ii) any seminar or meeting whose attendees were invited by any general
solicitation or general advertising.
5G. Litigation. There is no action, suit, proceeding or
investigation pending or, to the Stockholder's knowledge, threatened against
such Stockholder that questions the validity of this Agreement or the ability of
such Stockholder to consummate the transactions contemplated hereby.
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5H. Brokerage. The Stockholder acknowledges that there are no
claims for brokerage commissions, finders' fees or similar compensation in
connection with the transactions contemplated by this Agreement based on any
arrangement or agreement binding upon such Stockholder.
5I. No Intention to Transfer Shares. The Stockholder acknowledges
that there is no intention or plan, formally or informally, on the date hereof,
to transfer any of the Shares received by such Stockholder pursuant to this
Agreement.
Section 6 Closing.
6A. Closing Date. The Company shall notify the Stockholder of the
occurrence of the Senior Noteholder Consent Date within one business day after
such date. The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Covington & Burling, in
Washington, D.C., or at such other place as shall be mutually agreed upon by the
parties on the date which is five (5) business days following the Senior
Noteholder Consent Date (or, in the event that any other conditions to the
obligations of any party to close as provided hereunder shall not have been met
at such date, then on the date which is three (3) business days following the
date on which such conditions shall have been satisfied or waived by the party
whose obligations are so conditioned), or at such other date and time as to
which the parties may agree (the "Closing Date"). The Closing shall be effective
immediately prior to the close of business on the Closing Date.
6B. Deliveries by the Company at the Closing. At the Closing, the
Company and Pathnet shall deliver the following documents:
i. A certificate of the President of each of Pathnet and the Company
each certifying that its representations and warranties are true in all
material respects as of the Closing Date and that it has performed or
complied, in all material respects, with all of its respective agreements
and obligations required by this Agreement to be performed or complied
with by it prior to or at the Closing;
ii. A certified copy of resolutions of the Board of Directors of the
Company, authorizing the execution and delivery of this Agreement and the
performance of the obligations of the Company hereunder;
iii. A certified copy of resolutions of the Board of Directors of
Pathnet, authorizing the execution and delivery of this Agreement and the
performance of the obligations of Pathnet hereunder;
iv. An opinion of Counsel to the Company substantially in the form set
forth on Exhibit G;
v. The Stockholders Agreement duly executed and delivered by the
Company and each other stockholder of the Company (other than any one or
more stockholder beneficially owning, in the aggregate, not more than one
percent of the outstanding capital stock of the Company);
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vi. Certificates representing the Shares to be issued to the
Stockholder;
vii. All third party and governmental consents necessary or appropriate
to consummate the transactions contemplated herein, including, without
limitation, the FCC Consents; and
viii. Those other closing documents required to be executed by it or as
may otherwise be reasonably necessary or appropriate to consummate the
transactions contemplated herein.
6C. Deliveries by the Stockholder at the Closing. At the Closing,
the Stockholder shall deliver the following documents:
i. The Stockholders Agreement duly executed and delivered by such
Stockholder;
ii. A certificate of the Stockholder certifying that the
representations and warranties of such Stockholder contained in this
Agreement are true and correct as of the Closing Date and that he has
performed, in all material respects, all of his respective agreements and
obligations required by this Agreement to be performed or complied with
by such Stockholder prior to or at the Closing;
iii. All third party and governmental consents necessary or appropriate
to consummate the transactions contemplated herein; and
iv. Those other closing documents required to be executed by it or as
may otherwise be reasonably necessary or appropriate to consummate the
transactions contemplated herein.
Section 7 Covenants.
7A. Implementing Agreement. Subject to the terms and conditions
hereof, each party hereto shall use its best efforts to take all action required
of it to fulfill its obligations under the terms of this Agreement and to
facilitate the consummation of the transactions contemplated hereby.
7B. HSR Act Filings. Each of the Company, Pathnet and the
Stockholder shall use reasonable efforts to prepare and, as soon as practicable
after the Agreement Date, file with the Federal Trade Commission and the
Antitrust Division of the Department of Justice any materials and information
required to be filed with or provided pursuant to the HSR Act with respect to
the transactions contemplated by this Agreement. Each of the Company, Pathnet
and the Stockholder shall promptly supply any additional information which may
be required or requested of it in connection with the HSR Act filings.
7C. FCC Filings. Each of the Company and Pathnet shall use
reasonable best efforts to prepare and, as soon as practicable after the
Agreement Date, file with the Federal Communications Commission any applications
necessary to obtain the FCC Consents.
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7D. Consents and Approvals. The Company and Pathnet shall use
their best efforts to obtain all consents, approvals, certificates and other
documents required in connection with its performance under this Agreement and
the consummation of the transactions contemplated hereby. The Company and
Pathnet shall make all filings, applications, statements and reports to all
governmental authorities and other Persons which are required to be made by
either of them prior to the Closing Date by or on behalf of the Company or
Pathnet or any of their Affiliates pursuant to any applicable law or contract in
connection with this Agreement and the transactions contemplated hereby.
7E. Tax Free Transfers. The parties intend that the contribution
of properties by the Stockholder and the other contributing Persons described in
Section 3A(v) in respect of the Closing will be part of a single integrated
transaction in which no gain or loss will be recognized to the Company or the
Stockholder upon the issuance and receipt of the Shares pursuant to IRC Section
351 and, in the case of Persons who contribute Pathnet stock to the Company, the
contributions will qualify as a tax-free reorganization pursuant to IRC Section
368(a)(1)(B), and the parties agree that they will prepare and file their
Federal and state income tax returns in a manner consistent with such
characterization. Further, the Stockholder agrees to provide to the Company a
statement setting forth the amount of such Stockholder's tax basis in the
property contributed by such Stockholder so that the Company can determine its
tax basis in the property in accordance with IRC Section 362. The Stockholder
agrees to file the information required by Treasury Regulation Section 1.351-3
for his Federal income tax return for the taxable year of the contribution, and
the Company agrees to furnish to such Stockholder information necessary to
enable such Stockholder to comply with the information reporting requirements of
Treasury Regulation Section 1.351-3. The Company agrees that it will exercise
reasonable care not to take any action that would cause the transactions
contemplated hereby not to qualify as tax-free pursuant to IRC Section 351. The
Company has no present intention or plan to transfer all or substantially all
(within the meaning of IRC Section 368(a)(1)(C)) of the assets of Pathnet to the
Company. The Company has no present intention or plan to issue additional shares
of the Company (other than the shares proposed to be issued in the transactions
contemplated by Sections 2 and 3A(v) hereof), or rights to acquire additional
shares, for consideration other than cash or property, if the result would be
that the Contributors would fail to have "control" of the Company within the
meaning of IRC Section 368(c).
Section 8 Miscellaneous.
8A. Complete Agreement. This Agreement (including the Exhibits
hereto) represents the entire agreement between the Stockholder, Pathnet and the
Company covering everything agreed upon or understood in this transaction and
all other prior agreements, written or oral are merged into this Agreement.
There are no oral promises, conditions, representations, understandings,
interpretations or terms of any kind as conditions or inducements to the
execution hereof in effect between the parties.
8B. Authorized Signatories. The persons executing this Agreement
for and on behalf of the Stockholder, Pathnet and the Company each represent
that they have the requisite authority to bind the entities on whose behalf they
are signing.
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8C. Termination. In the event that for any reason the Closing does
not occur on or before the 150th day after the date of this Agreement, then any
party, if not then in breach of its obligations under this Agreement, may
terminate this Agreement by giving written notice thereof to the other party;
provided, however, that no such termination shall relieve either party of
liability for any breach of its obligations hereunder prior to such termination.
8D. Survival of Representations and Warranties. Regardless of any
investigation made by any party or on its behalf, all representations and
warranties contained herein or made in writing by any party in connection
herewith shall terminate at the Closing.
8E. Successors and Assigns. This Agreement may not be assigned by
either party without the written consent of the other party. Except as otherwise
expressly provided herein, all covenants and agreements contained in this
Agreement by or on behalf of the parties hereto shall bind and inure to the
benefit of the respective successors and assigns of the parties hereto whether
so expressed or not.
8F. Knowledge. As used in this Agreement, the terms "knowledge" or
"aware" with respect to the Company and Pathnet shall mean the actual knowledge
or awareness of any one or more of Richard Jalkut, William Smedberg, Michael
Lubin, James Craig, Joe Mastrogiorgio and Robert Rouse.
8G. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
8H. Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
8I. Descriptive Headings: Interpretation. The descriptive headings
of this Agreement are inserted for convenience only and do not constitute a
Section of this Agreement. The use of the word "including" in this Agreement
shall be by way of example rather than by limitation.
8J. Governing Law. This Agreement shall be governed by the laws of
the State of Delaware.
8K. Amendment. No change or addition shall be made to this
Agreement except by a written agreement executed by the Stockholder, Pathnet and
the Company.
8L. Expenses. The Company, Pathnet and the Stockholder shall pay
their respective expenses, if any, incurred in connection with the exchange
pursuant to this Agreement.
8M. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be
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deemed to have been given when delivered personally to the recipient, sent to
the recipient by reputable express courier service (charges prepaid) or mailed
to the recipient by certified or registered mail, return receipt requested and
postage prepaid. Such notices, demands and other communications shall be sent to
the parties hereto at the address indicated below:
If to the Stockholder to his address as set forth in Exhibit B hereto.
If to the Company to:
Pathnet Telecommunications, Inc.
1015 31st Street, N.W.
Washington, D.C. 20007
Attn: General Counsel
Fax: 202-625-7369
With a copy (which shall not constitute notice) to:
Covington & Burling
1201 Pennsylvania Ave., N.W.
P.O. Box 7566
Washington, D.C. 20044
Attn: Bruce S. Wilson, Esq.
Fax: 202-662-6291
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
[End of text; signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
PATHNET TELECOMMUNICATIONS, INC.
By: /s/ RICHARD A. JALKUT
---------------------------------
Name: Richard A. Jalkut
Title: President and CEO
PATHNET, INC.
By: /s/ RICHARD A. JALKUT
---------------------------------
Name: Richard A. Jalkut
Title: President and CEO
STOCKHOLDER
/s/ DAVID SCHAEFFER
--------------------------------
David Schaeffer
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10.7
DARK FIBER NETWORK AGREEMENT
This DARK FIBER NETWORK AGREEMENT (this "Agreement") is entered into
as of the ___ day of August,1999 ("Effective Date") by and between PATHNET,
INC., a Delaware corporation, ("Pathnet" or "Developer"), TRI-STATE GENERATION
AND TRANSMISSION ASSOCIATION, INC., a Colorado cooperative corporation
("Tri-State"); EMPIRE ELECTRIC ASSOCIATION, INC. ("EEA"), LA PLATA ELECTRIC
ASSOCIATION, INC. ("LPEA"), DELTA-MONTROSE ELECTRIC ASSOCIATION, INC. ("DMEA"),
and SAN MIGUEL POWER ASSOCIATION, INC. ("SMPA"). EEA, LPEA, DMEA and SMPA are
referred to herein individually and collectively as the "Participating Member
Systems". Pathnet, Tri-State, EEA, LPEA, DMEA and SMPA are each referred to
herein individually as a Party and collectively as "Parties".
RECITALS
A. Pathnet desires to design, engineer, construct, install and
operate a carrier quality, long haul, fiber optic telecommunications system
between Albuquerque, New Mexico and Grand Junction, Colorado, with
interconnections in the locations identified herein.
B. The Parties desire to enter into this Dark Fiber Network Agreement
to share the costs and revenues in connection with the construction and
operation of a dark fiber network.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the receipt and sufficiency of which are hereby acknowledged, the
Parties hereto agree as follows:
1. DEFINITIONS
In this Agreement, unless the subject matter or context otherwise
requires:
1.1 "BUSINESS DAY" means a day other than a Saturday, Sunday or
holiday.
1.2 "CABLE" means the fiber optic cable, the conductor and the Fibers
contained therein, and associated splice connections, splice boxes and vaults,
to be installed as part of the Project. Cable does not include electronics and
optronics necessary to create telecommunications capacity on the Fibers.
1.3 "COMPLETION DATE" means the date on which the Fibers pass all
required testing procedures and the Project is otherwise complete, subject only
to punch list items that do not materially interfere with the operation of the
Project and can be completed within thirty (30) days.
1.4 "CONDUCTOR" means an optical ground wire conductor in which the
Fibers are installed on utility transmission facilities.
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Confidential Treatment Requested
1.5 "CONDUIT" when used herein as a defined term means a conduit to
be installed as part of the Project.
1.6 "DEFAULT RATE" shall mean the lesser of (i) [* * *] or (ii) the
highest amount permitted by applicable law.
1.7 "DEVELOPER" means Pathnet, who shall have responsibility to
design, engineer, construct and install the Project as set forth in this
Agreement.
1.8 "DISPOSITION" shall mean any disposition of Fibers, including a
sale, assignment, transfer, lease, or license of Fibers, or a grant of an
indefeasible right to use Fibers, as dark Fibers, or as "dim" Fibers (i.e. with
the benefit of optical amplification) but shall not include a sale of
telecommunications capacity on Fibers.
1.9 "EQUIPMENT SHELTER" means any regeneration, amplification,
optronic or other equipment shelter constructed as part of the Project to house
equipment used in connection with the creation and operation of
telecommunications capacity on the System or to otherwise support the use of the
System as a telecommunications network. The term "Equipment Shelter shall not
include any equipment shelter constructed at the sole cost and expense of a
Party that is in addition to the equipment shelters constructed as part of the
Project.
1.10 "FIBERS" means the [* * *] individual optical fibers installed
on the System as part of the Project or such other number agreed to by the
Parties as provided herein.
1.11 "FORCE MAJEURE" means in relation to the performance of any
obligations under this Agreement, any cause, condition or event of any nature
whatsoever that is beyond the reasonable control of the Party responsible for
such obligation and that prevents in whole or in part the performance by such
Party of its respective obligations including, without limitation, acts of war,
revolution, riot, sabotage, vandalism, earthquakes, and other acts of God, local
or national emergencies, rail accidents, strikes, lockouts, work slowdowns and
all other labor disputes, whether lawful or unlawful, delays of unrelated third
parties and governmental agencies, and any other event (whether or not of the
kind enumerated in this Section) beyond the reasonable control of a Party.
Notwithstanding anything in the preceding sentences, an event shall be treated
as Force Majeure as set forth above only if the delayed Party uses Reasonable
Efforts to mitigate the situation and thereafter to resolve the delay as
expeditiously as possible.
1.12 "FRANCHISE" means authority required under law by a Franchising
Authority as a precondition to providing telecommunications or other services.
1.13 "FRANCHISING AUTHORITY" means a city, county or other unit of
government authorized by law to grant Franchises.
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1.14 "IRU" OR "INDEFEASIBLE RIGHT TO USE" shall mean a long-term
right to use Fibers and shall include all indicia of ownership in such Fibers,
including unrestricted rights of use, with the exception of legal title to the
physical Fibers. A grant of an IRU does not provide the grantee with any
ownership interest or other rights in assets other than the Fibers and
associated equipment in which the IRU is granted.
1.15 "MINIMUM PRICES" shall mean the minimum prices for Dispositions
of Fibers agreed to by the Parties, as modified as agreed to by the Parties from
time to time as provided herein.
1.16 "MW" OR "MAINTENANCE WINDOW" shall mean a prearranged period of
time reserved for performing certain work on the System that may potentially
affect traffic, as more fully described in Exhibit B.
1.17 "NORTHERN ROUTE" means that portion of the System located on
right of way owned by Tri-State or in which Tri-State has an easement, license,
permit, or other interest.
1.18 "PERFECTION RIGHTS" shall mean those approvals, licenses,
easements, and other rights that permit the installation and operation, on the
rights of way described or created by the Underlying Rights, of fiber optic
cable and associated facilities for the purpose of transmitting voice, data,
video and other telecommunications signals between all types of customer
premises equipment and carrier equipment.
1.19 "PERSON" includes individuals, limited liability companies,
partnerships, associations, trusts, cooperatives, unincorporated organizations
and corporations.
1.20 "PNM AGREEMENT" means the Fiber Optic Cable Construction and Use
Agreement Between Public Service Company of New Mexico, Inc. and Pathnet, dated
June 9, 1999. A copy of the PNM Agreement has been disclosed to Tri-State and
the Participating Member Systems.
1.21 "PNM CABLE" shall mean that portion of the cable installed on
utility poles and other facilities owned by the Public Service Company of New
Mexico, including that portion of the Cable that extends from such facilities to
the splice point where such Cable enters an equipment shelter or is connected to
optronic, amplification, regeneration or other equipment.
1.22 "POOLED FIBERS" shall have the meaning set forth in Section 9.1.
1.23 "POP" shall mean a point of presence of a telecommunications
provider.
1.24 "PRIME RATE" shall mean the prime rate of interest published by
the Wall Street Journal as the base rate on corporate loans posted by a
substantial percentage of the nation's largest
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Confidential Treatment Requested
banks on the date any such payment is due. Unless otherwise provided in this
Agreement, interest shall be compounded annually in determining the amount of
interest due.
1.25 "PROJECT" means a carrier-quality, long-haul dark fiber optic
network with a total of [* * *] Fibers (or such other number agreed to by the
Parties as provided herein) and shall include all of the Cables, Conduits,
equipment shelters, utility connections, splice boxes, and all appurtenances
thereto installed, on the Underlying Rights between the POPs that are part of
the Project as agreed to by the Parties, and identified in the Project Budget.
1.26 "PROJECT BUDGET" means the budget for the Project agreed to by
the Parties, as modified from time to time in accordance with this Agreement.
1.27 "PROJECT COSTS" shall mean all costs which are necessary for the
design, engineering, construction, installation, maintenance, and testing of the
Project and the System, including, the cost of cable, fibers, conductor,
facility attachments, and any wires, interconnection facilities, connection
boxes, ducts and pull boxes, utility access points and equipment, regeneration
sites and buildings, cable installation, Underlying Rights Costs, acquiring the
Perfection Rights, permitting, infrastructure upgrades, any increase in real
estate or property taxes on Tri-State right-of-way attributable to the Project,
any costs of relocating the System as required by the grantor of any
right-of-way or permits (other than a Party). Notwithstanding the foregoing,
Project Costs will not include any costs attributable to obtaining, renewing or
expanding Tri-State's underlying rights in its right of way for utility or other
non-telecommunications purposes. In the event that, as part of its efforts to
obtain Perfection Rights, Tri-State also obtains rights attributable to the use
of the right of way for utility or non-telecommunications purposes, Project
Costs shall include only that portion of the costs and expenses incurred in
connection with such efforts that is attributable to obtaining the Perfection
Rights. The allocation of costs between Perfection Rights and other rights will
be as agreed to by Tri-State and Pathnet. Project Costs will also not include
any costs that are attributable to the negligence or willful misconduct of a
Party.
1.28 "PROJECT SPECIFICATIONS" means the construction plans, schedules
and materials, engineering, design and operational specifications agreed to by
Tri-State and Pathnet and set forth in Exhibit A.
1.29 "REASONABLE EFFORTS" shall mean commercially reasonable efforts,
but shall not obligate a Party to make expenditures that are excessive in
amount, in light of the circumstances to which the requirement to use reasonable
efforts applies.
1.30 "RETAINED FIBERS" shall have the meaning set forth in Section
9.1.
1.31 "SEGMENT" shall mean a portion of the Project between two POP's.
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Confidential Treatment Requested
1.32 "SOUTHERN ROUTE" means the portion of the System located on
right of way owned by the Public Service Company of New Mexico.
1.33 "SYSTEM" shall mean the fiber optic communication system,
consisting of the Conduits, Cables, Fibers, Equipment Shelters, and all splice
boxes, vaults and other appurtenances included in the Project.
1.34 "TRI-STATE FACILITIES" shall mean that portion of the Cable and
all other equipment installed on Tri-State Utility Facilities, including that
portion of the Cable that extends from such Utility Facilities to the splice
point where such Cable enters an equipment shelter or is connected to optronic,
amplification, regeneration or other equipment.
1.35 "UTILITY FACILITIES" shall mean utility towers, wires,
associated equipment, or other property used by Tri-State or a Participating
Member System for the generation or transmission of electrical service, whether
such Utility Facilities are on right of way owned by such Party or on right of
way in which such Party holds less than a fee interest, including but not
limited to an easement, license or permitting interest.
1.36 "UNDERLYING RIGHTS" means all deeds, leases, easements, rights
of way, licenses, franchises, permits, authorizations, consents and approvals
(including without limitation, any necessary local, state, federal or tribal
authorizations and environmental permits) including the PNM Agreement and other
rights, titles or interests as are necessary for the construction, installation,
operation, maintenance or repair of the System.
1.37 "UNDERLYING RIGHTS COSTS" means the total costs expended by
Pathnet or Tri-State or, as for Project tasks requested by Pathnet and
Tri-State, the Participating Member Systems, to obtain and defend the Underlying
Rights and any renewals thereof, including any litigation costs required to
defend and preserve Underlying Rights, and any costs required to perfect Project
rights of ways for telecommunications use, including the right to install and
operate fiber optic cable and associated facilities for the purpose of
transmitting voice, data, video and other telecommunications signals between all
types of customer premises equipment and carrier equipment.
1.38 "UNDERLYING RIGHTS REQUIREMENTS" means the terms, conditions,
requirements, restrictions, and/or limitations upon each Party's right to use or
operate the System imposed under the Underlying Rights and the associated
safety, operational and other rules and regulations imposed in connection
therewith or by applicable law.
2. TERM.
2.1 The term of this Agreement (the "Term") shall expire on the
[* * *] anniversary of the Effective Date. At least one hundred eighty (180)
days prior to the expiration of the Original Term, any Party may request, but no
Party shall have an obligation, to renew the Agreement, in
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Confidential Treatment Requested
which event the terms of any such renewal will be as agreed to by the Parties.
In the event that any customer's obligation to pay for Fiber, telecommunications
capacity or other rights or service provided pursuant to this Agreement extends
beyond expiration of this Agreement, then each Party shall have the continued
right to perform its rights hereunder and to receive its share of revenues from
such customer until the customer's obligation is terminated, but only as to the
extent necessary to fulfill such Party's obligations to the customer.
2.2 Notwithstanding the foregoing, nothing herein shall require any
Party to incur any additional costs for the renewal of the PNM Agreement should
such Party elect to have the rights to IRUs for the Southern Route for only the
Original Term of the PNM Agreement, provided that if a Party declines to
contribute its share of renewal costs for the PNM Agreement, then such
non-contributing Party shall not be entitled to any revenues from use of the
Southern Route to the extent attributable to any renewal period.
3. PATHNET TO ENGINEER, DESIGN, INSTALL AND CONSTRUCT
3.1 Pathnet will be the Project Manager for the Project and shall
have sole responsibility to engineer, design, install, construct and test the
Project and shall do so using its best efforts and consistent with industry
standards and in compliance with the Project Specifications set forth in the
Exhibits as they may be revised as agreed by Pathnet and Tri-State in writing
from time to time, and in compliance with applicable laws and governmental and
regulatory requirements. Pathnet shall coordinate with governmental and
regulatory agencies the construction of the Project, obtain all requisite
permits, licenses and authorizations required to engineer, design, install,
construct and test the Project, and prepare monthly summary reports on the
status and scheduling of the Project. Pathnet shall keep the Project free of
debris following installation and shall comply at all times with all applicable
environmental and health and safety laws and all Underlying Rights Requirements.
Pathnet shall use Reasonable Efforts to prevent any lien(s) from being attached
to any Underlying Rights or Tri-State Facilities and ensure that any and all
construction or suppliers' liens on the Project are promptly vacated. Pathnet
shall supply all vehicles, tools, equipment, labor and similar items and
services necessary for Pathnet to perform and complete the Project, and Pathnet
shall be solely responsible for maintaining the security thereof. The Project
shall include equipment and regeneration shelters but shall not include
optronics or other equipment attributable to the creation of telecommunications
capacity on the System, except and only to the extent necessary or appropriate
to the proper functioning of the Project as a dark fiber network.
3.2 Pathnet will provide project management services ("Project
Management") to the Project [* * *]. Project Management shall mean the overall
home office administration, coordination and supervision of the Project, and
shall include Project Cost tracking, preparation of cash flow projections and
other financial reports, preparation of construction schedules and status
reports, coordination of design, procurement and material deliveries, and
non-field supervision and coordination of contractors, subcontractors, suppliers
and escrows. Nothing herein shall prohibit
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Pathnet from contracting out portions of Project Management, provided that the
cost of such contractors shall not be included in Project Costs and shall be
entirely the responsibility of Pathnet.
3.3 Pathnet may contract out such other Project tasks as it deems
appropriate. Each contractor and subcontractor utilized by Pathnet in connection
with the Project shall have the requisite skills and resources to fulfill, in a
timely and good, workmanlike fashion, the obligations for which such entity is
hired. Pathnet may use Pathnet personnel for Project tasks and services, and the
cost of such activities (other than Project Management) shall be a Project Cost,
provided that such costs do not exceed the costs that Pathnet could obtain for
such activities in a third-party arms length transaction.
3.4 Prior to the commencement of any construction, Pathnet and
Tri-State shall agree upon a construction schedule that shall be substantially
adhered to unless modified in writing by Pathnet and Tri-State. Pathnet shall
submit design and materials specifications and construction drawings to
Tri-State for its review and approval. Pathnet shall make all reasonable
revisions to the design and materials specifications and construction drawings
requested by Tri-State. The costs associated with making all reasonable
revisions requested by Tri-State in connection with Tri-State's initial review
of the plans and specifications, and any revisions requested by Tri-State after
the commencement of construction due to field conditions, shall be treated as
Project Costs. Tri-State will solely bear only those costs and expenses
associated with making a revision requested by Tri-State after its initial
approval or if after the commencement of construction the revision that is
requested is not due to field conditions (and Pathnet will use commercially
reasonable efforts to minimize any such costs to Tri-State). Tri-State's
approvals pursuant to this Section 3.4 shall not be unreasonably withheld,
provided that Tri-State may withhold its approval where such drawings or plans
propose activities that may, in Tri-State's sole judgment, adversely affect
Tri-State's utility operations.
3.5 All permits, deeds, leases, licenses, franchises, and other
consents and approvals affecting a Party's Underlying Rights shall be in the
name of such Party. The Parties shall cooperate and, where necessary, jointly
take such action as may be necessary to ensure that such permits are applied for
and granted in a timely fashion and that the Project remains in compliance with
such permits at all times.
3.6 Each Party shall have the right, at its option, to approve any
attachment to its Utility Facilities or to property associated with that Party's
Underlying Rights, including attachment of the Tri-State Cable, as to loading,
location and any other matter that may adversely affect utility operations. In
addition to the approvals from Tri-State described in Section 3.4, all Project
Specifications that may adversely affect the utility operations of a
Participating Member System require the prior approval of that Participating
Member System. Each Party acknowledges that time is of the essence in approving
the drawings and plans, and agrees to respond to submitted plans as promptly as
feasible.
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3.7 Pathnet shall convene periodic meetings of the representatives of
Pathnet and Tri-State to review the progress of the work relating to the
Project, such meetings to be held at the principal office of the Project, or in
Denver, Colorado, or at such other place as may be mutually agreed upon between
Pathnet and Tri-State. Both Parties agree that such meetings may be convened by
means of a telephone conference or any other communication facility whereby all
representatives participating in the meeting can hear each other and make
themselves heard.
3.8 Prior to the commencement of any construction, Tri-State and
Pathnet shall agree upon a Project Budget and a cash flow projection for the
first month and first quarter. Pathnet shall make all reasonable changes to the
Project Budget and cash flow projections requested by Tri-State. Either
Tri-State or Pathnet may request a change to the System, the Project
Specifications set forth in the Exhibits, the Project Budget or the cash flow
projections in writing. If either Tri-State or Pathnet makes such request,
Pathnet shall prepare a detailed statement of the additional costs and savings,
if any, within fifteen (15) Business Days. If such change is required due to
circumstances discovered during the course of construction, is agreed to by
Tri-State and Pathnet, or is prior to Tri-State's initial approval of the
Project Specifications or Budget, then the cost of such change shall be a
Project Cost. Pathnet shall use Reasonable Efforts to comply with the Project
Budget. The Parties acknowledge that the Project Budget is by necessity a
preliminary estimation of Project Costs, and that actual Project Costs may vary
based upon field conditions, actual supplier and contractor contracts and other
issues. Neither Tri-State nor Pathnet will unreasonably withhold their consent
to a change requested by the other.
3.9 Tri-State shall at all times have the right to observe and
inspect Pathnet's performance in connection with the Project.
3.10 All construction activities on the Project shall be conducted so
as to avoid interference with the utility operations of the Parties. Any
construction activities that may adversely affect the utility operations of a
Party shall be approved in advance by such Party. Such approval shall not be
unreasonably withheld, but may be conditioned on Pathnet taking appropriate
measures to minimize the risk of interference. The Parties will cooperate with
Pathnet to enable Pathnet to construct the Project as expeditiously and
cost-effectively as possible, which cooperation will include the scheduling of
utility outages where doing so will not materially and adversely affect utility
operations.
3.11 The parties currently contemplate that the number of Fibers on
the Project will be [* * *], with minor modifications on certain segments of the
Project. In the event that Pathnet or Tri-State agree to modify the foregoing
number of Fibers in the Project, Pathnet will provide written notice of such
fact to the Participating Member Systems. Within five (5) business days
thereafter, any Participating Member System may object to the modification of
the number of additional Fibers. Any Participating Member System that does not
respond within such five (5) day period will be deemed to have consented to the
modification. If a Participating Member System objects to
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modification of the number of Fibers, then Pathnet and Tri-State may agree to
make such modification over the objection.
4. UNDERLYING RIGHTS
4.1 The Underlying Rights for the Southern Route will be provided pursuant to
the PNM Agreement. Tri-State will provide the Underlying Rights for the Northern
Route pursuant to this Agreement and to the extent permitted by the Underlying
Rights that have been provided to Pathnet for its review prior to [* * *],
hereby grants to each Party an easement for the term of this Agreement to use
and access the Tri-State right of way to the extent necessary or appropriate to
permit such Party to exercise its rights and perform its obligations hereunder.
Pathnet will be responsible for obtaining any and all other Underlying Rights
required to install, maintain and operate the System, provided that the Parties
will use reasonable efforts to cooperate with Pathnet in obtaining any
additional underlying rights. Prior to [* * *], Tri-State will disclose to
Pathnet any Underlying Rights Requirements of which it is aware that would
materially interfere with the construction and operation of the System on the
Northern Route. Tri-State will use its best efforts to obtain Perfection Rights
for at least the term of the Agreement, and will not agree to any Perfection
Rights for less than the term of the Agreement without the prior written consent
of Pathnet. If Tri-State is unable to obtain Perfection Rights for the full term
of the Agreement on any portion of the right of way, then Tri-State and Pathnet
will convene to discuss the best way to proceed. Provided that Tri-State follows
the procedures set forth in this Section 4.1, Tri-State will not be in breach of
this Agreement for any failure to obtain Perfection Rights for the full term of
this Agreement.
4.2 In order to prevent a situation where Tri-State incurs Project
Costs in obtaining the Perfection Rights, but is subsequently unable to obtain
sufficient Perfection Rights to develop the System, Tri-State may obtain
Perfection Rights by making deposit or option payments, with full payment for
the Perfection Rights contingent on acquiring sufficient Perfection Rights to
develop the System. Pathnet shall be responsible for its share of the costs in
obtaining the Perfection Rights, including both the amount of any payments to
landowners and the cost of contractors and Tri-State personnel (not in excess of
costs that would have been charged by non-affiliated entities) in obtaining the
Perfection Rights, provided that if Pathnet elects to withdraw from the Project
as provided in Section 5.2, Pathnet's share of the costs of acquiring the
Perfection Rights shall be capped at [* * *].
5. COMPLETION
5.1 Prior to commencement of construction, Tri-State and Pathnet will
agree on a construction schedule for the construction of the Project. Pathnet
will use best efforts to adhere to the construction schedule, which will be
extended to the extent of delays due to Force Majeure events, any extension of
time expressly provided for in this Agreement or the agreement of Pathnet and
Tri-State.
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5.2 After discussing alternatives to termination with the other
Parties, each of the Parties shall be permitted to withdraw from participation
in this Agreement upon the occurrence of the termination conditions provided in
Section 2.6 of the PNM Agreement as to the Southern Route, or if perfection of
the Northern Route exceeds [* * *] or is not substantially complete by [* * *].
In addition, (i) for ten (10) business days after the date hereof, Pathnet and
Tri-State may conduct due diligence on each other, and each of Pathnet and/or
Tri-State may withdraw upon written notice within such ten (10) day period if
such due diligence reveals issues that would materially interfere with the other
Party's ability to fulfill its obligations hereunder; and (ii) Tri-State may
withdraw within forty five (45) days after the Effective Date if it fails to
obtain any required approvals from the Rural Utility Service. The Parties
acknowledge that, in order to enable construction of the Project during the
September maintenance window on the Northern Route, Pathnet will have to incur
engineering, network design and other Project Costs prior to [* * *]. In
consideration for Pathnet's agreement to incur such Costs prior to [* * *], if
Pathnet desires to withdraw from participation in the Agreement as provided in
this Section, because perfection of the Northern Route exceeds [* * *] or is not
substantially complete by [* * *], then Tri-State will reimburse Pathnet for
actual and reasonable Project Costs incurred by Pathnet attributable to the
Northern Route prior to termination, other than Pathnet's share of costs
attributable to acquisition of the Perfection Rights as set forth in Section 4.2
hereof. Pathnet will keep Tri-State informed as to Project Costs incurred, and
will use commercially reasonable efforts to minimize such Project Costs. If
Pathnet elects to withdraw from participation in the Southern Route and the
Northern Route, then at Tri-State's request, and subject to the prior approval
of Public Service of New Mexico and the release of Pathnet from all obligations
thereunder, Pathnet will assign the agreement for development of the Southern
Route to Tri-State so that it may complete the Project. If any Party withdraws,
then any non-withdrawing Party may contribute the withdrawing Parties' capital
to the Project and continue the Project, in which event the withdrawing Party(s)
will have no further rights or obligation under the Agreement, and the remaining
Parties' share of revenue from the Project shall be adjusted to reflect its
additional contribution. No Party will be obligated to continue participation
after withdrawal of another Party. Each Party will remain fully liable for
Project Costs incurred prior to the date of withdrawal or termination, as
appropriate. Notwithstanding the foregoing, if Tri-State elects to withdraw from
participation, then upon completion of the Project, the Project will provide
Tri-State with [* * *].
6. TITLE TO SYSTEM.
6.1. Title to the Tri-State Facilities shall be retained by
Tri-State. Public Service of New Mexico shall retain title to the PNM Cable.
Pathnet shall retain title to all other portions of the System, including
regeneration and equipment shelters, and Cable not on a Party's Utility
Facilities except that notwithstanding the foregoing, legal ownership shall not
vest in Pathnet for more than [* * *] of the aggregate initial value of the
Project's fibers, equipment and other property. Nothing herein shall be deemed
to grant Pathnet title to any Utility Facilities or other property in which a
Party has a fee, easement, lease, license, permitting or other ownership
interest. Each Party shall retain full ownership to (and shall be responsible
for all costs in connection with) all optronics and
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other equipment such Party adds to the System for the purpose of creating,
operating or selling telecommunications capacity or services, provided that any
of such equipment that is attached to a Party's Utility Facilities will be owned
by that Party.
6.2 Each Party grants to the other Parties rights in and to all
property owned by the granting Party sufficient to allow the grantee to exercise
its rights, privileges and obligations hereunder, all to the extent of the
granting Parties rights in such property and subject to all Underlying Rights
Requirements, including the PNM Agreement. The foregoing grant includes the
grant of an IRU for the Term of this Agreement in any Fibers, Cable and other
equipment or property owned by the granting Party sufficient to enable the
grantee to utilize its Retained Fibers as provided herein, and to enable Pathnet
to Dispose of the Pooled Fibers as provided herein.
7. CAPITAL CONTRIBUTIONS
7.1 Each Party shall be responsible for timely payment of its
pro-rata share of Project Costs to a third-party escrow agent acceptable to all
Parties (the "Project Escrow") as follows: Tri-State shall pay [* * *], Pathnet
shall pay [* * *], and each Participating Member System shall pay [* * *].
Payments to the third party escrow agent shall be held in an interest bearing
account. All payments of Project Costs shall be made into a Project Escrow as
provided in this Article 7.
7.2 During construction of the Project, Pathnet shall provide each
month to Tri-State for its review and approval an up-to-date budget, an
up-to-date costs report of the Project on a percentage of completion basis, and
a cash flow projection of the costs of the Project to be incurred during the
following month of the development and construction of the Project. These
reports shall be updated monthly and quarterly. After submission of the first
cash flow projection, the Parties shall thereafter establish a Project escrow
account (the "Project Escrow") from which Project Costs will be paid. The
Project Escrow will initially be funded on or before the date that is thirty
(30) days after Pathnet provides the initial budget and cash flow projections
and thereafter, by periodic payments on a schedule to be agreed to by the
Parties. Each Party's payment to the Project Escrow shall be that Party's share
of 100% of the Project Costs projected to become due and payable in the
succeeding quarter plus a buffer of fifteen percent (15%) of such payment. All
payments into the Project Escrow will be made by wire transfer, and will be made
within fifteen (15) days after such Party's receipt of the cash flow projection
reviewed and approved by Tri-State. The Parties shall also make unscheduled
payments as agreed upon by the Parties into the Project Escrow as necessary to
account for unforeseen circumstances.
7.3 The Project Escrow agreement shall provide that the escrow agent
shall disburse Project Costs from the Project Escrow upon its receipt from
Pathnet of (i) a draw request accompanied by reasonable supporting documents
describing Project Costs incurred; and (ii) a certification that such request
and documentation has been provided to Tri-State. The escrow agent shall wait
for ten (10) days after the date of the draw request before honoring the draw
request. In the event that Tri-State disputes the draw request, then within such
ten (10) days period, Tri-State may
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deliver written notice to the escrow agent describing, in reasonable detail,
such dispute. Upon receipt of Tri-State's objection, the escrow agent shall
honor such portion of the draw request that is undisputed, if any, but shall not
disburse any disputed amounts until receipt of written notice from Tri-State and
Pathnet resolving such dispute. If Tri-State has not disputed the draw request,
the escrow agent shall disburse the draw request from the Project Escrow. The
Project Escrow shall terminate upon mutual agreement of the Parties. Tri-State
shall have the right to submit requests for disbursement from the Project Escrow
for (1) the reasonable and actual costs Tri-State incurs to acquire and obtain
easements and rights-of-way to the extent attributable to the Project, (2) all
reasonable and actual costs and expenses relating to obtaining the grant of the
express right to install and operate, on Tri-State Utility Facilities, or
right-of-way or other property owned by Tri-State, used by Tri-State for its
utility operations, or for which Tri-State has been granted a permit for utility
operations, fiber optic cable and other facilities for the purpose of
transmitting voice, data, video and any other signals between all types of
customer premises equipment or carrier equipment, (3) any increase in real
estate or property taxes on Tri-State right-of-way attributable to the Project,
(4) the costs of obtaining the Perfection Rights, (5) and any costs, including
litigation costs, incurred to defend Underlying Rights, Perfection Rights, or
other approvals necessary for the construction, installation, operation,
testing, maintenance or repair of the System, provided that all such defense
activities shall be conducted as provided in Section 16.1.3 hereof., in which
event Pathnet and Tri-State shall follow the same procedures set forth in this
paragraph as to such draw requests, including Pathnet's right to dispute
Tri-State's requested draws from the Project Escrow.
7.4 Prior to the Completion Date, Pathnet shall provide to Tri-State
each month an up-to-date costs report of the Project on a percentage of
completion basis and forecast reports prepared in accordance with generally
accepted accounting principles. A complete set of books of account and records
of the Project, truly and accurately documenting the Project Costs of the
Project shall be maintained at Pathnet's office. Tri-State or its designated
representatives shall have access to and right to inspect, copy and audit such
books and records during business hours upon reasonable prior notice. In the
event that Tri-State disputes any amount, Tri-State shall provide written notice
describing in detail the basis for any such dispute and promptly forward such
notice to Pathnet. To the extent Pathnet and Tri-State are otherwise unable to
resolve such dispute through their respective operating and administrative
personnel within thirty (30) days after notice thereof from Tri-State, the
matter shall be submitted for dispute resolution as provided in this Agreement.
8. GENERAL PROVISIONS RE: CAPITAL CONTRIBUTIONS
8.1 In the event that a Party fails to make any payment under this
Agreement when due, such amounts shall accrue interest from the date five (5)
days after such payment is due until paid, compounded monthly, at an annual rate
equal to the Default Rate.
8.2 Tri-State shall be responsible for and pay all sales and/or
purchase taxes levied or assessed by any governmental agency in connection with
any transfer or deemed transfer of title to
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the Tri-State Cable to Tri-State. Each Party will be responsible for payment of
any and all sales and/or purchase taxes levied on any assets or IRU conveyed to
such Party. The Parties will cooperate to minimize any such taxes. Neither
Tri-State nor the Participating Member Systems will have any liability for any
taxes attributable to any transfer of assets to PNM.
8.3 In addition to the Project Escrow, within thirty (30) days after
funding of the Project Escrow, the Parties shall create and fund a security
escrow account (the "Security Escrow") with a third-party financial institution
reasonably acceptable to all of the Parties. Payments to the third party escrow
agent shall be held in an interest bearing account. Each party shall fund the
Security Escrow with [* * *] of such Party's total estimated contribution to
Project Costs. Once the Project is [* * *] complete, funds from the Security
Escrow will be available to the Project Escrow to pay Project Costs. The
Security Escrow will provide that upon a Default by a Party, all of such Party's
funds in the Security Escrow shall be available to the Project Escrow to pay
Project Costs as they become due, and such disbursements will be credited
towards the defaulting Party's capital contribution to the Project. All interest
earned on a Party's contribution to the Security Escrow will be capitalized on
such Party's escrowed funds.
8.4 Each Party will provide all documents reasonably requested by and financial
assurances reasonably acceptable to the other Parties on or before sixty (60)
days following the Effective Date, including but not limited to, any Pathnet
agreements (or pertinent parts thereof) with Lucent or other equipment
manufacturers, any Pathnet agreements (or pertinent parts thereof) or
correspondence with Native American tribes, and any agreement with or permits
granted by the U.S. Forest Service or other governmental or municipal
organization.
9. REVENUE SHARING.
9.1 The Parties will create a pool consisting of indefeasible rights
to use [* * *] of the Project's Fibers, and such IRUs shall be termed "Pooled
Fibers." Each Party shall be granted IRUs in the following number of Fibers for
the term of this Agreement, which Fibers shall be termed "Retained Fibers":
Pathnet - [* * *]; Tri-State - [* * *]; Participating Member System - [* * *],
to be allocated among the Participating Member Systems in proportion to their
capital contributions. Each Party may sell Retained Fibers to another Party,
provided that such Fibers shall remain Retained Fibers and shall be subject to
all restrictions thereon.
9.2 Pathnet shall be the exclusive sales and marketing agent for
Dispositions of the Pooled Fibers, and for sales, leases or other grants of
other rights on the System, including use of Equipment Shelters, other than
sales of Retained Fibers between Parties. Pathnet will have sole responsibility
for setting the terms and conditions of any such transactions above the Minimum
Price agreed upon by the Parties, subject to the conditions imposed by this
Agreement, and shall have the right, in its sole discretion, to accept or reject
any such orders. Pathnet will dedicate commercially reasonable efforts to the
marketing and sale of the Pooled Fibers and to getting, in Pathnet's
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reasonable judgment, the highest price the market will bear. In consideration
for its sales and marketing efforts, Pathnet will be entitled to a sales
commission on the revenues received from the Disposition of Pooled Fibers or of
other rights on the System, including Equipment Shelter rights, as provided
below (the "Sales Commission"). Nothing herein shall be deemed to grant Pathnet
the right to lease, license or otherwise convey rights to use a Party's Utility
Facilities, Tri-State Facilities, or Underlying Rights owned by Tri-State, used
by Tri-State for its utility operations, or for which Tri-State has been granted
a permit for use in connection with its utility operations or other property
used by a Party for its utility operations. Notwithstanding the foregoing,
Pathnet shall have the right to grant access and other similar rights incidental
and appropriate to the Disposition of Fibers or rights on the System.
9.3 If Tri-State has obtained all Perfection Rights necessary to
permit the construction and operation of the System on the Northern Route by [*
* *], or if the Project Costs associated with obtaining the Perfection Rights
are equal to or less than [* * *], then the Sales Commission shall be [* * *] of
the revenues from transactions on the System. Otherwise, the Sales Commission
shall be [* * *] of such revenues. Notwithstanding the foregoing, in any event,
the Sales Commission on transactions to customers referred to Pathnet by
Tri-State or one of the Participating Member Systems shall be [* * *]. Pathnet
will not receive a Sales Commission on sales of Retained Fibers between the
Parties or on a disposition of the Pooled Fibers to Pathnet, Tri-State or a
Participating Member System.
9.4. The Pooled Fibers shall be Disposed of as dark fibers, or with
the benefit of optical regeneration and/or amplification only if agreed to by
the Parties. Any other sale, lease, assignment, transfer or other disposition in
connection with the Pooled Fibers, including the creation and sale of
telecommunications capacity, a swap or exchange of the Pooled Fibers, or the
Disposition of Pooled Fibers for less than the Minimum Prices shall require the
prior consent of the Parties. If all Participating Member Systems have not
agreed to a requested modification of the Minimum Prices within five (5)
business days after receipt of such request, Pathnet and Tri-State, after
reaching an agreement, may elect to modify such Minimum Prices without their
consent. All Pooled Fibers will be Disposed of with a restriction prohibiting
resale as dark fibers, or with the benefit of optical amplification or
regeneration, for at least [* * *] years from the date of sale.
9.5. All Dispositions shall be made pursuant to an agreement in form
and content to be mutually agreed to between Tri-State and Pathnet prior to any
Disposition. Provided that the proposed Disposition complies with the Minimum
Prices and does not materially diverge from the approved form of agreement, then
the Disposition of the Pooled Fibers may be consummated without further consent.
The agreement for the Disposition of the Pooled Fibers shall require the
customer to pay all fees, franchise charges, universal service fund
contributions, taxes, assessments or other governmental impositions.
9.6 Upon expiration or termination of any Disposition, all Pooled
Fibers that were part of that Disposition shall revert to the Pool and shall
continue to be Pooled Fibers.
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9.7 Either party shall have the right to use, create and sell
telecommunications capacity on, swap or otherwise deal with its Retained Fibers
without restriction, except that no Party may, directly or indirectly, effect a
Disposition of Retained Fibers as dark fibers, or with the benefit of optical
amplification or regeneration, until all Pooled Fibers have been Disposed of,
except as to another Party as provided herein.
9.8. The Pooled Fibers shall be disposed of as dark fibers at no less
than the Minimum Price agreed upon by all of the Parties. If the Parties fail to
agree on a mutually acceptable price for a Disposition that is below the Minimum
Prices, then Pathnet may consummate such Disposition with its Retained Fibers,
or with Fibers purchased from Pooled Fibers at the Minimum Prices.
9.9 Revenues received by Pathnet from Dispositions of the Pooled
Fibers or rights on the System, including licenses for use of any Equipment
Shelters, after deduction of the Sales Commission discussed above and any taxes,
assessments, impositions and other charges imposed by governmental agencies not
passed through to the customer, shall be allocated among the parties in
accordance with their respective contributions to Project Costs. After deducting
the Sales Commission, Pathnet will disburse revenues from each transaction in
proportion to each Party's capital contribution within thirty (30) days after
receipt, and will attempt to expedite all such disbursements. If Pathnet fails
to disburse such sums within thirty (30) days, then such sums will bear interest
at the Default Rate until disbursed.
9.10. Each Party may purchase indefeasible rights to use Pooled
Fibers, at the agreed upon Minimum Prices for the term of this Agreement, but
the number of Pooled Fibers that a Party may purchase shall be equivalent to
such Party's capital contribution to the Project (i.e. if a Party has
contributed 25% of the capital to the Project, such Party may purchase up to 25%
of the Pooled Fibers, or [* * *] Pooled Fibers). The purchasing Party may use,
create and sell telecommunications capacity on, swap or otherwise deal with such
Fibers without restriction, except that the purchasing Party may not Dispose of
the purchased Fibers as dark Fibers or Fibers with the benefit of optical
amplification or regeneration, for a period of [* * *] after the date of
purchase. The purchasing party shall be entitled to its share of the revenue
from the initial purchase of the Pooled Fibers as if the purchasing party were
an unrelated third party, but shall thereafter retain all revenue resulting from
the purchased Pooled Fibers. Pathnet shall not be entitled to any Sales
Commission on a Disposition of the Pooled Fibers to Pathnet, Tri-State or a
Participating Member System.
10. ADDITIONAL BENEFIT RE: TELECOMMUNICATIONS CAPACITY
10.1 Subject to availability, each of the Parties has the right to
purchase telecommunications capacity on lit fiber from Pathnet on the System at
the most favorable rate that is being offered by Pathnet on the open market (not
including reasonable costs of interconnection, collocation and other
non-recurring charges based on the open market prices that third parties assess
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Pathnet). Nothing in this provision shall be deemed to require Pathnet to create
or offer services or telecommunications capacity on fiber that lacks the benefit
of optical amplification or regeneration or optronics for the creation of
telecommunications capacity.
11. DEFAULT
11.1 The following events shall be deemed to be events of default
(each, a "Default") under this Agreement:
11.1.1 A Party's violation of any applicable laws,
statutes, ordinances, codes, Underlying Rights Requirements, or other
legal requirements which substantially affects the progress,
maintenance or operation of the Project, if such violation(s) is not
remedied within fifteen (15) Business Days after receipt of notice
thereof from a non-defaulting Party, or, if such default cannot with
reasonable diligence be remedied within such period, a Party's
failure to remedy such default within an additional period reasonably
required to remedy such default if a longer period is permitted at
law (provided that the defaulting Party promptly commences the remedy
within such fifteen (15) day period and diligently pursues
appropriate efforts to remedy such default until completion);
11.1.2 Subject to a Party's right to dispute payment of
sums due hereunder as provided in Article 7, such Party's failure to
make any payment of money required under this Agreement within
fifteen (15) Business Days after receipt of written notice of the
requirement of such payment;
11.1.3 A Party becomes insolvent, liquidates, is
adjudicated as bankrupt, makes an assignment for the benefit of
creditors, invokes any provision of law for the relief of debtors or
initiates any proceeding seeking protection from its creditors;
11.1.4 A material breach of this Agreement by a Party which
is not cured within thirty (30) days after receipt of written notice
from a non-breaching Party, or, if the default cannot be remedied
within such period, the breaching Party's failure to commence the
remedy within such thirty (30) day period and diligently pursue
appropriate efforts to remedy such default until completion.
12. REMEDIES UPON DEFAULT
12.1 Tri-State's Default. In the event of a Default by Tri-State,
Pathnet shall, in addition to any other right or remedy available at law or in
equity, have the right to elect any or all of the remedies set forth below:
12.1.1 Pathnet may temporarily suspend construction of the
Project for the duration of such Default, which suspension shall
delay the scheduled Completion Date for the
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suspension period; in the event Pathnet suspends its performance, the
Participating Member Systems shall have the right to cure Tri-State's
Default, and upon such cure, Pathnet shall recommence performance;
12.1.2 Pathnet may require additional security to ensure
that Tri-State retains the financial and other ability to timely
fulfill its obligations under this Agreement. Such security shall be
no greater than necessary, and may include, without limitation,
additional financial guarantees by Tri-State or other third party;
escrowed funds; letters of credit; or a payment bond;
12.1.3 Intentionally Omitted;
12.1.4 Pathnet and the Participating Member Systems may
complete the Project as provided herein so long as such does not
violate any permit, right-of-way agreement or other Underlying Rights
provided to Pathnet for its review prior to [* * *]. In the event
that the Default is a monetary default, (i) Pathnet and the
Participating Member Systems may contribute Tri-State's remaining
share of the Project Costs and the revenue from the Project shall be
reallocated to reflect the additional capital contributions by
Pathnet or the Participating Member Systems, and (ii) Tri-State's
right to share in revenue shall be adjusted to reflect Tri-State's
actual capital contributions to Project Costs (including any amounts
contributed from escrowed funds). Notwithstanding the foregoing, in
connection with any loss, cost, damage or expense they incur in
connection with such Default by Tri-State, Pathnet and the
Participating Member Systems may (a) retain such amounts, plus
interest at the Default Rate, from all disbursements of revenue due
to Tri-State; and/or (b) recover such amounts in a proceeding under
Article 32 hereof;
12.1.5 In the event such Default materially affects another
Party's ability to perform its rights and obligations hereunder, that
Party may seek appropriate injunctive relief in a court of competent
jurisdiction.
12.2 Pathnet's Default. In the event of a Default by
Pathnet, Tri-State and the Participating Member Systems shall, in
addition to any other right or remedy available at law or equity,
have the right to elect any of the remedies set forth below.
12.2.1 The other Parties may temporarily suspend payment
of any sums owing hereunder until such Default is cured;
12.2.2 One or more of the other Parties may require
additional security to ensure that Pathnet retains the financial and
other ability to timely fulfill its obligations under this Agreement.
Such security shall be shall be no greater than necessary, and may
include, without limitation, additional financial guarantees by
Pathnet or other third party; escrowed funds; letters of credit; or a
performance bond;
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12.2.3 Intentionally Omitted;
12.2.4 Tri-State or the Participating Member Systems may
complete the Project as provided herein by themselves or by using a
vendor of Pooled Fibers other than Pathnet. In the event that the
Default is a monetary default, (i) Tri-State and the Participating
Member Systems may contribute Pathnet's remaining share of the
Project Costs and Tri-State's and the Participating Member System's
respective shares of revenue shall be reallocated to reflect their
additional capital contribution, and (ii) Pathnet's right to share in
revenue shall be adjusted to reflect Pathnet's actual capital
contributions to Project Costs (including any amounts contributed
from escrowed funds). Notwithstanding the foregoing, in connection
with any loss, cost, damage or expense they incur in connection with
such Default by Pathnet, Tri-State or the Participating Member
Systems may (a) retain such amounts, plus interest at the Default
Rate, from all disbursements of revenue due to Pathnet; and/or (b)
recover such amounts in a proceeding under Article 32 hereof;
12.2.5 In the event such Default materially affects a
Party's ability to perform its rights and obligations hereunder, that
Party may seek appropriate injunctive relief in a court of competent
jurisdiction.
12.3 Default by the Participating Member System's. In the
event of a Default by a Participating Member System, Pathnet and
Tri-State shall, in addition to any other right or remedy available
at law or equity, have the right to elect any of the remedies set
forth below:
12.3.1 Pathnet may temporarily suspend construction of the
Project for the duration of the Default, which suspension shall delay
the scheduled Completion Date for the suspension period; in the event
Pathnet suspends its performance, Tri-State and the remaining
Participating Member Systems shall have the right to cure the
Participating Member System's Default, and upon such cure, Pathnet
shall recommence performance;
12.3.2 Either or both of Pathnet and Tri-State may require
additional security to ensure that the defaulting Participating
Member System retains the financial and other ability to timely
fulfill its obligations under this Agreement. Such security shall be
as determined by the requiring party in its sole discretion, and may
include, without limitation, additional financial guarantees by an
Participating Member System or other third party; escrowed funds;
letters of credit; or a performance bond;
12.3.3 Any or all of the remaining participants may
complete the Project as provided herein. If the Default is a monetary
default, then (i) Pathnet Tri-State or any remaining Participating
Member System may contribute the defaulting Participating Member
System's remaining share of the Project Costs and the Parties'
respective shares of revenue shall be reallocated to reflect their
additional capital contribution, and (ii) the defaulting
Participating
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Member System's right to share in revenue shall be adjusted to
reflect such Participating Member System's actual capital
contributions to Project Costs (including any amounts contributed
from escrowed funds). Notwithstanding the foregoing, the Parties may,
on a pari passu basis, retain the amount of any loss, cost, damage or
expense it has incurred in connection with such Default by such
Participating Member System, plus interest at the Default Rate, from
all disbursements of revenue due to such Participating Member System;
and/or (b) recover such amounts in a proceeding under Article 32
hereof;
12.3.4 In the event such Default materially affects a
Party's ability to perform its rights and obligations hereunder, that
Party may seek appropriate injunctive relief in a court of competent
jurisdiction.
12.3.5 If Parties (not including Pathnet) representing more
than 30% of the capital contributions to the Project Default
hereunder, Pathnet may terminate this Agreement, in which event all
obligations of Pathnet hereunder shall be null and void, and Pathnet
may recover damages from the defaulting Participating Member Systems
in a proceeding under Article 3 hereof.
13. LIMITED WARRANTY
13.1 For a period of twelve (12) months following the Completion
Date, Pathnet warrants that the engineering, design, construction and
installation of the System is in compliance with the Project Specifications and
the terms of this Agreement. Upon termination of the twelve (12) month warranty
period, Tri-State shall have no further recourse whatsoever against Pathnet with
respect to the engineering, design, construction and installation of System
except for claims made during such warranty period, for which Pathnet shall
remain responsible.
13.2 EXCEPT AS SET FORTH IN THIS ARTICLE 13 OR AS MAY BE SET FORTH
SPECIFICALLY AND EXPRESSLY ELSEWHERE IN THIS AGREEMENT, NO PARTY MAKES ANY
WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE SYSTEM OR ANY PERFORMANCE OF
SUCH PARTY HEREUNDER, , INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE OR USE, AND ALL SUCH WARRANTIES ARE HEREBY EXPRESSLY
DISCLAIMED. THE WARRANTIES SET FORTH IN THIS AGREEMENT CONSTITUTE THE ONLY
WARRANTIES MADE BY THE PARTIES TO EACH OTHER WITH RESPECT TO THIS AGREEMENT AND
ARE MADE IN LIEU OF ALL OTHER WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR
IMPLIED.
14. MAINTENANCE
14.1 Pathnet shall be responsible for obtaining maintenance and
monitoring services for the System after the Completion Date. Any maintenance
agreement shall be decided on a
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competitive cost basis reasonably acceptable to all Parties. Any maintenance
contract for lit Fibers shall require that the maintenance provider maintain the
System at least to the standards set forth in Exhibit B hereof, or to such other
standards as may be agreed upon by Tri-State and Pathnet. Each Party may bid to
provide maintenance and monitoring services on all or part of the System.
Notwithstanding the foregoing, any monitoring of dark Pooled Fibers on the
System prior to Disposition of such Fibers will be conducted by Pathnet at no
cost to the Project.
14.2 Pathnet acknowledges and agrees that in the event of damage to
the System that adversely affects a Party's utility operations, that Party's
first priority will be to restore utility operations. Each Party will cooperate
with Pathnet or another maintenance provider to permit restoration and repair of
the System as promptly as possible.
14.3 Each Party will notify Pathnet and Tri-State immediately upon
its becoming aware of a situation that adversely affects, or threatens to
adversely affect, the System or a Party's utility operations.
15. LEGAL REQUIREMENTS
15.1 Except as may appear to the contrary in this Agreement, Pathnet
shall be fully responsible for obtaining and maintaining all required regulatory
permits, franchises, authorizations, licenses, consents or approvals required
for the construction of the Project (the "Permits"), except that Tri-State will
be responsible for obtaining any permits required from the Bureau of Land
Management and such other permits that Tri-State identifies that it desires to
obtain prior to [* * *]. All permits relating to Tri-State Facilities or
Underlying Rights used by Tri-State for its utility operations shall be in the
name of Tri-State. Each Party shall provide such assistance to Pathnet in
fulfilling its obligations hereunder as Pathnet may from time to time reasonably
request.
15.2 Pathnet shall fully comply with all provisions of applicable law
in carrying out its obligations hereunder but shall not be obliged under any
circumstances whatsoever to obtain any of the permits, authorizations, licenses,
consents or approvals to be obtained by Tri-State in the conduct of its
business, or the use and operation by each Party of its rights in the System.
15.3 Each Party shall be solely responsible for compliance with all
legal and regulatory requirements associated with its business or with ownership
or operation of its portion of the System, including without limitation
obtaining, maintaining and paying for any and all required regulatory permits,
franchises, authorizations, licenses, consents or approvals which are required
for its use, ownership and operation of its portion of the System, and the other
Parties shall have no responsibility or liability whatsoever in connection
therewith.
15.4 Each Party shall comply with all terms and conditions of the
Underlying Rights Requirements. At the request of a Party, each of Pathnet and
Tri-State shall provide the requesting
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Party with a copy of all Underlying Rights including those obtained in
connection with the Southern Route.
16. INDEMNIFICATION AND LIABILITY
16.1 Indemnities.
16.1.1 Pathnet hereby releases and agrees to indemnify,
defend, protect and hold harmless the other Parties, their respective
directors, officers, stockholders, members, agents, and employees,
and their respective successors or permitted assigns from and
against, and assumes liability for: (i) any and all causes of action,
demands, claims, suits, losses, judgments or costs, including without
limitation legal costs and reasonable attorney fees (collectively
"Damages") which may be brought by or asserted by any of Pathnet's
affiliates, subscribers, or subscribers' customers, any person or
entity providing labor, services or materials to Pathnet, or any
other action or matter of any nature arising out of, connected to, or
related to Pathnet's design, construction, maintenance, operation or
use of the System, and (ii) each and every breach, or material
default by Pathnet of any of its covenants, agreements, duties or
obligations hereunder, and (iii) any violation by Pathnet of any
regulation, rule, statute or court order of any local, state or
federal governmental agency, court or body in connection with
Pathnet's performance of its obligations under this Agreement, and
(iv) each and every breach or default of any of Pathnet's
representations or warranties contained herein; and (v) any of the
acts, omissions, negligence or willful misconduct of Pathnet or its
directors, officers, stockholders, affiliates, employees, contractors
or agents in connection with the performance of this Agreement,
unless and to the extent that the claim results from the actions or
omissions of Pathnet at the direction or on the request of Tri-State
or an Participating Member System, or from the actions or omissions
of Tri-State or an Participating Member System, or unless liability
is otherwise disclaimed in this Agreement. The provisions of this
Section shall survive termination or expiration of this Agreement.
16.1.2 Tri-State hereby releases and agrees to indemnify,
defend, protect and hold harmless the other Parties, their respective
directors, officers, stockholders, agents, and employees, and their
respective successors or permitted assigns from and against, and
assumes liability for: (i) any and all causes of action, demands,
claims, suits, losses, judgments or costs, including without
limitation legal costs and reasonable attorney fees (collectively
"Damages") which may be brought by or asserted by any of Tri-State's,
affiliates, subscribers, subscribers' customers, any person or entity
providing labor, services or materials to Tri-State, or any other
action or matter of any nature arising out of, connected to, or
related to Tri-State's construction, maintenance, operation or use of
the System, and (ii) each and every breach, or material default by
Tri-State of any of its covenants, agreements, duties or obligations
hereunder, and (iii) any violation by Tri-State of any regulation,
rule, statute or court order of any local, state or federal
governmental agency, court or body in connection with Tri-State's
performance of its obligations under this Agreement, and (iv)
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each and every breach or default of any of Tri-State's
representations or warranties contained herein; and (v) any of the
acts, omissions, negligence or willful misconduct of Tri-State's
directors, officers, stockholders, members, affiliates, employees,
contractors or agents in connection with the performance of this
Agreement, unless and to the extent that the claim results from the
actions or omissions of Tri-State at the direction or on the request
of another Party, or from the actions or omissions of another Party,
or unless liability is otherwise disclaimed in this Agreement. The
provisions of this Section shall survive termination or expiration of
this Agreement.
16.1.3 Each Participating Member System hereby releases and
agrees to indemnify, defend, protect and hold harmless the other
Parties, their respective directors, officers, stockholders, members,
agents, and employees, and their respective successors or permitted
assigns from and against, and assumes liability for: (i) any and all
causes of action, demands, claims, suits, losses, judgments or costs,
including without limitation legal costs and reasonable attorney fees
(collectively "Damages") which may be brought by or asserted by that
Participating Member System's affiliates, subscribers, or
subscribers' customers, any person or entity providing labor,
services or materials to that Participating Member System, or any
other action or matter of any nature arising out of, connected to, or
related to that Participating Member System's design, construction,
maintenance, operation or use of the System, including any Segment,
and (ii) each and every breach, or material default by that
Participating Member System of any of its covenants, agreements,
duties or obligations hereunder, and (iii) any violation by that
Participating Member System of any regulation, rule, statute or court
order of any local, state or federal governmental agency, court or
body in connection with that Participating Member System's
performance of its obligations under this Agreement, and (iv) each
and every breach or default of any of that Participating Member
System's representations or warranties contained herein; and (v) any
of the acts, omissions, negligence or willful misconduct of that
Participating Member System or its directors, officers, stockholders,
affiliates, employees, contractors or agents in connection with the
performance of this Agreement, unless and to the extent that the
claim results from the actions or omissions of that Participating
Member System at the direction or on the request of another Party or
from the actions or omissions of another Party, or unless liability
is otherwise disclaimed in this Agreement. The provisions of this
Section shall survive termination or expiration of this Agreement.
16.1.4 The Parties agree to promptly provide each other
with notice of any lawsuit, judicial, administrative or other dispute
resolution, action, proceeding or claim of which it becomes aware and
which it believes may result in an indemnification obligation
hereunder (each, an "Action"); provided that the failure to provide
any such notice shall not affect the indemnifying Party's
indemnification obligation unless the indemnifying Party is actually
prejudiced by the failure to receive such notice and then only to the
extent of such prejudice. After receipt of any such notice, if the
indemnifying Party shall acknowledge in writing to the indemnified
Party that the indemnifying Party shall be obligated under the terms
of this
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indemnity hereunder in connection with such Action, then the
indemnifying Party shall be entitled, if it so elects (i) to take
control of the defense and investigation of such Action, (ii) to
employ and engage attorneys of its own choice, which are reasonably
acceptable to the indemnified Party, to handle and defend the same,
at the indemnifying Party's cost, risk and expense, unless the named
Parties to such action or proceeding include both the indemnifying
Party and the indemnified Party and the indemnified Party has been
advised in writing by counsel that there may be one or more legal
defenses available to such indemnified Party that are different from
or additional to those available to the indemnifying Party, in which
case the indemnified Party shall also have the right to employ its
own counsel in any such case with the reasonable fees and expenses of
such counsel being borne by the indemnifying Party, and (iii) to
compromise or settle such Action, which compromise or settlement
shall be made only with the written consent of the indemnified Party,
such consent not to be unreasonably withheld or delayed, provided,
however, such consent of the indemnified Party is not required if
such settlement, compromise or consent includes as an unconditional
term thereof given by the claimant or the plaintiff to the
indemnified Party a full release from all liability in respect of
such indemnifiable claim. Notwithstanding anything in this Article 16
to the contrary, (i) if there is a reasonable probability that an
indemnifiable claim may materially adversely affect the indemnified
Party, other than as a result of money damages or other money
payments, the indemnified Party shall have the right to participate
in such defense, compromise or settlement and the indemnifying Party
shall not, without the indemnified Party's written consent (which
consent shall not be unreasonably withheld or delayed), settle or
compromise any indemnifiable claim or consent to entry of any
judgment in respect thereof unless such settlement, compromise or
consent includes as an unconditional term thereof giving by the
claimant or the plaintiff to the indemnified Party a full release
from all liability in respect of such indemnifiable claim. In all
such cases, the indemnified Party shall cooperate in the defense of
the Action.
16.2 In no event shall any Party be liable to the other for any
non-performance or breach of contract, or for any costs, losses or damages,
including without limitation loss of profit or consequential damages of any type
whatsoever under this Agreement, which arise by reason of or under conditions of
Force Majeure.
16.3 Notwithstanding any other provision in this Agreement, no Party
shall be liable for any loss of profit or revenues, or indirect, incidental,
consequential, punitive, special or exemplary damages of any type whatsoever
arising under this Agreement.
16.4 Notwithstanding any other provision of this Agreement, no Party
shall be liable for any breach hereof or for any claim of any nature whatsoever
in the aggregate in excess of [* * *] of the Project Costs as estimated as of
the date hereof, provided that the foregoing limitation on damages shall not
apply to a Party's funds in the Security Escrow to the extent such funds are
allocated to the Project and increase such Party's share of capital costs of the
Project. This Section 16.4 shall not form the basis of any claim against either
party in and of itself, and shall not increase
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or enlarge the liability of either party pursuant to the other terms of this
Agreement or otherwise. This Section 16.4 shall not limit any claim by a party
against an insurer under any insurance policy specified and provided hereunder.
[* * *]
17. TAXES
17.1 Each Party shall bear its share (in proportion to its capital
contribution) of any and all taxes levied by any authority in respect of the
construction of the Project, provided that this shall not apply to any taxes on
the income or capital of another Party or PNM. Without limiting the foregoing,
taxes shall include all sales taxes, use taxes, municipal taxes, levies or
assessments, and goods and services taxes, fees or other charges. The Parties
shall have no liability for any such taxes payable by PNM, whether under the PNM
Agreement or otherwise.
17.2 The Parties agree to negotiate in good faith with a view to
minimizing any taxes that may be due in connection with the Project.
17.3 Notwithstanding any provision to the contrary herein, either
Pathnet or Tri-State shall have the right to protest by appropriate proceedings
the imposition and/or amount of any taxes or franchise, license or permit fees,
interest or penalties imposed or assessed against it due to its use of the
System and/or based on the physical location of the System and/or the
construction thereof ("Additional Taxes"). In such event, the protesting Party
shall protect, indemnify, hold harmless and defend, at the protesting Party's
sole cost and expense, the other from and against any costs, expenses, damages
or losses incurred by the non-protesting Party, or other reasonable charges or
expenses, including reasonable attorney fees, which are incurred by the
non-protesting Party as a result of the protesting Party's protest, including,
without limitation, any Additional Taxes or any deficiency asserted by any
taxing authority. Any benefits obtained in connection with the protest shall be
allocated among the protesting parties based upon their contribution to the cost
of the protest.
18. EQUIPMENT SHELTERS
18.1 Each party shall have the right to use up to [* * *] square feet
in all Equipment Shelters constructed as part of the Project. Each party shall
also have the right to construct, at its sole cost and expense, its own
regeneration or equipment shelters, provided such installations do not adversely
affect the System and Tri-State has given its prior written approval to the
installation of any facilities that will be located on property owned by
Tri-State, used by Tri-State for its utility operations, or for which Tri-State
has been granted a permit for use in connection with its utility operations, and
the constructing party shall retain all right, title and interest in and to such
shelters, including the right to any revenues resulting from grants of licenses
to use such shelter, or otherwise. Each Party shall have the right to approve
any such additional shelters that would interfere with such Party's utility
operations, such approval not to be unreasonably withheld. In connection with
any Equipment Shelters, each party shall have the following rights:
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18.1.1 The unrestricted right of access and entry; and
18.1.2 The right to utilize on an equal basis with the
other party, common amenities such as power and fire suppression.
18.2 Revenue from leases of collocation space in or any other rights
to any Equipment Shelters shall be shared as provided herein.
19. INTERCONNECTIONS AND ADDITIONAL FACILITIES
19.1 Each Party shall have the right, at its sole cost and expense,
to install interconnections and additional facilities to the System, including
additional equipment shelters, provided such installations do not adversely
affect the System. Each Party shall have the right to approve any such
additional equipment that are attached to such Party's utility structures or
that would interfere with such Party's utility operations, such approval not to
be unreasonably withheld. The non-interconnecting Party will cooperate with the
interconnecting Party in facilitating such interconnections. All costs related
thereto, including maintenance of all equipment, shall be the sole
responsibility of the Party making such interconnection and any revenues
resulting therefrom, shall be retained by the Party making such interconnection.
Notwithstanding the foregoing, any installation of more than the
initially-agreed upon number of Fibers requires the procedures provided in
Section 3.11.
20. REPRESENTATIONS AND WARRANTIES
20.1 With the exception of any approvals to be obtained by Tri-State
from the Rural Utility Service, each Party represents and warrants to the others
that:
20.1.1 subject to the approvals described in Article 41
hereof, it has been duly created, is validly existing and has the
power and authority to enter into and perform its obligations under
this Agreement and otherwise to carry on its business as presently
conducted;
20.1.2 the entry into and performance of this Agreement
will not violate or constitute a default or breach under its Articles
of Incorporation and Bylaws, any laws or orders binding upon it or
any agreement to which it is a party;
20.1.3 there is no litigation or administrative proceeding
pending or, to its knowledge, threatened against it which could
reasonably be expected to have a material adverse effect on its
financial condition or business;
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20.1.4 this Agreement has been duly authorized, executed
and delivered and is binding on it and enforceable against it in
accordance with its terms; and
20.1.5 it shall, at all times, use equipment and operate
in a manner which will not damage or cause injury or impairment to
the Project.
20.2 Except as specifically set forth in this Agreement,
no party makes any representations or warranties with respect to the
engineering, design, capacity, construction, installation or functions of the
System.
21. PATHNET TO INSURE PRIOR TO FINAL ACCEPTANCE DATE
21.1 Pathnet agrees to maintain at all times during the construction
of the Project the following insurance coverage as part of the Project Costs
with terms and conditions acceptable to Tri-State:
21.1.1 Professional Liability Insurance in the amount of
[* * *] per claim and in the aggregate;
21.1.2 Commercial General Liability Insurance in the
amount of [* * *] combined single limit per occurrence, subject to
the applicable annual aggregate, or such higher amounts as determined
by Pathnet;
21.1.3 Workers Compensation Insurance and Employer's
Liability Insurance in the amount of [* * *] or as required by law;
21.1.4 Builders Risk Insurance in the amount of [* * *],
or as required by law;
21.1.5 Automobile Liability Insurance in the amount of
[* * *] for all Pathnet owned, hired and non-owned vehicles.
21.1.6 Umbrella Excess Liability with limits of not less
than [* * *] combined single limit in excess of the above-referenced
Commercial General Liability and Automobile Insurance.
Each of the Parties shall be added as an additional insured in the
policies referred to in Section 21, with the exception of the Workers
Compensation Policy, all to the extent of their respective interests in the
Project. Pathnet shall obtain policies with financially reputable insurer(s)
with at least an A.M. Best rating of "A" or better, which are lawfully approved
to do business in all jurisdictions where any work is performed and that are
reasonably acceptable to Tri-State. A certified copy of such policies shall be
provided to the Parties, which will provide for thirty (30) days written notice
to the Parties prior to any cancellation or modification to the policy. In
addition, all
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policies referred to above, except Workers Compensation, shall contain a waiver
of subrogation clause in favor of all insureds, their respective employees,
agents, representatives, directors or officers.
22. PARTIES TO INSURE FOLLOWING COMPLETION DATE
22.1 As of and following the Completion Date, each Party shall obtain
and maintain, at its sole cost and expense, the following insurance coverage:
22.1.1 Insurance coverage as set forth in any maintenance
agreement; and
22.1.2 Any insurance coverage that is required by law; and
22.1.3 Any insurance coverage that either Party reasonably
considers necessary.
23. FURTHER ASSURANCES
Each Party shall, from time to time, execute and deliver all such
further documents and instruments and do all acts and things as the other Party
may reasonably require to effectively carry out or better evidence or perfect
the full intent and meaning of this Agreement.
24. FEES
Each Party hereto will pay their respective legal and accounting
costs and expenses incurred in connection with the preparation, execution and
delivery of this Agreement and all documents and instruments executed pursuant
hereto and any other costs and expenses that are not Project Costs as provided
herein.
25. PUBLIC ANNOUNCEMENTS
No public announcement or press release concerning this Agreement may
be made by a Party without the prior consent and joint approval of Pathnet and
Tri-State, not to be unreasonably withheld or delayed, except as required under
applicable law or in connection with the obligations of a public company.
26. BENEFIT OF THE AGREEMENT
This Agreement will inure to the benefit of and be binding upon the
respective heirs, executors, administrators, successors and permitted assigns of
the Parties hereto.
27. ENTIRE AGREEMENT
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This Agreement constitutes the entire agreement between the Parties
hereto with respect to the subject matter hereof and cancels and supersedes any
prior understandings and agreements between the Parties with respect thereto.
28. AMENDMENTS AND WAIVERS
No amendment to this Agreement will be valid or binding unless set
forth in writing and duly executed by all of the Parties hereto. No waiver of
any breach of any provision of this Agreement will be effective or binding
unless made in writing and signed by the Party purporting to give the same and,
unless otherwise provided, will be limited to the specific breach waived.
29. ASSIGNMENT
29.1 This Agreement may not be assigned by a Party without the prior
written consent of Pathnet and Tri-State, not to be unreasonably withheld.
Notwithstanding the foregoing, however, upon prior notice to Pathnet and
Tri-State but without the necessity of obtaining their consent, a Party may
assign this Agreement to an entity that controls, is controlled by, or is under
common control with, the assignor, or to the successor of a party by merger,
consolidation or purchase of all or substantially all of the assignor's stock or
assets (an "Affiliate"). For purposes hereof, "control" shall mean the
ownership, directly or indirectly, of more than 50% of the outstanding equity
interests in an entity. No assignment, whether permitted or otherwise, shall be
effective unless the assignee has agreed to be bound by the provisions of this
Agreement in all respects and to the same extent as the assignor. In addition,
upon any assignment, the assignor will continue to be bound by all the
obligations hereunder as if such assignment had not occurred and perform such
obligations to the extent that the assignee fails so to do. Nothing in this
Section shall limit a Party's ability to sell or convey its Fibers, Cable,
Underlying Rights, or other rights in and to the System, all to the extent
permitted hereunder.
29.2 Notwithstanding any other provision of this Agreement, each
Party may assign, encumber or place liens on its interest in this Agreement and
the Project in connection with any financing or investment transactions. Such
Party's lender(s) shall have the additional right to take possession, sell,
assign or otherwise deal with such Party's interest in the Project and System,
subject to the terms of this Agreement. Notwithstanding the foregoing, nothing
herein shall be construed to permit any Party other than Tri-State to place a
lien on or otherwise encumber Tri-State Facilities, Tri-State Utility
Facilities, or any structures, other property, rights-of-way, or other
Underlying Rights used by Tri-State for its utility operations or for which
Tri-State has obtained a permit for its utility operations.
29.3 The Parties acknowledge that other entities in the region of the
Project own right of way and other assets that, if incorporated into the
Project, could increase the value of the System. Either Tri-State or Pathnet
shall have the right to propose the participation of a third-party in the
Agreement. In that event the Parties will discuss incorporating such third-party
into the Agreement,
28
<PAGE> 29
which incorporation may involve an extension of the System or a reallocation of
the Parties' respective shares of capital contributions and revenues.
Notwithstanding the foregoing, no Party shall have any obligation to agree to
such an extension or reallocation or to incorporate the proposed third-party
into the Agreement.
30. NOTICES
Any demand, notice or other communication to be given in connection
with this Agreement will be given in writing and will be given by personal
delivery, by certified or registered mail or by facsimile addressed to the
recipient as follows:
To Pathnet: Pathnet
1015 31st Street, N.W.
Washington, D.C. 20007
Attn: General Counsel
Facsimile Number: (202) 625-7369
To Tri-State: Tri-State Generation and Transmission Association
1100 West 116th Avenue
Denver, Colorado 80233
Attn: General Counsel
Facsimile Number: (303) 254-6007
or to such other address, individual or facsimile number as may be
designated by notice given by either Party to the other. Any demand, notice or
other communication given by personal delivery or by certified or registered
mail will conclusively be deemed to have been given on the day of actual
delivery thereof and, if given by facsimile, on the day of transmittal thereof
if given during the normal business hours of the recipient and on the Business
Day during which such normal business hours next occur if not given during such
hours on any day, provided that the sender of the facsimile receives
confirmation of delivery of the facsimile transmission by personal delivery,
certified or registered mail. If the Party giving any demand, notice or other
communication knows or ought reasonably to know of any difficulties with the
postal system that might affect the delivery of mail, any such demand, notice or
other communication may not be mailed but must be given by personal delivery or
by facsimile.
31. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the domestic laws of the State of Colorado, without reference to its choice of
law principles.
32. DISPUTE RESOLUTION
29
<PAGE> 30
If the Parties are unable to resolve any disagreement or dispute
arising under or related to this Agreement, including without limitation, the
failure to agree upon any item requiring a mutual agreement of the Parties
hereunder, they shall resolve the disagreement or dispute as follows:
32.1 Attempt to settle such dispute by mutual discussion
between Frank Knutson and Robert Temmer acting on behalf of
Tri-State, and Bill Smedberg and Dick Jalkut, acting on behalf of
Pathnet, or such other persons as may nominated by the Parties.
32.2 If the matter has not been resolved by the mutual
discussion required by Section 29.1 within thirty (30) business days
after the date on which the dispute arose, then, the Parties shall
endeavor to settle the dispute by mediation under the applicable
rules of the American Arbitration Association.
32.3 If such dispute cannot be settled within thirty (30)
business days after submission to mediation pursuant to Section 32.2
hereof, such dispute shall finally be resolved by an arbitral
tribunal consisting of three (3) independent and impartial
arbitrators (the "Tribunal"), under the Rules of the American
Arbitration Association (the "Arbitration Rules"). Each Party shall
appoint one (1) arbitrator within fifteen (15) days after initiation
of arbitration and the two (2) arbitrators so appointed shall select
a third (3rd) arbitrator as the chairman of the Tribunal within
fifteen (15) days of the appointment of the second arbitrator. In the
event that the Parties or the arbitrators fail to select arbitrators
as required above, the AAA shall select such arbitrators. The AAA
shall have the authority to disqualify any arbitrator who it
determines not to be independent and impartial. The arbitrators shall
be entitled to a fee commensurate with their fees for professional
services requiring similar time and effort. Venue for the arbitration
shall be Denver, CO.
32.4 Arbitration discovery shall be conducted in accordance
with the Federal Rules of Civil Procedure, with any disputes over the
scope of discovery to be determined by the arbitrators, it being
intended that the arbitrators shall allow limited, reasonable
discovery prior to any hearing on the merits. The arbitrators shall
conduct a hearing no later than sixty (60) days after initiation of
the matter to arbitration, and a decision shall be rendered by the
arbitrators within thirty (30) days after the hearing. At the
hearing, the Parties shall present such evidence and witnesses as
they may choose, with or without counsel. Adherence to formal rules
of evidence shall not be required but the arbitration panel shall
consider any evidence and testimony that it determines to be
relevant, in accordance with procedures that it determines to be
appropriate. The arbitration determination shall be in writing and
shall specify the factual and legal bases for the determination. The
arbitrators may award legal or equitable relief, including but not
limited to specific performance, and any award of damages shall be
limited as provided in this Agreement. The arbitrators' fees and
other costs of the arbitration shall be borne by the Party against
whom the award is rendered, except as the arbitration panel may
otherwise provide in its written opinion. Notwithstanding anything
herein to the contrary, Pathnet or Tri-State may, prior to the final
decision rendered by a mediator or arbitrator, petition a state or
federal court for a temporary restraining order or a
30
<PAGE> 31
preliminary injunction upon a showing of the requisites therefor in
such court. The foregoing provision for court proceedings is intended
to be limited to those cases in which emergency access to the court
is necessary to prevent immediate and irreparable harm in the interim
period until mediation or arbitration can be completed.
32.5 The Parties agree that this submission and agreement
to arbitrate shall be governed by and specifically enforceable in
accordance with the laws of the State of Colorado. The Parties agree
to abide by all decisions and determinations rendered in such
proceedings. Such decisions and determinations shall be final and
binding on all Parties. All decisions and determinations may be filed
with the clerk of one or more courts, state, federal or foreign
having jurisdiction over the Party against whom it is rendered or its
property, as a basis of judgment.
32.6 Pending the resolution or settlement of a dispute
between the Parties as set forth in this Article 32, the Parties
hereby expressly agree that the performance of its obligations under
this Agreement shall not be delayed, suspended, impeded or hindered.
33. CONFIDENTIAL INFORMATION
33.1 As used in this Agreement, 'Confidential Information' means only
information marked as confidential or proprietary (or if disclosed orally,
information that is summarized in a written document marked as confidential or
proprietary). Information marked as confidential or proprietary and of a
technical, business or other nature (including, without limitation, trade
secrets, know-how and information relating to the technology, customers,
business plans, promotional and marketing activities, finances and other
business affairs of such Party) may constitute Confidential Information. The
Parties understand and agree that this Agreement and all materials, maps,
engineering designs and documents, construction techniques, pricing and other
information marked as confidential or proprietary that are exchanged between
them in fulfilling the provisions and intents of this Agreement, are and shall
be Confidential Information. Each Party shall disclose Confidential Information
only to its attorneys, representatives, advisors, bankers, lenders, investors,
the Rural Utility Service, property owners for the purpose of obtaining
Underlying Rights, governmental entities for the purpose of obtaining permits
and other approvals, members, contractors, agents, affiliates, directors,
officers and employees with a need to know, provided such entities agree to be
bound by the confidentiality provisions of this Article 33, and shall keep
secret all Confidential Information of the other Party except as authorized by
the respective owners. This obligation shall continue to bind any Party after it
shall cease to be a Party for whatever reason and shall survive for a period of
two years following the termination of this Agreement but such obligation of
confidentiality shall not apply:
33.1.1 to a disclosure to a person who knew the
confidential information prior to its being disclosed;
31
<PAGE> 32
33.1.2 to information which comes into the public domain
without any breach of the provisions of this Article;
33.1.3 to disclosure of information which is disclosed on
a confidential basis to consultants or advisers of a Party who have a
bona fide need to know to assist that Party in the carrying out of
the terms of this Agreement;
33.1.4 to a disclosure of information required by a
governmental or judicial law, order, rule or regulation; If any
Confidential Information is required to be disclosed under this
subsection, disclosure shall be limited only to persons with a need
to know, and the disclosing Party shall provide at least five (5)
days (or such shorter period permitted by law) prior notice of such
disclosure to the other Party to give such other Party an
opportunity, at its own expense, to oppose or seek to limit
disclosure;
33.1.5 to a disclosure of information which is disclosed
in proceedings taken by either Party for the enforcement of any of
its rights and remedies under this Agreement;
33.1.6 in connection with one's obligations as a public
company;
33.1.7 to third parties in connection with financing or
investments on a need to know basis, provided such recipients agree
to be bound by the confidentiality terms hereof;.
33.1.8 such information that is reasonably necessary (and
specifically excluding any Confidential Information concerning
another Party's business plans, goals, strategies or other
proprietary information) in connection with sales and marketing
efforts.
33.2 The provisions of this Article shall survive expiration or
termination of this Agreement by two (2) years.
34. PATENTS AND COPYRIGHTS
Each Party acknowledges the rights of the other Party in certain
patents and copyrighted material the other Party may possess or develop in the
performance of this Agreement or in the operation of the System. Each Party
further acknowledges that any such rights shall remain the exclusive property of
the owning Party, and the non-owning Party shall have no interest in such rights
by virtue of the existence of this Agreement between the Parties. Each Party
agrees to use its reasonable efforts to protect such rights in dealings with
third parties.
35. TIME
Time shall be of the essence of this Agreement.
32
<PAGE> 33
36. LANGUAGE
The Parties have expressly requested that this agreement and its
ancillary documents be drafted in English.
37. SEVERABILITY
If any term, covenant or condition contained herein shall, to any
extent, be invalid or unenforceable in any respect under the laws governing this
Agreement, so long as such invalidity does not materially impair the benefit of
this Agreement to either Party, the remainder of this Agreement shall not be
affected thereby, and each term, covenant or condition of this Agreement shall
be valid and enforceable to the fullest extent permitted by law.
38. RELATIONSHIP
The Parties acknowledge and agree that this Agreement does not create
a partnership or joint venture relationship between them. The performance by the
Parties of all duties and obligations hereunder shall be as independent
contractors and not as agents or trustees of the other Party. No Party shall owe
any fiduciary obligations to any other Party. No Party has any authority or
capacity whatsoever to contract for or on behalf of or bind the other in respect
of any matter related to these presents or otherwise. None of the employees of
any Party shall be considered to be servants, employees or agents of any other
Party.
39. JOINT PREPARATION, COUNSEL AND RELEASE OF LIABILITY
Each Party acknowledges and agrees that it has had the advice of
legal and business counsel in connection with this Agreement, has had a full and
fair opportunity to review this Agreement and the terms hereof, and has fully
considered the business, economic and other risks inherent in the Project. The
Parties acknowledge that Pathnet has disclosed to the other Parties certain
business models, revenue projections and other analyses pertinent to the Project
and other information pertinent to the Underlying Rights, the Project or the
System. Pathnet will have no liability to the other Parties or otherwise with
respect to the accuracy of such information, and each of the other Parties
hereby releases and holds Pathnet harmless from any and all loss, cost, damage,
expense or other liability, in the event such models, projections or analyses or
other information prove to be inaccurate in any respect. The Parties also
acknowledge that Tri-State has disclosed or will disclose to the other Parties
certain models, projections, analyses, or other information pertinent to the
Underlying Rights, the Project or the System, and hereby agree that Tri-State
will have no liability to the other Parties or otherwise, and each of the other
Parties hereby releases and holds Tri-State harmless from any and all loss,
cost, damage, expense or other liability, in the event such information
disclosed by Tri-State proves to be inaccurate in any respect.
40. SURVIVAL
33
<PAGE> 34
Any provision and paragraph of this Agreement which by its nature
extends beyond the term hereof or which is required to ensure that the Party
fully exercise their rights and perform their obligations hereunder, shall
survive the expiration or termination of this Agreement for any cause
whatsoever.
41. APPROVALS
The participation of each of the Participating Member Systems in this
Agreement remains subject to the approval of such Participating Member System's
Board of Directors. If any Participating Member System does not provide written
confirmation within ten (10) days after the date hereof that such approval has
been obtained, this Agreement shall continue to be binding upon Pathnet and
Tri-State, and, absent an agreement between the Parties to the contrary, Pathnet
and Tri-State will each contribute their respective proportionate shares of the
Project Costs that would have been contributed by such Participating Member
System, provided that Tri-State shall have the first option to contribute the
withdrawing Participating Member System's share. All revenues from the Project
will be adjusted proportionally.
42. COUNTERPARTS
This Agreement may be executed in any number of counterparts each of
which shall be deemed an original, but all of which together shall constitute
the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
34
<PAGE> 35
IN WITNESS WHEREOF the Parties have executed this Agreement.
TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC.,
a Colorado cooperative corporation
By: /s/ Frank R. Knutson
---------------------------
Name: Frank R. Knutson
Title:
Date: August , 1999
PATHNET, INC., a Delaware corporation
By: /s/ W.R. Smedberg V
---------------------------
Name: William R. Smedberg V
Title: EVP Corporate Development
Date: August 5, 1999
EMPIRE ELECTRIC ASSOCIATION, INC.
By: /s/ W.C. Bauer
---------------------------
Name: William C. Bauer
Title: President
Date: August , 1999
LA PLATA ELECTRIC ASSOCATION, INC.
By: /s/ David L. Potter
---------------------------
Name: David L. Potter
Title: General Manager
Date: August , 1999
DELTA-MONTROSE ELECTRIC ASSOCATION, INC.
By: /s/ Daniel R. McClendon
---------------------------
Name: Daniel R. McClendon
Title: General Manager
Date: August , 1999
35
<PAGE> 36
SAN MIGUEL POWER ASSOCATION, INC.
By: /S/ Gary Norton
---------------------------
Name: Gary N. Norton
Title: General Manager
Date: August , 1999
36
<PAGE> 37
EXHIBIT A
PROJECT SPECIFICATIONS
[to be determined]
37
<PAGE> 38
EXHIBIT B
MAINTENANCE SPECIFICATIONS AND PROCEDURES
Any Party responsible for providing maintenance of the System
hereunder shall be referred to herein as the "Service Provider". The Party
receiving maintenance services from the Service Provider hereunder shall be
referred to herein as the "Service Recipient". All other capitalized terms not
otherwise defined herein shall have their respective meanings as set forth in
the Agreement of which this Exhibit forms a part.
1. Maintenance.
(a) Routine maintenance and repair of the System
described in this Section ("Scheduled
Maintenance") shall be performed by or under the
direction of Service Provider, at Service
Provider's reasonable discretion or at Service
Recipient's request. Scheduled Maintenance shall
commence upon the Completion Date of the
Agreement. Scheduled Maintenance shall include
the following activities:
(i) Patrol of System route on a regularly
scheduled basis, which will be weekly;
(ii) Maintenance of a "Call-Before-You-Dig"
program and all required and related cable
locates;
(iii) Maintenance of sign posts along the System
right-of-way with the number of the local
"Call-Before-You-Dig" organization; and
(iv) Assignment of fiber maintenance employees
to locations along the System at intervals
dependent upon terrain, accessibility,
locate ticket volume, etc. Service Provider
shall decide the staffing of fiber
maintenance employees for the System.
(b) Non-routine maintenance and repair of the System
which is not included as Scheduled Maintenance
("Unscheduled Maintenance"), shall be performed
by or under the direction of Service Provider.
Unscheduled Maintenance shall commence upon the
Effective Date of the Agreement. Unscheduled
Maintenance shall consist of:
(i) "Emergency Unscheduled Maintenance" in
response to an alarm identification by
Service Provider's Operations Center,
notification by
38
<PAGE> 39
Confidential Treatment Requested
Service Recipient or notification by any
third party of any failure, interruption or
impairment in the operation of the System,
or any event imminently likely to cause the
failure, interruption or impairment in the
operation of the System.
(ii) "Non-Emergency Unscheduled Maintenance" in
response to any potential service-affecting
situation to revent any failure,
interruption or impairment in the operation
of the System.
Service Recipient shall immediately report the need for
Unscheduled Maintenance to Service Provider in accordance
with procedures promulgated by Service Provider from time
to time. Service Provider will log the time of Service
Recipient's report, verify the problem and dispatch
personnel immediately to take corrective action.
2. Operations Center.
Service Provider shall operate and maintain an Operations Center
("OC") capable of receiving System alarms twenty-four (24) hours a
day, seven (7) days a week. Service Provider's maintenance employees
shall be available for dispatch twenty-four (24) hours a day, seven
(7) days a week. Service Provider shall have its first maintenance
employee at the site requiring Emergency Unscheduled Maintenance
activity within [* * *] after the time Service Provider becomes aware
of an event requiring Emergency Unscheduled Maintenance, unless
delayed by circumstances beyond the reasonable control of Service
Provider. Service Provider shall maintain a toll-free telephone
number to contact personnel at the OC. Service Provider's OC
personnel shall dispatch maintenance and repair personnel to handle
and repair problems detected in the System.
(i) Through the Service Recipient's remote
surveillance equipment and upon
notification by Service Recipient to
Service Provider; or
(ii) Upon notification by a third party.
3. Cooperation and Coordination.
(a) Service Recipient and Service Provider shall
utilize the Escalation List attached hereto, as
updated from time to time, to report and seek
immediate initial redress of exceptions noted in
the performance of Service Provider in meeting
maintenance service objectives.
(b) Service Provider will, as necessary, arrange for
unescorted access for Service Provider to all
sites of the System, subject to applicable
contractual, underlying real property and other
third party limitations and restrictions.
39
<PAGE> 40
Confidential Treatment Requested
(c) In performing its services hereunder, Service
Provider shall take workmanlike care to prevent
impairment to the signal continuity and
performance of the System. The precautions to be
taken by Service Provider shall include
notifications to Service Recipient. In addition,
Service Provider shall reasonably cooperate with
Service Recipient in sharing information and
analyzing the disturbances regarding the cable
and/or fibers. In the event that any Scheduled or
Unscheduled Maintenance hereunder requires a
traffic roll or reconfiguration involving cable,
fiber, electronic equipment, or regeneration or
other facilities of the Service Recipient, then
Service Recipient shall, at Service Provider's
reasonable request, make such personnel of
Service Recipient available as may be necessary
in order to accomplish such maintenance, which
personnel shall coordinate and cooperate with
Service Provider in performing such maintenance
as required of Service Provider hereunder.
(d) Service Provider shall notify Service Recipient
at least five (5) business days prior to the
date in connection with any Maintenance Window
(MW) of any Scheduled Maintenance and as soon
as possible after becoming aware of the need
for Unscheduled Maintenance. Service Recipient
shall have the right to be present during the
performance of any Scheduled Maintenance or
Unscheduled Maintenance so long as this
requirement does not interfere with Service
Provider's ability to perform its obligations
under this Agreement. In the event that
Scheduled Maintenance is canceled or delayed
for whatever reason as previously notified,
Service Provider shall notify Service Recipient
at Service Provider's earliest opportunity, and
will comply with the provisions of this
Section.
4. Facilities.
(a) Service Provider shall maintain the System in a
manner, which will permit Service Recipient's use
in accordance with this Agreement. All common
systems within facilities along the System shall
be maintained in accordance with manufacturer's
specifications, to include battery plants,
generators, and HVAC units.
(b) Except to the extent otherwise expressly provided
in the Agreement, Service Recipient will be
solely responsible for providing and paying for
any and all maintenance of [* * *], none of which
is included in the maintenance services to be
provided hereunder.
40
<PAGE> 41
Confidential Treatment Requested
5. Fiber Optic Cable/Fibers.
(a) Service Provider shall perform appropriate
Scheduled Maintenance on the fiber optic cable
contained in the System in accordance with
Service Provider's then current preventative
maintenance procedures as agreed to by Service
Recipient, which shall not substantially deviate
from standard industry practice.
(b) Service Provider shall have qualified
representatives on site any time Service Provider
has reasonable advance knowledge that another
person or entity is engaging in construction
activities or otherwise digging within five (5)
feet of the System.
(c) Service Provider shall maintain sufficient
capability to teleconference with Service
Recipient during an Emergency Unscheduled
Maintenance in order to provide regular
communications during the restoration process.
When correcting or repairing fiber optic cable
discontinuity or damage, including but not
limited to in the event of Emergency
Unscheduled Maintenance, Service Provider shall
use best efforts to repair traffic-affecting
discontinuity within [* * *] after the Service
Provider maintenance employee's arrival at the
problem site. In order to accomplish such
objective, it is acknowledged that the repairs
so effected may be temporary in nature. In such
event, within twenty-four (24) hours after
completion of any such Emergency Unscheduled
Maintenance, Service Provider shall commence
its planning for permanent repair, and
thereafter promptly shall notify Service
Recipient of such plans, and shall implement
such permanent repair within an appropriate
time thereafter. Restoration of open fibers on
fiber strands not immediately required for
service shall be completed on a mutually
agreed-upon schedule. If the fiber is required
for immediate service, the repair shall be
scheduled for the next available Maintenance
Window (MW).
(d) In performing repairs, Service Provider shall
comply with the splicing specifications as set
forth in the Project Specifications. Service
Provider shall provide to Service Recipient any
modifications to these specifications as may be
necessary or appropriate in any particular
instance for Service Recipient's approval, which
approval shall not be unreasonably withheld.
(e) Service Provider's representatives that are
responsible for initial restoration of a cut
fiber optic cable shall carry on their vehicles
the typical appropriate equipment that would
enable a temporary splice, with the objective of
restoring operating capability in as little time
as possible. Service Provider shall maintain and
supply an inventory of spare fiber optic cable in
storage
41
<PAGE> 42
facilities supplied and maintained by Service
Provider at strategic locations to facilitate
timely restoration.
6. Maintenance Window (MW).
Scheduled Maintenance, which is reasonably expected to
produce any signal discontinuity, must be coordinated
between the Parties. Generally, this work should be
scheduled after 6:00 p.m. and before 8:00 a.m. local time.
Major system work, such as fiber rolls and hot cuts, will
be scheduled for MW weekends and shall allow work during
daylight hours if on a Saturday or Sunday. Service
Provider and Service Recipient will agree upon a MW
calendar. The intent is to avoid jeopardy work on
high-traffic holidays.
7. Subcontracting.
Service Provider may subcontract any of the maintenance
services hereunder; provided that Service Provider shall
require the subcontractor(s) to perform in accordance with
the requirements and procedures set forth herein. The use
of any such subcontractor shall not relieve Service
Provider of any of its obligations hereunder.
8. Fees and Costs.
Each Party shall pay for total maintenance costs,
including without limitation taxes required under the
Agreement, in proportion to that Party's contribution to
Project Costs.
42
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE STATEMENTS OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001061148
<NAME> PATHNET, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 98,896
<SECURITIES> 74,524
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 170,728
<PP&E> 110,606
<DEPRECIATION> 4,482
<TOTAL-ASSETS> 338,575
<CURRENT-LIABILITIES> 33,123
<BONDS> 346,519
35,970
0
<COMMON> 30
<OTHER-SE> (77,331)
<TOTAL-LIABILITY-AND-EQUITY> 338,575
<SALES> 2,275
<TOTAL-REVENUES> 2,275
<CGS> 9,579
<TOTAL-COSTS> 9,579
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,318
<INCOME-PRETAX> (40,409)
<INCOME-TAX> 0
<INCOME-CONTINUING> (40,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,409)
<EPS-BASIC> (13.88)
<EPS-DILUTED> (13.88)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
Contact: Becky Haight
Investor Relations
Pathnet
877 227-5600
[email protected]
Kye Presley-Dowd
Media Relations
Pathnet
202 295-3286
[email protected]
PATHNET REPORTS THIRD QUARTER RESULTS
WASHINGTON, DC, NOVEMBER 9, 1999-- Pathnet, a privately-held carrier's carrier
of digital telecommunications capacity to under-served and second- and
third-tier markets, today announced revenue of $584,000 for the quarter ended
September 30, 1999, a 23% increase over 1998 third quarter revenue of $475,000.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the
quarter was a loss of $6.9 million.
"Pathnet has clearly evolved to a new level over the past six months," said
president and chief executive officer Richard A. Jalkut. "Our installed network
has grown from 3,900 to 6,100 route miles, and we recently announced landmark
agreements with Colonial Pipeline, BNSF and CSX. These agreements provide for
combined investments in Pathnet of rights-of way and cash valued at $250
million. Our underlying ability to pick and choose from our new partners'
extensive rights-of-way as dictated by demand, clearly facilitates our strategy
of reaching target markets through unique network corridors with a 'smart build'
approach."
Pathnet increased its gross plant and equipment by $24.3 million in the third
quarter, bringing total plant and equipment acquired to $110.6 million.
Depreciation and amortization expense for the quarter was $2.1 million, compared
to $0.2 million for the third quarter of 1998. The company activated 2,200
additional route miles of network during the quarter, bringing total activated
network to 6,100 route miles.
"Pathnet's backbone network is proceeding as planned, and our new agreements
will clearly enhance our capabilities in the future" said Bob Rouse, Pathnet
chief operating officer. "On a related front, we've also made tremendous
progress with collocations. To date we've completed over 20 collocations which
provide us with a way to differentiate ourselves, while adding significant value
for our carrier customers," he added.
1
<PAGE> 2
Third Quarter Highlights and Recent Developments
- - Announced potential investment valued at $250 million from Colonial Pipeline,
BNSF and CSX
- - Construction on 1,100 mile Chicago to Denver fiber route on schedule
- - Completed 2,200 miles of network in third quarter, bringing total route miles
of network activated to 6,100
- - Completed Y2K compliance work
- - Promoted Bob Rouse to chief operating officer
- - Shawn O'Donnell, senior vice president of engineering and construction,
Gerry Sharp, vice president and chief technology officer and Chuck Liggett,
senior vice president and chief marketing officer joined senior management
team
Pathnet is a carriers' carrier providing high capacity, digital bandwidth and
access services to under-served and second- and third-tier U.S. markets. It
provides service to inter-exchange carriers, local exchange carriers, Internet
service providers, Regional Bell Operating Companies, cellular operators and
resellers. Pathnet currently has 6,100 route miles of completed network and
1,400 route miles of network under construction. The company's headquarters are
located in Washington, D.C., at 1015 31st Street, NW, Washington, D.C., 20007.
For additional information about Pathnet, visit the company Web site at
www.pathnet.net.
The statements made by Pathnet in this press release may be forward looking in
nature. No assurance can be given that future results will be achieved; actual
results may differ materially from those projected in forward looking
statements. Pathnet believes that its primary risk factors include, but are not
limited to: signing additional agreements with private network operators and
others; offering services to telecom service providers; entering into partnering
arrangements; and building a digital network. Additional information concerning
these and other potential important factors can be found within Pathnet's public
filings with the U.S. Securities and Exchange Commission. Statements in this
release should be evaluated in light of these important factors.
2
<PAGE> 3
PATHNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 584 $ 475 $ 2,275 $ 1,050
--------- --------- --------- ----------
Expenses:
Cost of revenue 4,259 1,621 9,579 5,386
Selling, general and administrative 3,197 2,694 9,500 6,722
Depreciation 2,143 204 3,714 315
--------- --------- --------- ----------
Total expenses 9,599 4,519 22,793 12,423
--------- --------- --------- ----------
Net operating loss (9,015) (4,044) (20,518) (11,373)
Interest expense (9,987) (11,151) (30,318) (21,862)
Interest income 3,319 4,729 10,511 9,574
Other (244) (1,354) (84) (1,354)
--------- --------- --------- ----------
Net loss $ (15,927) $ (11,820) $ (40,409) $ (25,015)
========= ========= ========= ==========
Basic and diluted loss per
Common share $ (5.44) $ (4.07) $ (13.88) $ (8.62)
========= ========= ========= ==========
Weighted average number of
Common shares outstanding 2,926 2,902 2,912 2,902
========= ========= ========= ==========
Other Data:
EBITDA (1) $ (6,872) $ (3,840) $ (16,804) $ (11,058)
========= ========= ========= ==========
</TABLE>
(1) EBITDA comprises earnings before interest, taxes, depreciation and
amortization
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PATHNET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT ROUTE MILES)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 98,896 $ 57,322
Marketable securities available for sale, at market 69,420 97,896
Other current assets 2,412 7,261
--------- ---------
Total current assets 170,728 162,479
Property and equipment, net 106,124 47,971
Marketable securities available for sale, at market 5,103 71,900
Pledged marketable securities held to maturity 42,380 61,825
Other assets 14,240 21,239
--------- ---------
Total assets $ 338,575 $ 365,414
========= =========
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Total current liabilities 33,123 20,280
Bonds payable, net of unamortized bond discount of $3,481 346,519 346,212
Other non-current liabilities 264 --
Total mandatorily redeemable preferred stock 35,970 35,970
Total stockholders' equity (deficit) (77,301) (37,048)
--------- ---------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' equity (deficit) $ 338,575 $ 365,414
========= =========
Selected statistical data:
Route miles under construction 1,400
Route miles complete 6,100
</TABLE>
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