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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1999
REGISTRATION NO. 333-.....
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PATHNET TELECOMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
4813
PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
52-2201331
(IRS EMPLOYER
IDENTIFICATION NUMBER)
1015 31ST STREET, N.W.
WASHINGTON, D.C. 20007
(202) 625-7284
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL A. LUBIN, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
1015 31ST STREET, N.W.
WASHINGTON, D.C. 20007
(202) 625-7284
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
With a copy to:
BRUCE S. WILSON, ESQ.
COVINGTON & BURLING
P.O. BOX 7566
1201 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20044
(202) 662-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT PRICE FEE
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Guarantees of 12 1/4% Senior Notes due
2008....................................... N/A N/A N/A $60,326.00
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The date of this Registration Statement is November 22, 1999
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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The information in this preliminary prospectus is not complete and may be
changed. We may not sell the securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
Subject to completion. Preliminary Prospectus dated November 22, 1999
PATHNET TELECOMMUNICATIONS, INC.
SENIOR GUARANTEES OF PATHNET, INC. 12 1/4% SENIOR NOTES DUE 2008
LOGO
Pathnet Telecommunications, Inc. is offering to all holders of Pathnet, Inc.'s
12 1/4% Senior Notes due 2008 our absolute, irrevocable and unconditional senior
guarantees of those Notes. Concurrent with our offer, Pathnet is seeking
consents from the holders of those Notes to the waiver and amendment of certain
provisions of the indenture governing the Notes. Pathnet is seeking these
consents in connection with a contribution and reorganization transaction in
which Pathnet will become our wholly owned subsidiary. Each holder of the Notes
on the record date who consents to the requested waivers and amendments in
connection with the contribution and reorganization transaction will receive, in
addition to our guarantees, a consent fee payment of $10.00 per $1,000 in face
amount of Notes owned of record by the consenting holder on the record date.
PUBLIC OFFERING PRICE: None
PROCEEDS TO PATHNET TELECOM: None
This investment involves substantial risk. See "RISK FACTORS" beginning on page
14 to read about certain factors you should consider before investing in the
securities.
------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 1999.
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TABLE OF CONTENTS
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PAGE
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ABOUT THIS PROSPECTUS....................................... 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 1
PROSPECTUS SUMMARY.......................................... 3
RISK FACTORS................................................ 15
USE OF PROCEEDS............................................. 32
CAPITALIZATION.............................................. 33
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA.......... 35
BUSINESS.................................................... 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 55
MANAGEMENT.................................................. 63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 75
DESCRIPTION OF CONTRIBUTION AND REORGANIZATION
TRANSACTION............................................... 82
THE PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED
INDENTURE AMENDMENTS...................................... 91
DESCRIPTION OF THE GUARANTEES............................... 99
DESCRIPTION OF THE NOTES AND THE INDENTURE.................. 103
DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING
ARRANGEMENTS.............................................. 137
DESCRIPTION OF CAPITAL STOCK................................ 139
FEDERAL INCOME TAX CONSEQUENCES............................. 145
PLAN OF DISTRIBUTION........................................ 149
LEGAL MATTERS............................................... 149
EXPERTS..................................................... 149
WHERE YOU CAN FIND MORE INFORMATION......................... 149
INDEX TO FINANCIAL STATEMENTS............................... F-1
GLOSSARY OF SELECTED TERMS.................................. A-1
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ABOUT THIS PROSPECTUS
This preliminary prospectus is subject to completion prior to the offering.
It describes our company and the Guarantees that we propose to issue as we
currently expect them to exist at the time of the offering.
This prospectus contains the trademark of Pathnet, which is the property of
Pathnet and is licensed to us.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We make statements in this prospectus that are not historical facts. You
can identify these "forward-looking statements" by our use of terminology such
as "believes," "expects," "may," "will," "should" or "anticipates" or comparable
words. These forward-looking statements include, among others, statements
concerning:
- Our business strategy and competitive advantages;
- Our anticipated potential revenues from designated markets;
- The growth of the telecommunications industry and our business;
- The markets for our services and products;
- Forecasts of when we will enter particular markets or begin offering
particular services;
- Our anticipated capital expenditures and future funding requirements,
including the role of vendor and other sources of financing for equipment
and related asset purchases; and
- Anticipated regulatory developments.
These statements are only predictions. You should be aware that these
forward-looking statements are subject to risks and uncertainties, including
financial and regulatory developments, industry trends, and projections that
could cause actual events or results to differ materially from those expressed
or implied by the statements. Should one or more of these risks or uncertainties
materialize, or should our underlying assumptions about them prove incorrect,
our actual results, our performance or our proposed activities may vary
materially from those expressed or implied by these forward-looking statements.
We disclose factors that could cause our actual results to differ materially
from our descriptions in the section entitled "RISK FACTORS" beginning on page
14 and elsewhere in this prospectus. Please read the entire prospectus for a
description of some of these risks, including competitive, financial,
developmental, operational, technical, regulatory and other risks associated
with our business, before accepting our Guarantees. In particular, the sections
under the "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," "DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING
ARRANGEMENTS," "RISK FACTORS" and "BUSINESS" captions contain forward-looking
statements.
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PROSPECTUS SUMMARY
This summary highlights information that we believe is especially important
concerning our business, the offering of our Guarantees and Pathnet's consent
solicitation and proposed indenture amendments. As a summary, it is necessarily
incomplete and does not contain all of the information that you should consider
before accepting our Guarantees and granting your consent to the requested
waivers and amendments to the Indenture necessary to authorize the contribution
and reorganization transaction that we describe in this prospectus. You should
read the entire prospectus carefully.
Except as indicated or as otherwise required by the context, references in
this prospectus to "Pathnet Telecom," "we," "us," or "our" refer to Pathnet
Telecommunications, Inc., and references to "Pathnet" refer to Pathnet, Inc.
only. We are a holding company and will be providing historical and financial
information regarding Pathnet's performance and results of operations. We
provide the information in this way because Pathnet will be our sole direct and
wholly owned subsidiary immediately after the closing of the transactions
described in this prospectus. You should therefore assume that all references to
our business or actions or conditions affecting us before the date of this
prospectus are references to Pathnet's business or actions or conditions
affecting Pathnet. Unless we indicate otherwise, references to our future
business, strategies or plans are references to our consolidated business,
strategies or plans, including Pathnet and any other subsidiaries we may form in
the future.
For a description of some of the technical industry terminology used in
this prospectus, you should refer to the "Glossary" at the end of this
prospectus. You should also read and consider the information in the "RISK
FACTORS" section of this prospectus before accepting our Guarantees and
consenting to the requested waivers and amendments to the Indenture necessary to
authorize the contribution and reorganization transaction described in this
prospectus.
OVERVIEW
We are Pathnet Telecommunications, Inc., a newly formed Delaware
corporation and the issuer of the Guarantees in this offering. We are offering
to all holders of Pathnet's 12 1/4% Senior Notes due 2008 our absolute,
unconditional and continuing guarantee of Pathnet's obligations under the
Indenture that governs the terms of those Notes, including Pathnet's obligations
to make interest and principal payments on the Notes. The Guarantees will
guarantee Pathnet's performance of and compliance with these obligations and
will not trade separately from the Notes. Concurrent with our offer, Pathnet is
seeking consents from the holders of the Notes to the waiver and amendment of
certain provisions of the Indenture.
THE CONTRIBUTION AND REORGANIZATION TRANSACTION
Pathnet is seeking your consent to these waivers and amendments in
connection with a single plan of contribution and reorganization in which:
- The existing shareholders of Pathnet will exchange their shares of
Pathnet's common stock and Series A, B and C Convertible Preferred Stock
solely in return for substantially similar shares of our common stock and
our Series A, B, and C Convertible Preferred Stock;
- Pathnet will become our wholly owned subsidiary;
- Three new investors in the Pathnet business -- The Burlington Northern
and Santa Fe Railway Company, CSX Transportation, Inc. and Colonial
Pipeline Company -- will contribute to us property (in the form of rights
of way to permit us to build our telecommunications network along their
existing railroad and pipeline corridors) with an
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estimated value of $187 million in return for an aggregate of 8,511,607
shares of our Series D Convertible Preferred Stock;
- Colonial will also contribute $68 million in cash, allocated as follows:
-- An aggregate of $63 million, payable in two separate tranches (one of
$38 million payable at the initial closing and another of $25 million
payable upon the completion of a fiber optic network segment build
that we expect to complete during the first calendar quarter of 2000)
for the purchase of an aggregate of 2,867,546 shares of our Series E
Convertible Preferred Stock;
-- $1 million at the closing for the purchase of associated options to
purchase more of our shares of capital stock; and
-- $4 million at the closing to acquire from us a single fiber optic
conduit along a specified number of miles of the Colonial right of
way corridors (or other telecommunications assets of equivalent
value);
- Pathnet will lend to us $50 million of the proceeds remaining from
Pathnet's initial equity investments and the issue of the Notes; and
- Pathnet will sell to us, for a promissory note in the amount of $70
million, three fiber optic development contracts (and the assets and
other agreements relating to those contracts) and the rights to use
Pathnet's name and other intellectual property.
In this prospectus, we refer to this plan of contribution and
reorganization as the "Contribution and Reorganization Transaction."
PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED INDENTURE AMENDMENTS
The structure of the proposed Contribution and Reorganization Transaction
requires Pathnet to obtain waivers and consents from the holders of a majority
in principal amount of Pathnet's Notes. In consideration for the required
consents, we are offering our Guarantees for all of the Notes and Pathnet will
make a consent payment to each of the consenting holders of Notes who held Notes
on the record date of the consent solicitation. To consent to the Contribution
and Reorganization Transaction, the holders of the Notes will need to:
- Waive Pathnet's compliance, for purposes of the Contribution and
Reorganization Transaction, with the "Change of Control" repurchase
obligation set forth in Section 1010 of the Indenture, which otherwise
would be triggered by the closing of the transaction and our becoming the
new holding company for Pathnet;
- Waive Pathnet's compliance, for purposes of the Contribution and
Reorganization Transaction, with the "Excess Proceeds Offer" requirements
set forth in Section 1017 of the Indenture, which otherwise would be
triggered by Pathnet's proposed sale to us of the three fiber development
contracts and related agreements and assets, and the intellectual
property rights;
- Agree to the adoption (by means of the approval of a Supplemental
Indenture) of certain amendments to the terms of the Indenture that are
intended in general to:
-- Subject us to covenants parallel to those contained in the Indenture
and currently applicable to Pathnet; and
-- Amend the scope and application of several terms of the Indenture in
order to extend to us (and any subsidiaries that we may form in the
future) the current covenants of the
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Indenture applicable to Pathnet, so that the Supplemental Indenture
will permit transactions (such as the proposed $50 million loan)
between Pathnet and us (and our other future subsidiaries) to the
same extent that the Indenture currently permits such transactions
between Pathnet and its subsidiaries.
More specifically, the Supplemental Indenture will amend the terms of the
Indenture as described in the following table. As indicated above, this table is
a summary of complex provisions contained in the Indenture and the Supplemental
Indenture, and it may omit detailed information important to your understanding
of the operation of relevant covenants of the Indenture and the Supplemental
Indenture in specific circumstances important to you. We encourage you to read
the text of the Indenture and the Supplemental Indenture filed as exhibits to
the registration statement of which this prospectus is a part.
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CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
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EVENTS OF DEFAULT Payment defaults on the Notes. No change for Notes; adds failure
of Guarantees to be in effect.
Covenant defaults on the Indenture. Covenant defaults on the Indenture,
including obligations imposed
directly on Pathnet Telecom.
Cross defaults to other indebtedness or Cross defaults to other
adverse judgments over $7.5 million indebtedness or adverse judgments
against Pathnet or any Significant over $7.5 million against any of
Subsidiary of Pathnet. Pathnet, Pathnet Telecom, or any
Significant Subsidiary of either
Pathnet or Pathnet Telecom.
Bankruptcy proceedings by or in respect Bankruptcy proceedings by or in
of Pathnet or any Significant respect of Pathnet, Pathnet
Subsidiary of Pathnet. Telecom, or any Significant
Subsidiary of Pathnet or Pathnet
Telecom.
Pledge Agreement ceases to be in full No change.
force and effect.
CONSOLIDATION, Restricts the ability of Pathnet and Expands the covenant so that it
MERGER, CONVEYANCE, its Restricted Subsidiaries to enter applies to Pathnet Telecom and its
TRANSFER OR LEASE into transactions involving a merger or consolidated group, rather than
disposition of all or substantially all solely to Pathnet and its
of Pathnet's and its Restricted consolidated group. Provisions
Subsidiaries' assets on a consolidated relating to the required
basis. substitution of successors and the
requirement to secure the Notes in
certain circumstances apply to
Pathnet obligations under the Notes
and as appropriate to Pathnet
Telecom obligations under the
Guarantees.
AMENDMENTS Certain types of amendments (and Provides that Pathnet Telecom and
TO THE Supplemental Indentures) may be adopted Pathnet can amend the Indenture in
INDENTURE without consent of Holders. the same circumstances, and with
the same levels of approvals, as
Pathnet is permitted to make such
amendments under the Indenture.
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CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
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AMENDMENTS TO THE Most types of amendments (and Applies to the Supplemental
INDENTURE (CONTINUED) Supplemental Indentures) may be adopted Indenture the same majority consent
with the consent of a majority of the threshold for those amendments that
Holders. currently require such a majority
in the Indenture.
Certain types of amendments (and Subjects Pathnet Telecom to the
Supplemental Indentures) may not be unanimous consent threshold for the
adopted without the consent of all amendments requiring unanimous
Holders. consent in the original Indenture,
and adds to that list any amendment
that modifies the provisions of the
Indenture relating to the
Guarantees in a manner adverse to
the holders of the Notes.
MAINTENANCE OF OFFICE Pathnet must maintain an office or Both Pathnet and Pathnet Telecom
agency in New York City for service of must maintain an office or agency
notices and demands. in New York City for the service of
notices and demands under the Notes
and the Guarantees, on the same
terms as that obligation currently
applies to Pathnet.
MONEY FOR NOTE PAYMENTS Regulates Pathnet's dealings with Regulates Pathnet Telecom's
Paying Agents and its ability to act as dealings with Paying Agents and
its own Paying Agent. Pathnet Telecom's ability to make
payments directly to the holders of
the Guarantees in the same manner
as Pathnet's dealings are regulated
under the Indenture.
CORPORATE EXISTENCE Pathnet and its subsidiaries must Expands the covenant so that it
maintain corporate existence. also applies to Pathnet Telecom and
its other subsidiaries.
PAYMENT OF TAXES AND Pathnet and its subsidiaries must pay Expands the covenant so that it
OTHER CLAIMS taxes and other claims. also applies to Pathnet Telecom and
its other subsidiaries.
MAINTENANCE OF Pathnet and Restricted Subsidiaries Expands the covenant so that it
PROPERTIES must maintain material properties in also applies to Pathnet Telecom and
good condition and repair. its Restricted Subsidiaries.
INSURANCE Pathnet and Restricted Subsidiaries Expands the covenant so that it
must maintain customary insurance. also applies to Pathnet Telecom and
its Restricted Subsidiaries.
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CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
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OFFICERS COMPLIANCE Required from Pathnet. Required from Pathnet and from
CERTIFICATE Pathnet Telecom.
FINANCIAL STATEMENTS Pathnet must file Exchange Act reports Pathnet Telecom must file Exchange
with the SEC (whether or not required Act reports (including consolidated
by law to do so) and must provide reports) with the SEC (whether or
Trustee with copies. not required by law to do so) and
must provide Trustee with copies.
To the extent permitted in the
future by applicable law, releases
Pathnet from separate SEC and
Trustee periodic report filing
obligations.
CHANGE OF CONTROL Pathnet required to offer to repurchase No change to Pathnet's obligation.
REPURCHASE OBLIGATION the Notes at a premium upon occurrence Expands the provision so that
of a Change of Control. Pathnet's repurchase obligation is
also triggered by a Change of
Control of Pathnet Telecom;
Guarantees apply to this
obligation.
LIMITATION ON Subject to a ratio test for Expands the existing covenant so
INDEBTEDNESS Consolidated Indebtedness to that both Pathnet and Pathnet
Consolidated Operating Cash Flow Test Telecom are subject to the same
for Pathnet and its Restricted limitations (including the
Subsidiaries, neither Pathnet nor its limitations on their respective
Restricted Subsidiaries can incur Restricted Subsidiaries), except
Indebtedness other than Permitted that:
Indebtedness. Permitted Indebtedness
includes Telecommunications (1) the definition of Permitted
Indebtedness of either Pathnet or any Indebtedness will continue to
Restricted Subsidiary; subordinated include Telecommunications
indebtedness of Pathnet to its Indebtedness, but will apply to
Restricted Subsidiaries; and any Pathnet Telecom's Restricted
indebtedness of a Restricted Subsidiary Subsidiaries as well as
to Pathnet or to any other Restricted Pathnet's, and will allow
Subsidiary. intercompany Indebtedness among
Pathnet Telecom, Pathnet, and
their respective Restricted
Subsidiaries subject to the
corresponding restrictions; and
(2) the Consolidated Indebtedness
to Consolidated Operating Cash
Flow Ratio used to determine
whether any of the covered
entities can incur additional
debt is calculated by reference
to Pathnet Telecom, Pathnet and
all Restricted Subsidiaries on
a consolidated basis.
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CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
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RESTRICTED PAYMENTS Restricts Pathnet and its Restricted Changes the cash dividend
LIMITATION Subsidiaries from declaring cash declaration and capital stock
dividends on Pathnet capital stock, redemption restrictions to apply to
redeeming capital stock or subordinated Pathnet Telecom rather than to
debt of Pathnet, or making investments Pathnet.
(other than Permitted Investments), Imposes parallel restrictions on
unless Pathnet could, after such Pathnet Telecom's ability to make
payment, incur additional Indebtedness other Restricted Payments.
under the Permitted Indebtedness
covenant and the aggregate amount of
permitted Restricted Payments does not
exceed an amount determined as
described in the Restricted Payments
covenant.
SALE OF CAPITAL STOCK OF Restricts the sale or issuance of Expands the covenant to apply to
RESTRICTED SUBSIDIARIES Capital Stock of Restricted capital stock of Pathnet and
Subsidiaries of Pathnet to third Restricted Subsidiaries of both
parties. Pathnet Telecom and Pathnet.
TRANSACTIONS WITH Restricts transactions by Pathnet and Imposes the same restriction on
AFFILIATES its Restricted Subsidiaries with Pathnet Telecom and its Restricted
Affiliates unless conducted on an Subsidiaries and expands the
arms'-length basis. definition of Affiliates to include
all Affiliates of Pathnet Telecom.
As provided in the current
Indenture for transactions among
Pathnet and its own Restricted
Subsidiaries, the Supplemental
Indenture provides that
transactions among any of Pathnet
Telecom, Pathnet and any Restricted
Subsidiary are not restricted.
LIEN RESTRICTIONS Neither Pathnet nor any Restricted Expands the restriction to include
Subsidiary can permit any Lien to exist Pathnet Telecom and its Restricted
other than Permitted Liens, unless the Subsidiaries, and expands the
Notes are equally and ratably secured. definition of "Permitted Liens" to
Permitted Liens include liens for include liens among Pathnet
Telecommunications Indebtedness and Telecom, Pathnet and their
liens among Pathnet and any Restricted respective Restricted Subsidiaries.
Subsidiary.
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CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
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LIMITATIONS ON Prohibits Restricted Subsidiaries of Expands the restrictions to apply
GUARANTEES AND OTHER Pathnet from issuing or guaranteeing to Pathnet Telecom's Restricted
DEBT Debt Securities unless they Subsidiaries; exception for vendor
concurrently guarantee the Notes; financings and other borrowings
specific exception excludes from the continues to apply.
definition of Debt Securities any
vendor equipment financing facilities
or similar financings and other
borrowings incurred in a manner not
customarily viewed as a securities
offering.
LIMITATION ON ASSET Pathnet and its Restricted Subsidiaries Retains unmodified Pathnet's
SALES may not engage in an Asset Sale unless obligations in respect of Asset
the transaction is for fair market Sales. Imposes corresponding
value and meets other requirements as obligations on Pathnet Telecom and
to the nature of the consideration; if its Restricted Subsidiaries.
the amount of proceeds exceeds a
specified threshold, Pathnet is
required to commence an offer to
purchase Notes up to such amount within
15 Business Days of the closing of the
Asset Sale.
PROHIBITION AGAINST Subject to exceptions, including, among Expands the existing covenant to
DIVIDEND RESTRICTIONS others, those for Secured Indebtedness apply to Pathnet and to Restricted
and Telecommunications Indebtedness, Subsidiaries of both Pathnet and
Pathnet cannot permit any Restricted Pathnet Telecom.
Subsidiary to accept a restriction on
its ability to pay dividends or make
other payments to Pathnet or any
Restricted Subsidiary of Pathnet to the
extent necessary to permit Pathnet to
make payment on the Notes.
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Each holder of the Notes on the record date providing its consent to the
requested waivers and amendments of the Indenture covenants necessary for the
contribution and reorganization transactions will receive, in addition to our
Guarantees, a consent fee payment of $10.00 per $1,000 in face amount of Notes
owned of record by the consenting holder on the record date. The terms of the
Indenture governing the Notes require the affirmative consents of the holders of
a majority in outstanding principal amount of the Notes for the waiver and
amendments to take effect. We have conditioned the Contribution and
Reorganization Transaction on the success of a consent solicitation. THIS
OFFERING AND THE CONCURRENT CONSENT SOLICITATION WILL END ON , 1999,
TEN CALENDAR DAYS FOLLOWING THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT OF
WHICH THIS PROSPECTUS IS A PART (UNLESS WE
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AND PATHNET AGREE TO EXTEND THE CONSENT SOLICITATION PERIOD). IF WE HAVE NOT
RECEIVED BEFORE THE EXPIRATION OF THE CONSENT PERIOD THE REQUISITE CONSENTS FROM
THE HOLDERS OF A MAJORITY IN OUTSTANDING PRINCIPAL AMOUNT OF THE NOTES, OUR
OFFER OF THE GUARANTEES WILL TERMINATE AND THE CONTRIBUTION AND REORGANIZATION
TRANSACTION WILL NOT TAKE PLACE AS PLANNED.
OUR COMPANY
We were formed as a Delaware corporation on November 1, 1999, in order to
give effect to the Contribution and Reorganization Transaction and become
Pathnet's parent company. Pathnet, also a Delaware corporation, was formed on
August 25, 1995. Since inception, Pathnet has operated as a development stage
enterprise since inception in 1995 and operations have resulted in cumulative
net losses of $82.9 million through September 30, 1999. Together, we are a
wholesale telecommunications provider building a nationwide network designed to
provide other wholesale and retail telecommunications service providers with
access to underserved and second and third tier markets throughout the United
States, of which there are over 200.
OUR NETWORK
Our network will enable our customers, including existing local telephone
companies, interexchange carriers, Internet service providers, competitive
telecommunications companies, cellular operators and resellers to offer
additional services to new and existing customers in these markets without
having to expend their own resources to build, expand or upgrade their networks.
In addition to serving unique markets, our network will be differentiated by
both its:
- Ability to provide a complete access solution in our target markets,
including collocations in central offices and intercity transport; and
- Its advanced network architecture that will allow our customers to offer
the latest voice, video and data services across a single network at very
high speeds.
We expect our nationwide network to grow to over 20,000 route miles
utilizing fiber and high capacity Synchronous Optical Network Technology, also
known as "SONET" microwave. We intend to continue to develop our backbone on a
"smart-build" basis by prioritizing route development along corridors with high
demand for dark fiber and conduit or partnering with established companies in
the joint development of those routes. We expect our network will terminate in
central offices in our target markets where we intend to collocate and use
existing local telephone companies' unbundled network elements or other third
party local network assets.
As of November 22, 1999, our network consisted of over 6,100 wireless route
miles providing wholesale transport services to 13 cities. We are constructing
1,100 route miles of fiber network scheduled for completion in the first half of
2000 and an additional 300 route miles of wireless network. We have also entered
into two co-development agreements for the construction of an additional 750
route miles of fiber optic network. We expect to develop more backbone network
from a pool of over 12,000 route miles of right of way -- 8,000 of which will
have some form of exclusivity -- that we will receive from our new investors in
the Contribution and Reorganization Transaction. We believe these additional
right of way route miles will provide us with the opportunity to develop unique
and diverse paths connecting our target markets back to first tier metropolitan
areas.
ADDRESSABLE MARKET
We plan to serve second and third tier markets with populations between
600,000 and 50,000, with backbone infrastructure products and services, long
haul transport and local access services. We also expect to capture a portion of
the long haul transport services segment between first tier markets.
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We estimate that our addressable market for these products and services is $13
billion in 1999, growing to $27 billion in 2005.
We believe that a substantial market opportunity exists for our products
and services as the result of:
- Increasing demand for high capacity access and transport services to
accommodate unprecedented consumer demand for Internet access and related
services;
- Growing disparity, sometimes referred to as the "digital divide," between
telecommunications services available in the largest markets and those
services available in our target second and third tier markets;
- Rapid development of new technologies such as Digital Subscriber Line
technology that allow carriers to exploit existing local network
infrastructure to deliver multiple media (including voice, data, video
and Internet) at high speed over one physical local access connection to
a network;
- Rapid migration from circuit-based network architectures to fast
packet-based network technologies that allow for the efficient
integration of multiple customers across a common backbone network
infrastructure; and
- Adoption of the Telecommunications Act of 1996 and certain state
regulatory initiatives that provide increased opportunities in the
telecommunications marketplace by opening local markets to competition
and enhancing opportunities to obtain direct interconnection to and
collocation with our competitors.
For a discussion of our competitive advantages and business strategy, see
"BUSINESS--Business Strategy."
CAPITAL NEEDS AND FINANCING
To date, Pathnet has funded its expenditures primarily with equity
investments made by its stockholders and proceeds received from Pathnet's issue
of Notes in April 1998. The development of our business plan will require
substantial additional capital to fund capital expenditures, working capital and
operating losses. Our principal capital expenditures include costs related to
the construction and development of our nationwide network (including
installation of electronics and transmission equipment), collocations and
interconnections to our network and the continued development of our
administrative and managerial support systems. Proceeds from the April 1998 debt
offering, proceeds from the Contribution and Reorganization Transaction and cash
on hand are expected to provide us with adequate resources to meet the projected
capital requirements through the end of calendar year 2000.
Our current financing plan consists of:
- DEBT OFFERING: On April 8, 1998, Pathnet issued and sold $350 million in
aggregate principal amount in senior unsecured notes, the Notes, and
warrants to purchase shares of Pathnet common stock, resulting in net
proceeds to Pathnet of $338.7 million. Pathnet used approximately $83.1
million of those net proceeds to purchase securities to provide for
payment in full of interest due on the Notes through April 15, 2000.
- PRIVATE EQUITY INVESTMENT: Simultaneously with the debt offering,
Pathnet issued and sold 1,879,699 shares of Pathnet Series C Preferred
Stock at an aggregate price of $20 million, bringing the total investment
by Pathnet's private equity investors to $36 million.
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- CONTRIBUTION AND REORGANIZATION TRANSACTION: We will receive an
aggregate of $68 million in cash proceeds from Colonial Pipeline Company
in connection with the Contribution and Reorganization Transaction.
- LUCENT FINANCING AND OTHER VENDOR FINANCING: We are currently in
negotiations with Lucent Technologies, Inc. over the terms of a senior
secured credit facility for vendor financing covering our fiber optic
cable purchases from Lucent.
The actual amount of our future capital requirements will depend upon many
factors, including the costs and speed of the development of our network in each
of our markets, the extent of competition and pricing of telecommunications
services in our markets, other strategic opportunities that we pursue and the
acceptance of our services in our markets.
RISK FACTORS
You should carefully consider the risk factors discussed under the caption
"RISK FACTORS," immediately following this summary and the other information
included in this prospectus before accepting our Guarantees and consenting to
the requested waivers and amendments to the Indenture necessary to authorize the
Contribution and Reorganization Transaction.
------------------------
Our principal executive office is located at 1015 31st Street, N.W.,
Washington, D.C. 20007, and our telephone number is (202) 625-7284.
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SUMMARY CONSOLIDATED FINANCIAL DATA
We present below summary historical consolidated financial data for Pathnet
and the pro forma balance sheet data for Pathnet Telecom. The summary historical
statements of operations data for the years ended December 31, 1997 and 1998
have been derived from Pathnet's audited financial statements that are included
elsewhere in this prospectus. The summary historical balance sheet data as of
September 30, 1999 and the summary historical statements of operations data for
the nine months ended September 30, 1998 and 1999, and the period from August
25, 1995 (the date of Pathnet's inception) to September 30, 1999 have been
derived from Pathnet's unaudited financial statements that are included
elsewhere in this prospectus. The unaudited financial information as of
September 30, 1998 and 1999 and for the nine month periods then ended includes,
in the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of Pathnet's interim
results. The unaudited pro forma balance sheet as of September 30, 1999 gives
effect to the Contribution and Reorganization Transaction as if it occurred on
September 30, 1999. We have provided the pro forma balance sheet data for
informational purposes only.
<TABLE>
<CAPTION>
PATHNET
--------------------------------------------------------------------------
PERIOD FROM
AUGUST 25, 1995
YEAR ENDED NINE MONTHS ENDED (DATE OF
DECEMBER 31, SEPTEMBER 30, INCEPTION) TO
-------------------------- --------------------------- SEPTEMBER 30,
1997 1998 1998 1999 1999
----------- ------------ ------------ ------------ ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue....................................... $ 162,500 $ 1,583,539 $ 1,050,000 $ 2,275,003 $ 4,022,042
Net operating loss............................ (4,131,243) (16,312,761) (11,372,827) (20,518,466) (42,733,227)
Net loss...................................... (3,977,400) (36,296,596) (25,014,744) (40,409,110) (82,853,567)
Basic and diluted loss per common share....... $ (1.37) $ (12.51) $ (8.62) $ (13.88) $ (28.54)
Weighted average number of common shares
outstanding................................. 2,900,000 2,902,029 2,901,917 2,911,512 2,902,594
OTHER FINANCIAL DATA (UNAUDITED):
Ratio of earnings to fixed charges............ <1 <1 <1 <1 <1
Deficiency of earnings to fixed charges....... $ 3,977,400 $ 36,658,917 $ 25,377,065 $ 42,237,083 $ 85,043,861
</TABLE>
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<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------
PATHNET PATHNET TELECOM
ACTUAL PRO FORMA (a)
------------ ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities (excluding
marketable securities pledged as collateral) (b).......... $173,420,328 $212,045,321
Property and equipment, net................................. 106,123,850 106,123,850
Intangible assets -- rights of way.......................... -- 187,275,006
Total assets................................................ 338,574,555 568,849,554
Long-term obligations (c)................................... 346,782,984 351,057,984
Total liabilities........................................... 379,906,142 384,181,142
Redeemable preferred stock.................................. 35,969,639 37,999,993
Stockholders' equity (deficit).............................. (77,301,226) 146,668,419
</TABLE>
- ---------------
(a) Our pro forma summary consolidated balance sheet data as of September 30,
1999 reflects the following events as if such events had occurred as of
September 30, 1999:
- Contribution of over 12,000 route miles of rights of way with an
estimated value of $187 million for 8,511,607 shares of our Series D
convertible preferred stock;
- Receipt of $38 million in cash at the initial closing for 1,729,631
shares of our Series E redeemable preferred stock. Another $25 million in
cash (which is excluded from our above pro forma balance sheet data) will
be received in exchange for 1,137,915 shares of our Series E redeemable
preferred stock (conditioned upon the completion of a fiber optic network
segment build that we expect to complete during the first calendar
quarter of 2000);
- Exchange of 2,977,593 shares of outstanding Pathnet common stock for
2,977,593 shares of our common stock;
- Exchange of 5,470,595 shares of Pathnet mandatorily redeemable preferred
stock into 15,864,715 shares of our convertible preferred stock;
- Receipt of $1 million in cash for options to purchase 1,593,082 shares of
our Series E redeemable preferred stock at $21.97 per share and shares of
our common stock at the time of an initial public offering;
- Receipt of $4 million in cash for our sale to Colonial of rights in a
specified number of conduit miles of our future network;
- Receipt of $275,000 in rights of way for our sale to CSX of rights a
specified number of conduit miles of our future network; and
- Payment by Pathnet of the proposed 1% consent fee to consenting holders
of the Notes (assuming all Noteholders provide their consent), and a
related payment to the Solicitation Agent, of an aggregate of
approximately $4.4 million.
See "DESCRIPTION OF CONTRIBUTION AND REORGANIZATION TRANSACTION" included
elsewhere in this prospectus.
(b) Cash, cash equivalents and marketable securities include investments in
marketable securities available for sale.
(c) Long term obligations include other non-current liabilities of $263,734.
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<PAGE> 17
RISK FACTORS
Pathnet Telecom is a new business venture that plans to build on the
existing Pathnet business following the closing of the Contribution and
Reorganization Transaction. As such, we will face all of the risks currently
faced by Pathnet, as well as a variety of new risks associated with the
expansion of the existing Pathnet business.
You should consider carefully the risk factors described below, in addition
to the other information in this prospectus, before you decide to accept our
Guarantees and grant your consent to the requested waivers and amendments to the
Indenture necessary to authorize the Contribution and Reorganization
Transaction. If any of the risks described below materializes and we are
unsuccessful in managing or addressing the risk, there could be a material
adverse effect on our business, financial condition or results of operations. We
cannot assure you that we will successfully manage or address these risks. The
risks and uncertainties described below are not all that we may encounter. We
may encounter other risks that we do not currently recognize or that we do not
currently regard as significant. If any of these other risks materializes, it
could also impair our business operations. In reviewing these risk factors, in
particular those relating to our industry, our network business and our company
operations, you may wish to refer to the glossary at the back of this prospectus
for definitions of technical terms.
RISKS RELATING TO OUR COMPANY OPERATIONS
WE MAY NOT BE ABLE TO DEVELOP THE RIGHTS OF WAY THAT BNSF, CSX AND COLONIAL ARE
AGREEING TO CONTRIBUTE TO US IN RETURN FOR THEIR SHARES, OR THE COST OF THAT
DEVELOPMENT MAY BE SIGNIFICANTLY HIGHER THAN WE ANTICIPATE.
Several factors could interfere with our ability to develop or even prevent
us from developing the rights of way that are the subject of the Contribution
and Reorganization Transaction. BNSF, CSX and Colonial do not own outright much
of the property over which they are granting us rights of way. Depending on the
nature of their underlying rights in the property, we may need but be unable to
obtain property rights from third parties to permit us to develop portions of
the rights of way.
In order to minimize or prevent interference with their primary business
operations, BNSF, CSX and Colonial may impose restrictions that increase our
cost of developing certain segments of their rights of way, or even render
development prohibitively expensive. Physical or engineering restrictions may
also limit our ability to develop particular segments of rights of way, or
increase the cost of developing those segments.
Finally, many segments of BNSF's, CSX's and Colonial's rights of way are
subject to existing contractual arrangements that may impose significant
restrictions on our ability to develop those segments. In some cases, existing
contractual arrangements between BNSF, CSX or Colonial and other third parties,
including our competitors, may prevent us from developing those segments.
Exclusivity provisions in the contracts themselves, or competitive factors,
including oversupply of communications bandwidth along the segments that we wish
to develop, could prevent us from making commercially effective use of the
rights of way. In addition, although we believe that we will be able to develop
segments of our network on these rights of way within an acceptable range of our
reasonable current cost estimates, we cannot predict the development costs with
certainty, and these costs could be significantly higher than we anticipate.
WE HAVE AGREED TO INDEMNIFY BNSF, CSX AND COLONIAL FROM CERTAIN LOSSES AND
LIABILITIES IN DEPLOYING AND OPERATING OUR NETWORK, AND THESE LOSSES AND
LIABILITIES COULD BE SIGNIFICANT.
In the agreements by which we obtain our rights of way we have agreed to
release and indemnify BNSF, CSX and Colonial from claims, losses or liabilities
resulting from damage to property, personal injury to personnel, and many other
circumstances while we construct and operate our network. In some cases, our
release and indemnity apply even to circumstances outside of our
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<PAGE> 18
control, including circumstances where the claim, loss or liability arises from
the negligence or gross negligence of BNSF, CSX, Colonial or their employees or
contractors within their control. While we intend to obtain insurance to address
these issues, we cannot ensure that insurance coverage will be available or, if
it is available, adequate to cover all of these risks. If our insurance coverage
is inadequate, or if coverage is not available for some of these risks, we could
be exposed to significant losses and liabilities.
OUR TELECOMMUNICATIONS NETWORK WILL BE CONSTRUCTED ON RIGHTS OF WAY USED FOR
RAILROAD AND PIPELINE PURPOSES AND COULD BE DAMAGED OR DELAYED BY OTHER BUSINESS
OPERATIONS CONDUCTED ALONG THOSE RIGHTS OF WAY. ANY DAMAGE OR DELAY COULD
SERIOUSLY HARM OUR RELATIONSHIP WITH OUR CUSTOMERS.
BNSF, CSX and Colonial use on a daily basis for railroad and pipeline
purposes the rights of way on which we intend to install our telecommunications
network. Many situations could arise, including the derailment of a train, the
breach of a pipeline or damage resulting from track or pipeline maintenance or
construction, that could interrupt telecommunications services on or otherwise
damage our network. If any of those circumstances occurs, our ability to provide
telecommunications services to our customers could be compromised, and our
relationship with those customers could be seriously damaged.
The lease and access agreements we will enter into with BNSF, Colonial, CSX
and our other rights of way providers require that we coordinate our network
design, construction, deployment, operation and maintenance with the rail,
pipeline, utility and other operations of the applicable rights of way
providers. Those agreements generally provide that the rights of many providers'
operational needs take precedence over our own in terms of scheduling, access
time, personnel and other rights. Scheduling conflicts could increase our
development or operational costs on particular segments of rights of way, or
make deployment along the affected segment commercially impracticable. If we
cannot coordinate these activities successfully with the rights of way
providers, the development, design, construction, deployment, operation and
maintenance of the affected segments of our network could be delayed or become
prohibitively expensive.
WE HAVE NO HISTORY OF OPERATIONS AND WILL BE UNDERTAKING A SIGNIFICANTLY
EXPANDED NETWORK DEVELOPMENT BUSINESS.
We are newly incorporated and have no history of operations. Pathnet was
incorporated in August 1995 and has only a limited operational history. As of
November 22, 1999, Pathnet had constructed approximately 6,100 route miles of
our digital network and had completed 25 collocations. To achieve our business
plan, we will need to expand our fiber network substantially and at a much
faster rate than in prior years.
WE ARE UNDERTAKING A MAJOR EXPANSION OF THE BUSINESS PREVIOUSLY CONDUCTED BY
PATHNET AND WE MAY NOT BE ABLE TO MANAGE THIS EXPANSION EFFECTIVELY.
The expansion and development of our business will depend upon, among other
things, our ability successfully to:
- Implement our sales and marketing strategy;
- Evaluate markets for our products and services;
- Acquire rights of way;
- Design profitable network routes;
- Secure additional financing for our network deployment;
- Reach agreement with suitable co-development partners;
- Install facilities;
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<PAGE> 19
- Obtain required government authorizations;
- Interconnect to, and collocate with, facilities owned by existing local
telephone companies; and
- Obtain appropriately priced unbundled network elements and wholesale
services from existing local telephone companies.
We must accomplish these activities in a timely manner, at reasonable cost
and on satisfactory terms and conditions, or our business may be adversely
affected. As we increase our product and service offerings and expand our
network into our targeted markets, there will be additional demands on operating
support systems, sales and marketing, administrative resources and network
infrastructure. We cannot assure you that we will be able to manage our growth
successfully, and if we are unsuccessful in doing so, our business, results of
operations and financial condition will be negatively affected.
DEVELOPING AND EXPANDING OUR BUSINESS MAY SUBJECT US TO ADDED REGULATORY AND
MARKET RISKS.
The rights of way acquired in connection with the Contribution and
Reorganization Transaction may significantly expand our business, making us more
vulnerable to competition from major telecommunications companies and more
likely to become the subject of regulatory scrutiny. Increased competition or
regulatory burdens (whether from licensing or enforcement) could interfere with
our ability to capitalize on the expansion of our business.
Our business strategy is to provide an integrated bundle of
telecommunications services and expand our operations and network. Our ability
to implement this strategy will be subject to a variety of factors, including:
- Market pricing pressures for the services and products we offer;
- Changes in expenses associated with the construction and expansion of our
network and services;
- Availability of additional capital on acceptable terms;
- Regulatory uncertainties in an industry where the regulatory environment
is still evolving;
- Operating and technical problems;
- Availability of alternative technologies;
- The need to establish and maintain interconnection and collocation
arrangements with existing local telephone companies in our target
markets;
- Variations in market growth rates for our products and services; and
- General economic conditions.
WE MAY BE UNABLE TO HIRE AND RETAIN SUFFICIENT QUALIFIED PERSONNEL, AND THE LOSS
OF ANY OF OUR KEY EXECUTIVE OFFICERS COULD MATERIALLY ADVERSELY AFFECT US.
We believe that our future success will depend in large part on our ability
to attract and retain highly skilled, knowledgeable, sophisticated and qualified
managerial, professional and technical personnel. To implement our business plan
and manage our planned growth successfully, we will need to hire a substantial
number of additional employees. Pathnet has experienced, and we expect to
experience, significant competition from other companies in attracting and
retaining personnel who possess the skills that we are seeking. We may therefore
encounter a shortage of qualified personnel.
Currently, our business is managed by a small number of senior management
and operating personnel. We may be unable to retain our senior management, other
key employees, or other skilled personnel in the future. Losing some members of
the senior management team or key operating personnel could have a material
adverse effect on our business.
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<PAGE> 20
WE DEPEND ON THIRD PARTIES, INCLUDING SUPPLIERS AND CONTRACTORS, AND THE LOSS OF
KEY SOURCES OF SUPPLY AND SERVICES FROM THIRD PARTY CONTRACTORS COULD ADVERSELY
AFFECT US.
We depend on third party suppliers for a number of components and parts
used in our telecommunications network. If we are unable to obtain supplies or
services from our usual suppliers for any reason, we believe that there are
alternative suppliers of components for all of the components and transmission
equipment contained in our network or required to offer our products and
services, but those alternatives may not be available on as favorable terms.
Moreover, any delay, nationwide shortage, or extended interruption in the supply
of any of the key components, changes in the pricing arrangements with our
suppliers and manufacturers or delay in transitioning a replacement supplier's
product into the network could disrupt our operations. If a disruption continues
for an extended period of time, it could have a material adverse effect on our
business, financial condition and results of operations.
We plan to continue to use third party contractors to build various
segments of our network. If any of these relationships is terminated or a
supplier or contractor fails to provide reliable services or equipment, and we
are unable to reach suitable alternative arrangements quickly or on favorable
terms, we may experience significant delays and additional costs. The failure of
our contractors to complete their activities in a timely manner, within
anticipated budgets and in accordance with our quality standards and performance
criteria, could also delay the completion of our network or make it more costly
to construct.
WE WILL DEPEND ON SOPHISTICATED BILLING, CUSTOMER SERVICE AND INFORMATION
SYSTEMS.
We will depend on sophisticated information and processing systems to grow,
monitor costs, bill customers, service customer orders and achieve operating
efficiencies. As we expand our services and increase our customer base, our need
for enhanced billing and information systems will increase. If we are unable to
adequately identify our information and processing needs or develop or upgrade
systems as necessary, our ability to reach our financial and operational
objectives could be compromised.
FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE MAY HAVE ADVERSE EFFECTS ON US.
The Year 2000 issue is the result of computer programs using two digits,
rather than four, to define the applicable year. Because of this programming
convention, software, hardware or firmware may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures,
miscalculations or errors causing disruptions of operations or other business
problems, including, among others, an inability to process transactions, send
invoices, or engage in similar normal business activities. We cannot know the
actual effects of the Year 2000 issue on our business and operations until the
beginning of Year 2000. If we or our major vendors and other material service
providers and customers fail to address adequately our respective Year 2000
issues in a timely manner, we could experience, among other things,
interruptions in our network and a decline in sales which could have a material
adverse effect on our business, prospects, results of operations and financial
condition. The Year 2000 issues and our Year 2000 readiness program are
described in further detail below in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Year 2000 Readiness
Disclosure."
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<PAGE> 21
WE MAY FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS, STRATEGIC ALLIANCES
AND JOINT VENTURES.
To expand and deploy our network in a timely manner, we may need to acquire
other businesses, form strategic alliances or enter into joint ventures that
will complement our existing business markets or accelerate our entry into our
target markets. These transactions may:
- Pose challenges in assimilating the acquired operations and personnel;
- Disrupt our ongoing business;
- Divert resources;
- Create difficulties in maintaining uniform standards, controls,
procedures and policies;
- Impede management of our growth and information systems;
- Present challenges where entering markets in which we have little
experience; or
- Impair relationships with employees or customers.
We currently have no definitive acquisition agreement in place, although we
have had discussions with other companies and will continue to assess
opportunities on an ongoing basis. Our failure to implement our expansion and
growth strategy successfully would have a material adverse effect on our
business, results of operations and financial condition.
RISKS RELATING TO OUR FINANCING
WE EXPECT NEGATIVE OPERATING CASH FLOWS AND SUBSTANTIAL OPERATING LOSSES FOR THE
FORESEEABLE FUTURE AND OUR FUTURE GROWTH WILL REQUIRE SIGNIFICANT CAPITAL.
Pathnet has incurred operating losses and negative cash flow since
inception. From August 25, 1995 through September 30, 1999, Pathnet's operations
have resulted in cumulative net losses of $82.9 million. We expect to incur
continued operating losses and negative cash flow as we build our network, offer
additional products and services and increase our customer base. These losses
will reduce our ability to meet working capital needs and increase our need for
external financing to support our objectives.
The development of our business requires significant additional capital and
operational expenditures. We will incur substantial expenditures before we
realize any related revenues. Capital expenditures and other operating
expenditures will result in negative cash flow and operating losses until and
unless we develop an adequate customer base and revenue stream. We expect these
expenditures to increase as we develop our customer base in existing markets,
expand into new markets and diversify our service offerings. Moreover, we may
never develop an adequate customer base, sustain profitability or generate
sufficient cash flow to meet our obligations on the Guarantees or fund our other
business needs.
Our business plan requires us to expand our existing network and services,
acquire and develop new networks and services in additional markets, deploy our
own fiber capacity in the majority of our markets and fund our initial operating
losses. These activities will require significant capital for the foreseeable
future.
We currently plan to fund our capital requirements from these sources:
- $173.4 million of cash, cash equivalents and marketable securities (which
is the balance of the net proceeds remaining from Pathnet's private
placements of equity securities and the 1998 offering of the Notes less
any pledged or restricted funds);
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- The net proceeds of the issuance of our stock, an option for our stock
and a pre-construction sale of conduit, in return for approximately $68
million cash proceeds as part of the Contribution and Reorganization
Transaction;
- Sales of dark fiber and conduit, and co-development arrangements with
third parties;
- Vendor financing from equipment vendors;
- Additional private or public debt or equity financing; and
- Future cash flows generated from ongoing operations.
We estimate that our current available resources will be sufficient to fund
the implementation of our current business plan through the fourth quarter of
2000. In the event the Contribution and Reorganization Transaction is not
consummated or is consummated on different terms, this projection regarding
available resources may change. The actual amount and timing of our future
capital requirements may differ substantially from our estimate.
After the fourth quarter of 2000, we expect we will require additional
financing, which may include commercial bank borrowings, additional vendor
financing or the sale or issuance of equity or debt securities. If we are unable
to obtain necessary additional financing on acceptable terms, our business,
financial condition, or results of operations could be adversely affected.
WE WILL BE GUARANTEEING AND/OR INCURRING A SUBSTANTIAL AMOUNT OF DEBT THAT COULD
AFFECT OUR FUTURE PROSPECTS, AND WE MAY NOT HAVE SUFFICIENT FUNDS FROM OUR OWN
CASH FLOW OR OTHER SOURCES TO SERVICE OUR DEBT.
Pathnet currently has a substantial amount of debt in relation to its
stockholders' equity (deficit). As of September 30, 1999, Pathnet had
approximately $379.9 million of indebtedness outstanding and total stockholders'
equity (deficit) of ($77.3) million.
After the Contribution and Reorganization Transaction has closed, we will
have a substantial amount of debt in relation to our stockholders' equity. The
Indenture related to the Pathnet Notes permits Pathnet, and we expect that the
Supplemental Indenture will permit us and Pathnet, to incur additional
indebtedness, which we plan to do. The amount of our debt could adversely affect
our future prospects by:
- Impairing our ability to borrow additional money;
- Requiring us to use a substantial portion of our cash flows from
operations to pay interest or repay debt which will reduce the funds
available to us for our operations, acquisition opportunities and capital
expenditures;
- Placing us at a competitive disadvantage with companies that are less
restricted by their debt arrangements; and
- Making us more vulnerable in the event of a downturn in general economic
conditions or the occurrence of any risks described in this section.
We cannot assure you that we or Pathnet will be able to meet our debt
obligations under the Guarantees, the Pathnet Notes or otherwise. If we are
unable to generate sufficient cash to meet our obligations or if we fail to
satisfy the requirements of our debt agreements, we will be in default. A
default under the Notes, which may include a material default under other
indebtedness, would permit the holders of the Pathnet Notes (and other debt for
which we will be directly or indirectly responsible) to require payment before
the scheduled due date of the debt, resulting in further financial strain on us
and causing additional defaults under our other indebtedness.
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<PAGE> 23
In order to repay our debt and fund our capital expenditures, we must
successfully implement our business strategy. If we are unable to do so, we may
have to reduce or delay our planned capital expenditures, sell assets, issue
additional equity or debt securities or refinance or restructure our debt. Any
delay in our planned capital expenditures could materially and adversely affect
our future revenue prospects. Any sale of assets to raise money to meet our
financial obligations could also occur on unfavorable terms. We might not be
able to sell any additional equity or debt in those circumstances.
DESPITE OUR CURRENT DEBT LEVEL, WE AND OUR SUBSIDIARIES PLAN TO INCUR
SUBSTANTIALLY MORE DEBT. INCREASED DEBT COULD WORSEN THE RISKS DESCRIBED ABOVE,
BUT FAILURE TO OBTAIN THE DEBT NEEDED COULD PREVENT THE COMPLETION OF THE
NETWORK AND IMPAIR THE ROLLOUT OF OUR PRODUCTS AND SERVICES TO OUR CUSTOMERS.
We expect to need significant additional capital to complete the buildout
of our planned network and fulfill our long-term business strategies. We may be
unable to produce sufficient cash flows from ongoing operations to fund our
business plan and future growth. This could require us to alter our business
plan, including delaying or abandoning our expansion or spending plans, which
could have a material adverse effect on our business. In addition, we may elect
to pursue other business opportunities that could require additional capital
investments in our network. If any of these events were to occur, we could be
required to borrow more money than we currently anticipate, issue additional
debt or equity securities or enter into joint ventures.
Our ability to arrange financing depends upon many factors, including:
- General economic and capital markets conditions, especially the
non-investment grade debt market;
- Conditions in the telecommunications industry;
- Regulatory, technological or competitive developments;
- Investor confidence and credit availability from banks or other lenders;
- The success of our network and demand for our products and services;
- Cost overruns and unforeseen delays; and
- Provisions of tax and securities laws that affect capital raising
activities.
Our inability to raise additional funds would have an adverse effect on our
ability to complete our network. If we decide to raise additional funds by
incurring more debt, we may become subject to additional or more restrictive
financial covenants. These covenants or other terms of the additional financing
may place significant limits on our financial and operating flexibility, or may
not be acceptable to us. Our failure to raise sufficient funds when needed and
on reasonable terms may require us to modify or significantly curtail our
business expansion plans. These modifications could have a material adverse
impact on our growth and ability to compete and to service our existing debt.
Moreover, we are likely to secure any additional debt with our assets or to
borrow through subsidiaries. In such cases, those secured assets, or the assets
of our borrowing subsidiaries, will be available to other creditors before they
are available to you.
ALTHOUGH YOUR NOTES ARE REFERRED TO AS "SENIOR NOTES" THEY ARE AND WILL CONTINUE
TO BE EFFECTIVELY SUBORDINATED TO OUR SECURED DEBT AND THE SECURED AND UNSECURED
DEBT OF OUR SUBSIDIARIES. OUR SUBSIDIARIES WILL NOT GUARANTEE OR OTHERWISE BE
RESPONSIBLE FOR MAKING FUNDS AVAILABLE TO US OR TO PATHNET TO MAKE PAYMENTS ON
YOUR NOTES OR THE GUARANTEES.
The Notes are unsecured and therefore are and will continue to be
effectively subordinated to any secured debt we may incur to the extent of the
value of the assets securing that debt. In the
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event of a default, foreclosure, bankruptcy or similar proceeding involving us,
our assets which serve as collateral will be available to satisfy the
obligations under any secured debt before any payments are made on the Notes. In
the event of any shortfall after the foreclosure on these assets, our secured
creditors would have a claim for that shortfall ranking equally with your claim
against us under the Guarantees.
After the closing under the Contribution and Reorganization Transaction, we
will be a holding company that receives a substantial part, or even all, of our
revenues from our subsidiaries. Our ability to obtain payments from our
subsidiaries may be restricted by the profitability and cash flows of our
subsidiaries and laws relating to the payment of dividends by a subsidiary to
its parent company. If our subsidiaries are unable to pay dividends, we may be
unable to service our debt, including our obligations under the Supplemental
Indenture and the Guarantees. If any of our subsidiaries experiences a
bankruptcy, liquidation or reorganization, its creditors will generally be
entitled to payment of their claims from the assets of that subsidiary before
any assets are made available for distributions to us, except to the extent we
may also have a claim as a creditor. In that situation, creditors of our
subsidiaries and future holders of preferred stock, if any, of our subsidiaries,
would have claims on the assets of the subsidiaries with priority over our
claims.
Like your Notes, your rights under the Guarantees will be structurally
subordinated to both secured and unsecured debts of our subsidiaries (other than
Pathnet). Under the terms of the existing Indenture, if Pathnet incorporates any
additional subsidiaries, they will be separate legal entities with no
obligations under the Notes. The Supplemental Indenture will not change this
structure, and if we incorporate additional subsidiaries, whether new
subsidiaries of Pathnet or "sister" companies to Pathnet, these new subsidiaries
also will be separate legal entities. They will have no obligation under the
Supplemental Indenture or the Guarantees to make payments or to provide
dividends or other funds to us or Pathnet to permit us to make payments on the
Notes or Guarantees.
We have considered with our financial and other advisors the impact of an
initial proposal to require (as the current Indenture does not) that any future
subsidiary into which Pathnet Telecom or Pathnet proposes to make a material
investment (including an investment made by contributing assets) independently
guarantee the Notes. We have reviewed this proposal in light of the specific
requirements of our vendor financing partners and the general market
requirements of other sources of financing that we contemplate will be needed
for the expansion of our network. Based on this review, we have concluded that
revising the Indenture to provide for these Guarantees would interfere with our
ability to obtain equipment and other financing necessary in connection with the
future development of our network. As a result, the Notes are and will continue
to be, and the Guarantees will be, effectively subordinated to the debts of our
subsidiaries other than Pathnet.
Pathnet has formed and, under the terms of the existing Indenture, Pathnet
can continue to form subsidiaries to which it can contribute assets in
connection with the development of its business. Similarly, the Supplemental
Indenture will permit us to form subsidiaries that are not directly liable for
Pathnet's obligation under the Notes or our obligations under the Guarantees.
Our proposed vendor financing agreement with Lucent specifically requires us, if
we wish to take advantage of the Lucent financing, to form a new subsidiary and
to contribute to this new subsidiary a substantial portion of our assets. This
contribution of assets would include the rights of way relating to the segments
of our network that we plan to construct with fiber for which Lucent provides
vendor financing, and could include additional cash contributions. See
"DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING ARRANGEMENTS -- Proposed
Credit Facility with Lucent."
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OUR INDEBTEDNESS WILL CONTAIN RESTRICTIVE COVENANTS, WHICH COULD EXPOSE US TO
ADDITIONAL DEFAULTS.
By entering into the Supplemental Indenture, we will become subject to a
number of restrictive covenants parallel to those contained in the Indenture and
applicable to Pathnet. These restrictions affect, and, in certain cases
significantly limit (and in some cases prohibit), among other things, our
ability and the ability of our subsidiaries to:
- Incur additional indebtedness;
- Create liens;
- Make investments;
- Pay dividends;
- Issue stock; and
- Sell assets.
For example, the Indenture restricts and the Supplemental Indenture will
restrict our ability to incur indebtedness other than indebtedness to finance
the acquisition of equipment, inventory or network assets and other specified
indebtedness. In addition, if and when we (or our subsidiaries) borrow funds
under our proposed credit facility with Lucent or under other credit facilities
with other vendors or third parties who may provide financing, these credit
facilities may require us to maintain specified financial ratios. We cannot
assure you that we will be able to maintain those required ratios after each
borrowing, and our failure to maintain any of those required ratios or other
covenants could lead to a default on those facilities and a foreclosure against
any assets securing the facilities. These restrictive covenants may also
adversely affect our ability to finance our future operations or capital needs,
or to engage in other business activities that may be in our interest.
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS, THE STOCKHOLDERS
AGREEMENT TO WHICH WE WILL BECOME A PARTY AND THE TERMS OF THE INDENTURE AND
SUPPLEMENTAL INDENTURE COULD DELAY OR PREVENT OUR CHANGE OF CONTROL, EFFECTIVELY
HINDERING OUR ACCESS TO ADDITIONAL EQUITY FINANCING.
Our certificate of incorporation, bylaws and stockholders agreement contain
provisions that will make any acquisition of us or investment in us more
difficult, including restrictions on removal of directors and limitations on the
ability of stockholders to call special meetings. The terms of our Indenture and
Supplemental Indenture may also restrict and discourage attempts to change
control of Pathnet Telecom. Our ability to attract future equity investment may
be hindered because of these provisions, thereby limiting our access to
additional capital.
RISKS RELATING TO OUR NETWORK BUSINESS
THE DIFFICULTIES THAT WE MAY EXPERIENCE IN EXPANDING OUR NETWORK COULD INCREASE
OUR ESTIMATED COSTS AND DELAY SCHEDULED COMPLETION.
We plan to expand our existing network, enter new markets and broaden our
product and service offerings -- all of which are significant undertakings.
These activities will require us to install and operate additional facilities
and equipment, and develop, introduce and market new products and services. To
deploy these additional services we will need to modify and add to our existing
network architecture. We will also need to obtain and install our equipment in
the existing local telephone companies' central office collocation space as
described in further detail below. We may encounter administrative, technical,
operational, regulatory and other problems as a result of our expansion. Many of
these factors and problems are beyond our control. If we experience difficulties
in addressing and solving these problems, we may not be able to complete our
network buildout or expand our products and services as planned or in accordance
with our current cost or time estimates.
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In addition, we may enter into relationships with long distance telephone
companies, existing local telephone companies, Internet Service Providers,
competitive telecommunications companies or other entities to manage existing
assets or to deploy alternative telecommunications products and services. We may
also seek to serve markets in addition to underserved or second or third tier
markets and customers in addition to telecommunications service providers.
Pursuing these other opportunities could require additional financing, pose
additional risks (such as increased or different competition, additional
regulatory burdens and network economics and pricing different from our
currently planned network and products and services) and divert our resources
and management time. We cannot assure you that we will successfully integrate
any new opportunity into our operations or that the opportunity would perform as
expected.
WE DEPEND UPON RIGHTS OF WAY AND ACCESS AGREEMENTS TO EXPAND AND MAINTAIN OUR
DIGITAL NETWORK, AND WE WILL NEED TO CONTINUE TO OBTAIN AND MAINTAIN APPROPRIATE
RIGHTS OF WAY AND ACCESS TO BUILD AND OPERATE OUR NETWORK.
To construct and maintain our fiber optic and wireless network, we have
obtained and will obtain easements, leases, rights of way, franchises and
licenses from various private parties, including railroads, pipelines,
utilities, actual and potential competitors and local governments. We cannot
assure you, however, that we will continue to have access to existing rights of
way, leases and licenses after the expiration of our current agreements, or that
we will obtain additional rights necessary to extend our network on reasonable
terms. In addition, third parties may challenge our use of rights of way
obtained by or from others. Some of our agreements with right of way providers
require us to acknowledge that others who question the right of way providers'
ownership claim to the easement or property right may challenge our claim to the
rights of way being granted. These challenges may hinder or delay our business
plans. In addition, if a franchise, license or lease agreement is terminated and
we are forced to remove or abandon a significant portion of our network, our
business, results of operations, and financial condition will be materially
adversely affected.
In addition to the rights of way to which we will gain access as a result
of the Contribution and Reorganization Transaction, we expect that we will need
to obtain and maintain additional rights of way to construct and develop our
network. We may also require additional pole attachment or conduit use
agreements with existing local telephone companies, utilities or other local
exchange carriers. We cannot guarantee that we, or our operating companies or
partners, will be able to obtain new or maintain existing permits, rights of
way, pole attachment and conduit use needed to develop and operate and expand
our network and provide our planned products and services. Our failure to obtain
or maintain necessary permits, rights of way and agreements could have a
material adverse effect on our ability to operate and expand our network.
WE DEPEND ON OUR WIRELESS NETWORK INFRASTRUCTURE, PORTIONS OF WHICH WE DO NOT
OWN.
We do not own, and we do not expect to own in the future, the underlying
sites and facilities upon which Pathnet's current wireless digital network is
deployed. Instead, we (or our affiliated companies) have entered into long term
fixed point microwave services agreements with certain of our co-development
partners such as Kinder Morgan, formerly KN Energy. Under these agreements, each
co-development partner has agreed to grant us a leasehold interest in, or a
similar right to use, their facilities and infrastructure as required for us to
deploy our network. As a result, we depend and will continue to depend on the
facilities and infrastructure of our co-development partners for the operation
of our business. In many cases, we also rely on our co-development partners for
the maintenance and provisioning of circuits on our network. We have entered
into maintenance agreements with some of these co-development partners where
they perform maintenance and provisioning services for us in return for a
monthly fee. The cancellation or non-renewal of any of these arrangements or
agreements could have a material adverse effect on our business.
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WE DEPEND ON OUR STRATEGIC RELATIONSHIPS AND CO-DEVELOPMENT PARTNERS.
As part of our "smart build" strategy and pursuant to the Contribution and
Reorganization Transaction, we have formed and plan to continue in the future to
pursue strategic alliances and relationships which would allow us to enter
certain markets for telecommunications services sooner than if we had made the
attempt independently. As our network is further developed, we will be dependent
on some of these arrangements in order to expand our network into target
markets.
Any disagreements with our co-development partners or companies with which
we have a strategic alliance could impair or adversely effect our ability to
conduct our business. In addition, the bankruptcy or insolvency of a
co-development partner could result in the termination of its agreement with us
and any related rights of way agreements. The effect of those terminations or
the failure of a co-development partner to make required capital contributions
would have a material adverse effect on us.
WE DEPEND ON ACCESS TO AND INTERCONNECTION WITH THE FACILITIES OF EXISTING LOCAL
TELEPHONE COMPANIES, AND THE INABILITY TO SECURE SUCH ACCESS AND INTERCONNECTION
ON FAVORABLE TERMS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Our ability to provide local access services depends upon our securing
access to existing local telephone companies' networks, including the physical
or virtual collocation of our equipment in the existing local telephone
companies' central offices in our target markets.
Challenges we may face in obtaining central office space from the existing
local telephone companies include:
- Limitations on the availability of central office space in high demand
target markets where other competitive telecommunications companies are
seeking or have obtained central office space to offer services;
- Delays when existing local telephone companies fail to promptly address
our requests for central office space; and
- Expenditure of time and money to pursue negotiations, regulatory
disputes, and legal actions for resolution of disputes regarding lack of
sufficient office space.
We expect that these challenges may delay our attempts to obtain central
office space, which would slow down our deployment of our network and our
ability to increase the number of our customers. See "BUSINESS -- Government
Regulation."
WE DEPEND ON EXISTING LOCAL TELEPHONE COMPANIES TO PROVIDE NETWORK ELEMENTS FOR
OUR LOCAL ACCESS SERVICES.
We will interconnect with and use existing local telephone companies'
networks to provide local access services to our customers. This strategy
presents a number of challenges because we depend on existing local telephone
companies to:
- Allow us to use their technology and capabilities of their networks to
service our customers;
- Cooperate with us to provide and repair facilities; and
- Provide the services and network components that we order, for which they
depend significantly on unionized labor. Labor issues have in the past
and may in the future hurt the existing local telephone companies'
performance.
Our dependence on existing local telephone companies may cause us to
encounter delays in establishing our network and rolling out our products and
services. We must also establish satisfactory
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billing and payment arrangements with existing local telephone companies. We may
not be able to do these things in a manner that will allow us to retain and grow
our customer base.
We also depend significantly on the quality, availability and maintenance
of existing local telephone companies' networks. We may not be able to obtain
the facilities and the services we need from existing local telephone companies
at satisfactory quality levels, rates, terms and conditions. Our inability to do
so could delay the expansion of our network and degrade the quality of our
services to our customers.
WE MAY EXPERIENCE WIRELESS PATH FAILURES OR CABLE CUTS.
We do not have route diversity on our digital network to maintain services
in the event of a wireless path failure or fiber cable cut. If we were to suffer
a deterioration in the perceived quality or reliability of our service as a
result of a path failure, cable cut, or other network outage, our customer
relations would be materially adversely affected.
RISKS RELATING TO OUR INDUSTRY
OUR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD ADVERSELY
AFFECT US.
The telecommunications industry is extremely competitive, particularly with
regard to price and service. Many of our existing and potential competitors have
significantly greater financial, personnel, marketing and other resources than
we do. For example, some of our competitors have already made substantial
long-term investments in the construction of wireless and fiber optic networks
and the acquisition of bandwidth. Many of our competitors also have the added
competitive advantage of an established network and existing customer base. For
example, some communications carriers and local cable companies have extensive
networks in place that could be upgraded to fiber optic cable. Those companies
also have more employees and more substantial capital resources to begin those
upgrades. If communications carriers and local cable companies decide to equip
their existing networks with fiber optic cable, they could become significant
competitors of ours in a short period of time.
COMPETITION FOR INFRASTRUCTURE SERVICES, INCLUDING DARK FIBER AND CONDUIT
SALES AND WHOLESALE TRANSPORT SERVICES. We face competition from existing and
future telecommunications systems on each route where we plan to provide
infrastructure services and wholesale transport services.
Other companies may choose to compete with us in our current or planned
markets by selling or leasing network assets or wholesale transport services to
our targeted customers. Our competitors for these products and services include:
- Interchange carriers (often referred to as "IXCs"), such as AT&T Corp.,
MCI WorldCom, Inc. and Sprint Corporation;
- Wholesale providers, such as Qwest Communications International Inc.,
Williams Communications Group, Inc., IXC Communications, Inc., DTI
Holdings, Inc., Global Crossing Ltd. and Level 3 Communications, Inc.;
- Existing local telephone companies (often referred to as "ILECs"), such
as US West, BellSouth, Bell Atlantic, SBC and GTE Corporation, which
currently dominate their local telecommunications markets and have sought
or may soon seek authority to provide long distance services in their
local markets;
- Competitive telecommunications companies (often referred to as "CLECs"),
such as GST Telecommunications, Inc., ITC/Deltacom, Inc. and Metromedia
Fiber Network, Inc.; and
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- Potential competitors capable of offering services similar to those we
offer, such as communications service providers, cable television
companies, electric utilities, microwave carriers, satellite carriers,
wireless telephone operators and large end users with private networks.
COMPETITION FOR SERVICES IN LOCAL MARKETS. Our principal competitor for
local access services in each of our markets is the existing local telephone
company. Although recent federal legislation and rule-making proceedings afford
us increased opportunities to compete in providing these services, these
proceedings also benefit existing local telephone companies. See
"BUSINESS -- Government Regulation" for more information on legislation and
regulatory proceedings. Potential changes in the regulation of
telecommunications services could deprive us of some competitive advantages that
we now enjoy, which could harm our business.
In addition to the existing local telephone companies, other
telecommunications service providers, such as Covad Communications Group, Inc.,
NorthPoint Communications Group, Inc. and Rhythms Netconnections, Inc., have
recently begun providing some local services. Other competitors and potential
entrants in the market for the provision of these services include long distance
companies, cable television companies, electric utilities, microwave carriers,
wireless telephone system operators, data service companies and operators of
private networks. Significant new competitors also could enter the local market
through consolidation and strategic alliances in the industry, foreign carriers
being allowed to compete in the U.S. market, technological advances, and further
deregulation and other regulatory initiatives. The introduction of any of these
new competitors into our markets for local services could materially and
adversely affect our business. See "BUSINESS -- Competition."
WE DO NOT PLAN TO OFFER A BROAD RANGE OF PRODUCTS OR SERVICES IN THE IMMEDIATE
FUTURE, AND THIS LIMITATION COULD INCREASE OUR VULNERABILITY TO CHANGING TRENDS
IN OUR INDUSTRY OR INCREASED COMPETITION. AT THE SAME TIME, OUR FUTURE SUCCESS
WILL DEPEND ON GROWTH IN THE DEMAND FOR LOCAL ACCESS SERVICES WE PLAN TO
CONTINUE TO OFFER.
We have planned to undertake only a narrow scope of activities in the
immediate future, which could limit potential revenues and result in lower
revenues than competitors who now provide a wide range of services. Although
Pathnet has recently commenced marketing local access services to
telecommunications service providers, we cannot assure you that we will be
successful in entering this business. If the markets for these services fail to
develop, grow more slowly than anticipated or become saturated with competitors,
our business prospects, operating results and financial condition could be
materially adversely affected.
OUR PRODUCT AND SERVICE OFFERINGS ARE SUBJECT TO RISKS OF INDUSTRY OVER-CAPACITY
AND RESULTING DOWNWARD PRICING PRESSURES.
Since shortly after the AT&T divestiture in 1984, the long distance
transmission industry generally has experienced over-capacity and declining
prices. These trends have exerted downward pricing pressures on a number of
telecommunications services, including our wholesale transport services, and we
anticipate that prices for these services will continue to decline over the next
several years because:
- Existing long distance carriers and potential new carriers are
constructing new fiber optic and other long distance transmission
networks;
- Regulatory changes may permit the existing local telephone companies to
provide long-distance services out-of-region;
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- Expansion and new construction of transmission networks are likely to
create substantial excess capacity relative to demand in the short or
medium term. Persons building those networks are likely to install fiber
optic cable that provides substantially more transmission capacity than
will be needed because the cost of the actual fiber is a relatively small
portion of the overall cost of constructing new lines; and
- Recent technological advances may greatly expand the capacity of existing
and new fiber optic cable.
Dramatic and substantial price reductions in the long distance industry could
require us to reduce our prices significantly or to revise the mix of products
and services we plan to offer. Either of these results could adversely affect
our business. Also, an increase in the capacity of any of our competitors to
provide transport services could adversely affect our business even if we are
also able to increase our capacity.
The supply of dark fiber capacity (which refers to the sale of capacity on
fiber optic cable that has none of the associated transmission electronics
installed) has also increased. This has resulted in downward pricing pressure on
sales of dark fiber. The FCC recently issued an order requiring existing local
telephone companies to make dark fiber and other transport facilities available
to other telecommunications carriers at cost-based nondiscriminatory prices.
This requirement could further increase the supply of and decrease demand for
our dark fiber, adversely affecting our business, financial condition and
results of operations.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE DO NOT KEEP PACE WITH RAPID
TECHNOLOGICAL CHANGES.
The telecommunications industry is characterized by rapid and significant
changes in technology. We cannot predict the effect of technological changes on
our business. The introduction of new products or technologies may reduce the
cost or increase the supply of services similar to those that we plan to
provide, or could render those services (and our network assets) less desirable
or even obsolete. As a result, new entrants in the communications services
industry may become our most significant competitors in the future. These new
entrants may not be burdened by an installed base of outdated equipment and the
resulting competition they may provide could have a material adverse effect on
us.
RISKS RELATING TO REGULATION
WE ARE SUBJECT TO SIGNIFICANT REGULATION THAT COULD CHANGE IN A MANNER ADVERSE
TO US.
Communications services are subject to significant regulation at the
federal, state and local levels. Our business plans require us to exploit new
opportunities afforded by recent regulatory changes. However, this new
regulatory environment could adversely affect us in a number of ways, including:
- Delays in receiving required regulatory approvals or the imposition of
onerous conditions for these approvals;
- Difficulties in completing and obtaining regulatory approval of
interconnection agreements with existing local telephone companies; and
- Enactment of new and adverse legislation or regulatory requirements or
changes in the interpretation of existing laws or regulations.
The Telecommunications Act of 1996 was intended, among other things, to
foster competition in the local telephone market. However, the FCC and the
states are still implementing many of its rules and policies and it remains
uncertain how successfully the Telecommunications Act will promote
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competition. The decisions made to date provide little practical guidance to aid
in predicting whether the new rules and policies will hinder or assist our
attempts to compete in this market. Moreover, the Telecommunications Act and
other recently adopted federal laws regarding the U.S. telecommunications
industry remain subject to judicial review and additional FCC rule-making
proceedings. We therefore cannot predict the effect of these laws and
regulations on our future operations or results. Changes in regulations or
future regulations adopted by federal, state or local regulators, or other
legislative or judicial initiatives relating to the telecommunications industry
could have a material adverse effect on us, particularly if we are required to
change or delay offering of our products or services. Many regulatory actions
regarding issues that are important to our business are currently underway or
are being contemplated by federal and state authorities. In addition, changes in
our ownership or service offerings may subject us to further regulations. For
example, we may be required to seek additional authorization from the FCC if the
percentage of our capital stock owned by non-U.S. entities exceeds certain
thresholds. The FCC and certain state agencies also impose prior approval
requirements on transfers of control, including pro forma transfers of control
and corporate reorganizations, and assignments of regulatory authorizations. In
those instances where we provide service on an intrastate basis, we may be
required to obtain authorizations from or notify those states for certain
transfers or issuances of our capital stock, bonds or other indebtedness. Such
requirements may delay, prevent or deter other companies from acquiring us. See
"BUSINESS -- Government Regulation" for more information on regulatory matters.
NEW RULES PROPOSED BY THE FCC AND RECENT LEGISLATIVE INITIATIVES MAY
SIGNIFICANTLY INCREASE COMPETITION IN THE PROVISION OF LOCAL SERVICES.
Like most companies in the communications industry, we must comply with
many regulatory requirements. However, unlike some of our competitors,
particularly the existing local telephone companies, we are not currently
subject to some of the burdensome regulations federal law imposes on the
telecommunications industry. Our ability to compete in the provision of local
access services will depend upon a continued favorable, pro-competitive
regulatory environment. New regulations or legislation affording greater
flexibility and regulatory relief to our competitors could adversely affect us.
LONG DISTANCE ACCESS CHARGES. The FCC is currently considering an industry
proposal to restructure the fees that existing local telephone companies charge
long distance companies to use their local networks. These fees are referred to
as access charges. Changes in the access charge structure could fundamentally
affect the economic environment in which we and our customers operate. If the
FCC reduces the access charges imposed by existing local telephone companies, it
would significantly reduce our price advantage in the market for services
enabling long distance companies to use the existing local telephone companies'
local networks.
The FCC is also considering whether to impose limits on the use of selected
portions of the local telecommunications networks (sometimes called "unbundled
network elements") we purchase from the existing local telephone companies. If
the FCC limits our ability to offer long distance companies a package of
unbundled network elements that can be used to reach end users, our ability to
offer our products and services at competitive rates may be harmed.
DIGITAL SUBSCRIBER LINE SERVICES. In August 1998, the FCC proposed new
rules that would allow existing local telephone companies to provide Digital
Subscriber Line services through separate affiliates not subject to existing
local telephone company regulation. The FCC recently decided some of the other
issues raised in that proceeding, but the question of whether existing local
telephone companies can provide unregulated Digital Subscriber Line services
through a separate affiliate remains unresolved. Any decision that would permit
an existing local telephone company affiliate to
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offer Digital Subscriber Line services without being subject to regulation
imposed on existing local telephone companies could have a material adverse
effect on us.
Certain members of Congress have also expressed interest in giving existing
local telephone companies additional pricing flexibility for high-speed data
services (such as Digital Subscriber Line services) and the ability to offer
such services on a geographically expanded basis within their service areas. We
cannot predict whether Congress will adopt such legislation and, if it does, the
extent to which it may adversely affect our business.
WE MAY NOT BE ABLE TO OBTAIN AND MAINTAIN THE FCC LICENSES NECESSARY FOR THE
OPERATION OF THE WIRELESS PORTIONS OF OUR NETWORK.
Portions of our network are wireless, meaning that we provide access
services via over-the-air microwave transmissions instead of through fiber optic
cables. Our arrangements with certain of our wireless co-development partners
contemplate that the wireless portion of our digital network will largely
provide "common carrier fixed point-to-point microwave" telecommunications
services under Part 101 of the FCC's rules. These services are subject to
regulation by federal, state and local governmental agencies. Changes in
existing laws and regulations governing our provision of these services could
have a material adverse effect on our business, financial condition, and results
of operations.
WE MUST COMPLY WITH FEDERAL AND STATE TAX AND OTHER SURCHARGES ON OUR SERVICES,
THE LEVELS OF WHICH ARE UNCERTAIN.
As a telecommunications provider, we must pay a variety of surcharges and
fees on our gross revenues from interstate services and intrastate services.
Interstate surcharges include fees for Federal Universal Service and common
carrier obligations, number administration, the provision of telecommunications
services to the disabled and other miscellaneous FCC requirements. State
regulators impose similar surcharges and fees on intrastate services. The
division of our services between interstate services and intrastate services is
a matter of interpretation, and FCC or relevant state commission authorities may
in the future contest how we allocate our charges. If this allocation is
changed, our payment obligations for the relevant surcharges could increase.
Periodic revisions by state and federal regulators of the applicable surcharges
may also increase the surcharges and fees we currently pay.
For more information on these and other risks posed by regulatory
initiatives, see "BUSINESS -- Government Regulation."
WE MAY BE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, WHICH WOULD ADVERSELY
AFFECT US.
Pathnet has, and after the consummation of the Contribution and
Reorganization Transaction we will have, substantial cash balances and
short-term investments on a consolidated basis. As a result, we may be
considered an "investment company" under the Investment Company Act of 1940. The
Investment Company Act requires companies that are engaged primarily in the
business of investing, reinvesting, owning, holding or trading in securities, or
that fail numerical tests regarding composition of assets and sources of income
and that are not primarily engaged in a business other than investing,
reinvesting, owning, holding or trading in securities, to register as
"investment companies." Various substantive restrictions are imposed on
investment companies by the Investment Company Act.
Because we are primarily engaged in a business other than investing,
reinvesting, owning, holding or trading securities, we do not believe that we
are an investment company within the meaning of the Investment Company Act. If
we are required to register as an investment company under the Investment
Company Act, we would become subject to substantial regulation of our capital
structure, management, operations, transactions with "affiliated persons," as
defined in the Investment Company
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Act, and other matters. To avoid having to register as an investment company, we
may have to hold a portion of our liquid assets as cash or government securities
instead of as investment securities. Having to register as an investment company
or holding a material portion of our liquid assets as cash or government
securities to avoid registration could have a material adverse effect on us.
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USE OF PROCEEDS
We will not receive any proceeds from the issue of our Guarantees on the
Notes you hold. At September 30, 1999, the proceeds remaining from private
placements of equity securities and the 1998 offering of Notes, less any pledged
or restricted funds, consisted of $173.4 million of cash, cash equivalents and
marketable securities. Pathnet will lend $50 million of these proceeds to us in
the Contribution and Reorganization Transaction. In addition, in connection with
the closing of the Contribution and Reorganization Transaction (including both
of the Colonial tranches), we will receive $68 million in cash proceeds from
Colonial, comprised of $38 million at the initial closing; $25 million upon the
completion of a fiber optic network segment that we expect to complete during
the first calendar quarter of 2000; $1 million at the closing for the issuance
of an option to purchase more of our shares; and $4 million at the closing to
acquire a single conduit along a specified number of miles of the Colonial right
of way corridors or alternative telecommunications assets of equivalent value.
We anticipate that after payment of the expenses of this offering and the
Contribution and Reorganization Transaction, we will use our proceeds to fund:
- Capital expenditures to be incurred in the development of our digital
network and for other purposes relating to our business (including the
business currently conducted by Pathnet);
- Expenses associated with our (and Pathnet's) development and sales and
marketing activities;
- Operating losses;
- Possible strategic investments and strategic acquisitions; and
- Working capital and other general corporate purposes.
The amounts that we actually expend will vary depending on a number of
factors, including future revenue growth, capital expenditures and the amount of
cash generated by our operations. Additionally, if we determine it would be in
our best interests, we may increase or decrease the number, selection and timing
of entry of our targeted regions. Accordingly, our management will retain broad
discretion in the allocation of such proceeds. We may also use a portion of the
proceeds to pursue possible strategic investments in or acquisitions of
businesses, technologies or products complementary to ours in the future. We
presently have no understandings, commitments or agreements with respect to any
acquisitions or material investments. Pending use of such net proceeds for the
above purposes, we intend to invest such funds in short-term, interest-bearing,
investment-grade securities.
32
<PAGE> 35
CAPITALIZATION
The following table sets forth Pathnet's total unaudited cash, cash
equivalents and marketable securities and capitalization as of September 30,
1999 on an actual basis and our unaudited cash, cash equivalents and marketable
securities and capitalization as of September 30, 1999 on a pro forma basis to
give effect to the consummation of the Contribution and Reorganization
Transaction and the offering of the Guarantees as if they occurred on September
30, 1999. You should read the information in this table in conjunction with
Pathnet's Consolidated Financial Statements and the notes related thereto
included elsewhere in this prospectus. See also "USE OF PROCEEDS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------
PATHNET PATHNET TELECOM
ACTUAL PRO FORMA (a)
------------ ----------------
(UNAUDITED)
<S> <C> <C>
Cash, cash equivalents and marketable securities (excluding
marketable securities pledged as collateral)(b)............. $173,420,328 $212,045,321
============ ============
Pledged securities.......................................... $ 42,379,701 $ 42,379,701
============ ============
Long-term obligations:
Notes..................................................... $346,519,250 $346,519,250
------------ ------------
Mandatorily redeemable preferred stock:
Series A convertible preferred stock, par value $0.01 per
share, 1,000,000 and 0 shares authorized, issued and
outstanding actual and pro forma, respectively.......... 1,000,000 --
Series B convertible preferred stock, par value $0.01 per
share, 1,651,046 and 0 shares authorized, issued and
outstanding actual and pro forma, respectively.......... 5,008,367 --
Series C convertible preferred stock, par value $0.01 per
share, 2,819,549 and 0 shares authorized, issued and
outstanding actual and pro forma, respectively.......... 29,961,272 --
Series E convertible preferred stock, par value $0.01 per
share, 0 and 4,506,145 shares authorized actual and pro
forma, respectively, 0 and 1,729,631 shares issued and
outstanding actual and pro forma, respectively.......... -- 37,999,993
------------ ------------
Total mandatorily redeemable preferred stock....... 35,969,639 37,999,993
------------ ------------
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------
PATHNET PATHNET TELECOM
ACTUAL PRO FORMA()(A)()
------------ ----------------
(UNAUDITED)
<S> <C> <C>
Stockholders' equity (deficit):
Series A convertible preferred stock, par value $0.01 per
share, 0 and 2,899,999 shares authorized, issued and
outstanding actual and pro forma, respectively.......... -- 29,000
Series B convertible preferred stock, par value $0.01 per
share, 0 and 4,788,030 shares authorized, issued and
outstanding actual and pro forma, respectively.......... -- 47,880
Series C convertible preferred stock, par value $0.01 per
share, 0 and 8,176,686 shares authorized, issued and
outstanding actual and pro forma, respectively.......... -- 81,767
Series D convertible preferred stock, par value $0.01 per
share, 0 and 9,250,000 shares authorized actual and pro
forma, respectively, 0 and 8,511,607 shares issued and
outstanding actual and pro forma, respectively.......... -- 85,116
Undesignated preferred stock, par value $0.01 per share, 0
and 10,000,000 authorized, 0 issued and outstanding
actual and pro forma.................................... -- --
Common stock, par value $0.01 per share, 60,000,000 shares
authorized; 2,977,593 shares issued and outstanding
actual and pro forma.................................... 29,776 29,776
Deferred compensation..................................... (575,836) (575,836)
Additional paid in capital................................ 6,162,866 229,888,748
Accumulated other comprehensive loss...................... (45,465) (45,465)
Deficit accumulated during development stage.............. (82,872,567) (82,872,567)
------------ ------------
Total stockholders' equity (deficit)............... (77,301,226) 146,668,419
------------ ------------
Total capitalization............................... $305,187,633 $531,187,662
============ ============
</TABLE>
- ---------------
(a) Our pro forma summary consolidated balance sheet data as of September 30,
1999 reflects the following events as if such events had occurred as of
September 30, 1999:
- Contribution of over 12,000 route miles of rights of way with an estimated
value of $187 million for 8,511,607 shares of our Series D convertible
preferred stock;
- Receipt of $38 million in cash at the initial closing for 1,729,631 shares
of our Series E redeemable convertible preferred stock. Another $25
million in cash (which is excluded from our above pro forma balance sheet
data) will be received in exchange for 1,137,915 shares of our Series E
redeemable convertible preferred stock (conditioned upon the completion of
a fiber optic network segment build that we expect to complete during the
first calendar quarter of 2000);
- Exchange of 2,977,593 shares of outstanding Pathnet common stock for
2,977,593 shares of our common stock;
- Exchange of 5,470,595 shares of Pathnet mandatorily redeemable preferred
stock into 15,864,715 shares of our convertible preferred stock;
- Receipt of $1 million in cash for options to purchase 1,593,082 shares of
our Series E redeemable preferred stock at $21.97 per share and shares of
our common stock at an initial public offering;
- Receipt of $4 million in cash for our sale to Colonial of rights in a
specified number of conduit miles of our future network;
- Receipt of $275,000 in rights of way for our sale to CSX of rights in a
specified number of conduit miles of our future network; and
- Pathnet's payment of a 1% consent fee to holders of the Notes (assuming
all holders of Notes consent to the Contribution and Reorganization
Transaction) and other payments to the Solicitation Agent of approximately
$4.4 million in the aggregate.
See "DESCRIPTION OF CONTRIBUTION AND REORGANIZATION TRANSACTION" included
elsewhere in this prospectus.
(b) Cash, cash equivalents and marketable securities include investments in
marketable securities available for sale.
34
<PAGE> 37
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
We present below selected historical consolidated financial information for
Pathnet and the pro forma balance sheet data for Pathnet Telecom. The summary
historical statements of operations data for the years ended December 31, 1996,
1997 and 1998 have been derived from Pathnet's audited financial statements that
are included elsewhere in this prospectus. The summary historical statement of
operations data for the period from August 25, 1995 (the date of Pathnet's
inception) to December 31, 1995 has been derived from Pathnet's audited
financial statements that are not included elsewhere in this prospectus. The
summary historical balance sheet data as of September 30, 1999 and the summary
historical statements of operations data for the nine months ended September 30,
1998 and 1999 and the period from August 25, 1995 (the date of Pathnet's
inception) to September 30, 1999 have been derived from Pathnet's unaudited
financial statements that are included elsewhere in this prospectus. The
unaudited financial information as of September 30, 1998 and 1999 and for the
nine month periods then ended includes, in the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of Pathnet's interim results. The unaudited pro forma balance
sheet as of September 30, 1999 gives effect to the Contribution and
Reorganization Transaction as if it occurred on September 30, 1999. We have
provided the pro forma balance sheet data for informational purposes only.
<TABLE>
<CAPTION>
PATHNET
----------------------------------------------------------------------------------------
PERIOD FROM
AUGUST 25, 1995
(DATE OF YEAR ENDED NINE MONTHS ENDED
INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------------------------- ---------------------------
1995 1996 1997 1998 1998 1999
--------------- ----------- ----------- ------------ ------------ ------------
UNAUDITED UNAUDITED
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenue.................. $ -- $ 1,000 $ 162,500 $ 1,583,539 $ 1,050,000 $ 2,275,003
Operating expenses:
Cost of revenue........ -- -- -- 7,547,620 5,385,718 9,579,064
Selling, general and
administrative....... 429,087 1,333,294 4,247,101 9,615,867 6,721,862 9,500,235
Depreciation and
amortization
expense.............. 352 9,024 46,642 732,813 315,247 3,714,170
---------- ----------- ----------- ------------ ------------ ------------
Total operating
expenses............... 429,439 1,342,318 4,293,743 17,896,300 12,422,827 22,793,469
Net operating loss....... (429,439) (1,341,318) (4,131,243) (16,312,761) (11,372,827) (20,518,466)
Interest expense(a)...... -- (415,357) -- (32,572,454) (21,862,169) (30,318,331)
Interest income.......... 2,613 13,040 159,343 13,940,240 9,574,286 10,511,464
Write off of initial
public offering
costs.................. -- -- -- (1,354,534) (1,354,534) --
Other income (expense),
net.................... -- -- (5,500) 2,913 500 (83,777)
---------- ----------- ----------- ------------ ------------ ------------
Net loss................. $ (426,826) $(1,743,635) $(3,977,400) $(36,296,596) $(25,014,744) $(40,409,110)
========== =========== =========== ============ ============ ============
Basic and diluted loss
per common share....... $ (0.15) $ (0.60) $ (1.37) $ (12.51) $ (8.62) $ (13.88)
Weighted average number
of common shares
outstanding............ 2,900,000 2,900,000 2,900,000 2,902,029 2,901,917 2,911,512
OTHER FINANCIAL DATA
(UNAUDITED):
Ratio of earnings to
fixed charges.......... <1 <1 <1 <1 <1 <1
Deficiency of earnings to
fixed charges.......... $426,826 $ 1,743,635 $ 3,977,400 $ 36,658,917 $ 25,377,065 $ 42,237,083
<CAPTION>
PATHNET
---------------
PERIOD FROM
AUGUST 25, 1995
(DATE OF
INCEPTION) TO
SEPTEMBER 30,
1999
---------------
UNAUDITED
<S> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenue.................. $ 4,022,042
Operating expenses:
Cost of revenue........ 17,126,684
Selling, general and
administrative....... 25,125,584
Depreciation and
amortization
expense.............. 4,503,001
------------
Total operating
expenses............... 46,755,269
Net operating loss....... (42,733,227)
Interest expense(a)...... (63,306,142)
Interest income.......... 24,626,700
Write off of initial
public offering
costs.................. (1,354,534)
Other income (expense),
net.................... (86,364)
------------
Net loss................. $(82,853,567)
============
Basic and diluted loss
per common share....... $ (28.54)
Weighted average number
of common shares
outstanding............ 2,902,594
OTHER FINANCIAL DATA
(UNAUDITED):
Ratio of earnings to
fixed charges.......... <1
Deficiency of earnings to
fixed charges.......... $ 85,043,861
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------
PATHNET PATHNET TELECOM
ACTUAL PRO FORMA(B)
------------ ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities (excluding
marketable securities pledged as collateral)(c)........... $173,420,328 $212,045,321
Property and equipment, net................................. 106,123,850 106,123,850
Intangible assets -- rights of way.......................... -- 187,275,006
Total assets................................................ 338,574,555 568,849,554
Long-term obligations(d).................................... 346,782,984 351,057,984
Total liabilities........................................... 379,906,142 384,181,142
Redeemable preferred stock.................................. 35,969,639 37,999,993
Stockholders' (deficit) equity.............................. (77,301,226) 146,668,419
</TABLE>
- ---------------
(a) The 1996 expense relates to the beneficial conversion feature of a loan at
December 31, 1996.
(b) Our pro forma summary consolidated balance sheet data as of September 30,
1999 reflects the following events as if such events had occurred as of
September 30, 1999:
- Contribution of over 12,000 route miles of rights of way with an
estimated value of $187 million for 8,511,607 shares of our Series D
convertible preferred stock;
- Receipt of $38 million in cash at the initial closing for 1,729,631
shares of our Series E redeemable convertible preferred stock. Another
$25 million in cash (which is excluded from our above pro forma balance
sheet data) will be received in exchange for 1,137,915 shares of our
Series E redeemable convertible preferred stock (conditioned upon the
completion of a fiber optic network segment build that we expect to
complete during the first calendar quarter of 2000);
- Exchange of 2,977,593 shares of outstanding Pathnet common stock for
2,977,593 shares of our common stock;
- Exchange of 5,470,595 shares of Pathnet mandatorily redeemable preferred
stock into 15,864,715 shares of our convertible preferred stock;
- Receipt of $1 million in cash for options to purchase 1,593,082 shares of
our Series E redeemable preferred stock at $21.97 per share and shares of
our common stock at an initial public offering;
- Receipt of $4 million in cash for our sale to Colonial of rights in a
specified number of conduit miles of our future network;
- Receipt of $275,000 in rights of way for our sale to CSX of rights in a
specified number of conduit miles of our future network; and
- Pathnet's payment of a 1% consent fee to holders of the Notes (assuming
all holders of Notes consent to the Contribution and Reorganization
Transaction) and other payments to the Solicitation Agent of
approximately $4.4 million in the aggregate.
See "DESCRIPTION OF CONTRIBUTION AND REORGANIZATION TRANSACTION" included
elsewhere in this prospectus.
(c) Cash, cash equivalents and marketable securities include investments in
marketable securities available for sale.
(d) Long term obligations include other non-current liabilities of $263,734.
36
<PAGE> 39
BUSINESS
This discussion contains forward-looking statements that involve risks and
uncertainties including, without limitation, statements relating to our company
and our business units' plans, strategies, objectives, expectations, intentions
and resources. Our actual results could differ materially from those anticipated
in forward-looking statements as a result of various factors, including those
described in the section of this prospectus entitled "RISK FACTORS." You should
assume, for the purposes of this section, that all references to our business,
strategies, plans or conditions affecting us prior to the date of this
prospectus are references to Pathnet's business, strategies, plans or conditions
affecting Pathnet. Unless we indicate otherwise, references to our current or
future business, strategies or plans are references to our consolidated
business, strategies or plans, including Pathnet and our other future
subsidiaries. We are providing information regarding Pathnet's past and future
business, strategies, plans and conditions affecting Pathnet because Pathnet
will be our wholly owned subsidiary, and we will be assuming many of Pathnet's
assets and obligations, immediately following the closing of the Contribution
and Reorganization Transaction.
OVERVIEW
We are a wholesale telecommunications provider building a nationwide
network designed to provide other wholesale and retail telecommunications
service providers with access to underserved and second and third tier markets
throughout the United States. Our network will enable our customers including
ILECs, IXCs, ISPs, CLECs, cellular operators and resellers to offer additional
services to new and existing customers in these markets without having to expend
their own resources to build, expand, or upgrade their own networks. In addition
to serving unique markets, our network will be differentiated by both its:
- Ability to provide a complete access solution in our target markets,
including collocations in central offices and intercity transport, and
- Its advanced network architecture that will allow our customers to offer
the latest voice, video, and data services across a single network at
very high speeds.
We expect our nationwide network to grow to over 20,000 route miles
utilizing fiber and high capacity SONET microwave. We intend to continue to
develop our backbone on a "smart-build" basis by prioritizing route development
along corridors with high demand for dark fiber and conduit or partnering with
established companies in the joint development of those routes. We expect our
network will terminate in central offices in our target markets where we intend
to collocate and use ILEC unbundled network elements or other third party local
network assets in the provision of service to our customers.
As of November 22, 1999, our network consisted of over 6,100 wireless route
miles providing wholesale transport services to 13 cities. We are constructing
1,100 route miles of fiber network, which is scheduled for completion in the
first half of 2000, and an additional 300 route miles of wireless network. We
have also entered into two additional co-development agreements for the
construction of an additional 750 route miles of fiber optic network. We expect
to develop additional backbone network from a pool of over 12,000 route miles of
right of way received in the Contribution and Reorganization
Transaction -- 8,000 of which will have some form of exclusivity. These
additional route miles will provide us with the opportunity to develop unique
and diverse paths connecting our target markets back to major tier one
metropolitan areas.
37
<PAGE> 40
We currently project the development of our network through the middle of
2000 to be:
<TABLE>
<CAPTION>
PROJECTED PROJECTED PROJECTED
NETWORK ROUTE COLLOCATIONS ACCESSED
MILES COMPLETED DEVELOPED MARKETS
--------------- ------------ ---------
<S> <C> <C> <C>
As of November 22, 1999.............................. 6,100 25 13
End of Fourth Quarter 1999........................... 6,600 40 28
End of First Quarter 2000............................ 7,400 60 40
End of Second Quarter 2000........................... 7,600 85 50
</TABLE>
In addition to building our network backbone, since inception we have:
- Obtained state regulatory certification or otherwise been authorized to
provide our planned telecommunications services in 6 states, with
applications pending in an additional 9 states, which will allow us to
obtain unbundled network elements from the ILECs;
- Executed collocation agreements with two ILECs: US West and BellSouth;
- Launched our Alliance Program under which we expanded our virtual network
to reach additional markets by reselling portions of two other carriers'
networks;
- Signed Master Service Agreements with the three largest U.S. IXCs; and
- Completed our fully operational Network Operations Center, providing
twenty-four hours a day, seven days-a-week coverage.
MARKET OPPORTUNITY
INDUSTRY OVERVIEW
We believe that the following five factors create a substantial market
opportunity for our products and services:
- Increasing demand for high capacity access and transport services to
accommodate unprecedented consumer demand for Internet access and related
services;
- Growing disparity, sometimes referred to as the "digital divide," between
telecommunications services available in the largest markets and those
services available in second and third tier markets due to our
telecommunications service provider customers' nearly exclusive focus of
resources and product offerings on first tier domestic and on global
markets;
- Rapid development of new technologies such as DSL that allow carriers to
exploit existing local network infrastructure to deliver multiple media
(including voice, data, video and Internet) at high speed over a single
physical local access connection to a network;
- Rapid migration from circuit-based network architectures to fast
packet-based network technologies that allow for the efficient
integration of multiple customers across a common backbone network
infrastructure; and
- Adoption of the Telecommunications Act and certain state regulatory
initiatives that provide increased opportunities in the
telecommunications marketplace by opening local markets to competition
and requiring ILECs to provide additional direct interconnection and
collocation to their competitors.
We intend to exploit these developments and employ emerging convergent
technologies in the deployment of our backbone network and local access
platform. We believe the emergence and acceptance of advanced
convergence-supporting technologies at the user premise will significantly
increase our abilities to provide low cost solutions to our carrier customers in
underserved and second
38
<PAGE> 41
and third tier markets that have been overlooked by other emerging
telecommunications service providers.
ADDRESSABLE MARKET
We worked with The Yankee Group on an addressable market study for the
products and services we expect to bring to the marketplace in the near term.
The study found that the communications market is currently a $270 billion
market in the U.S. and is expected to grow at over 10% annually for the next
five years. According to The Yankee Group, the sections of the market that we
expect to address -- backbone infrastructure services, inter-city and local
wholesale transport services and local access services -- are among the most
rapidly growing components of the current telecommunications landscape which The
Yankee Group forecasts to grow at approximately 18% annually for the next five
years. The Yankee Group estimates that the addressable market for these products
and services in the United States to be $30 billion in 1999, expanding to $80
billion by 2005.
We plan to serve second and third tier markets with populations between
600,000 and 50,000, of which there are over 200, with backbone infrastructure
services, long haul wholesale transport and local access services. We also
expect to capture a portion of the long haul wholesale transport services
segment between first tier markets with populations over 600,000. We estimate
that the addressable market for these products and services is $13 billion in
1999, growing to $27 billion in 2004.
BUSINESS STRATEGY
Our business objective is to become the preferred facilities-based
wholesale telecommunications provider to customers in our target markets. To
achieve this goal, we plan to:
- Concentrate our focus on the needs of telecommunications service
providers and their customers;
- Focus on underserved and second and third tier markets;
- Enter and roll-out service rapidly in our target markets;
- Design, build and acquire a low-cost network;
- Provide superior customer service and service quality; and
- Pass to our customers savings from the deployment of our local network
access program.
Each of these strategies is discussed in more detail below:
- CONCENTRATE OUR FOCUS ON THE NEEDS OF TELECOMMUNICATIONS SERVICE
PROVIDERS AND THEIR CUSTOMERS. Our customers are companies in the
business of selling communications services to end user customers. We
believe that these companies are investing considerable sums to connect
as many customers as possible to keep pace with the rapidly evolving
telecommunications marketplace and that these carriers would like to find
the means to maximize the return on their investments and deployment of
resources. We further believe that these challenges are magnified when
they consider serving customers in second and third tier markets. Very
few of these telecommunications service providers operate at a scale that
justifies significant investment in building their own network in smaller
markets. The alternative -- re-selling ILEC local networks -- has limited
appeal because it can be expensive and, in many cases, the ILEC network
components lack the broadband capabilities that these telecommunications
service providers need to compete effectively in the marketplace. We
believe that our customers will be able to effectively "timeshare" our
products and services. This will enable them to access second and third
tier markets to serve their customers without incurring high
39
<PAGE> 42
capital expenditures, or many of the franchising and licensing fees and long
lead times that are usually associated with building their own networks and
establishing a meaningful local collocation presence in these markets.
- FOCUS ON UNDERSERVED AND SECOND AND THIRD TIER MARKETS. We plan to serve
second and third tier markets with populations between 600,000 and
50,000, of which there are over 200, as well as a portion of the first
tier markets with populations over 600,000. We believe our customers will
value our backbone network because, for the most part, it will be built
along unique rights of way offering route separation and diversity in the
event of a network system failure. Also, unlike others backbone networks
that bypass second and third tier markets, we will construct and design
our backbone to interconnect into these markets. We seek to be among the
first to market advanced wholesale transport and local access services in
many of our markets. By pioneering in second and third tier markets, we
hope to capitalize on escalating demand for high capacity bandwidth
services that is a product of the current unprecedented demand for
Internet access and related services.
- ENTER AND ROLL OUT SERVICE RAPIDLY IN OUR TARGET MARKETS. We seek to
become the first emerging carrier to enter and roll out our products and
services broadly in our targeted underserved and second and third tier
markets by:
- Securing central office space before our competitors do; and
- Obtaining and retaining customers before significant competition for
our products and services in these markets arises; and
- Maintaining advantages over our competitors by offering superior
coverage and high customer satisfaction.
- DESIGN, BUILD AND ACQUIRE A LOW-COST NETWORK. Consistent with our
conservative capital expenditure program, one of our key strategies since
inception has been to establish strategic relationships with owners of
existing telecommunications infrastructure, to reduce our capital costs
and time to market. As of November 22, 1999, we had entered into
strategic relationships with eight companies who have provided the
foundation for our existing 6,100-route mile wireless backbone network.
We have also entered into three co-development agreements relating to the
construction of 1,850 fiber route miles. After completing the
Contribution and Reorganization Transaction through our strategic
relationships with BNSF, CSX and Colonial, we will have access to over
12,000 miles of valuable rights of way, 8,000 miles of which will have
some form of exclusivity.
We are developing our network using a "smart build" approach. Under this
approach, we attempt to reduce the risk of building our network by
obtaining one or more co-development partners to share in the costs. We
also determine the level of customer demand before construction by
obtaining direct customer input regarding the attractiveness of a route
and, in certain cases, entering into pre-construction sales of dark fiber
and conduit. As a result, we expect that the cost of our retained
nationwide backbone network will be significantly less than a comparable
network built or acquired at market rates. We intend to continue this low
cost approach in providing our local access services. We plan to secure
CLEC status in each state that we provide service and we anticipate
signing interconnection agreements with all of the relevant ILECs. These
interconnection agreements allow us to construct our microwave tributary
routes directly to the ILEC central office facility, allowing us to use
the existing central office as our point of presence in the market, and
avoid the cost of separate facilities. This will enable us to obtain and
use unbundled network elements from the ILECs at favorable rates and
terms, including space in the ILEC's central offices that are necessary
to establish our collocations.
40
<PAGE> 43
- PROVIDE SUPERIOR CUSTOMER SERVICE AND SERVICE QUALITY. As part of our
strategy to obtain and retain business and telecommunications service
provider customers, we intend to provide superior service and customer
care. We will aim to provide high quality services by offering what we
believe to be state-of-the-art networking solutions and superior customer
service. These networking solutions include end-to-end proactive network
monitoring and management through our Network Operations Center, 24 hours
a day, seven days-a-week. We also offer multiple security features and we
have completed implementing our Year 2000 readiness program to ensure
that our networks and systems are Year 2000 compliant. See "RISK
FACTORS -- Risks Relating to Our Company Operations" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Year 2000 Readiness Disclosure." We plan to provide
superior customer service to promote a high level of customer
satisfaction, achieve customer loyalty and accelerate the use of our
products and services. In addition, we have, and will continue to
install, a technologically advanced network that we believe provides the
high level of reliability, security and flexibility that our customers
demand. Our fiber and wireless network is designed to meet industry
standards for reliability by maintaining overall network reliability of
99.999% and a bit error rate less than 10(-13).
- PASS TO OUR CUSTOMERS SAVINGS FROM THE DEPLOYMENT OF OUR LOCAL NETWORK
ACCESS PLATFORM. We plan to deploy a convergent local network access
platform. In other words, we intend to combine, or enable the combination
of, all multiple customer applications onto a single physical local
access connection, which will travel on our fast packet-based capable
backbone infrastructure. Using this convergent platform we believe that
our telecommunications service provider customers will be able to launch
their own services to better serve their end user customers.
STRATEGIC RELATIONSHIPS
FIBER CO-DEVELOPMENT PARTNERS
WORLDWIDE FIBER. In March 1999, we entered into a co-development agreement
with Worldwide Fiber, Inc. for the design, engineering and construction by
Worldwide Fiber of a multiple conduit fiber-optic system. The system will be
approximately 1,100 route miles long, between Aurora, Colorado (a suburb of
Denver) and Chicago, Illinois. The first segment, Chicago to Omaha, Nebraska, is
scheduled to be completed in the fourth quarter 1999, and the second segment,
Omaha to Aurora, is scheduled to be completed by the end of the first quarter of
2000. In connection with the co-development agreement, we entered into a joint
marketing agreement with Worldwide Fiber under which both Worldwide Fiber and we
will attempt to sell certain dark fibers on the route, and will share the
revenues from such sales. The joint marketing agreement also permits each party
to retain a certain number of dark fibers for its own use, subject to certain
restrictions on resale.
TRI-STATE. In August 1999, we entered into a co-development agreement with
Tri-State Generation and Transmission Association, Inc. and four regional
electric cooperatives for our design, engineering and construction of an aerial
fiber system, approximately 420 route miles long, between Albuquerque, New
Mexico and Grand Junction, Colorado. We expect this system to be completed in
the second half of 2000.
ALLIANCE PROGRAM. We have entered into capacity purchase agreements with
two other carriers, IXC and Frontier, enabling us to resell capacity on their
networks. This allows us to extend our network reach to POPs throughout the
markets reached by Frontier's and IXC's networks and pre-sell capacity along
routes we intend to develop.
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WIRELESS CO-DEVELOPMENT PARTNERS
FIXED POINT MICROWAVE SERVICES AGREEMENTS. We have entered into several
fixed point microwave services agreements with co-development partners who own
existing wireless telecommunications assets. Typically, under these agreements
we lease an interest in the co-development partner's sites and facilities on
which our network is built and in return we provide the co-development partner
with capacity on such network for its own internal use. These agreements
generally provide for a five or ten year term that is subject to renewal by us
upon the occurrence of certain events, for up to a 25-year term. As of the date
of this prospectus, we had entered into fixed point microwave services
agreements with these co-development partners:
- Idaho Power Company;
- Northern Indiana Public Service Company;
- The Burlington Northern and Santa Fe Railway Company;
- Kinder Morgan, Inc. (formerly KN Energy, Inc.);
- Kinder Morgan, Inc. (formerly KN Telecommunications, Inc.);
- Texaco Pipeline;
- Northern Border Pipeline Company; and
- Northeast Missouri Electric Power Cooperative.
TOWER LEASE AGREEMENTS. We entered into a leasing arrangement with
American Tower Company under which American Tower granted us a 25-year license
to use certain of its towers to deploy several wireless portions of our network.
PRODUCTS AND SERVICES
We plan to offer the following products and services:
- DARK FIBER AND CONDUIT FOR SALE OR GRANT OF IRU. We sell rights for dark
fiber and related services as well as rights to conduit. Dark fiber
consists of fiber strands contained within a fiber optic cable which has
been laid but does not yet have its transmission electronics installed. A
sale or grant of an indefeasible right to use our dark fiber typically
has a term which approximates the economic life of a fiber optic strand
(generally 20 to 30 years). Purchasers of dark fiber rights typically
install their own electrical and optical transmission equipment.
Substantially all of our current and planned builds include laying spare
conduits, and we may sell rights to use them. A purchaser of conduit
rights typically lays its own cable inside the conduit. Related services
for both sales of rights for dark fiber and conduits may include
installation of customer equipment at the locations where we have
installed transmission equipment and network equipment and maintenance of
the purchased fiber or conduit. Generally, we expect our customers to pay
for dark fiber rights and conduit at the time of delivery and acceptance
of the fiber or conduit, although other payment options may be available.
In addition, we typically require our customers to make ongoing payments
for maintenance services.
- DARK FIBER FOR LEASE OR LEASE TO PURCHASE. We will also lease dark fiber
for a term less than the period for which the indefeasible usage rights
are typically granted. Leases will be typically structured with monthly
payments over the term of the lease. Generally, we expect to realize a
premium in lease pricing for bearing the risk that the lease will not be
renewed for the balance of the life of the asset. We plan to offer
customers the option to lease to purchase.
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- WAVELENGTH LEASE. In our network, we intend to use Dense Wavelength
Division Multiplexing, or DWDM, a technology that allows multiple optical
signals to be combined so that they can be aggregated as a group and
transported over a single fiber to increase capacity. This will allow us
to sell a customer exclusive long-term use of a portion of the
transmission capacity of a fiber optic strand rather than the entire
strand. We expect that the installation of the necessary transmission
equipment to provide these services along our first completed fiber route
from Chicago to Denver will be complete in the first half of 2000. We
expect to be able to derive up to 160 individual wavelength channels at
either OC-48 or OC-192 per fiber pair.
- INTER-CITY WHOLESALE TRANSPORT SERVICES. Our inter-city transport
services are focused on second and third tier markets and are comprised
of point-to-point services offered as Time Division Multiplexing, or TDM,
which is an electronic process that combines multiple communication
channels into a single, higher-speed channel by interleaving portions of
each in a consistent manner over time-based private lines at DS-1, DS-3,
OC-3, OC-12, OC-48 and OC-192. We believe that our services will be
particularly attractive to our customers because of our low cost backbone
transport and low cost local loops (attributable to our collocation in
the ILEC's central office and our use of UNE transport). We believe that
we offer more flexible commitment levels with higher reliability than are
currently available on traditional multiplexed services. As of November
22, 1999, we offered inter-city wholesale transport services on our 6,100
route mile-wireless backbone network as well as via our Alliance Program.
- LOCAL WHOLESALE TRANSPORT SERVICES. Once we establish collocation in the
ILEC's central offices in second and third tier markets, we believe that
we will be able to deliver local transport between central offices or to
connect those central offices to our backbone or a telecommunications
service provider customer backbone. We plan to offer local transport
services, such as xDSL-based private lines or TDM-based private lines at
DS-0, DS-1, DS-3, OC-3, OC-12, OC-48. We expect our customers to use
these services to reduce charges for inter-office transport or to provide
end office trunking.
- LOCAL ACCESS SERVICES. We plan to deliver our local access services from
network presences we have established by collocating with the ILECs in
second tier and third tier markets and through the local networks we have
established using a combinations of UNEs and other network components
from other communications carriers.
- VIRTUAL POINTS OF PRESENCE (VPOP). We plan to bundle our wholesale
transport services and local access services to offer our virtual points
of presence service, sometimes referred to as VPOP. Through this bundle
of services, we intend to offer our customers the ability to establish a
virtual point of presence for their networks without requiring the
customer to place any equipment at our collocation site using our
facilities. We will focus this VPOP service on second and third tier
markets. We expect that our VPOP service will allow our customers to
virtually extend the reach of their networks while expending less
resources and incurring far less risk than if that customer had expanded
and built its own network.
SALES AND MARKETING STRATEGY
Our wholesale customers tend to be very knowledgeable about the nature of
the services and technology available in the marketplace. As a result, our
marketing efforts are largely limited to ensuring that our products and services
are visible and well represented in the market. As part of our marketing
strategy, we attempt to position ourselves as the provider of choice for
telecommunication service providers because of the quality of our service, the
control we provide customers over their service platforms, the reliability of
our services and our low cost position. We believe our cost
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advantages allow us to sell our services on our network at prices that represent
potentially significant savings for our large-volume customers relative to their
other alternatives.
We sell our services to large regional and national telecommunications
service providers through our direct sales team on a national account basis.
Since we sell primarily to other telecommunications service providers, we expect
that our sales and marketing department will remain relatively small and
focused, resulting in strong customer relationships and lower operating costs.
Our sales team consists of senior level management personnel and experienced
sales representatives with extensive knowledge of the industry and our products.
This team also has key industry contacts at various levels within many
telecommunications service provider organizations.
CUSTOMERS
We have defined a range of products and services designed to meet the
unique needs of our customers and, as a result, we intend to offer several types
of services to these types of customers:
- Full service IXCs: we intend to provide low cost DSL-based transport,
used to deliver broadband access. We expect to provide lower cost access
and short haul transport to reduce the cost of delivering traditional
voice, private line or data services;
- CLECs and competitive IXCs: we can extend reach to new markets by
providing a more efficient means for CLECs to originate or terminate
voice traffic and a lower cost source of inter-city wholesale transport
or infrastructure services;
- ISPs: we intend to offer low cost DSL to deliver broadband access. We
expect to be able to extend ISPs reach to new markets. We plan to provide
low cost infrastructure services and wholesale transport services. We
expect to provide direct access to the locations at which ISPs exchange
each other's traffic.
- ILECs: we expect to provide lower cost network services within the ILEC's
own region and wholesale transport services and local access services out
of region as ILECs become permitted to provide these services;
- Wireless and cable providers (including cellular companies): we plan to
provide backhaul services, head end distribution services and wholesale
transport services; and
- Resellers: we expect to provide low cost termination for switched
traffic.
THE PATHNET NETWORK
BACKBONE NETWORK
We plan to create an approximately 20,000 route mile nationwide network.
Tributaries using either fiber or wireless technology will connect our backbone
to our targeted markets. We believe that connecting the second and third tier
markets to a national backbone is the key to funneling traffic between these
markets and first tier markets.
NETWORK ROUTE SELECTION AND SMARTBUILD APPROACH. In order to utilize
capital effectively, we employ a "smart-build" approach. This means that we seek
to reduce our risks in undertaking the build by:
- Obtaining one or more co-development partners to share in the costs;
- Determining the levels of customer demand before construction (by
obtaining direct customer input on the route); and
- In certain cases, seeking to effect pre-construction sales of dark fiber
and conduit.
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Before deciding to construct or acquire a network to serve particular
markets, we review the demographic, economic, competitive and telecommunications
demand characteristics of the markets along proposed routes, including their
location, the concentration of potential business, government and institutional
end-user customers, the economic prospects for the area, available data
regarding transport demand and actual and potential competitive access
providers, also referred to as "CAPs" and CLEC competitors. Market demand is
estimated on the basis of market research performed by us and others, utilizing
a variety of data including estimates of the number of interstate access and
intrastate private lines in the market based primarily on FCC reports and
commercial databases.
We expect to enter into a co-development relationship with one or more
partners to share the costs of building the route as well as the dark fiber
revenue from each constructed route. We recently employed this approach in our
fiber routes from Chicago to Aurora (a suburb of Denver, Colorado), and from
Albuquerque, New Mexico to Grand Junction, Colorado with our partners, Worldwide
Fiber and Tri-State. Typically, independent contractors selected through a
competitive bidding process provide our construction and installation services.
In certain of our network builds, we provide project management services,
including contract negotiation and supervision of the construction, testing and
certification of our facilities.
FIBER CURRENCY, SWAPS AND ACQUISITIONS. When determining the fiber optic
cable and conduit sizing for a particular route, we take into account these
considerations:
- Fiber strands required for our retained network;
- Fiber strands required by our co-development partner's network;
- Projected sales of fibers and conduits along the route;
- Quantity of fibers to be allocated for swaps; and
- Retained empty conduit in the event we desire to deploy different or
advanced technologies.
We believe fiber has a "currency" value depending upon the value of the
route to specific telecommunications service providers. Once we determine a
particular route has a high currency value, we expect to capitalize on this by
using excess fibers and conduit to enable advantageous fiber swaps and sales of
fiber and conduit. If we determine that a particular route is being sufficiently
served by existing fiber, we will not build our own network along that route,
but instead we will use our fiber "currency" to swap for existing fiber along
those routes or we will acquire dark fiber that is already installed by another
company. In this way, swaps will allow us to leverage our network, gain more
geographical coverage and decrease our time to market.
In order to connect our network with our customers, we develop
interconnections from our backbone network into our targeted underserved and
second and third tier markets. We design and install our interconnections using
the most cost effective technology to meet the market's needs that may include
building fiber optic cable, acquiring existing fiber, installing wireless
components, or combinations of these technologies.
LOCAL ACCESS CONVERGENT PLATFORM
We believe establishing a local presence in our target markets will
position us to deploy a convergent local network access platform that will
enable multiple customer applications to be combined at a single physical local
access connection and then travel onto our advanced, fast packet-based backbone
infrastructure. From this convergent platform, we expect to enable our
telecommunications service provider customers to launch their own services to
better serve their customers.
We intend to obtain state certification or authorization as a CLEC in each
state in which we are required to do so, and to sign interconnection agreements
with the relevant ILECs in our target
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markets. Once we have obtained the appropriate state authorization and entered
into interconnection agreements with the ILECs, we will be able to construct our
ILEC central office collocation facilities and obtain and use network elements
from the ILECs. As of the date of this prospectus we were authorized to provide
our products and services in 6 states and have several interconnection
agreements in negotiation with the ILECs.
As of November 22, 1999, we had 25 collocations, which are environmentally
controlled, secure sites designed to house transmission, routing and other
equipment. We are designing our collocations with an average of 100 square feet
in order to provide our customers direct local access via our access platform to
those markets. We intend to expand our network to include multiple collocations
in ILEC central offices within our target markets in order to provide the
platform for our end-to-end service offerings for our customers.
Once our collocations are established, we plan to link these collocations
together within the market using UNE transport from the ILECs in order to
provide our products and services throughout the market. In addition to UNEs
from the ILECs, there are other possible alternatives for us to employ in
linking these central offices. For instance, we may lease or purchase dark
fibers from a third party provider, use wireless connections or possibly even
lay our own local fiber if warranted based upon demand.
EQUIPMENT SUPPLIER RELATIONSHIPS
We have agreed upon an exclusive vendor agreement with Lucent Technologies
which provides for discounted pricing on the fiber that we purchase from Lucent
as well as marketing and engineering support in connection with the expansion of
our network. The effectiveness of this agreement is conditioned on the execution
of documents relating to the financing by Lucent of such purchases of fiber and
the execution of these financing documents is, in turn, conditioned on the
closing of the Contribution and Reorganization Transaction.
Under a Master Agreement between Pathnet and NEC, dated August 8, 1997, we
agreed to purchase from NEC certain equipment, services and licensed software
for us to use in our network under pricing and payment terms the we believe are
favorable. In addition, NEC has agreed, subject to certain conditions, to
warranty equipment that we purchase from NEC for three years, if defective, to
repair or replace certain equipment promptly and to maintain a stock of critical
spare parts for up to 15 years. This agreement with NEC provides for fixed
prices during the first three years of its term.
We have also entered into a Purchase Agreement with the Andrew Corporation
in which we agreed exclusively to recommend to our co-development partners
certain products manufactured by Andrew. In return, Andrew agreed to sell those
products to our co-development partners and to us for a three year period,
renewable for two additional one-year periods at our option. The agreement
generally provides for discounted pricing based on projected order volume.
NETWORK RELIABILITY
We have constructed our Network Operations Center located in Washington,
D.C. This center, the NOC, currently provides real-time, end-to-end monitoring
of our network operations 24 hours a day, seven days-a-week, as well as
pro-active customer care for all of our customers' services. The NOC ensures the
efficient and reliable performance of the network through pro-active early
identification and prevention of potential network disruptions. In addition, the
NOC enables us to schedule and conduct maintenance of our network while
minimizing interference with the use of the network by our customers. Specific
features provided by the NOC include network fault and event management, network
and service level performance management and analysis as well as remote
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configuration of all network elements. Our NOC has full fallback capability and
we believe that it is Year 2000 compliant.
COMPETITION
Competition in the telecommunications industry is intense. In our target
markets, we expect to face increasing competition in the areas of price and
performance, transmission quality, breadth and reliability of our network,
customer service and support, brand recognition and critical relationships with
third parties such as Internet service providers. While we generally will not
compete with telecommunications service providers for end user customers, we may
compete as a "carriers' carrier" with certain of those providers including IXCs
(such as AT&T Corp. and MCI WorldCom, Inc. and Sprint Corporation), wholesale
providers (such as Qwest Communications International Inc., Williams
Communications Group, Inc., DTI Holdings, Inc., Global Crossing Ltd and Level 3
Communications, Inc.), ILECs (such as US West, BellSouth, Bell Atlantic, SBC and
GTE Corporation) and CLECs (such as GST Communications, Inc., ITC/Deltacom, Inc.
and Metromedia Fiber Network, Inc.) who would otherwise be our customers in our
target markets. Other entities which may become our competitors in this regard
include communications service providers, cable television companies, electric
utilities, wireless telephone operators, microwave carriers, satellite carriers,
and large end users with private networks.
Initially, in second and third tier markets our most significant
competitors will be ILECs and other CLECs. Many of the largest ILECs will begin
offering in the near future some of the products and services we plan to offer
and some have already begun to do so. These companies are able to draw upon
established networks, well-known brand names, customer loyalty, a pre-existing
base of management and employees, and greater access to capital than will likely
be available to us. Moreover, many ILECs own the telephone wires they use, and
can bundle digital data services, for example, without having to incur the costs
of negotiating interconnection agreements. As other industry participants also
seek to enter these markets, we will face increasing competition.
Industry consolidation and strategic alliances between participants in the
telecommunications industry will also increase the level of competition we will
face, particularly as the demand for bundling of services surges. New
technologies, further deregulation and other changes in our regulatory
environment will create further competitive pressures as we enter our target
markets.
GOVERNMENT REGULATION
OVERVIEW. Our telecommunications businesses are subject to varying degrees
of federal, state and local regulation. We are a telecommunications carrier
under the terms of the federal Communications Act. As a telecommunications
carrier, we are subject to FCC and state utility commission regulation of our
activities. Local authorities also may regulate the permitting and construction
of our telecommunications facilities.
The Telecommunications Act created a uniform national policy in favor of
competition in all telecommunications market segments. As described below, the
rules and policies implementing the Telecommunications Act remain subject to
agency action and litigation at both the federal and state level. We nonetheless
believe that the national policy in favor of competition that was created by the
Telecommunications Act will lead to increased market opportunities for us.
Because these opportunities require additional agency action before the
Telecommunications Act is fully implemented, and because these actions may be
subject to court review, we cannot predict the pace at which the law will be
fully implemented.
We are required to file federal and state tariffs describing the prices,
terms and conditions of our services, and these tariffs are subject to varying
degrees of regulatory oversight and approval. We must also comply with state and
local license or permit requirements relating to the installation and
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operation of our network. Burdensome license, permit or other regulatory
requirements or developments could make it more difficult for us to comply with
these laws and regulations.
The FCC and state public service commissions generally have the right to
impose sanctions, forfeitures, or other penalties mandating refunds if a carrier
fails to comply with applicable rules. We cannot assure you that regulators or
such third parties will determine that we have complied with all applicable laws
and regulations. Any proceedings against us could have a material adverse effect
on our business, financial condition, or results of operations.
FEDERAL REGULATION. The FCC regulates interstate and international
telecommunications services, and it also regulates the holders of radio
licenses. We are subject to FCC regulation as a common carrier, which means that
we are subject to longstanding general requirements that our rates be "just and
reasonable" and that we not engage in "unjust or unreasonable discrimination" in
serving the public. As a common carrier, we also must file certain periodic
reports and applications with the FCC, and the FCC has jurisdiction to act on
certain complaints for failure to comply with regulatory obligations. We also
are required to file basic tariffs at the FCC for our provision of
telecommunications services generally, although those tariffs are not subject to
pre-effective review and can be amended on one day's notice. We are subject to
the licensing processes of the FCC for the use of our microwave licenses. We
also generally must apply to the FCC for its consent before assigning a radio
license or transferring control (for example, through the sale of stock) of any
company holding radio licenses or common carrier authorizations.
We are not, however, subject to the particular laws and FCC regulations
imposed by the Telecommunications Act on ILECs, which are the existing local
telephone companies including, among others, the former Bell operating companies
and GTE. These regulations have provided, and we believe they will continue to
provide, significant opportunities for us to compete with ILECs for the
provision of competitive telecommunications services. These laws and regulations
require ILECs to:
- Provide "physical collocation" to competitors, a requirement that permits
us and other similarly licensed common carriers to install and maintain
our own network termination equipment at ILEC central offices;
- "Unbundle" components of their local service networks in a
nondiscriminatory manner so that we and other new competitors can obtain
network facilities, equipment, features, functions and capabilities at
cost-based prices (which may include a reasonable profit);
- Permit us and other competitors to "interconnect" with ILEC facilities at
any technically feasible point within their networks, at prices based on
cost (which may include a reasonable profit);
- Engage in "reciprocal compensation" for the exchange of
telecommunications traffic, an obligation that requires ILECs and new
competitors to complete calls originated by competing carriers under
reciprocal arrangements at prices based on a reasonable approximation of
incremental cost, or through the mutual exchange of traffic without
explicit payment;
- Establish wholesale prices for their services to promote resale of
services and facilities by new competitors;
- Establish "number portability" so that customers can maintain their
existing phone numbers when they switch from one telecommunications
provider to another without impairing quality, reliability or
convenience;
- Establish "dialing parity" so that customers will not detect a difference
in quality or complexity in dialing telephone numbers or accessing
operators and emergency services; and
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- Provide nondiscriminatory access to telephone poles, ducts, conduits and
rights of way.
Applicable FCC regulations require ILECs to negotiate in good faith with
carriers requesting any of the above arrangements. If the negotiating carriers
cannot reach agreement in a prescribed time, either carrier may request binding
arbitration of the disputed issues by a state regulatory commission. This set of
obligations provides significant market opportunity for new competitors, but, as
discussed below, we cannot assure you that the various government agencies
responsible for implementing these pro-competitive policies and requirements
will do so in a timely and effective manner.
The Telecommunications Act requires the FCC to establish rules and
regulations to implement its local competition provisions. In August 1996, the
FCC issued rules governing interconnection, resale, unbundled network elements,
the pricing of those facilities and services, and the negotiation and
arbitration procedures that would be utilized by states to implement those
requirements. These rules, which were generally favorable to new competitors,
were vacated in part by a July 1997 ruling of the United States Court of Appeals
for the Eighth Circuit. On January 25, 1999, the United States Supreme Court
issued an opinion upholding the authority of the FCC to establish rules,
including pricing rules, to implement statutory provisions governing both
interstate and intrastate services under the Telecommunications Act. The Court
also upheld rules allowing carriers to select provisions from among different
interconnection agreements approved by state commissions for the carriers' own
agreements (the "pick-and-choose" rule) and a rule allowing carriers to obtain
combinations of unbundled network elements.
The Supreme Court, however, vacated the FCC rule setting forth the specific
unbundled network elements ILECs must make available, finding that the FCC had
failed to apply the appropriate statutory standard. On November 5, 1999, the FCC
responded to the Court's decision by issuing a decision that maintains
competitors' access to a wide variety of unbundled network elements. Six of the
seven unbundled elements the FCC had originally required carriers to provide in
its 1996 order implementing the Telecommunications Act remain available to
competitors. These elements are loops, including loops used to provide
high-capacity and advanced telecommunications services; network interface
devices; local circuit switching, subject to restrictions in major urban
markets; dedicated and shared transport; signaling and call-related databases;
and operations support systems. The FCC removed access to operator and directory
assistance service from the list of available unbundled network elements. In
addition, the FCC added to its list certain unbundled network elements that were
not at issue in 1996. These elements include subloops, or portions of loops, and
dark fiber loops and transport. The FCC did not, however, require ILECs to
unbundle facilities used to provide Digital Subscriber Line service (packet
switches and digital subscriber line access multiplexers). The FCC did not
decide, but sought additional information on, the question of whether carriers
may combine certain unbundled network elements to provide special access
services to compete with those provided by the ILECs. The ability to obtain
unbundled network elements is an important element of our business, and we
believe that the FCC's actions in this area have generally been positive.
However, we cannot predict the extent to which the existing rules will be
sustained in the face of additional legal action and the scope of the rules that
are yet to be crafted by the FCC. For example, the FCC may restrict the use of
UNEs for the provision of services affording long distance companies access to
local telephone networks, which would reduce our competitive price advantage and
limit the market opportunities in that segment of the telecommunications market.
The rates charged for interconnection and unbundled network elements we
require vary greatly. These rates are subject to the approval of state
regulatory commissions, through approval processes that typically involve a
lengthy review of the rates proposed by the ILECs in each state. The final rates
approved typically depend on the ILECs' initial rate proposals and the policies
of the state public utility commission. These rate approval proceedings are
time-consuming and expensive. Recurring and non-recurring charges for telephone
lines and other unbundled network elements may
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increase based on the rates proposed by the ILECs and approved by state
regulatory commissions from time to time, which would have a material adverse
effect on the results of our operations. Moreover, because the cost-based
methodology for determining these rates is still subject to judicial review,
there is great uncertainty about how these rates will be determined in the
future.
Under the rules adopted by the FCC pursuant to the Telecommunications Act,
we have entered into collocation agreements with two major ILECs (BellSouth and
USWest) covering 20 states. We expect these collocation agreements to be part of
the more comprehensive interconnection agreements with these ILECs that are
currently under negotiation. In addition, we are negotiating additional
collocation agreements in other states. We have negotiated with two ILECs for
the provision of unbundled network elements to be used in connection with
competitive telecommunications services. We expect the pace of these
negotiations to continue for the foreseeable future. Although we expect, based
on our experience thus far, that such negotiations will yield acceptable
agreements that will permit us to implement our business plan on schedule, we
cannot predict the extent to which ILECs interpreting the FCC regulations may
seek to frustrate our collocation plans or the extent to which we will need to
seek arbitration or commence litigation to achieve our goal. If we are unable to
enter into, or experience a delay in obtaining, interconnection agreements, this
inability or delay may materially and adversely affect our business and
financial prospects.
The FCC has been reviewing the policies and practices of the ILECs with the
goal of facilitating the efforts of telecommunications companies to obtain
access to central office space and other network facilities more easily and on
more favorable terms. On March 31, 1999, the FCC adopted rules to make it easier
and less expensive for telecommunications companies to obtain central office
space and to require ILECs to make new alternative arrangements for providing
central office space. However, the FCC's new rules have not been uniformly
implemented in a timely manner and may not ultimately enhance our ability to
obtain central office space. Difficulties we experience in obtaining access to
and interconnection with the ILECs' facilities can negatively impact our future
plans for providing certain services.
Our expected provision of DSL is largely unregulated by the
Telecommunications Act or the FCC because we, and the telecommunications
companies that are our customers, are not ILECs. Moreover, our customers
providing DSL service to end users, such as Internet service providers, are
unregulated "information services providers." The FCC affirmed in a report
adopted on April 10, 1998, that Internet service providers will not be subject
to regulation as telecommunications carriers under the Telecommunications Act.
They thus will not be subject to universal service subsidies and other
regulations. We cannot, however, assure you that neither Congress nor the FCC
will alter that regulatory scheme in the future. Further, in August 1998, the
FCC proposed new rules that would allow ILECs to provide their own DSL services
through separate affiliates that are not subject to ILEC regulation. Although
the FCC recently decided some of the other issues raised in that proceeding, the
question of whether ILECs can provide unregulated DSL services through a
separate affiliate remains unresolved. Some members of Congress also have
expressed interest in giving ILECs additional pricing flexibility for high speed
data services and expanding the geographic area in which ILECs may offer these
services to their customers. Any expansion of ILECs' ability to offer high speed
data and Internet services may have an adverse impact on our business. On
November 18, 1999, the FCC decided to require ILECs to share telephone lines
with DSL providers, an action that may foster competition by allowing
competitors to offer DSL services without the purchase their customers to having
to a second telephone line. Whether this development will be implemented in an
effective way remains to be seen. Moreover, it is impossible to predict whether
the FCC or Congress may change the rules under which these services are offered
and, if such changes are made, the extent of the impact of such changes on our
business.
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The Telecommunications Act obligates the FCC to establish "universal
service" mechanisms to ensure that certain subscribers living in rural and
high-cost areas, as well as certain low-income subscribers, continue to have
access to telecommunications and information services at prices reasonably
comparable to those charged for similar services in urban areas. These
mechanisms also are meant to foster the provision of advanced telecommunications
services to schools, libraries and rural health-care facilities. Under the rules
adopted by the FCC to implement these requirements, we and all other
telecommunications providers will be required to contribute to a fund to support
universal service. The amount that we must contribute to the federal universal
service subsidy will be based on our share of specified defined
telecommunications end-user revenues. Therefore, it is difficult to predict in
advance the precise contributions that we will be required to make.
The FCC regulates the fees that local telephone companies charge long
distance companies for access to their local networks. These fees are commonly
called access charges. The FCC is currently considering a proposal, supported by
parts of both the local and long distance telephone industries, that would
restructure and most likely significantly reduce access charges. Changes in the
access charge structure could fundamentally change the economics of some aspects
of our business. Any material reduction in the access charges imposed by local
telephone companies could significantly reduce our price advantage in the market
for services affording long distance companies access to local telephone
networks.
As an enhancement to our local access services, during the second half of
2000, we expect to begin marketing and selling DSL services to our second and
third tier markets. To provide unbundled DSL capable lines to connect each
customer to our equipment, we will use networks owned by ILECs. The terms upon
which we connect our network to ILECs' networks are specified in interconnection
agreements that we must negotiate with the ILECs operating in our existing and
target markets. Federal law requires ILECs to provide access to their networks
through interconnection agreements and to offer network elements to other
telecommunications carriers at rates which generally must be cost-based and
nondiscriminatory. However, we may be unable to negotiate interconnection
agreements on favorable terms. The failure of ILECs to comply with their
obligations under these interconnection agreements could result in customer
dissatisfaction and the loss of potential customers.
We also are regulated by the FCC as the holder of a substantial number of
common carrier fixed point-to-point microwave licenses that we use on the
wireless portion of our network. Under the FCC's rules, we must coordinate our
proposed frequency use with other existing users of the spectrum to prevent
interference. After completing that process, we (and, in some cases, our co-
development partners) must apply to the FCC for the issuance of a license to
permit us to transmit information on the frequencies we desire to use. To obtain
a license we must demonstrate that the owner of the transmission site has
complied with the reporting, notification and technical requirements of the
Federal Aviation Administration for the construction, installation, location,
lighting and painting of transmitter towers and antennae like ours. Once the
license is obtained, we must make routine regulatory filings and obtain the
FCC's prior consent for any assignment of the license or any substantial change
in control of the entity holding the license and for certain modifications to a
licensed facility. We cannot assure you that we, or any of our co-development
partners who desire to be the licensee for their portion of our network, will
obtain all of the licenses or approvals necessary for the operation of our
business, the transfer of any license or the modification of any facility, or
that the FCC will not impose burdensome conditions or limitations on any such
license, transfer or approval.
Our ownership also is regulated by the FCC to ensure that we do not exceed
the foreign ownership restrictions imposed by the Communications Act. Under the
Act, we cannot increase our foreign ownership to a level greater than 25%
without obtaining prior FCC consent. The FCC has
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determined that it will authorize a higher level of foreign ownership, up to
100%, on a streamlined basis where the foreign ownership is by citizens of, or
companies organized under the laws of, World Trade Organization member states.
(A more demanding public interest showing is required by proposals to increase
foreign ownership by citizens or countries of non-WTO member states.) We
currently comply with the 25% cap on foreign ownership, and we will monitor
foreign investment to ensure that we do not exceed that benchmark without
obtaining appropriate FCC consent. These requirements may, in some
circumstances, be applied to our co-development partners as well. If a co-
development partner were to choose to hold the relevant license itself, and not
through a holding company, that co-development partner would be subject a
provision that limits direct foreign ownership of FCC licenses to 20%. The FCC
does not have discretion to waive this limitation. If a co-development partner
exceeded the 20% limitation it would be required to reduce its foreign ownership
in order to obtain or retain its license.
STATE REGULATION. The Telecommunications Act preempts state statutes and
regulations that restrict the provision of competitive local telecommunications
services. State commissions can, however, impose reasonable terms and conditions
upon the provision of telecommunications service within their respective states.
States also can require that telecommunications providers apply for and obtain a
certificate of public convenience and necessity or other authorization prior to
commencing service in their respective states. We are in the process of becoming
certified, to the extent such certification is required, in the 48 contiguous
states as a competitive local exchange carrier ("CLEC") or other competitive
telecommunications carrier under the regulations of each state's regulatory
commission. We currently are authorized or permitted to provide service in six
states: Colorado, Idaho, Iowa, Montana, Oregon and Texas. We have pending
applications before an additional nine state commissions. Although we do not
anticipate any issues that would prevent us from obtaining authorization as a
competitive telecommunications carrier in each of the states in which we will
apply, we cannot assure you that all required state authorizations will be
granted.
In most states, we are required to file tariffs setting forth the general
terms, conditions and prices for services classified as intrastate by the
particular state commission in question. Most states require us to list the
services provided and the specific rate for each service. Under various states'
rules, however, we have regulatory flexibility to set price ranges for specific
services and, in some cases, prices can be set on an individual customer basis.
We also may be required to file applications with some states for the assignment
of our state certifications to any other entity and for any transfer of
substantial control that we decide to undertake in the future. Some states also
may require a filing prior to the issuance of substantial debt or equity
securities or other transactions that would result in a lien upon the property
we use to provide intrastate telecommunications services. States generally
require us to file various reports and pay certain fees, including state
universal service subsidies. Like the FCC, most state commissions are empowered
to consider complaints filed against carriers subject to their jurisdiction. We
cannot assure you that our state certificates will not be revoked or amended by
state commissions.
LOCAL REGULATION. We may be required to obtain local permits for street
opening and construction permits to install and expand fiber optic networks.
Local zoning authorities often regulate our use of towers for microwave and
other telecommunications sites. We also are subject to general regulations
concerning building codes and local licensing. The Telecommunications Act
requires that fees charged to telecommunications carriers be applied in a
competitively neutral manner, but there can be no assurance that ILECs and
others with whom we will be competing will bear costs similar to those we will
bear in this regard.
OTHER LAWS AND REGULATIONS. Although the foregoing discussion provides an
overview of the major regulatory issues that confront our business, this
discussion does not attempt to describe all
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current and proposed federal, state and local rules and initiatives affecting
the telecommunications industry. Other federal and state laws and regulations
are currently the subject of judicial proceedings and proposed additional
legislation. In addition, some of the FCC's rules implementing the
Telecommunications Act will be subject to further judicial review and could be
altered or vacated by courts in the future. We cannot predict the ultimate
outcome of any such further proceedings or legislation.
INTELLECTUAL PROPERTY
We have entered into a license agreement with Pathnet under which we may
use all of Pathnet's tradenames, trademarks and other intellectual property. We
use the name "Pathnet" as our primary business name and service mark, and have
registered that name with the United States Patent and Trademark Office. On
February 26, 1998, Pathnet filed an application in the United States Patent and
Trademark Office to register service mark "A NETWORK OF OPPORTUNITIES" for
communication services. Pathnet also filed an application for the Pathnet logo
on July 27, 1999.
We regard our products, services and technology as proprietary and we
attempt to protect them with patents, copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. These methods may not be
sufficient to protect our technology. We also enter into confidentiality or
license agreements with our employees and consultants, and generally control
access to and distribution of our documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our products, services or technology without
authorization, or to develop similar technology independently.
Pathnet currently has a patent application pending and we intend to prepare
additional applications and seek patent protection for our systems to the extent
possible. These patents may not be issued to us, and if issued, they may not
protect our intellectual property from competition that could seek to design
around or invalidate these patents.
PROPERTIES
Our network and our component assets are the principal properties that we
own. Our installed fiber optic cable is laid on rights of way held by us or our
co-development partners, and our digital wireless network is constructed on our
leasehold interests in telecommunications infrastructure.
Our corporate headquarters are located in Washington, D.C., and Pathnet
leases this space from 6715 Kenilworth Avenue General Partnership, under a Lease
Agreement dated August 9, 1997. Although our facilities are adequate at this
time, we believe that we will be required to lease additional facilities in the
D.C. metropolitan area as a result of anticipated growth. Recently, Pathnet
executed a lease with 11720 Sunrisecorp., L.L.C. for approximately 40,000 square
feet of office space in Reston, Virginia which will become our new headquarters
in the first half of 2000. We also lease office space in Richardson, Texas and
Lewiston, Texas under leases that expire in 2000 and 2001, respectively.
We believe that all of our properties are well maintained.
EMPLOYEES
As of November 22, 1999, we employed 122 people. As needed, we also hire
temporary employees and independent contractor computer programmers. In
connection with our growth strategy, we anticipate hiring a significant number
of additional personnel in sales and other areas of our operations in the near
future. Our employees are not unionized, and we believe our relations with our
employees are good. Our success will continue to depend in part on our ability
to attract and
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retain highly qualified employees. See "RISK FACTORS -- Risks Relating to Our
Company Operations."
LEGAL PROCEEDINGS
From time to time, we are a party to routine litigation and proceedings in
the ordinary course of business. We are not aware of any current or pending
litigation to which we are or may be a party that we believe could materially
adversely affect our results of operations or financial condition.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements that involve risks and
uncertainties including, without limitation, statements relating to our company
and our business units' plans, strategies, objectives, expectations, intentions
and resources. Our actual results could differ materially from those anticipated
in forward-looking statements as a result of various factors, including those
described in the section of this prospectus entitled "RISK FACTORS." You should
assume for purposes of this section that all references to our business, our
actions or conditions affecting us prior to the date of this prospectus are
references to Pathnet's business, actions or conditions affecting Pathnet.
Unless we indicate otherwise, references to our future business, strategies, or
plans, are references to our consolidated business, strategies or plans,
including Pathnet and our other future subsidiaries. We are providing
information regarding Pathnet's performance and results of operations, because
Pathnet will be our sole, direct and wholly owned subsidiary, and we will be
assuming many of Pathnet's assets and obligations, immediately after the closing
of the Contribution and Reorganization Transaction. You should read the
following discussion and analysis in conjunction with our combined financial
statements and related notes included in this prospectus. You can find
additional information concerning our businesses and strategic investments and
alliances in the section of this prospectus entitled "BUSINESS."
OVERVIEW
Since Pathnet's inception on August 25, 1995, its principal activities have
included:
- Entering into strategic relationships with owners of telecommunications
assets and co-development partners;
- Developing and constructing our digital backbone network;
- Negotiating collocation and interconnection agreements and installing
collocations and interconnections off our backbone network;
- Designing and developing our network architecture and operations support
systems, including the buildout and launch of our 24-hour Network
Operations Center;
- Raising capital and hiring management and other key personnel;
- Developing "leading edge" products and services; and
- Procuring governmental authorizations.
As of September 30, 1999, Pathnet had completed 6,100 wireless route miles
of our digital backbone network. In addition, as of September 30, 1999, we had
established seven collocations serving seven of our targeted second and third
tier markets. As of November 22, 1999, we had an additional 1,400 route miles of
network under construction with an additional 18 collocations completed. Pathnet
began offering wholesale transport services with the "turn up" of our first
route in the first quarter of 1998. During 2000, we intend to deploy additional
products and services including bundled wholesale transport and local access
services.
Pathnet has experienced operating losses since its inception, and we expect
these operating losses to continue as we expand our operations. Implementing our
business plan will require significant capital expenditures. See "RISK
FACTORS -- Risks Relating to Our Financing." Our financial
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performance will vary from market to market, and the time when we will achieve
positive earnings before interest, taxes, depreciation and amortization, if at
all, will depend on the:
- Size of our target markets;
- Timely completion of backbone routes, collocations and interconnections;
- Cost of the necessary infrastructure;
- Timing of and barriers to market entry; and
- Commercial acceptance of our services.
SOURCES OF REVENUE
INFRASTRUCTURE SERVICES. We employ a "smart build" approach in the
development of our network that includes determining the level of customer
demand on a route before construction and, in certain cases, entering into
pre-construction sales of dark fiber and conduit. We can sell indefeasible
rights of use or leases of fiber or conduit along a segment of our network at a
fixed price. Under our dark fiber and conduit sales agreements, we expect to
receive all of the proceeds relating to the sale of the dark fiber and conduits
upon completion of the route and acceptance by the customer. Our dark fiber and
conduit sale business is becoming increasingly competitive as other carriers
build and expand their networks. To expedite infrastructure development and
decrease development risk, we have sought, and in the future will continue to
seek, co-developers to share the project construction costs. We have pursued
co-marketing arrangements to facilitate selling the assets along network
segments and we may continue to do so in the future.
MANAGEMENT SERVICES. To date, we have generated revenues primarily from
services related to the construction of our digital network. We expect to
continue construction of our digital network with co-development partners when
these projects 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 the percentage of revenues that we receive from management
services will decline as we near the completion of our network.
WHOLESALE TRANSPORT AND LOCAL ACCESS SERVICES. We provide inter-city and
local wholesale transport services and local access services to our customers on
a long-term or month-to-month basis. We plan to bundle local access services
with our wholesale transport services to provide low cost, 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. We price our customer contracts 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 customers. We seek to price our services competitively in
relation to those of the 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 -- a trend 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
bundled services will increase.
OPERATING EXPENSES
COST OF REVENUE. The primary components of our cost of services to date
have been costs relating to network engineering, operations and maintenance.
With expected growth of our bundled
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wholesale transport and local access services we expect components such as
access costs (including fees for use of the local loop, rent, power and other
fees charged by ILECs, competitive telecommunications companies and other
providers) and costs associated with the provision of services to comprise a
greater portion of our costs of service.
SELLING, OPERATIONS AND ADMINISTRATION. We are building a small and
focused sales and marketing department that should allow us to maintain a low
ratio of overhead expenses to revenues compared to other telecommunications
service providers. Our general and administrative costs include expenses typical
of other telecommunications service providers, including office leases, customer
care, billing, corporate administration and human resources. We expect that
these costs will grow significantly as we expand our operations and that our
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 increase the number of customers connected to our network.
DEPRECIATION AND AMORTIZATION. Because we are primarily a facilities-based
wholesale provider, expenses associated with depreciation of property, plant and
equipment will be a substantial 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, other collocations and
related equipment;
- Depreciation of network control center facilities, furniture, fixtures
and corporate facilities;
- Amortization of rights of way; and
- Amortization of software.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998
During the nine months ended September 30, 1999, we continued to focus on
(1) developing relationships and strategic alliances with owners of valuable
telecommunications assets such as rights of way and with co-development
partners, (2) building out our network, (3) obtaining the regulatory status and
entering into interconnection agreements in each of our target markets to enable
us to obtain unbundled network elements and central office space from the ILECs,
and (4) developing 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
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 our sales of telecommunications services, which
were $1.7 million in 1999 with no corresponding revenue in 1998. We expect that
the majority of our future revenue will be generated from our sale of wholesale
transport services, local access services and backbone infrastructure 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 our
continued buildout of our network and additional staff costs incurred in
developing our infrastructure. We expect selling, general and administrative
expenses to continue to increase in the remainder of 1999 as
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additional staff is added. Cost of revenue reflects direct costs we incurred in
performing construction and management services and providing telecommunications
services.
INTEREST EXPENSE. Interest expense for the three months ended September
30, 1999 and 1998 was approximately $10 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 Notes together with the amortization
expense related to bond issuance costs in respect of the 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 and cash equivalents and
marketable securities as those funds were used in building our network, funding
operations, and making interest payments on our Notes in April and September of
1999. Interest income for the nine months ended September 30, 1999 and 1998 was
approximately $10.5 million and $9.6 million, respectively. The increase in
interest income is attributable to the funds from the Notes generating income
over a nine month period in 1999 versus a six month period in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
During the twelve months ended December 31, 1998, we focused on (1)
developing relationships and strategic alliances with owners of valuable
telecommunications assets such as rights of way and with co-development
partners, (2) building out our network, and (3) hiring key management and other
personnel.
REVENUE. Substantially all of our revenue for the year ended December 31,
1998 consisted of fees received for services we provided to our wireless
co-development partners, including analysis of existing facilities and system
performance, advisory services relating to PCS spectrum relocation matters, and
turnkey network construction and management services. For the years ended
December 31, 1998 and 1997, we generated revenue of approximately $1.6 million
and $162,500, respectively. This increase was attributable to fees we received
for performing construction and management services primarily for one customer.
OPERATING EXPENSES. For the twelve months ended December 31, 1998 and
1997, we incurred operating expenses of approximately $17.9 million and $4.3
million, respectively. This increase results primarily from accelerating the
buildout of our network and additional staff costs incurred in developing our
infrastructure. Cost of revenue reflects direct costs we incurred in performing
construction and management services and providing telecommunications services.
INTEREST EXPENSE. Interest expense for the twelve months ended December
31, 1998 was approximately $32.6 million. We had no interest expense for the
twelve months ended December 31, 1997. Interest expense primarily represents
interest on the Notes together with the amortization expense related to bond
issuance costs in respect of the Notes.
INTEREST INCOME. Interest income for the twelve months ended December 31,
1998 and 1997 was approximately $13.9 million and $159,300, respectively. The
increase in interest income represents interest earned on the proceeds of the
Notes issued in April, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
During the twelve months ended December 31, 1997, we (1) initiated
construction on the first segment of our network, (2) continued focusing on
developing relationships and strategic alliances with owners of valuable
telecommunications assets, and (3) continued the development of our engineering
department and key management personnel.
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REVENUE. Substantially all of our revenue for the year ended December 31,
1997 consisted of fees received for services we provided to our wireless
co-development partners, including analysis of existing facilities and system
performance, advisory services relating to PCS spectrum relocation matters, and
turnkey network construction and management services. For the years ended
December 31, 1997 and 1996, we generated revenue of approximately $162,500 and
$1,000, respectively. This increase was attributable to fees we received for
performing construction and management services.
OPERATING EXPENSES. For the twelve months ended December 31, 1997 and
1996, we incurred operating expenses of approximately $4.3 million and $1.3
million, respectively. The increase results primarily from building our network
and additional staff costs incurred in developing our infrastructure. Cost of
revenue reflects direct costs we incurred in performing construction and
management services and providing telecommunications services.
INTEREST EXPENSE. We had no interest expense for the twelve months ended
December 31, 1997. Interest expense for the twelve months ended December 31,
1996 was $415,357 and represents interest on a bridge loan from the original
investors in our company.
INTEREST INCOME. Interest income for the twelve months ended December 31,
1997 and 1996 was approximately $159,300 and $13,000, respectively. This
increase in interest income represents interest we earned on the proceeds of a
private offering of Series B convertible preferred stock in June 1997 and a
private offering of Series C convertible preferred stock in October 1997.
CAPITAL EXPENDITURES
We have invested a significant amount of capital constructing and deploying
our digital network. We intend to continue to expand our network coverage. We
plan to add a bundled product comprised of local access and wholesale transport
to our existing products. These efforts will require us to fund our operating
losses and we will require significant capital to:
- Continue construction and development of our nationwide network
infrastructure;
- Purchase and install electronics, transmission and interconnection
equipment and other components along the network and as needed to
establish the platform for our local access and bundled services;
- Procure, design and construct central office and other collocation and
interconnection sites; and
- Continue development of our corporate infrastructure.
Capital expenditures were approximately $61.8 million for the nine months
ended September 30, 1999. We expect that our capital expenditures will be
substantially higher in future periods in connection with the expansion of our
network and services in our target markets.
As of September 30, 1999, we had capital commitments of approximately $79.9
million relating to the development of our network pursuant to existing
agreements. From September 30, 1999 until December 31, 2000 we intend to:
- Complete the construction and lighting of network segments to which we
are currently committed, including Chicago, Illinois to Aurora (a suburb
of Denver), Colorado, Grand Junction, Colorado to Alberquerque, New
Mexico and Alberquerque to El Paso, Texas;
- Begin perfection and pre-engineering of selected network segments from
the right of way acquired under the Contribution and Reorganization
Transaction; and
- Commence construction on up to three additional fiber routes;
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- Continue interconnecting and collocating in 60 to 80 of our targeted
underserved and second and third tier markets.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1999, we financed our operations
primarily through private placements of $36 million of equity securities and
$338.7 million of net proceeds raised from the issuance of the 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. In
connection with the Contribution and Reorganization Transaction, Colonial is
contributing an aggregate (in both tranches) of $68 million in cash to us in
exchange for shares of our Series E Convertible Preferred Stock, rights to a
single conduit along the Colonial rights of way and an option to purchase
additional shares of our capital stock. The Contribution and Reorganization
transaction will bring the total cash equity investment in Pathnet Telecom and
our subsidiaries to $100 million, including $25 million which will be received
upon the completion of a fiber optic network during the first calendar quarter
of 2000.
In addition, we expect to finance the cost of some of our equipment through
vendor financing arrangements. We have negotiated with Lucent a proposed credit
facility in which Lucent will, subject to certain conditions (including the
closing of the Contribution and Reorganization Transaction), provide us with
financing for fiber optic cable that we purchase from them. For a description of
the terms and conditions of the proposed financing transaction with Lucent see
"DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING ARRANGEMENTS -- Proposed
Credit Facility with Lucent."
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 through the fourth quarter of 2000. In the event the
strategic investment from Colonial is not consummated or is consummated on
different terms, this projection of available resources may change. After such
time, we expect we will require 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 require additional sources of capital or
additional capital sooner than anticipated. See "RISK FACTORS -- Risks Relating
to Our Financing."
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue exists because many computer systems and software
applications use two, rather than four, digits to designate a particular year.
As a result, these systems and applications may not properly recognize the Year
2000, or process data that includes that date, potentially causing data
miscalculations or inaccuracies, operational malfunctions or failures.
OVERVIEW OF OUR YEAR 2000 PROGRAM. In the fourth quarter of 1998, we began
a corporate-wide program to ready technology systems, 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
Pathnet has operated for only a few years, few legacy systems or applications
exist. We identified all systems and applications that we believe needed to be
modified or reprogrammed to achieve Year 2000 compliance and implemented the
necessary changes.
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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 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 develop 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 be Year 2000 compliant. Responses received
to date indicate a high level of Year 2000 compliance at these companies, but we
cannot assure you 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 buildout 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 our Year 2000
compliance, but we have relied primarily on our own employees to develop and
implement our Year 2000 compliance strategy. Because our existing systems are
relatively new, we have not had to replace any significant portion of them. As a
result our expenditures to implement our Year 2000 plan have not been material
to date and we do not believe our 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 our technology systems, our expenditures
could have material adverse effects 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. The dates by which we
believe the program will be completed are based upon management's best
estimates. We derived these estimates 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 we currently
anticipate. Specific factors that could cause 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. In addition, variability of definitions
of "compliance with Year 2000" may lead to claims relating to products and
services sold by us whose impact we cannot currently estimate. 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.
Due to the general uncertainty inherent in the Year 2000 problem, resulting
in large part from the uncertainty of the Year 2000 readiness of third parties,
we cannot ensure our ability to timely and cost effectively resolve problems
associated with the Year 2000 issue that may adversely affect our operations and
business or expose us to third party liability and we have been unable to fully
determine the risks associated with the reasonably likely worst case scenario.
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
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securities, that typically mature 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. We periodically need additional debt
financing due to our large operating losses, and capital expenditures associated
with establishing and expanding our network coverage increase our financing
needs. 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
obtained on our current debt.
Although 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.
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MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The table below contains information about the ages and positions of our
executive officers, selected key employees, and directors as of the date of this
prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH PATHNET TELECOM
- ---- --- --------------------------------
<S> <C> <C>
Richard A. Jalkut....................... 55 President, Chief Executive Officer and
Director
Robert A. Rouse......................... 50 Executive Vice President, Chief
Operating Officer and President, Network
Services
James M. Craig.......................... 43 Executive Vice President, Chief
Financial Officer and Treasurer
William R. Smedberg, V.................. 38 Executive Vice President, Corporate
Development
Michael A. Lubin........................ 50 Vice President, General Counsel and
Secretary
Shawn F. O'Donnell...................... 34 Vice President, Senior Vice President of
Engineering and Construction
Peter J. Barris......................... 47 Director
Kevin J. Maroni......................... 37 Director
Patrick J. Kerins....................... 44 Director
Stephen A. Reinstadtler................. 33 Director
</TABLE>
Richard A. Jalkut has served as President, CEO and director of Pathnet
since August 1997. He will serve in these capacities for Pathnet Telecom upon
the close of the Contribution and Reorganization Transaction. Mr. Jalkut has
over 30 years of telecommunications experience. From 1995 to August 1997, he
served as President and Group Executive of NYNEX Telecommunications Group, where
he was responsible for all activities of the NYNEX Telecommunications Group, an
organization with over 60,000 employees. From 1991 until 1995, Mr. Jalkut served
as President and CEO of New York Telephone Co. Inc., the predecessor company to
NYNEX Telecommunications Group. Mr. Jalkut currently serves as a member of the
board of directors of HSBC Bank USA, a commercial bank; Ikon Office Solutions,
Inc., a company engaged in wholesale and retail office equipment; Digex
Incorporated; and Home Wireless Networks, a start-up company developing a
wireless product for home and business premises.
Robert A. Rouse has served as Pathnet's Executive Vice President, President
of Network Services since April 1999 and, since September 1999, as Pathnet's
Chief Operating Officer. He will hold these positions for Pathnet Telecom after
completion of the Contribution and Reorganization Transaction. Mr. Rouse joined
Pathnet with over 30 years experience in the telecommunications industry. Before
Pathnet, Mr. Rouse was Executive Vice President of Intermedia, responsible for
network services, engineering and systems. Before that, he spent over 10 years
with MCI - the last three as Senior Vice President of Network Services for
MCI/Concert. In this position, he was responsible for integrating the network
and product functionality between MCI and British Telecom as well as building
global networks. Before joining MCI in 1986, Mr. Rouse spent 17 years with
Frontier Communications, Inc. where he was involved in a series of unregulated
start-up business ventures, and he played a key role in developing Frontier's
long distance company.
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James M. Craig has served as Executive Vice President, Chief Financial
Officer and Treasurer of Pathnet since April 1999. He will serve in these
capacities for Pathnet Telecom upon the close of the Contribution and
Reorganization Transaction. Mr. Craig has 22 years of accounting and finance
experience, including 15 years specifically in the communications industry.
Formerly the Senior Director Treasury Management for Omnipoint Communications,
Mr. Craig was responsible for corporate planning and forecasting. He also served
as a point of contact for investment banks, sell-side analysts and rating
agencies. Before that, Mr. Craig assisted in the launch of two start-up
telecommunications companies, UniSite and National Telecom PCS, Inc. While with
UniSite, he established regional and national alliances between UniSite and
telecommunications tower owners. Mr. Craig also spent a total of 11 years with
MCI, holding positions such as Director of Wireless Communications, Director of
Corporate Development, Director of Telecommunications Group Planning and
Director of Corporate Treasury Group.
William R. Smedberg, V joined Pathnet initially as a consultant in 1996,
served as Vice President, Finance and Corporate Development of Pathnet from
January 1997 to February 1999 and assumed the position of Executive Vice
President, Corporate Development of Pathnet in March 1999. Mr. Smedberg will
serve as Pathnet Telecom's Executive Vice President, Corporate Development after
completion of the Contribution and Reorganization Transaction. Before joining
Pathnet, Mr. Smedberg served in various financial and planning positions at the
James River Corporation of Virginia, Inc. for nine years. In particular, he
served as Director, Strategic Planning and Corporate Development for Jamont, a
European consumer products joint venture among Nokia Oy, Montedison S.p.A. and
James River, from 1991 to 1996, where he was responsible for Jamont's corporate
finance, strategic planning and corporate development. Before that, Mr. Smedberg
worked in the defense industry as a consultant and engineer for TRW, Inc.
Michael A. Lubin has served as Vice President, General Counsel and
Secretary of Pathnet since its inception in August 1995. He will serve in this
capacity for Pathnet Telecom upon the close of the Contribution and
Reorganization Transaction. Before joining Pathnet, Mr. Lubin was an
attorney-at-law at Michael A. Lubin, P.C., a law firm he founded in 1985. Mr.
Lubin has experience in telecommunications, copyright and intellectual property
matters, corporate and commercial law, construction claims adjudication and
trial work. From 1976 until 1981, he served as a Federal prosecutor with the
Fraud Section, Criminal Division, United States Department of Justice.
Shawn O'Donnell has served as Vice President, Senior Vice President of
Engineering and Construction of Pathnet since August 1999. He will serve in this
capacity for Pathnet Telecom upon the close of the Contribution and
Reorganization Transaction. Mr. O'Donnell has more than 14 years of engineering
experience in the telecommunications industry. Before joining Pathnet, Mr.
O'Donnell served as Director of Transmissions and Facility Standards and
Engineering with MCI WorldCom. In that position, he was in charge of a 340+
person team that was responsible for overall transmission and facility
engineering for local, long distance and Internet networks. He also held a
variety of other positions at MCI WorldCom, including Senior Manger of
Transmission Engineering Implementation and Senior Manager of Switched Network
Planning. Before MCI WorldCom, Mr. O'Donnell was a Control Engineer with Potomac
Edison. While there, he was responsible for the management of communications
networks associated with high voltage control systems.
Peter J. Barris has been a director of Pathnet since August 1995 and will
serve as a director of Pathnet Telecom upon consummation of the Contribution and
Reorganization Transaction. Since 1992, Mr. Barris has been a partner; in 1994,
was appointed a General Partner; and, in 1999, was appointed Managing General
Partner of New Enterprise Associates, a firm that manages venture capital
investments. Mr. Barris is also a member of the board of directors of Mobius
Management Systems, Inc., PcOrder.com, Inc. and Careerbuilder, Inc., each of
which is quoted on the NASDAQ National Market.
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Kevin J. Maroni has been a director of Pathnet since August 1995 and will
serve as a director of Pathnet Telecom after the closing of the Contribution and
Reorganization Transaction. Since 1994, Mr. Maroni has been a principal, and, in
1995, was appointed a General Partner of Spectrum Equity Investors, which
manages private equity funds focused on growth capital for Telecommunications
companies. Prior to Spectrum, Mr. Maroni worked at Time Warner and Harvard
Management Company. Mr. Maroni is currently on the board of directors of several
private companies and CTC Communications Corp (which is quoted on the NASDAQ
National Market).
Patrick J. Kerins has been a director of Pathnet since July 1997 and will
serve as a director of Pathnet Telecom after consummation of the Contribution
and Reorganization Transaction. Since March 1997, Mr. Kerins has served as
Managing Director of Grotech Capital Group, which is engaged in venture capital
and other private equity investments. From 1987 to March 1997, he worked in the
investment banking division of Alex Brown & Sons, Incorporated, including
serving as Managing Director beginning in January 1994. Mr. Kerins is a member
of the board of directors of CD Now, Inc., an online retailer of compact discs
and other music related projects which is quoted on the NASDAQ National Market.
Stephen A. Reinstadtler has been a director of Pathnet since October 1997
and will, upon consummation of the Contribution and Reorganization Transaction,
serve as a director of Pathnet Telecom. Since August 1995, Mr. Reinstadtler has
served as Vice President and Director at Toronto Dominion Capital (U.S.A.) Inc.,
where he has been involved in private equity and mezzanine debt investments.
From April 1994 to July 1995, he was Manager at The Toronto-Dominion Bank, where
he was involved in commercial lending activities to the telecommunications
industry. From August 1992 to April 1994, Mr. Reinstadtler also served as
Associate at Kansallis-Osake-Pankki, where he was involved in commercial lending
activities to the telecommunications industry.
ADDITIONAL DIRECTORS TO BE ELECTED
Our board of directors currently consists of Richard Jalkut, Kevin Maroni,
Patrick Kerins, Stephen Reinstadtler and Peter Barris, all of whom are also
directors of Pathnet. Upon the closing of the Contribution and Reorganization
Transaction our stockholders will designate additional directors as provided in
the stockholders agreement that will be executed at the closing.
Upon the closing of the Contribution and Reorganization Transaction, Mr.
Barris and Mr. Maroni will serve as the representative of the holders of our
Series A Convertible Preferred Stock, Mr. Kerins will serve as the
representative of the holders of our Series B Convertible Preferred Stock, Mr.
Reinstadtler will serve as the representative of our Series C Convertible
Preferred Stock, and Mr. Jalkut, our President and CEO, will serve by virtue of
his position as CEO. The remaining directors will be elected as set forth in
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Our Stockholders Agreement."
After an initial "Qualified Public Offering," for so long as BNSF, CSX and
Colonial hold at least 5% of our outstanding voting securities, all of the
stockholders who are party to the stockholders agreement have agreed to vote
their shares to elect each of BNSF's, CSX's and Colonial's designees to the
board of directors. The terms of the stockholders agreement relating to election
of directors (other than the election of the BNSF, CSX and Colonial designees as
described above) will terminate upon the earlier of the date on which no shares
of our preferred stock remain outstanding or, if applicable, on which we
complete an initial "Qualified Public Offering." After the termination of these
stockholders agreement provisions and the conversion of our preferred stock into
common stock, each of our directors, other than the designees of BNSF, CSX and
Colonial, will be elected by a majority vote of our stockholders.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Although we may establish a compensation committee in the future, we do not
currently have one. Unless our board of directors determines otherwise, our
present intention is to keep Pathnet employees, other than our executive
officers, and accordingly our decisions regarding compensation, at the level of
our Pathnet subsidiary. Pathnet does have a compensation committee of its board
of directors, which currently consists of two of Pathnet's directors, Messrs.
Maroni and Barris. Prior to the resignation of Richard Prins from Pathnet's
board of directors in 1999, Pathnet had a three member compensation committee,
consisting of Messrs. Maroni, Barris and Prins. Pathnet's compensation committee
was established to, among other things, administer Pathnet's stock incentive
plans, review and make recommendations to the board of directors concerning the
compensation of executive officers, and consider existing and proposed
employment agreements between Pathnet and its executive officers.
During the fiscal year ended December 31, 1998, no executive officer of
Pathnet served as a member of Pathnet's compensation committee or as a director
of any entity of which any of our or Pathnet's directors served as an executive
officer. No member of Pathnet's compensation committee is currently a Pathnet
employee.
COMPENSATION OF OUR DIRECTORS
Currently, our directors do not receive directors' fees or other
compensation and they are not compensated or reimbursed for their out-of-pocket
expenses incurred in serving as directors or for attending meetings of the board
of directors or its committees. However, our new stockholders agreement
contemplates the election of at least one director who is not an affiliate of
any stockholder or member of management. As a result, after the close of the
Contribution and Reorganization Transaction, we may consider changing the
compensation arrangements for our directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION
We are incorporated under the laws of the State of Delaware.
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a provision in the certificate of incorporation of each corporation
organized thereunder, eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director.
Our certificate of incorporation limits, to the fullest extent permitted by
law, the liability of our directors to us and our stockholders for monetary
damages for breach of their fiduciary duty. This provision is intended to afford
our directors the benefit of the DGCL. This limitation on liability does not
extend to:
- Any breach of a director's duty of loyalty to us or our stockholders;
- Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- Violations of the Delaware General Corporation Law regarding the improper
payment of dividends; or
- Any transaction from which the director derived any improper personal
benefit.
Section 145 of the DGCL, in summary, empowers a Delaware corporation,
within certain limitations, to indemnify its officers, directors, employees and
agents against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement, actually and reasonably incurred by them in
connection with any suit or proceeding other than by or on behalf of the
corporation, if they
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acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interest of the corporation, and, with respect to a criminal action
or proceeding, had no reasonable cause to believe their conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145 of
the DGCL permits a corporation to indemnify its officers, directors, employees
and agents against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit,
provided such person meets the standard of conduct described in the preceding
paragraph, except that no indemnification is permitted in respect of any claim
where such person has been found liable to the corporation, unless the Court of
Chancery or the court in which such action or suit was brought approves such
indemnification and determines that such person is fairly and reasonably
entitled to be indemnified.
Our certificate of incorporation requires us to indemnify our directors and
officers to the extent not prohibited by law for actions or proceedings arising
because of their positions as directors or officers.
Our stockholders agreement provides for indemnification of us, our
directors and officers, and persons who control us within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act for certain
liabilities, including liabilities under the Securities Act.
In addition, Pathnet maintains, and we will maintain, standard directors'
and officers' insurance policies.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Pathnet Telecom
pursuant to the foregoing agreements and provisions, we have been informed that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
COMPENSATION OF OUR EXECUTIVE OFFICERS
We are being formed as part of the Contribution and Reorganization
Transaction and, as such, we have no historical compensation information.
However, we expect that each of the executive officers who will serve as our
officers immediately after closing the transaction will be the individuals that
held the same office at Pathnet immediately before closing. Consequently, the
following tables present the compensation information for Pathnet's last two
fiscal years as illustrative of the total compensation that we (including
Pathnet) will pay to our executive officers.
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The table below presents information about compensation earned by Pathnet's
CEO and each of Pathnet's four other most highly compensated executive officers
who served as executive officers at the end of our last fiscal year. The
officers listed in the table below are referred to as the Named Executive
Officers:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION OTHER SECURITIES
--------------------- ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION* OPTIONS**
- --------------------------- ---- ---------- ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Richard A. Jalkut.......... 1998 $ 400,000 $ -- $ 40,289(1) --
President and Chief 1997 166,154(2) -- 9,857(3) 858,754
Executive Officer
David Schaeffer............ 1998 300,000 -- -- --
Chairman of the Board and 1997 216,923(5) -- -- 430,413
Treasurer(4)
William R. Smedberg V...... 1998 111,250 28,267 -- 78,656
Vice President, Finance and 1997 100,384 -- -- --
Corporate Development(6)
Michael A. Lubin........... 1998 136,840 5,000 -- 15,000
Vice President, General 1997 136,115 -- -- --
Counsel and Secretary
Michael L. Brooks.......... 1998 102,000 38,780 -- 85,732
Vice President, Network 1997 103,077 -- -- --
Operations(7)
</TABLE>
- ---------------
* Except as stated herein, none of the above Named Executive Officers received
perquisites or other personal benefits in excess of the lesser of $50,000 or
10% of that individual's salary plus annual bonus.
** We have not issued any stock appreciation rights or long-term incentive
plans.
(1) Consists of $16,277 for club dues; $7,756 for lodging; $11,685 for airfare;
and $4,571 for other transportation.
(2) Mr. Jalkut began his employment with Pathnet in August 1997, and his salary
was $400,000 per annum in 1997.
(3) Reimbursement for travel expenses.
(4) Mr. Schaeffer ceased to be an executive officer of Pathnet in February 1999,
and resigned as a director of Pathnet on November 4, 1999.
(5) Mr. Schaeffer's salary increased to $300,000 per annum from $150,000 per
annum in August 1997. He no longer receives a salary from Pathnet.
(6) Mr. Smedberg currently serves as the Executive Vice President, Corporate
Development of Pathnet.
(7) Mr. Brooks continues to serve as Vice President, Network Operations of
Pathnet, but is no longer an executive officer of Pathnet.
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STOCK OPTION GRANTS IN OUR LAST FISCAL YEAR
The table below provides information regarding stock options granted to the
Named Executive Officers of Pathnet during the year ended December 31, 1998.
None of the Named Executive Officers received stock appreciation rights. As part
of the Contribution and Reorganization Transaction, each of the option grants
for Pathnet common stock will be assumed by us and will be exercisable for
shares of our common stock on terms and conditions substantially identical to
the terms of the Pathnet options, including terms relating to the option vesting
schedule.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS ASSUMED ANNUAL RATE OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR THE OPTION TERM(1)
OPTIONS EMPLOYEES IN OF BASE EXPIRATION ------------------------------------
GRANTED FISCAL YEAR $/SHARE DATE 0% 5% 10%
---------- -------------- -------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard A. Jalkut........ -- --% $ -- -- $ -- $ -- $ --
David Schaeffer(4)....... -- -- -- -- -- -- --
Michael A. Lubin......... 15,000(2) 1.35 5.20 12/2/2008 -- 49,054 124,312
Michael L. Brooks........ 70,732(3) 6.39 1.13 3/24/2008 287,879 519,191 878,567
15,000(2) 1.35 5.20 12/2/2008 -- 49,054 124,312
William R. Smedberg V.... 63,656(3) 5.75 1.13 3/24/2008 239,080 467,251 786,427
15,000(2) 1.35 5.20 12/2/2008 -- 49,054 124,312
</TABLE>
- ---------------
(1) The information disclosed assumes, solely for purposes of demonstrating
potential realizable value of the stock options, that the fair market value
per share of common stock of Pathnet was $21.97 share as of September 30,
1999 and increases at the rate indicated during the option term.
(2) The options vest ratably over a four year period. The option may be
transferred by will or by the laws of descent and distribution. Upon a
change of control of Pathnet and a termination of the optionee's employment
without cause, the options that would otherwise become vested within one
year will be deemed vested immediately before such optionee's termination.
(3) The options vest ratably over a three year period. The option may be
transferred by will or by the laws of descent and distribution. Upon a
change of control of Pathnet and a termination of the optionee's employment
without cause, the options that would otherwise become vested within one
year will be deemed vested immediately before such optionee's termination.
(4) Mr. Schaeffer is no longer an officer or director of Pathnet.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table lists information about the number and value of
unexercised stock options held by each of the Named Executive Officers as of
December 31, 1998. None of the Named Executive Officers exercised stock options
in 1998 and none of them holds stock appreciation rights.
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FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
DECEMBER 31, 1998 OPTIONS(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard A. Jalkut(2)........................ 286,251 572,503 $9,965,971 $11,930,963
David Schaeffer(3).......................... 215,206 3,835,270 --
Michael A. Lubin............................ 141,465 15,000 3,103,792 251,550
Michael L. Brooks........................... 35,366 50,366 737,027 988,577
William R. Smedberg V....................... 21,217 57,439 442,162 1,135,979
</TABLE>
- ---------------
(1) Based on an assumed market price of Pathnet's common stock of $21.97 per
share as of September 30, 1999.
(2) The options vest ratably over a three-year period and may be transferred
only by will, by the laws of descent and distribution, or to a "Permitted
Transferee," as provided under Pathnet's 1997 Plan. If Mr. Jalkut is
actually or constructively terminated following a "Change in Control," his
options that are unvested at the time of the termination of his employment
and that would have vested within one year following his termination will be
deemed vested immediately before a "Change in Control." Mr. Jalkut has
agreed with Pathnet that the Contribution and Reorganization Transaction
will not constitute a "Change in Control" as defined under Pathnet's 1997
Plan and, as such, the vesting of Mr. Jalkut's options will not be
accelerated due to this transaction.
(3) Pathnet and Mr. Schaeffer have agreed with respect to options originally
granted to Mr. Schaeffer under Pathnet's 1997 Plan, that a total of 107,389
shares of common stock are fully vested at an exercise price of $3.76 per
share, and all other options granted to Mr. Schaeffer under Pathnet's 1997
Plan have terminated or lapsed. Under the terms of Mr. Schaeffer's option
agreement, he has two years from the date of his termination from Pathnet to
exercise the vested portion of his option award.
1995 STOCK OPTION PLAN
We will assume Pathnet's 1995 Stock Option Plan at the closing of the
Contribution and Reorganization Transaction. Additionally, upon the close of the
Contribution and Reorganization Transaction, we will assume, and we have agreed
with the existing option holders to amend, all existing awards under Pathnet's
"1995 Plan" so that the awards will be exercisable for shares of our common
stock rather than common stock of Pathnet. The total number of shares of common
stock that we may issue under the 1995 Plan may not exceed 495,126 shares of
common stock. As of September 30, 1999, Pathnet had awarded options on all
shares reserved under Pathnet's 1995 Plan, at an exercise price of $0.03 per
share. The 1995 Plan will permit our board of directors, or a committee of the
board, to exercise broad discretion to grant stock options to our employees. If
additional shares are authorized under the 1995 Plan, the 1995 Plan will permit
the board of directors to exercise its discretion to determine:
- The exercise price of the options;
- Any vesting provisions, including whether accelerated vesting will occur
with a "Change in Control"; and
- The term of the options, which cannot exceed 10 years.
Within one year following the closing of the Contribution and
Reorganization Transaction, our stockholders must approve our assumption of the
1995 Plan and the options awarded under the Plan.
1997 STOCK INCENTIVE PLAN
At the closing of the Contribution and Reorganization Transaction, we will
assume Pathnet's 1997 Stock Incentive Plan, which will become our 1997 Plan.
Additionally, upon the close of the Contribution and Reorganization Transaction,
we will assume and amend all existing awards under Pathnet's 1997 Plan so that
the awards will be exercisable for our shares of common stock rather than
Pathnet common stock. Our stockholders also must approve our assumption of the
1997 Plan and the options awarded under the Plan. The 1997 Plan will permit our
board of directors, or a
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committee of the board, to grant a variety of awards to employees and
consultants. Under our 1997 Plan, the board of directors will have the authority
to grant:
- Incentive and non-qualified stock options;
- Stock appreciation rights, which are rights to receive an amount equal to
a specified portion of the increase in market value of common stock over
a specified exercise price between the date of grant and the date of
exercise;
- Restricted shares, which involve the immediate transfer of shares of
common stock for the performance of services. Restricted shares must be
subject to a "substantial risk of forfeiture" within the meaning of
Section 83 of the Internal Revenue Code;
- Deferred shares, which involve an agreement to deliver shares of common
stock in the future in consideration for the performance of service;
- Performance awards, each of which is a bookkeeping unit equivalent to one
share of common stock;
- Performance compensation awards; and
- Other stock based awards.
The total number of shares of common stock that may be issued or
transferred under our 1997 Plan may not exceed 5,004,874. The maximum share
number is subject to adjustment in the event of a stock split, stock dividend or
other similar transactions.
The board of directors will have broad discretion in granting and
establishing the terms of awards under our 1997 Plan. However, our 1997 Plan
will contain limitations, including:
- No individual may be granted, in any calendar year, options and stock
appreciation rights for more than 1,160,000 total shares of common stock;
- No individual may be granted, in any one calendar year, performance
compensation awards for more than 1,160,000 shares of common stock or, in
the event the performance compensation is paid in cash, the equivalent
cash value thereof;
- The term of options may not be more than 10 years; and
- Performance compensation awards must specify a performance period not to
exceed one year and pre-established objective performance criteria which,
if achieved, will result in payment.
Similar to our 1995 Plan, our 1997 Plan will allow the board of directors
to exercise broad discretion in determining:
- The exercise price of any stock based award;
- Any vesting terms of an award, including whether vesting will accelerate
with a "Change in Control" (which is described below); and
- The term of the options, which cannot exceed 10 years.
Under our 1997 Plan, the board of directors may establish performance
criteria for purposes of performance awards. The 1997 Plan will also allow the
board of directors to specify performance criteria for stock options, stock
appreciation rights and restricted stock awards that are designated as
performance compensation awards. Performance criteria may be described in terms
of either company-wide objectives or objectives that are related to the
performance of the individual participant or a division, department, region or
function within Pathnet Telecom. Performance criteria applicable to any award to
a participant who is, or is determined by the board of directors likely to
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become, a "covered employee" within the meaning of Section 162(m) of the
Internal Revenue Code must be limited to specified levels of, or growth in, one
or more of these criteria:
- Return on net assets;
- Return on stockholders' equity;
- Return on assets;
- Return on capital;
- Stockholder returns;
- Profit margin;
- Earnings per share;
- Net earnings;
- Operating earnings;
- Price per share; and
- Sales or market share.
Except where a modification would result in an award to a "covered
employee" no longer qualifying as performance-based compensation within the
meaning of Section 162(m) of the Internal Revenue Code, the board of directors
may modify a part or all of these performance criteria as it deems appropriate
and equitable in light of events and circumstances, such as changes in our
business, operations, corporate structure or capital structure.
The option agreements between us and each existing optionee provide that,
if we terminate the optionee's employment either actually or constructively,
following the occurrence of a "Change in Control," the portion of the option
that otherwise would have vested in the 12-month period following the Change in
Control will be deemed vested as of the date immediately before the date of the
Change in Control.
"Change in Control" is defined under the 1997 Plan to mean:
- A sale of all or substantially all of our assets or a merger or other
similar transaction involving us which results in less than a majority of
the voting power of the surviving corporation being held by our common
stockholders immediately before the transaction;
- During any two year period, a majority of the board of directors consists
of persons who are not members of or have not been approved by the
incumbent board of directors; or
- The ownership or acquisition of 50% or more of our voting power by any
person or group.
The option agreements between Pathnet and each of Richard Jalkut and Robert
Rouse provide that if Mr. Jalkut's or Mr. Rouse's employment, whichever the case
may be, is terminated after a Change of Control, then certain of their options
will be deemed to become vested immediately before the "Change in Control." Both
Mr. Jalkut and Mr. Rouse have agreed with Pathnet that the Contribution and
Reorganization Transaction does not constitute a "Change in Control" under
Pathnet's 1997 Plan.
In August 1997, Mr. Jalkut was granted an option to purchase 296,122 shares
of common stock under Pathnet's 1997 Plan, which vests in equal installments
over three years.
As of September 30, 1999, there were options covering 2,624,308 shares of
Pathnet's common stock outstanding under Pathnet's 1997 Plan.
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<PAGE> 75
SCHAEFFER BOARD RESIGNATION
In October 1997, Mr. Schaeffer was an employee of Pathnet and was granted
an option to purchase 430,413 shares of common stock under Pathnet's 1997 Plan.
Mr. Schaeffer is no longer an officer or director of Pathnet and has not been an
officer or director of Pathnet Telecom. In a letter agreement dated November 4,
1999, in which Mr. Schaeffer resigned from his position as a director of
Pathnet, Pathnet and Mr. Schaeffer agreed that Mr. Schaeffer holds options for a
total of 107,389 shares of Pathnet common stock, which are fully vested at an
exercise price of $3.67 per share. We will assume these option grants and
convert them to options for shares of our common stock at closing of the
Contribution and Reorganization Transaction.
JALKUT EMPLOYMENT AGREEMENT
Pathnet is currently a party to an employment agreement with Mr. Jalkut.
Under this employment agreement, Mr. Jalkut will receive a minimum annual base
salary of $400,000 (or any greater amount approved by a majority of the board of
directors), bonuses and other benefits determined by the board of directors.
Additionally, Mr. Jalkut is entitled to receive reimbursement of certain
expenses, all of which expenses may not exceed $50,000 per year. In accordance
with his employment agreement, on August 4, 1997, Mr. Jalkut received
nonqualified stock options for 296,122 shares of common stock at an exercise
price of $3.28 per share; the number of shares and the option price were
subsequently adjusted in a stock split. These options vest ratably over three
years. We have granted Mr. Jalkut registration rights for the shares he will
receive upon exercise of his options. If we terminate Mr. Jalkut's employment he
may elect, within 10 business days of his termination, to have us pay him,
subject to the terms of the Indenture and the Supplemental Indenture, the
aggregate fair value of his options then vested or held by him. We will be
required to make any payments in accordance with his employment agreement.
During his employment and for two years after his termination, Mr. Jalkut's
employment agreement requires him to refrain from investing in businesses or
activities that compete with us, soliciting our employees or otherwise competing
with us, by, for example, working with or for one of our competitors. Mr.
Jalkut's employment agreement also prevents him from disclosing or using our
confidential or proprietary information at any time.
Other than the restrictions on Mr. Jalkut described above and our
obligation to pay severance for one year following the termination of Mr.
Jalkut's employment (depending on the basis for his termination), Mr. Jalkut's
employment agreement will terminate in the event of his death and may be
terminated:
- By us:
(a) Without cause (as defined in his employment agreement), by giving
60 days' prior written notice; or
(b) For cause, generally subject to a 30-day written notice of the
board's intention to terminate him for cause;
(c) Upon Mr. Jalkut's disability (as defined in his employment
agreement); and
- By Mr. Jalkut:
(a) Without cause, by giving 180 days' prior written notice; and
(b) Immediately, upon a constructive termination (as defined in his
employment agreement).
Unless we terminate Mr. Jalkut's employment for cause, or Mr. Jalkut
terminates his employment without cause, Mr. Jalkut is entitled to continue to
receive his salary for 12 months following the termination of his employment
with us.
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OTHER AGREEMENTS
Messrs. Schaeffer, Lubin, O'Donnell, Rouse, Craig and Smedberg each have
entered into an agreement with Pathnet which requires each of them to (1) assign
to Pathnet all inventions developed by them during their employment, (2)
maintain the confidentiality of our proprietary information, and (3) refrain
from working with or for a competitor of ours for two years after his
termination.
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<PAGE> 77
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We summarize in this section selected material terms of our stockholders
agreement. For a more complete description of these rights, we refer you to the
copy of our stockholders agreement filed as an exhibit to the registration
statement of which this prospectus is a part. If there is an inconsistency
between this summary and our stockholders agreement, the stockholders agreement
will control.
OUR STOCKHOLDERS AGREEMENT
Overview
Upon closing of the various contribution agreements comprising the
Contribution and Reorganization Transaction, we will enter into a stockholders
agreement with CSX, Colonial, BNSF, our other preferred stockholders and David
Schaeffer. Our stockholders agreement will put in place at the Pathnet Telecom
level many of the provisions that currently apply under Pathnet's existing
Investment and Stockholders Agreement. Pathnet's existing Investment and
Stockholders Agreement will be terminated after the Contribution and
Reorganization Transaction.
In accordance with our stockholders agreement, each stockholder will agree
to vote in favor of the election of a board of directors consisting of 10
members:
- Two designees of the Series A Preferred Stockholders (initially, a
designee of Spectrum Equity Investors L.P. and the other will initially
be a designee of New Enterprise Associates VI Limited Partnership);
- One designee of the Series B Preferred Stockholders (initially, a
designee of Grotech Partners IV, L.P.);
- One designee of the Series C Preferred Stockholders (initially, a
designee of Toronto Dominion Capital (U.S.A.), Inc.) who may not be a
partner or associate of Spectrum, New Enterprise Associates or Grotech
for so long as they have designation rights under our stockholders
agreement;
- Three designees of the Series D and E Preferred Stockholders (one
designated by BNSF, one by CSX and one by Colonial);
- Our CEO;
- One independent "outside" director, who is neither a member of management
nor an affiliate of any stockholder; and
- One director who will be elected by all voting stockholders voting
together as a single class, as provided by our certificate of
incorporation.
Under the stockholders agreement, we will be subject to covenants
substantially similar to those in effect under Pathnet's Investment and
Stockholders Agreement. For so long as at least 25% of the shares of preferred
stock outstanding immediately after the closing of the Contribution and
Reorganization Transaction remain outstanding, these covenants will require that
we obtain the approval of the holders of two-thirds of the outstanding shares of
preferred stock (all voting as a single class) before we undertake certain
fundamental actions, including mergers, dispositions, acquisitions, amendments
to our certificate of incorporation and bylaws, affiliated transactions, and
certain issuances of securities. In addition, certain actions that would
adversely affect the rights of a single series of preferred stock relative to
any other series of preferred stock would require the majority vote of each
adversely affected series.
Each party to our stockholders agreement will represent and warrant to the
other stockholders that they, he or it (1) has no present intention or plan,
formally or informally, on the closing date to
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<PAGE> 78
transfer or dispose of any of the shares received by such party under their, his
or its contribution agreement, and (2) intends for their, his or its
contribution of Pathnet shares or other property to us in accordance with their,
his or its contribution agreement to be treated as part of a single integrated
transaction in which gain or loss will not be recognized for tax purposes. Each
existing Pathnet stockholder who participates will represent and warrant to the
other parties that it intends its contribution of Pathnet shares to us to
qualify as a tax-free reorganization under Section 368(a)(1)(B) of the Internal
Revenue Code, pursuant to which gain or loss will not be recognized.
Registration Rights
In our stockholders agreement, we will grant registration rights to our
preferred stockholders and to Mr. Jalkut and Mr. Schaeffer. These registration
rights are substantially similar to the registration rights granted to these
same holders in the Pathnet Investment and Stockholders Agreement, except that
Mr. Schaeffer will now have registration rights. The holders of securities
subject to registration rights will have both "demand" and "piggy back"
registration rights.
Demand Rights
We will grant "demand" registration rights for two separate groups of our
equity securities. The groups are broadly distinguished by the identity of the
holders who can demand that we register their shares under the Securities Act.
The first group consists of the holders of:
- Shares of common stock issued to our preferred stockholders, or issuable
to our preferred stockholders upon the conversion of their shares of
preferred stock; and
- Shares of common stock issued or issuable to Mr. Jalkut upon the exercise
of his options.
We refer to these groups of shares as "registrable securities." On three
separate occasions, by the vote of the holders of the applicable percentage of
the registrable securities outstanding in this first group, the holders of the
shares in this group may require us to use our best efforts to file a
registration statement with the SEC in respect of their registrable securities.
Before we make an initial "Qualified Public Offering" (which the stockholders
agreement defines as a public offering of more than $75 million in value of our
securities at a per share price that implies a valuation in excess of $600
million for all of the shares of our capital stock), the holders of at least 67%
of the total number of outstanding registrable securities must affirmatively
vote to exercise any of these demand rights. After we make an initial Qualified
Public Offering, the holders of 20% of the total number of outstanding
registrable securities may make the demand. Although we do not include Mr.
Schaeffer's shares in calculating the percentages for purposes of the demand by
this group, he will be entitled to participate on a proportional basis in any
registration demanded by this group of our stockholders.
Separately, we have granted Mr. Schaeffer a single right to demand that we
register his shares of our common stock under the Securities Act. Mr. Schaeffer
may exercise his demand registration right if: (1) we complete an initial
Qualified Public Offering, and (2) our registration statement filed in respect
of that initial offering either:
- Does not include Mr. Schaeffer's shares of our common stock that he
proposes to register; or
- Has ceased to be effective within the thirty-day period following the
expiration of a mandatory "lock-up" period applicable to all of the
holders of our securities with registration rights. (The lock-up
provisions of our stockholders agreement will prohibit sales of our
securities by the parties to our stockholders agreement for a period up
to 180 days following the completion of an initial public offering.)
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<PAGE> 79
Although they may not initiate a "demand" under this provision, the holders
of our registrable securities identified above may participate on a proportional
basis in any registration demanded by Mr. Schaeffer under this provision of the
stockholders agreement.
In exercising these demand registration rights, the stockholders must in
all cases have selected an underwriter reasonably acceptable to us who is
prepared to underwrite the offering of the shares on a firm commitment basis. We
have additional obligations to assist in the registration and underwriting of
any shares that these holders seek to sell pursuant to their registration
rights. We have a right to defer each of those demand registrations for up to 60
days, if our legal counsel has advised us that filing a registration statement
relating to such a demand registration would require us either (1) to disclose a
material impending transaction and we have determined in good faith that the
disclosure would have a material adverse effect on us, or (2) to conduct a
special audit.
Pathnet has separate "demand registration" obligations under a Warrant
Registration Rights Agreement executed in conjunction with Pathnet's Note and
warrant offering in April 1998. Under that agreement, the holders of a majority
of the Pathnet warrants may require Pathnet on one occasion after an initial
public offering to register under the Securities Act their shares of common
stock received upon the exercise of their warrants, subject to Pathnet's right
to defer the registration of those shares for up to 60 days in similar
circumstances. As we discuss below in "DESCRIPTION OF THE CONTRIBUTION AND
REORGANIZATION TRANSACTION -- Disposition of Existing Pathnet Stock Options and
Warrants," we are proposing to the holders of these rights that we assume
Pathnet's obligations under this Warrant Registration Rights Agreement. If the
requisite holders of the Pathnet warrants consent to the proposed amendments, we
may be required by the terms of the Warrant Registration Rights Agreement to
register additional shares of our common stock upon the exercise of these
warrants.
Piggyback Rights
We will also grant to each of these groups of our stockholders (and, if we
assume Pathnet's obligations to the holders of its warrants, then also to those
warrant holders) so-called "piggyback" registration rights, under which they can
require us to register their shares of common stock whenever we register any of
our equity securities under the Securities Act. These piggyback registration
rights will be subject to underwriter "cutbacks," which means that our managing
underwriter may decide to limit the number of shares added to a registration
that we initiate because the underwriter has concluded that including the
additional "piggyback" shares would have an adverse impact on the marketing of
the securities to be sold in the underwritten offering. These piggyback
registration rights will not apply to any registration relating to a public
offering pursuant to demand registration rights granted to the Pathnet
warrantholders, to the registration of securities with our employee benefit
plans, on any SEC form that does not permit secondary offerings, or to
securities we issue in a merger, exchange offer or similar transaction.
We are required to bear up to $60,000 of registration expenses for each
demand registration under our stockholders agreement. In addition, we have
agreed to indemnify the registration rights holders against, and provide
contribution for, liabilities under the Securities Act, the Securities Exchange
Act of 1934 or other federal or state laws regarding the registration of our
securities. However, we will not indemnify the registration rights holders
against, or provide them contribution for, any untrue statements or omissions
made by us in reliance on and in conformity with information furnished to us in
writing by the registration rights holders.
Preemptive Rights
Under our stockholders agreement, each of our preferred stockholders and
Mr. Schaeffer have the right to participate in certain of our sales of
securities. Specifically, on each occasion between the
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<PAGE> 80
closing of the Contribution and Reorganization Transaction and an initial
"Qualified Public Offering" that we issue shares of our capital stock (or other
securities convertible or exchangeable for our capital stock), our preferred
stockholders and Mr. Schaeffer will have the right to purchase their pro rata
share of the newly issued securities. In addition, in the event that any of our
preferred stockholders or Mr. Schaeffer elects not to purchase his or its pro
rata share of the newly issued securities, the remaining preferred stockholders
and Mr. Schaeffer have the right to purchase those shares as well.
Transfer Restrictions
Mr. Schaeffer's ability to transfer his shares of our capital stock is
subject to restrictions under our stockholders agreement. He is prohibited from
making any transfers other than specifically enumerated "Permitted Transfers."
Those Permitted Transfers include:
- Transfers made in accordance with specified provisions of our
stockholders agreement which, among other things, grant a right of first
refusal to our preferred stockholders with respect to the shares Mr.
Schaeffer proposes to transfer.
- Transfers by Mr. Schaeffer to his spouse or his children, to a trust he
establishes for his spouse or children, upon his death, to a trust
established under his will and other similar transfers, provided that the
transferee enters into an enforceable written agreement that is
satisfactory to us and to a majority of our preferred stockholders,
providing that the shares transferred by Mr. Schaeffer remain subject to
our stockholders agreement.
- Transfers that constitute a bona fide pledge or other granting of a
security interest in Mr. Schaeffer's shares of our stock to secure a loan
for borrowed money, subject to specified restrictions, including
limitations on the purpose of any such loan, the minimum net assets of
the lending institution, and a review of the applicable loan documents by
our outside counsel for compliance with the terms of our stockholders
agreement.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below provides some information regarding beneficial ownership of
our capital stock as of September 30, 1999 for:
- Each of the Named Executive Officers.
- Each of our directors.
- All of our executive officers and directors as a group.
- Each other person, entity or group who we know beneficially owns 5% or
more of any class of our stock.
All share amounts in the table have been adjusted and are presented
assuming that the Contribution and Reorganization Transaction was closed as of
September 30, 1999. Unless otherwise noted, the address of each of our Named
Executive Officers and directors is 1015 31st Street, N.W., Washington, D.C.
20007.
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<PAGE> 82
<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING
COMMON STOCK SERIES A PREFERRED SERIES B PREFERRED
---------------------- ---------------------- ----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
STOCKHOLDER(A) SHARES OF CLASS SHARES OF CLASS SHARES OF CLASS
-------------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Spectrum Equity Investors, L.P.(d)................ 0 0.00% 1,372,668 47.33% 1,220,099 25.48%
Spectrum Equity Investors II, L.P.(d)............. 0 0.00% 0 0.00% 0 0.00%
New Enterprise Associates VI, Limited
Partnership(e)................................... 0 0.00% 522,000 18.00% 685,014 14.31%
Onset Enterprise Associates II, L.P.(f)........... 0 0.00% 522,000 18.00% 463,976 9.69%
Onset Enterprise Associates III, L.P.(f).......... 0 0.00% 0 0.00% 0 0.00%
Paul Capital Partner Funds(g)..................... 0 0.00% 245,989 8.48% 125,144 2.61%
Thomas Domencich(h)............................... 0 0.00% 145,000 5.00% 62,573 1.31%
Toronto Dominion Capital (USA) Inc.(i)............ 0 0.00% 0 0.00% 884,146 18.47%
Grotech Partners IV, L.P.(j)...................... 0 0.00% 0 0.00% 884,146 18.47%
Utech Climate Challenge Fund, L.P.(k)............. 0 0.00% 0 0.00% 442,076 9.23%
Utility Competitive Advantage Fund, LLC(l)........ 0 0.00% 0 0.00% 0 0.00%
BNSF(m)........................................... 0 0.00% 0 0.00% 0 0.00%
Colonial(n)....................................... 0 0.00% 0 0.00% 0 0.00%
CSX(o)............................................ 0 0.00% 0 0.00% 0 0.00%
David Schaeffer(p)................................ 2,900,000 97.4% 0 0.0% 0 0.0%
Richard A. Jalkut(q).............................. 0 0.00% 0 0.00% 0 0.00%
Michael A. Lubin(r)............................... 0 0.00% 0 0.00% 0 0.00%
William R. Smedberg V(s).......................... 0 0.00% 0 0.00% 0 0.00%
Michael Brooks(t)................................. 0 0.00% 0 0.00% 0 0.00%
Kevin J. Maroni(u)................................ 0 0.00% 1,372,668 47.33% 1,220,099 25.48%
Peter J. Barris(v)................................ 0 0.00% 522,000 18.00% 685,014 14.31%
Stephen A. Reinstadtler(w)........................ 0 0.00% 0 0.00% 884,146 18.47%
Patrick J. Kerins(x).............................. 0 0.00% 0 0.00% 884,146 18.47%
All Directors and Executive Officers as a
Group(p)(q)(r)(s)(t)(u)(v)(w)(x)................. 2,900,000 97.39% 1,894,668 65.33% 3,673,405 76.72%
<CAPTION>
SERIES C PREFERRED SERIES D PREFERRED SERIES E PREFERRED
---------------------- ---------------------- ----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
STOCKHOLDER(A) SHARES OF CLASS SHARES OF CLASS SHARES OF CLASS
-------------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Spectrum Equity Investors, L.P.(d)................ 1,363,406 16.67% 0 0.00% 0 0.00%
Spectrum Equity Investors II, L.P.(d)............. 1,363,406 16.67% 0 0.00% 0 0.00%
New Enterprise Associates VI, Limited
Partnership(e)................................... 1,374,051 16.80% 0 0.00% 0 0.00%
Onset Enterprise Associates II, L.P.(f)........... 817,672 10.00% 0 0.00% 0 0.00%
Onset Enterprise Associates III, L.P.(f).......... 272,553 3.33% 0 0.00% 0 0.00%
Paul Capital Partner Funds(g)..................... 136,275 1.67% 0 0.00% 0 0.00%
Thomas Domencich(h)............................... 0 0.00% 0 0.00% 0 0.00%
Toronto Dominion Capital (USA) Inc.(i)............ 1,006,500 12.31% 0 0.00% 0 0.00%
Grotech Partners IV, L.P.(j)...................... 1,006,500 12.31% 0 0.00% 0 0.00%
Utech Climate Challenge Fund, L.P.(k)............. 136,276 1.67% 0 0.00% 0 0.00%
Utility Competitive Advantage Fund, LLC(l)........ 366,980 4.49% 0 0.00% 0 0.00%
BNSF(m)........................................... 0 0.00% 3,413,746 40.11% 0 0.00%
Colonial(n)....................................... 0 0.00% 1,684,115 19.79% 2,867,546 100.00%
CSX(o)............................................ 0 0.00% 3,413,746 40.11% 0 0.00%
David Schaeffer(p)................................ 0 0 0 0.00% 0 0.00%
Richard A. Jalkut(q).............................. 0 0.00% 0 0.00% 0 0.00%
Michael A. Lubin(r)............................... 0 0.00% 0 0.00% 0 0.00%
William R. Smedberg V(s).......................... 0 0.00% 0 0.00% 0 0.00%
Michael Brooks(t)................................. 0 0.00% 0 0.00% 0 0.00%
Kevin J. Maroni(u)................................ 2,726,812 33.35% 0 0.00% 0 0.00%
Peter J. Barris(v)................................ 1,374,051 16.80% 0 0.00% 0 0.00%
Stephen A. Reinstadtler(w)........................ 1,006,500 12.31% 0 0.00% 0 0.00%
Patrick J. Kerins(x).............................. 1,006,500 12.31% 0 0.00% 0 0.00%
All Directors and Executive Officers as a
Group(p)(q)(r)(s)(t)(u)(v)(w)(x)................. 6,113,863 74.77% 0 0.00% 0 0.00%
<CAPTION>
BENEFICIAL OWNERSHIP OF
COMMON STOCK
----------------------------
STOCK PRO FORMA
STOCKHOLDER(A) OPTIONS(B) TOTAL SHARES PERCENTAGE(C)
-------------- ---------- ------------ -------------
<S> <C> <C> <C>
Spectrum Equity Investors, L.P.(d)................ 0 3,956,173 57.06%
Spectrum Equity Investors II, L.P.(d)............. 0 1,363,406 31.41%
New Enterprise Associates VI, Limited
Partnership(e)................................... 0 2,581,065 46.43%
Onset Enterprise Associates II, L.P.(f)........... 0 1,803,648 37.72%
Onset Enterprise Associates III, L.P.(f).......... 0 272,553 8.39%
Paul Capital Partner Funds(g)..................... 0 507,408 14.56%
Thomas Domencich(h)............................... 0 207,573 6.52%
Toronto Dominion Capital (USA) Inc.(i)............ 0 1,890,646 38.84%
Grotech Partners IV, L.P.(j)...................... 0 1,890,646 38.84%
Utech Climate Challenge Fund, L.P.(k)............. 0 578,352 16.26%
Utility Competitive Advantage Fund, LLC(l)........ 0 366,980 10.97%
BNSF(m)........................................... 0 3,413,746 53.41%
Colonial(n)....................................... 1,593,082 6,144,742 67.36%
CSX(o)............................................ 0 3,413,746 53.41%
David Schaeffer(p)................................ 107,389 3,007,389 97.48%
Richard A. Jalkut(q).............................. 572,502 572,502 16.13%
Michael A. Lubin(r)............................... 141,465 141,465 4.54%
William R. Smedberg V(s).......................... 54,936 54,936 1.81%
Michael Brooks(t)................................. 53,049 53,049 1.75%
Kevin J. Maroni(u)................................ 0 5,319,579 64.11%
Peter J. Barris(v)................................ 0 2,581,065 46.43%
Stephen A. Reinstadtler(w)........................ 0 1,890,646 38.84%
Patrick J. Kerins(x).............................. 0 1,890,646 38.84%
All Directors and Executive Officers as a
Group(p)(q)(r)(s)(t)(u)(v)(w)(x)................. 929,341 14,581,936 99.50%
</TABLE>
- ---------------
(a) In accordance with the rules of the Securities and Exchange Commission, each
beneficial owner's holding has been calculated assuming full exercise of
outstanding warrants and options exercisable or convertible by the holder
within 60 days after September 30, 1999.
(b) Only Options exercisable within 60 days after September 30, 1999 are listed.
(c) The pro forma percentages of beneficial ownership of common stock as to each
beneficial owner assumes the exercise or conversion into common stock of all
outstanding options, warrants and convertible securities held by such owner
that are exercisable or convertible within 60 days of September 30, 1999,
but not the exercise or conversion of options, warrants and convertible
securities held by others shown in the table.
(d) Spectrum Equity Investors, L.P.'s and Spectrum Equity Investors II, L.P.'s
address is One International Place, Boston, Massachusetts, 02110.
(e) New Enterprise Associates VI, Limited Partnership's address is 1119 Saint
Paul Street, Baltimore, Maryland, 21202.
(f) Onset Enterprise Associates II, L.P.'s and Onset Enterprise Associates III,
L.P.'s address is 8911 Capital of Texas Highway, Austin, Texas, 78759.
(g) The Paul Capital Partner Funds are five funds that constitute a "group"
under Section 13(d) of the Exchange Act. Each fund's address is: c/o Paul
Capital Partners, 50 California Street, Suite 3000, San Francisco,
California, 94111. The five funds are Paul Capital Partners V L.P., Paul
Capital Partners V (Domestic Annex Fund) L.P., Paul Capital Partners V
International, L.P., Paul Capital Partners VI, L.P. and PCP Associates, L.P.
(h) Thomas Domencich's address is 104 Benevolent Street, Providence, Rhode
Island, 02906.
(i) Toronto Dominion Capital (USA) Inc.'s address is 31 West 52nd Street, New
York, New York, 10019.
(j) Grotech Partners IV, L.P.'s address is 9690 Deereco Road, Timonium,
Maryland, 21093.
(k) Utech Climate Challenge Fund, L.P.'s and Utility Competitive Advantage Fund,
L.L.C.'s address is c/o Arete Ventures, Two Wisconsin Circle, Chevy Chase,
Maryland 20815.
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(l) Utility Competitive Advantage Fund L.L.C.'s address is c/o William T.
Heflin, Managing Director, Kinetic Ventures, L.L.C., 2 Wisconsin Circle,
Suite 620, Chevy Chase, Maryland 20815.
(m) BNSF's address is 2500 Lou Menk Drive, Fort Worth, Texas, 76131.
(n) Colonial Pipeline Company's address is 945 East Paces Ferry Road, NE,
Atlanta, Georgia, 30326.
(o) CSX's address is c/o CSX Real Property, Inc., 301 West Bay Street, J915,
Jacksonville, Florida, 32202.
(p) Mr. Schaeffer is no longer an officer or director of Pathnet and is not an
officer or director of Pathnet Telecom.
(t) Mr. Brooks is no longer an executive officer of Pathnet, but he is included
in the beneficial ownership computation of all directors and officers as a
group because Mr. Brooks was an executive officer of Pathnet at the end of
its last fiscal year.
(u) Mr. Maroni, who is a limited partner of the general partner of Spectrum and
a general partner of the general partner of Spectrum Equity Investors II,
L.P., disclaims beneficial ownership of the shares owned by Spectrum Equity
Investors, L.P. and Spectrum Equity Investors II, L.P.
(v) Mr. Barris, who is general partner of the general partner of New Enterprise
Associates VI, Limited Partnership, disclaims beneficial ownership of the
shares owned by New Enterprise Associates VI, Limited Partnership.
(w) Mr. Reinstadtler, Vice President and Director of Toronto Dominion Capital
(USA) Inc., disclaims beneficial ownership of the shares owned by Toronto
Dominion Capital (USA) Inc.
(x) Mr. Kerins, Managing Director of the general partner of Grotech Partners IV,
LP, disclaims beneficial ownership of the shares owned by Grotech Partners
IV, LP.
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DESCRIPTION OF CONTRIBUTION AND REORGANIZATION TRANSACTION
TRANSACTION OVERVIEW
OVERVIEW. We have entered into agreements providing for the Contribution
and Reorganization Transaction with each of BNSF, CSX, Colonial and all of the
existing stockholders of Pathnet. This section describes the terms of those
agreements and the Contribution and Reorganization Transaction in general. As
discussed in the following section entitled "THE PATHNET SENIOR NOTEHOLDER
WAIVERS AND OTHER PROPOSED INDENTURE AMENDMENTS," we intend by this offering and
the consent solicitation to address the current requirements of the indenture
governing the Notes that would otherwise inhibit our ability to complete the
Contribution and Reorganization Transaction and to operate our businesses
(including the business currently conducted by Pathnet) following the completion
of the Contribution and Reorganization Transaction.
The Contribution and Reorganization Transaction consists of the following
principal steps:
- Our issuance of 8,511,607 shares of our Series D Convertible Preferred
Stock, valued at $187 million, to three new investors -- BNSF, CSX and
Colonial -- in exchange for leasehold interests or comparable license
rights to their railroad and pipeline rights of way in order to construct
and operate our fiber optic telecommunications network;
- Our issuance, at a cash purchase price of $21.97 per share for an
aggregate purchase price of $38 million, of 1,729,631 shares of our
Series E Convertible Preferred Stock to Colonial;
- Our issuance of an additional 1,137,915 shares of our Series E
Convertible Preferred Stock to Colonial at a cash purchase price of $25
million conditioned upon the completion of our fiber optic build between
Chicago, Illinois and Aurora (a suburb of Denver), Colorado;
- Our grant, in exchange for a $1 million cash payment at the closing of
the Contribution and Reorganization Transaction, of an option to Colonial
and certain affiliates of Colonial to purchase up to an additional
1,593,082 shares of our Series E or, under certain circumstances, Series
D Convertible Preferred Stock and a separate option to purchase our
common stock;
- The exchange of all shares of the outstanding common and preferred
Pathnet stock solely for shares of our common and preferred stock on
substantially similar terms, after which we will own 100% of Pathnet;
- Our sale to Colonial of rights in a specified number of conduit miles of
our future network along Colonial's rights of way (or equivalent
telecommunications assets) for a $4 million cash payment at the closing
of the Contribution and Reorganization Transaction;
- Our purchase from Pathnet for $70 million (payable by means of our
promissory note to Pathnet) of the following Pathnet assets:
- three fiber co-development contracts and the agreements related to
those co-development contracts;
- those fiber network assets that are currently constructed and
installed relating to Pathnet's network segment build between
Chicago and Aurora (a suburb of Denver), Colorado; and
- the right to use Pathnet's intellectual property in our business.
- Our borrowing from Pathnet of $50 million to assist in the development of
our fiber optic rights of way received from BNSF, CSX and Colonial.
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THE PARTIES. Pathnet Telecom was formed on November 1, 1999, to effectuate
the Contribution and Reorganization Transaction and become the parent company of
Pathnet. Pathnet, a company formed in August 1995, is a wholesale
telecommunications provider building a nationwide network designed to provide
our customers, who are telecommunications providers, with access to underserved
and second and third tier markets, of which there are over 200. CSX, BNSF and
Colonial are each holders of extensive right of way assets that were originally
acquired and maintained for use in their primary railroad and pipeline
businesses. The other parties to the Contribution and Reorganization Transaction
include all of the existing stockholders of Pathnet.
THE TRANSACTION. BNSF, CSX, and Colonial have agreed to contribute right
of way assets and, in the case of Colonial, both right of way assets and cash,
in exchange for newly-issued shares of our capital stock. At the same time, we
are reorganizing the Pathnet corporate structure, and through an exchange of
shares of our capital stock with existing Pathnet stockholders, Pathnet Telecom
will become the parent company of Pathnet. As discussed below, prior to the
filing of the registration statement of which this prospectus is a part, the
parties executed the definitive contribution agreements providing for these
contributions of assets and exchanges of shares. The closing of those
transactions is conditioned principally upon our obtaining the consents of the
holders of a majority in principal of the Notes.
PURPOSE OF THE TRANSACTION. We plan to use the rights of way and cash
obtained in the Contribution and Reorganization Transaction in the construction
of our fiber optic telecommunications network. BNSF, CSX and Colonial have
committed to enter into right of way leases or licenses permitting us to install
and operate a fiber optic and wireless network across their rights of way for
periods ranging from 30 to 35 years. We expect that the access rights that we
obtain from CSX, BNSF and Colonial will satisfy substantially all of our planned
right of way requirements for our backbone network. We will obtain additional
rights of way as necessary to link our backbone network to our target markets.
Once the contribution transactions with CSX, BNSF and Colonial have closed, we
will have right of way agreements in place to access over 12,000 railroad track
and pipeline miles. One of our purposes in entering into the Contribution and
Reorganization Transaction is to enhance our ability to conduct and finance the
future operations of Pathnet and Pathnet Telecom in an efficient and competitive
manner, but we cannot assure you that we will realize this goal.
CONSENT OF NOTEHOLDERS REQUIRED. The Indenture executed in 1998 between
Pathnet and The Bank of New York as trustee contains the covenants,
restrictions, events of default, and other terms relating to the Notes. Under
the terms of the Indenture, completing the Contribution and Reorganization
Transaction technically would constitute a "change of control" of Pathnet,
triggering its obligation (under Section 1010 of the Indenture) to offer to
repurchase the Notes at a premium to both their face amount and their current
market value. Pathnet likely would not have access to the funds necessary to
meet this repurchase obligation if it were to arise. Moreover, repurchasing the
Notes would deprive Pathnet of resources needed to help fund the development of
the Pathnet and Pathnet Telecom network and other telecommunications businesses.
As a result, the Contribution and Reorganization Transaction if Pathnet is
unable to obtain the waiver of this repurchase obligation from the holders of a
majority in outstanding principal amount of the Notes.
In seeking the waiver of this "change of control," Pathnet will also seek
related waivers and amendments to the terms of the Indenture as more fully
described below in "THE PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED
INDENTURE AMENDMENTS," including a waiver of obligations to consummate the
Excess Proceeds Offer because the Contribution and Reorganization Transaction
constitutes an "Asset Sale" under the terms of the Indenture. Pathnet's purpose
in seeking these related waivers and amendments is to impose upon us
substantially the same covenant restrictions that are currently imposed upon
Pathnet, and to permit inter-company
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transactions between us and Pathnet (and our other subsidiaries) to the same
extent that the Indenture currently permits those transactions between Pathnet
and its subsidiaries.
DESCRIPTION OF THE CONTRIBUTION AND REORGANIZATION TRANSACTION AGREEMENTS
We have executed contribution agreements with our new investors and former
Pathnet stockholders to accomplish the Contribution and Reorganization
Transaction. We summarize some of the material terms of these agreements in this
section. We have filed complete copies of these agreements as exhibits to our
registration statement filed in connection with this offering, and we encourage
you to review the agreements for further details concerning their terms.
CONTRIBUTION AGREEMENTS WITH CSX, BNSF AND COLONIAL. On November 4, 1999,
we entered into definitive contribution agreements with each of CSX, BNSF and
Colonial to issue our shares of Series D and Series E Convertible Preferred
Stock and obtain right of way access rights along their railroad and pipeline
properties and easements. Each of these companies has significant property and
easement holdings in areas where we expect to build and expand our fiber optic
telecommunications network. Under those contribution agreements:
- CSX agreed to enter into a Fiber Optic Access and License Agreement by
which CSX will provide us with access to portions of CSX's extensive
railroad corridors covering the eastern United States;
- BNSF agreed to enter into a Fiber Optic Access Agreement by which BNSF
will provide us with access to portions of BNSF's extensive railroad
corridors covering the western United States; and
- Colonial agreed to contribute access to portions of its pipeline
corridors covering the eastern United States.
The contribution agreements are subject to certain conditions to closing,
which are described in more detail below in "-- Conditions to Closing the
Transaction." In exchange for granting us these rights of way, we will issue to
CSX, BNSF and Colonial shares of our Series D Convertible Preferred Stock. In
addition, our Contribution Agreement with Colonial provides for Colonial to
contribute $38 million in cash in exchange for shares of our Series E
Convertible Preferred Stock. Colonial has agreed to pay this amount at the
initial closing of the Contribution and Reorganization Transaction, and another
$25 million in exchange for additional Series E Convertible Preferred Shares
promptly following Pathnet's substantial completion of the fiber optic build
between Chicago, Illinois and Aurora, a suburb of Denver, Colorado (which
Pathnet is currently constructing with World Wide Fiber, Inc.). We currently
expect Pathnet to complete this fiber build during the first calendar quarter of
2000, but we cannot assure you that construction will be completed within this
time frame.
Colonial will pay an additional $4 million at the initial closing of the
Contribution and Reorganization Transaction in return for the future right to
receive a specified number of "conduit miles" of installed fiber optic conduit
or the equivalent value in other telecommunications assets.
Under the contribution agreements with BNSF, CSX and Colonial, we have made
a variety of representations and warranties to each of the new investors with
respect to the Contribution and Reorganization Transaction, our securities to be
issued to each of them, and the current business and financial condition of
Pathnet. We have also agreed to indemnify the new investors against any breach
of those representations and warranties.
COLONIAL OPTION AGREEMENT. In addition to the contribution and conduit
purchase investments outlined above, our contribution agreement with Colonial
provides for a separate option agreement which will permit Colonial to purchase
additional shares of our stock. Upon the execution of the Colonial Option
Agreement at the closing of the Contribution and Exchange Transaction, Colonial
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will pay us a non-refundable fee of $1 million for the purchase of this option.
Under the Colonial Option Agreement, we have agreed to grant two options to
Colonial in exchange for their cash contribution.
The first option, which may be exercised by a number of Colonial's
affiliated companies, permits Colonial or those affiliates to purchase up to $35
million of additional shares of our Series E Convertible Preferred Stock at the
same purchase price as that paid by Colonial under the Colonial contribution
agreement. Colonial also has the right to exercise $10 million of the $35
million on its own behalf. This option will expire on the later of the date
which is 120 days after the date Colonial's contribution agreement was signed or
15 days after the closing of the Contribution and Reorganization Transaction.
The option agreement also allows us during the same period to enter into
agreements with one or more of Colonial's designated affiliated entities, where
those entities would contribute rights of way in exchange for shares of our
Series D Convertible Preferred Stock at $21.97 per share.
The second option permits Colonial to purchase a number of shares of our
common stock equal to 10% of the total number of shares of common stock that we
actually sell in any initial public offering of our common stock at a price
determined in accordance with the terms of the Colonial option agreement. This
second option must be exercised by Colonial prior to the filing of our
registration statement for an initial public offering of our common stock, but
the shares will be issued only if and when we close on a firm commitment
underwritten initial public offering.
CONTRIBUTION AGREEMENTS WITH PATHNET'S EXISTING STOCKHOLDERS. Concurrent
with our contribution agreements with BNSF, CSX and Colonial, we entered into
contribution agreements with existing Pathnet preferred and common stockholders.
All of the Pathnet common stockholders (except for David Schaeffer) are parties
to one contribution agreement under which those stockholders agreed to exchange
their entire stock and interest in Pathnet for shares of our common stock.
Mr. Schaeffer signed a separate contribution agreement with us under which
he also agreed to exchange his entire stock and interest in Pathnet for shares
of our common stock. Mr. Schaeffer is the only common stockholder that is a
party to the Pathnet Investment and Stockholders Agreement, and he has agreed in
his contribution agreement to enter into our new stockholders agreement.
The holders of Pathnet's Series A, B and C Convertible Preferred Stock have
also elected to participate in the Contribution and Reorganization Transaction.
They executed a contribution agreement, under which they agreed to exchange
their shares Pathnet Series A, B and C Convertible Preferred Stock solely for
shares of our Series A, B and C Convertible Preferred Stock, respectively, with
substantially similar terms for each corresponding series. The contribution
agreement with the existing Pathnet preferred stockholders also requires that
those stockholders enter into our new stockholders agreement. For a discussion
of the provisions of that new stockholders agreement, please refer to the
section below entitled "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Our
Stockholders Agreement."
As with the contribution transactions involving BNSF, CSX and Colonial, the
closing of the contribution transactions involving all of the existing
stockholders of Pathnet remains subject to the effectiveness of this
registration statement, our receiving appropriate waivers and consents from the
holders of the Notes, the FCC, the Antitrust Division of the Department of
Justice and the FTC to all required filings under applicable law.
Under the contribution agreements with the Pathnet existing stockholders,
we have made a limited number of representations and warranties with respect to
the Contribution and Reorganization Transaction and our securities to be issued.
However, these contribution agreements do not contain
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representations and warranties with respect to the business and financial
condition of Pathnet, nor do they contain the indemnification provisions
contained in the contribution agreements with CSX, BNSF and Colonial.
STRUCTURE OF THE PATHNET BUSINESS FOLLOWING THE CONCLUSION OF THE
CONTRIBUTION AND REORGANIZATION TRANSACTION
The structure of the issued and outstanding stock and debt security of
Pathnet business immediately following the closing of the Contribution and
Reorganization Transaction will be as follows:
[PATHNET GRAPHIC]
To facilitate vendor financing and other business relationships that will
be required to permit us to continue to develop and maintain our network, we may
in the future need to incorporate other subsidiaries ("sister" companies to
Pathnet or other subsidiaries of Pathnet). We plan to enter into vendor
financing arrangements, including a pending fiber optic purchase agreement and
related vendor financing facility with Lucent Technologies, Inc., that would
require us to incorporate those separate subsidiaries and to contribute some of
our assets to those subsidiaries. See "DESCRIPTION OF OTHER INDEBTEDNESS AND
OTHER FINANCING ARRANGEMENTS -- Proposed Credit Facility with Lucent."
To support additional vendor and other financing, we (or our relevant
subsidiaries) may in the future need to pledge or secure our assets, together
with any other assets provided by the vendors, in order to obtain vendor
financing. Because the Notes and our Guarantees are unsecured, any security that
we provide to a vendor will be senior to your interests as holders of the Notes.
Moreover, after the Contribution and Reorganization Transaction, we may
establish subsidiaries for purposes of such vendor financing or for other
reasons associated with the operation of our business, which we are permitted to
do under the Indenture and the Supplemental Indenture, and the Supplemental
Indenture, like the Indenture, will not require these new subsidiaries to
guarantee the Notes. Accordingly, if we establish additional subsidiaries in the
future, your Notes will be effectively
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subordinated to the claims of the creditors of those subsidiaries, except in
cases in which we or Pathnet are creditors to the new subsidiaries. In those
cases (and assuming that our status or Pathnet's status as a creditor is
respected in any proceeding relating to a claim as a creditor), our claims still
would be effectively subordinated to any security interests in the assets of the
subsidiary held by vendor finance providers or other creditors.
DESCRIPTION OF FIBER OPTIC ACCESS AGREEMENTS AND RELATED FIBER OPTIC LEASES AND
LICENSES FROM BNSF, CSX AND COLONIAL
Upon the successful completion of the consent solicitation process and the
closing of the Contribution and Reorganization Transaction, we will enter into
two further agreements relating to the rights of way with each of BNSF, CSX and
Colonial. In each case, the first agreement, which we refer to as an "access
agreement," will describe the basic structure of our right to develop the rights
of way. These agreements will address the number of miles available for
development, the nature and duration of any exclusive rights we will have in the
rights of way, and any obligation we have to provide additional benefits to
BNSF, CSX or Colonial. The second agreement, which we refer to as a "lease
agreement," identifies the particular segments in which we will have a right of
way interest. These agreements will also ensure that our construction and
operational activities will not interfere with any of the grantors' rail or
pipeline businesses, including any other contractual obligations to which that
grantor is a party. We describe each agreement with BNSF, CSX and Colonial in
more detail below.
BNSF AGREEMENTS. The access agreement with BNSF authorizes us to develop
up to a specified number of miles of BNSF's rail corridor. Prior to December 31,
2004, we will have the exclusive right to develop approximately 4,000 miles of
this right of way (the "Exclusive Corridors"). In addition, for five years after
commencing construction of each segment along the Exclusive Corridors, and for
three years after commencing construction on all other BNSF rights of way, any
party that requests the right to develop BNSF rights of way for fiber optic uses
must first negotiate with us to provide for their communications needs. If we do
not reach agreement within a specified time period, the party may proceed to
negotiate its development directly with BNSF.
We could lose these exclusivity rights in certain specified circumstances,
including our failure to develop at least 800 miles of the BNSF Exclusive
Corridors before April 30, 2001, and an additional 800 miles per year
thereafter. We must also develop or acquire fiber optic rights in at least 3,000
miles of telecommunications network nationally (including, but not limited to,
the BNSF right of way) by June 30, 2001 and approximately an additional 3,000
miles per year thereafter.
The lease agreement with BNSF, which addresses conditions of construction
and operations, is for a term of 35 years and permits us to install an unlimited
number of fibers and conduits. It requires us to use BNSF personnel for
supervising all construction and to pay all costs associated with using these
personnel. It also contains other provisions associated with construction and
operation of our facilities, including indemnification, insurance provisions and
mechanisms for complying with BNSF safety and operations regulations.
CSX AGREEMENTS. The CSX access agreement authorizes us to develop up to a
specified number of miles of CSX's right of way on the former Conrail system
(the "Conrail Miles") and an additional specified number of miles on the
remainder of CSX's system. For the first three years after the date of the
access agreement (the "CSX Exclusivity Period"), we will have the exclusive
right to develop up to 2,000 of the Conrail Miles, subject to restrictions
concerning the length and location of specific developments ("Construction
Exclusivity"). For an additional four years after the end of the CSX Exclusivity
Period, any party that requests the right to develop a segment of the Conrail
Miles where we have commenced construction must first negotiate with us to
provide for their communications and development needs. If we do not reach an
agreement within a specified time
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period, the party can proceed to negotiate its development with CSX. If we fail
to develop at least 500 miles of CSX rights of way in each year after the date
of the access agreement, or if at least 75% of our development is not in
contiguous segments of 200 miles each, we will lose our Construction Exclusivity
for all segments of right of way on which development is not complete.
The CSX access agreement also provides that we will construct four conduits
for CSX between Boston and Framingham, Massachusetts (the "Boston/Framingham
Conduits") and one conduit for CSX wherever else we develop CSX rights of way
(the "CSX Conduit"). CSX may sell or use the Boston/Framingham conduit for
commercial purposes as soon as we complete construction but may use each
completed segment of the CSX Conduit only for CSX internal communications until
the earlier of five years after completion of construction of that segment of
the CSX Conduit, or ten years after the closing of the Contribution and
Reorganization Transaction.
The CSX lease agreement is for a term of 30 years and addresses the terms
of constructing and operating our telecommunications network on the CSX rights
of way. We must use CSX personnel to supervise our construction activities and
are responsible for all costs associated with using these personnel. We may
install an unlimited amount of fibers but we may not install more than eight
conduits (plus the conduits that we provide to CSX) without CSX's permission.
COLONIAL PIPELINE AGREEMENTS. The Colonial access agreement authorizes us
to develop our network along the entire route of Colonial's right of way up to a
specified number of miles. We have the exclusive right to develop these rights
of way for ten years following the date of the Colonial lease agreement. Any
segment of the Colonial right of way that we have not designated for development
within five years of the date of the lease agreement, or on which development is
not completed within seven years of the date of the lease agreement, reverts to
Colonial and we have no further right to develop those segments.
Concurrent with the closing of the Contribution and Reorganization
Transaction, Colonial will pay us $4 million for our obligation to construct a
single conduit for Colonial along a specified number of miles of Colonial's
right of way. If the full amount of conduit is not available within five years
after the date of the lease agreement, we may provide alternate
telecommunications services or assets of equivalent value on other portions of
our network. Until the fifth anniversary of the date of the lease, Colonial may
use the Colonial conduit only for its internal communications. After that date,
Colonial may sell its conduit on any terms it desires. However, subject to
certain limitations, if Colonial desires to sell any portion of its conduit, it
must first give us an opportunity to purchase that portion on the same terms. If
we decide not to purchase that portion, Colonial may proceed with the sale.
The Colonial lease agreement is for a term of 30 years, which we may renew
for one term of 10 years by paying a fair market value rental rate. Like the
other lease agreements, the Colonial lease agreement addresses construction and
operational issues affecting the Colonial right of way, and provides that we may
not install more than ten conduits (including the conduit we provide to
Colonial).
TERMS COMMON TO THE BNSF, CSX AND COLONIAL AGREEMENTS. In addition to the
terms described above, several additional provisions are common to our
agreements with each of BNSF, CSX and Colonial. Each may purchase
telecommunications capacity on our national telecommunications network at prices
at least as favorable as we are then offering to our other customers. In certain
defined circumstances which constitute a material breach of our obligations
under a lease agreement or an access agreement, the other party may terminate
that agreement.
Our rights under the access agreements and the lease agreements are subject
to the rights of others with existing contractual arrangements with BNSF, CSX
and Colonial. Other provisions in the lease agreements and the access agreements
describe our obligations to maintain certain levels of
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insurance and our obligations to indemnify BNSF, CSX and Colonial for certain
specified liabilities. Our indemnification obligations are broad, and we could
incur significant liabilities if deploying our fiber optic network interferes in
any way with the rail or pipeline operations of BNSF, CSX or Colonial. We are
required to coordinate our construction and maintenance activities with our
partners, and we are in some cases responsible for the actions of their
employees or contractors, even where we do not control them.
While our partners own many of their rights of way in fee, in many other
cases they have only an easement or other limited property interest in their
right of way. In many cases, this easement or other limited property interest
may permit railroad or pipeline uses, but may not permit use of the right of way
for fiber optic development. Where that situation exists, we are responsible for
all costs required to obtain any additional property or legal rights necessary
to permit us to develop each right of way. These costs will vary significantly
and could be substantial. In addition, the process of obtaining these additional
rights is time consuming and could significantly delay completion of affected
segments of our network.
DISPOSITION OF EXISTING PATHNET STOCK OPTIONS AND WARRANTS
STOCK OPTIONS. On September 30, 1999, options to purchase an aggregate of
3,119,434 shares of common stock of Pathnet were outstanding with employees and
several consultants of Pathnet under Pathnet's 1995 Stock Option Plan and its
1997 Stock Incentive Plan. As discussed above in "MANAGEMENT -- 1995 Stock
Option Plan" and "MANAGEMENT -- 1997 Stock Option Plan," we will upon the
closing of the Contribution and Reorganization Transaction assume Pathnet's
obligations under its 1995 Plan and its 1997 Plan. We have entered into
agreements with the two employees of Pathnet who currently hold options issued
under Pathnet's 1995 Plan to amend both the 1995 Plan and their existing option
awards under the Plan. The amended plan and amended awards will provide that
upon the exercise of their options, we will issue to these two optionees shares
of our common stock in lieu of the shares of Pathnet common stock for which the
awards were originally issued.
Under the terms of Pathnet's 1997 Plan as we will assume it, our board of
directors and the committee appointed to administer the Plan will exercise their
authority to amend that Plan and the awards already issued under Pathnet's 1997
Plan at the closing of the Contribution and Reorganization Transaction. The
amended plan and amended awards will provide that upon the exercise of awards
granted under Pathnet's 1997 Plan, we will issue shares of our common stock in
lieu of the shares of Pathnet common stock for which the awards were originally
issued. For a more detailed description of our stock option plans, see
"MANAGEMENT -- 1995 Stock Option Plan" and "MANAGEMENT -- 1997 Stock Incentive
Plan."
WARRANTS. In April 1998, Pathnet issued warrants for the purchase of
shares of its common stock under a Warrant Agreement (and a related Warrant
Registration Rights Agreement) together with the original private placement of
the Pathnet Notes. The Pathnet warrants are not currently exercisable, but
would, unless amended, become exercisable upon the closing of the Contribution
and Reorganization Transaction. Concurrent with this offering and the consent
solicitation, in a separate private transaction, Pathnet plans to approach the
qualified institutional buyers permitted to hold the warrants to request that
they agree to amend the terms of the Pathnet warrants, the effect of which would
be to waive their right to exercise their warrants for shares of Pathnet common
stock upon the closing of the Contribution and Reorganization Transaction. In
return, we propose to amend the Warrant Agreement (and the related Warrant
Registration Rights Agreement) to require us, upon the closing of the
Contribution and Reorganization Transaction, to convert their existing warrants
into warrants to purchase shares of our common stock on substantially similar
terms. The terms of the Warrant Agreement provide that Pathnet may amend or
waive any term of the warrants with the consent of the holders of at least a
majority of the outstanding warrants.
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Neither the consent solicitation for the Notes nor the Contribution and
Reorganization Transaction are conditioned upon the success of the warrant
transaction. If the warrant consent solicitation is not successful, the Pathnet
warrants will remain outstanding, and will be exercisable upon the closing of
the Contribution and Reorganization Transaction. For additional information
concerning the Pathnet warrants, see "DESCRIPTION OF CAPITAL STOCK -- Warrants."
CONDITIONS TO CLOSING THE CONTRIBUTION AND REORGANIZATION TRANSACTION
The conditions listed below must be met before we, or the other parties to
the contribution agreements, are obligated to complete the Contribution and
Reorganization Transaction:
- There must be no court order or injunction restraining the Contribution
and Reorganization Transaction;
- As required by the Hart-Scott-Rodino Antitrust Improvement Act of 1976,
as amended, and the FTC rules promulgated thereunder, BNSF, CSX, Colonial
and certain existing Pathnet stockholders must file premerger
Notification and Report Forms with the FTC and Department of Justice and
all waiting periods applicable to such filings must have either expired
or been terminated early so that all HSR requirements arising from our
transaction will have been satisfied;
- If required by applicable law, we must obtain consents from the FCC or
applicable state public utility commissions either to transfer or license
the FCC or state authorizations and licenses currently held by Pathnet
and its subsidiaries to us, or to continue to operate under the current
Pathnet FCC and state authorizations and licenses;
- All of the representations and warranties made by BNSF, CSX, Colonial and
the existing Pathnet stockholders in the contribution agreements must be
correct in all material respects on the date those agreements are signed
and on the date that the transactions described in the agreements are
completed before we are obligated to close;
- All of the representations and warranties made by Pathnet or by us in the
contribution agreements must be correct in all material respects on the
date those agreements were signed and on the date the transactions
described in the agreements are completed before the other parties are
obligated to close;
- We must have performed our obligations under the contribution agreements
in all material respects;
- On the date the transactions described in the contribution agreements
close, we must also close, as a single overall plan of contribution,
contribution agreements with (1) each of BNSF, CSX and Colonial; (2) the
holders of at least 90% of Pathnet's preferred stock; and (3) certain
common stockholders of Pathnet; so that immediately after closing, we
will own enough Pathnet stock to constitute control under a provision of
the tax code that will require us to hold 80% or more of Pathnet's
outstanding voting stock and 80% or more of any class of Pathnet
non-voting stock;
- All parties to the contribution agreements must deliver closing documents
listed in the contribution agreements, such as certified board
resolutions from us and from Pathnet authorizing the Contribution and
Reorganization Transaction, and certificates from us certifying that the
representations and warranties we make in the contribution agreements are
correct; and
- Pathnet and we must have obtained the required consents from the holders
of the Notes to certain waivers and amendments to the Indenture governing
the Notes.
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THE PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED
INDENTURE AMENDMENTS
In April 1998, Pathnet issued $350 million in principal amount of 12 1/4%
Senior Notes due 2008. A separate agreement, called the Indenture, contains a
series of covenants, restrictions, events of default, and other terms relating
to the Notes. When we refer in this document to the "12 1/4% Notes" (or
sometimes the "Senior Notes" or just the "Notes") and the Indenture, we are
referring to those notes and that agreement unless we expressly state otherwise.
The Indenture was originally filed by Pathnet in connection with the
registration of the Notes in 1998 and was an exhibit to that registration
statement, and we are incorporating that original Indenture as an exhibit to the
registration statement of which this prospectus is a part.
Before the Contribution and Reorganization Transaction can occur, Pathnet
needs to obtain a waiver of certain provisions of the Indenture, namely the
"Change of Control" repurchase obligation and the "Excess Proceeds Offer"
obligation, each of which is more fully described under the heading "Waiver of
Pathnet Obligations" below. Under Section 1019 of the Indenture, the holders of
at least a majority in outstanding principal amount of the Notes can waive
Pathnet's compliance with the Change of Control Offer obligation and with the
Excess Proceeds Offer obligation in connection with the closing of the
Contribution and Reorganization Transaction.
To facilitate the consents to the necessary waivers for the Contribution
and Reorganization Transaction, we are proposing to issue to the holders of the
Notes our senior irrevocable and unconditional Guarantees of the Notes. The
holders of the Notes will have recourse against us, as the ultimate parent
entity of the underlying business, in the form of our Guarantees of Pathnet's
payment on the Notes (as described more fully under the heading "DESCRIPTION OF
THE GUARANTEES" below). You do not need to provide your consent as a holder of
Notes to our issue of the Guarantees. However, we will not issue the Guarantees
unless we obtain the requisite number of consents, as described below, and close
on the Contribution and Reorganization Transaction.
In addition to our agreement to issue the Guarantees, upon the receipt of
the requisite consents, we propose to become a party to and be bound by a
Supplemental Indenture. The Supplemental Indenture will contain covenants that
correspond to the Indenture covenants currently applicable to Pathnet. In return
for our agreement to become bound by the Supplemental Indenture covenants and to
guarantee Pathnet's obligations under the Notes, Pathnet wishes to amend the
scope and application of several terms of the Indenture. By proposing the
amendments, Pathnet intends solely to expand the corporate group covered by the
Indenture to include Pathnet Telecom and its other Restricted Subsidiaries (as
defined in Supplemental Indenture), and thereby permit transactions between
Pathnet and Pathnet Telecom (and our other future subsidiaries) to the same
extent that the Indenture currently permits such transactions between Pathnet
and its Restricted Subsidiaries (as defined in the Indenture). Accordingly,
Pathnet proposes to amend the scope of the restrictions in the Indenture that
previously applied to Pathnet and its Restricted Subsidiaries to apply more
broadly to include us and any other Restricted Subsidiaries (as defined in
Supplemental Indenture) that we may create in the future that would, if Pathnet
created them, fall within the Indenture definition of Restricted Subsidiaries.
In order to effect the proposed amendments, it will also be necessary to make
amendments to a number of other defined terms of the Indenture.
Pathnet may amend most terms of the Indenture by obtaining the approval of
the holders of at least a majority in outstanding principal amount of the Notes.
However, Section 902(2) of the Indenture provides that certain provisions of the
Indenture (including the Change of Control Offer obligation and the Excess
Proceeds Offer obligation) cannot be amended without the consent of the holders
of all outstanding Notes. Pathnet intends to preserve without modification those
covenant obligations that cannot be amended without the consent of the holders
of all outstanding Notes. We
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describe the proposed amendments to the Indenture more fully in "Proposed
Indenture Amendments" below.
Pathnet has undertaken the consent solicitation process in order to obtain
the waivers and consent to the proposed amendments from the holders of at least
a majority in outstanding principal amount of the Notes. The consent
solicitation process and the documentation produced in connection with it is
described in more detail in "The Consent Solicitation Process" below. The
consent solicitation documentation is included as an exhibit to the registration
statement of which this prospectus is a part.
WAIVER OF PATHNET OBLIGATIONS
Waiver of "Change of Control" Offer Obligation. Section 1010 of the
Indenture requires Pathnet to repurchase the Notes at a premium if a "Change of
Control" (as that term is defined in the Indenture) occurs before the Notes
mature in 2008. The Contribution and Reorganization Transaction involves a
proposed exchange of our shares with all of Pathnet's current stockholders.
Interposing Pathnet Telecom as a holding company for Pathnet technically
constitutes a "Change of Control" of Pathnet under the applicable definition in
the Indenture. As a result, if this change of control repurchase provision were
to apply to the Contribution and Reorganization Transaction, closing the
Contribution and Reorganization Transaction would trigger Pathnet's obligation
under the Indenture to offer to repurchase the Notes at 101% of their face
value, plus accrued and unpaid interest.
Pathnet does not have the funds to finance the repurchase of the Notes at
the price required by the Section 1010 change of control provision of the
Indenture. Moreover, the repurchase obligation would deprive us and Pathnet of
the funds necessary to contribute to the development of our telecommunications
business, and BNSF, CSX, and Colonial would be unwilling to invest in us on the
terms provided in the contribution agreements if Pathnet remained subject to the
repurchase obligation. As a result, if Pathnet does not obtain from the
requisite holders of a majority in outstanding principal amount of the Notes the
necessary waiver under Section 1019 of the Indenture of the Change of Control
Offer Obligation, the Contribution and Reorganization Transaction will not take
place, and BNSF, CSX and Colonial will not invest in us as contemplated in the
contribution agreements.
Waiver of "Excess Proceeds Offer" Obligation. Section 1017 of the
Indenture requires Pathnet to make an Excess Proceeds Offer (as that term is
defined in the Indenture) in connection with certain sales and other conveyances
of assets and similar transactions. The Excess Proceeds Offer provision in
effect requires Pathnet to apply excess cash generated from the sale of Pathnet
assets outside the ordinary course of business -- to the extent not applied to
repayment of the Notes or investment in other telecommunications assets -- to a
proportional repurchase of the Notes.
Pathnet seeks a one-time waiver, pursuant to Section 1019 of the Indenture,
of the obligation to make an "Excess Proceeds Offer" to permit it to sell to us
in return for a promissory note in the principal amount of $70.0 million the
following assets:
- $ 50 million in cash and marketable securities remaining from the
proceeds of the original issue of the Notes;
- The fiber optic network assets already installed and constructed along
the Chicago to Aurora route;
- The Agreement between Pathnet and World Wide Fiber dated March 31, 1999,
relating to the development of the fiber optic route between Chicago and
Aurora, Colorado, a suburb of Denver and the joint marketing agreement
and other documents and agreements relating to that agreement and the
assets acquired in accordance with that agreement;
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- The Dark Fiber Network Agreement between Pathnet and Tri State dated
August 5, 1999 relating to the development of the fiber optic network
between Albuquerque, New Mexico and Grand Junction, Colorado and the
related escrow arrangements and other documents and agreements with
Tri-State, including the associated right of way agreement with Public
Service of New Mexico;
- The fiber optic development agreement, joint marketing agreement and
other related documents and agreements with CapRock Telecommunications
Corp.; relating to the development of an approximately 340 route mile
fiber route between El Paso, Texas and Albuquerque, New Mexico; and
- The right to use Pathnet's tradenames, trademarks and other intellectual
property.
These sales and other transfers by Pathnet to us would constitute an Asset Sale
and would trigger Pathnet's obligation to make and consummate an Excess Proceeds
Offer. The imposition of this obligation would deprive us and Pathnet of funds
necessary to contribute to the development of our telecommunications business.
Accordingly, Pathnet, BNSF, CSX, and Colonial have conditioned their obligation
to consummate the Contribution and Reorganization Transaction upon Pathnet
having obtained a waiver of the Excess Proceeds Offer obligation from the
requisite holders of the Notes. As a result, if Pathnet does not obtain from the
holders of a majority in outstanding principal amount of the Notes the necessary
waiver under Section 1019 of the Indenture of the Excess Proceeds Offer
obligation, the Contribution and Reorganization Transaction will not take place,
and BNSF, CSX and Colonial will not invest in us as contemplated in the
contribution agreements.
Following the completion of the Contribution and Reorganization
Transaction, we expect that Pathnet will:
- Continue to own and operate its existing 6,300 route miles of wireless
network segments and the associated wireless partner contracts, together
all of Pathnet's existing central office collocations, the Network
Operations Center, intellectual property previously developed by Pathnet
and the current Pathnet employees; and
- Provide management and general and administrative services, and related
Network Operations Center functions and support, to Pathnet Telecom and
other companies within the Pathnet Telecom affiliated group, pursuant to
the terms of a management services agreement that we plan to execute with
Pathnet at the closing of the Contribution and Reorganization
Transaction.
We expect that Pathnet Telecom, either directly or through other
subsidiaries of either Pathnet or Pathnet Telecom, will conduct the fiber and
other businesses made possible by the contribution of the railroad and pipeline
company rights of way.
PROPOSED INDENTURE AMENDMENTS
The proposed Indenture amendments are designed to impose upon us and our
Restricted Subsidiaries restrictions parallel to those that the Indenture
currently imposes upon Pathnet and its Restricted Subsidiaries, and to permit
transactions between Pathnet and us (and our other Restricted Subsidiaries) to
the same extent that the Indenture currently permits such transactions between
Pathnet and its Restricted Subsidiaries. The necessary amendments to the
Indenture will be contained in the Supplemental Indenture, which will bind both
Pathnet and us.
The following description summarizes the material amendments to the
Indenture that Pathnet proposes to make in the Supplemental Indenture. This
description does not restate the Supplemental Indenture in its entirety and is
subject to and qualified in its entirety by reference to the provisions of the
Supplemental Indenture, which is incorporated by reference into this prospectus.
We urge you to read the Supplemental Indenture, which is filed as an exhibit to
the registration statement of which
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this prospectus is a part. Capitalized terms used in this description have the
meaning given to them in the Indenture as amended by the Supplemental Indenture
unless we refer to the "original Indenture," in which case terms are used as
defined in that version.
- CERTAIN DEFINITIONS IN THE INDENTURE. The definitions used in the
original Indenture will be amended to the extent necessary to effect the
proposed amendments to the original Indenture described below. Revised
definitions that are used generally throughout the Supplemental Indenture
will be contained in Section 102 of the Supplemental Indenture.
As discussed above, the Indenture (Section 902(2)) provides that two of
Pathnet's obligations cannot be amended, changed or modified without the
consent of the holders of each outstanding Note. These are Pathnet's
obligations to make and consummate (1) an Excess Proceeds Offer with
respect to any Asset Sale by Pathnet or any of its Restricted
Subsidiaries in accordance with Section 1017 of the Indenture; and (2) a
Change of Control Offer in the event of a Change of Control of Pathnet in
accordance with Section 1010 of the Indenture. The Indenture also
provides that Pathnet cannot, without the consent of the holder of each
affected Note, amend the definitions relating to these obligations in any
way that would amend, change or modify any of these obligations.
Accordingly, none of the amendments in the Supplemental Indenture in any
way amends, changes or modifies Pathnet's independent obligation to make
and consummate an Excess Proceeds Offer or a Change of Control Offer
under the Indenture.
However, in order to effect the amendments necessary to impose
corresponding obligations on us, Pathnet must amend certain defined terms
that are otherwise used in Section 1017 of the original Indenture. For
ease of application, we have reproduced in the Supplemental Indenture as
a new Section 1017(a) of the Indenture the independent obligation on
Pathnet and its Restricted Subsidiaries pursuant to Section 1017 of the
original Indenture to make an Excess Proceeds Offer in respect of any
Asset Sale by those entities. We have also reproduced (in Section 103 of
the Supplemental Indenture and without the inclusion of any references to
us) the applicable definitions from Section 102 of the Supplemental
Indenture used in Section 1017(a) of the Supplemental Indenture. These
"Section 1017(a)-only" definitions represent definitions previously set
forth in Section 101 of the Indenture that have been modified solely to
conform to changes to other defined terms or provisions of the Indenture
necessitated by the new corporate structure. Examples of these amendments
are the frequent replacement of the term "Restricted Subsidiary" (which
meant all restricted subsidiaries of Pathnet under Section 101 of the
original Indenture but now means all restricted subsidiaries of Pathnet
and us under Section 102 of the Supplemental Indenture) with the new term
"Restricted Company Subsidiary," which means all restricted subsidiaries
of Pathnet. These changes preserve the meaning of the original provisions
of Section 1017 of the Indenture.
- MODIFICATION AND AMENDMENT. Section 901 of the Indenture specifies the
amendments that Pathnet and the Trustee can make without the consent of
the holders of Notes. Section 902 states that Pathnet and the Trustee
must have the unanimous consent of holders of the Notes to make any of
the amendments specifically listed in that section, but that any other
amendment can be made with the consent of a majority of holders of the
Notes. These sections are modified in the Supplemental Indenture so that
we can make amendments on the same terms as Pathnet, except that any
amendment to the Guarantees adverse to the holders of the Notes requires
unanimous consent of the holders.
The defined terms used in Section 1010 of the original Indenture are
either unamended in the Supplemental Indenture, or were already defined
within that Section. Accordingly, Pathnet does not propose to reproduce
these terms in a separate section of the Supplemental Indenture.
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Defined terms listed in Section 101 of the Indenture that do not need to
be amended for the purposes of the Supplemental Indenture, and are not
included in the revised definitions in Section 102 or 103 of the
Supplemental Indenture, retain the meaning given to them in the
Indenture.
- EVENTS OF DEFAULT. Section 501 of the Indenture currently contains the
definition of "Event of Default." The Supplemental Indenture deletes this
section in its entirety and inserts the same definitions of "Event of
Default" in the definition sections, except that:
- the same Events of Default that previously applied to Pathnet (and in
several cases to any of Pathnet's "Significant Subsidiaries") will also
be triggered by us (and in several cases any of our Significant
Subsidiaries) and
- the Supplemental Indenture will include an additional Event of Default
for the Guarantees ceasing to be in full force and effect before payment
in full of the Notes.
- CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. Article 8 of the
Indenture currently restricts the ability of Pathnet and its Restricted
Subsidiaries to consolidate or merge with or into any other person or
entity or to sell, assign, convey, transfer, lease or otherwise dispose
of all or substantially all of the properties or assets of Pathnet or its
Restricted Subsidiaries. The Supplemental Indenture amends this Article
so that the corresponding restrictions apply to us and our Restricted
Subsidiaries as well as Pathnet and its Restricted Subsidiaries, except
that:
- the exceptions for transactions with Restricted Subsidiaries will
include Pathnet and our Restricted Subsidiaries (as redefined in the
Supplemental Indenture to include any of our other direct or indirect
subsidiaries, which would if Pathnet incorporated them, fall within the
original Indenture definition of Restricted Subsidiaries); and
- with respect to us, the provisions relating to substitution of
successors and the requirement to secure the Notes in certain events
apply to our obligations under the Guarantees.
In determining whether the merger, conveyance, transfer or lease satisfies
paragraph (3) of Indenture Section 801 (with respect to our ability to
incur additional Indebtedness), the test refers to our "Consolidated
Indebtedness to Consolidated Operating Cash Flow Ratio" calculated by
reference to Pathnet, Pathnet Telecom and all of the Restricted
Subsidiaries on a consolidated basis.
- MAINTENANCE OF OFFICE OR AGENCY. Section 1002 of the Indenture currently
requires Pathnet to maintain an office or agency in The City of New York
where Notes can be presented or surrendered for payment, or surrendered
for registration of transfer or exchange and where notices and demands to
or upon Pathnet in respect of the Notes and the Indenture can be served.
The Supplemental Indenture provides that we are also required to maintain
an office for the service of notice or demands on us with respect to the
Guarantees on the terms set out in that section.
- MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST. Section 1003 of the
Indenture currently places certain obligations on Pathnet with respect to
its dealings with Paying Agents and regulates the terms on which Pathnet
is able to make any payments on the Notes directly to any holder of the
Notes. The Supplemental Indenture provides that our dealings with Paying
Agents, and our ability to make payments directly to the holders of Notes
pursuant to the Guarantees, are regulated in the same manner.
- AFFIRMATIVE COVENANTS. These provisions of the Indenture currently
contain affirmative covenants of Pathnet (and in certain cases its
subsidiaries or Restricted Subsidiaries):
- Section 1004 (corporate existence);
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- Section 1005 (payment of taxes and other claims);
- Section 1006 (maintenance of properties);
- Section 1007 (insurance);
- Section 1008 (statement by officers as to default); and
- Section 1009 (provision of financial statements).
The Supplemental Indenture amends these covenants so that each affirmative
covenants also applies to us (and, where the corresponding covenant from
the Indenture is so applicable, to any other subsidiaries or Restricted
Subsidiaries that we may in the future incorporate), except that:
- the separate SEC filing requirements and the obligation to prepare and
deliver financial statements under Section 1009(a) of the original
Indenture will not apply to Pathnet if Pathnet is able to rely on any
law, rule, regulation or SEC approval, whether in force now or
subsequently introduced, to limit the scope of or cease compliance with
these obligations and we are otherwise in compliance with our SEC filing
obligations; and
- the requirements to file documents with the Trustee under Section
1009(b) will apply only to us and not to Pathnet.
- CHANGE OF CONTROL. Section 1010 of the Indenture currently gives holders
of the Notes a right to require Pathnet to repurchase Notes upon the
occurrence of a Change of Control. The Supplemental Indenture expands the
definition of Change of Control so that the repurchase right is also
triggered by a change of control of Pathnet Telecom. The proposed
amendment does not change, amend or modify the existing obligation of
Pathnet to make and consummate a Change of Control Offer in the event of
a Change of Control of Pathnet in accordance with Section 1010.
- LIMITATION ON INDEBTEDNESS. Section 1011 of the Indenture currently
limits the ability of Pathnet and its Restricted Subsidiaries to incur
additional Indebtedness, other than Permitted Indebtedness or
Indebtedness that would not result in Pathnet's Consolidated Indebtedness
to Consolidated Operating Cash Flow Ratio being outside the parameters
described in that Section. The Supplemental Indenture amends this section
so that:
- the Consolidated Indebtedness to Consolidated Operating Cash Flow Ratio
that we must use -- to determine whether any Indebtedness that either we
or Pathnet (or any of our respective Restricted Subsidiaries) wish to
incur is allowed -- is calculated by reference to Pathnet Telecom,
Pathnet and the Restricted Subsidiaries on a consolidated basis; and
- we are subject to the same limitations on our ability (and the ability
of any of our other Restricted Subsidiaries) to incur additional
Indebtedness as Pathnet and its Restricted Subsidiaries.
- LIMITATION ON RESTRICTED PAYMENTS. Section 1012 of the Indenture
currently restricts the ability of Pathnet and its Restricted
Subsidiaries to (1) declare or pay cash dividends or other distributions;
(2) purchase, redeem or otherwise acquire or retire for value any shares
of Capital Stock of Pathnet or certain of its Affiliates; (3) make any
principal payment on, repurchase, redeem, defease or otherwise acquire or
retire for value Indebtedness of Pathnet that is subordinated in right of
payment to the Notes; or (4) make any Investment (other than a Permitted
Investment) in any Person. The Supplemental Indenture expands the scope
of this Section so that;
- the restriction on cash dividends applies to us, rather than to Pathnet;
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- the purchase and redemption restrictions apply to our Capital Stock and
the Capital Stock of our Affiliates (other than our Affiliates that are,
directly or indirectly, wholly-owned by us);
- the restrictions on principal payments or retirement of Indebtedness
refers to any of our Indebtedness or Indebtedness of Pathnet that is so
expressly subordinated in right of payment to the Guarantees or the
Notes;
- the restrictions on investment apply to Investments by us, by Pathnet
and by any of our Restricted Subsidiaries, except that the definition of
Permitted Investments will be correspondingly expanded to include
Investments in all Restricted Subsidiaries (and not just those of our
Restricted Subsidiaries that are also Pathnet Restricted Subsidiaries);
and
- in determining whether a Restricted Payment satisfies the test with
respect to our ability to incur additional Indebtedness, reference is
made to the Consolidated Indebtedness to Consolidated Operating Cash
Flow Ratio calculated by reference to Pathnet, Pathnet Telecom and all
Restricted Subsidiaries on a consolidated basis.
- LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. Section 1013 of the Indenture currently restricts the
ability of Pathnet and its Restricted Subsidiaries to issue or sell any
Capital Stock of a Restricted Subsidiary (other than to Pathnet or to a
Restricted Subsidiary). The Supplemental Indenture expands the scope of
this section so that the same restriction also applies to us and the
issuance or sale of the Capital Stock of Pathnet and our Restricted
Subsidiaries.
- LIMITATION ON TRANSACTIONS WITH AFFILIATES. Section 1014 of the
Indenture currently imposes restrictions on the ability of Pathnet and
its Restricted Subsidiaries to engage in any transaction or series of
related transactions with or for the benefit of Affiliates, unless
conducted on an arm's-length basis with appropriate certifications to the
holders of the Notes of the arm's-length nature of such transactions.
This provision also permits transactions between Pathnet and its
Restricted Subsidiaries. This section is amended by the Supplemental
Indenture so that our ability and the ability of our Restricted
Subsidiaries to engage in transactions with Affiliates is restricted in
the same manner, but so that transactions between us and Pathnet or any
of our Restricted Subsidiaries are not subject to the restrictions under
this section. We have also included (as the Indenture provides in respect
of the existing Pathnet Stockholders Agreement) that Pathnet Telecom will
be permitted to perform its obligations under the Pathnet Telecom
stockholders agreement.
- LIMITATION ON LIENS. Section 1015 of the Indenture currently limits the
ability of Pathnet or any Restricted Subsidiary to create, incur, assume
or suffer to exist any Lien (other than Permitted Liens) on the property
or assets of Pathnet or any Restricted Subsidiary. The Supplemental
Indenture amends this Section so that our ability and the ability of our
Restricted Subsidiaries to create, incur, assume or suffer to exist any
Lien (other than Permitted Liens) on our respective property or assets is
also restricted in the same manner. The definition of the term "Permitted
Liens" is correspondingly expanded to cover liens and indebtedness within
the Pathnet Telecom "Restricted Entity" group, which will include
Pathnet, Pathnet Telecom, and all their respective Restricted
Subsidiaries, to the extent previously permitted as between Pathnet and
its Restricted Subsidiaries.
- LIMITATION ON ISSUANCE OF CERTAIN GUARANTEES AND DEBT
SECURITIES. Section 1016 of the Indenture currently limits the ability
of Restricted Subsidiaries of Pathnet to guarantee, assume or in any
other manner become liable for any Debt Securities or to issue any Debt
Securities unless, in either such case, the Restricted Subsidiary
simultaneously executes and delivers a guarantee of payment for the
Notes. The scope of this section is expanded so that
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our Restricted Subsidiaries are subject to the same limitations. The
amendment does not provide for us to be subject to such limitations as we
are already secondarily liable for the Notes under the Guarantees.
- LIMITATIONS ON ASSET SALES. Section 1017 of the Indenture currently
restricts the ability of Pathnet and its Restricted Subsidiaries to
engage in Asset Sales. The Supplemental Indenture expands this section by
adding a new paragraph that imposes equivalent restrictions on Asset
Sales by us and our Restricted Subsidiaries, except that in the new
paragraph, for the purpose of determining whether any transfer of
property or assets by Pathnet or any Restricted Subsidiary of Pathnet
falls within the exemptions in clause (A) or clause (G) of the definition
of "Asset Sale," the Consolidated Indebtedness to Consolidated Operating
Cash Flow Ratio is calculated by reference to Pathnet, Pathnet Telecom,
and all Restricted Subsidiaries on a consolidated basis. Asset Sales
between Pathnet and Pathnet Telecom will continue to be subject to the
limitations under this section, and the proposed amendment will not
change, amend or modify Pathnet's existing obligation to make and
consummate an Excess Proceeds Offer in connection with any Asset Sale in
accordance with Section 1017(a) of the Indenture. In particular, for the
purpose of determining whether any transfer of property or assets by
Pathnet or any Restricted Subsidiary of Pathnet falls within the
exemptions in clause (A) or clause (G) of the definition of "Asset Sale,"
with respect to Section 1017(a), the Consolidated Indebtedness to
Consolidated Operating Cash Flow Ratio is calculated by reference to
Pathnet and its Restricted Subsidiaries alone.
- LIMITATIONS ON DIVIDEND RESTRICTIONS. Section 1018 of the Indenture
currently limits the ability of Pathnet and its Restricted Subsidiaries
to create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of the Restricted Subsidiaries
to: (1) pay dividends or other distributions; (2) pay Indebtedness owed
to Pathnet or any other Restricted Subsidiary; (3) make Investments in
Pathnet or any other Restricted Subsidiary, (4) transfer any of their
assets or property to Pathnet or any other Restricted Subsidiary; or (5)
guarantee any Indebtedness of Pathnet or any other Restricted Subsidiary.
This Section is expanded in the Supplemental Indenture so that these
restrictions apply more broadly to Pathnet and all Restricted
Subsidiaries.
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DESCRIPTION OF THE GUARANTEES
The following description is a summary of the material provisions of the
Guarantees. It does not restate the terms of the Guarantees in their entirety
and is subject to, and qualified in its entirety by reference to, the provisions
of the Guarantees. We urge you to read the form of Guarantees, which is filed as
an exhibit to the registration statement of which this prospectus is a part.
Capitalized terms used in this section have the meaning given to them in the
Indenture and the Notes.
- GUARANTEE OF THE NOTES. We will unconditionally guarantee to the holder
of any outstanding Note(s) all obligations, covenants, liabilities,
undertakings and agreements of any kind of Pathnet contained in the
Indenture, including:
(1) the prompt payment in full, in United States currency, when due, of
the principal and of the interest on the Notes and all other amounts
that may be owing from Pathnet to the holders of the Notes under the
Indenture and the Notes; and
(2) the prompt performance and observance by Pathnet of all covenants,
agreements and conditions to be performed and observed by Pathnet
under the Indenture.
The Guarantees will be absolute, unconditional and continuing guarantees of
the obligations of Pathnet under the Indenture, including its obligations to
make interest and principal payments. If Pathnet does not comply with its
obligations under the Indenture the holders may proceed directly against us
without being required to seek payment or performance from Pathnet.
- DURATION OF THE GUARANTEES. The Guarantees will continue in effect with
respect to any Note until the holder of that Note has received payment in
full of the Redemption Price with respect to that Note, when the
Guarantees terminate. Until that time, the holder of any Note can enforce
the Guarantees as many times as necessary. If we make a payment to any
holder of Notes under the Guarantees, as a result of Pathnet's
non-compliance with any provision of the Indenture, and that payment is
or can be avoided, invalidated, recaptured or set-aside for any reason,
then the Guarantees will be reinstated with respect to Pathnet's
compliance with that provision.
- NATURE OF OUR OBLIGATIONS UNDER THE GUARANTEES. Our obligation and
liability under the Guarantees is absolute and unconditional. If any
holder of Notes makes a claim under the Guarantees we will not be
entitled to make any counterclaim, set-off, deduction or raise any
defense based on any claim that we may have against Pathnet or any other
person. We will remain liable even if there is an intervening event,
circumstance or condition that might ordinarily give us a defense,
discharge our liability under the Guarantees or limit the extent of any
claim made against us.
- AMENDMENT. We will not be able to amend, modify, waive, discharge or
terminate the Guarantees in any way that is adverse to the holders of the
Notes without the consent of the holders of all of the Notes outstanding
at the time.
- TRANSFERABILITY. The Guarantees are intended solely for the benefit of
the holders of the Notes. The Guarantees will not be transferable
separately from the Notes.
- GOVERNING LAW. The Guarantees will be governed by the laws of the State
of New York.
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DESCRIPTION OF THE CONSENT SOLICITATION PROCESS
PRINCIPAL TERMS OF THE SOLICITATION
On the terms and subject to the conditions set forth in this prospectus and
in the Consent and Letter of Transmittal, Pathnet is soliciting consents in
connection with the Contribution and Reorganization Transaction. Pathnet seeks
consents from those persons who are holders of outstanding Notes on the
effective date of the registration statement of which this prospectus is a part
(referred to in this Section as the "record date") to each of the following:
- The waiver of Pathnet's compliance with the Change of Control Offer
obligation (as described above);
- The waiver of Pathnet's compliance with the Excess Proceeds Offer
obligation (as described above); and
- The proposed amendments to the Indenture (as described above under the
heading "THE PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED
INDENTURE AMENDMENTS").
Pathnet will make consent payments to the holders of Notes on the record
date (referred to in this Section as the "record holders") in the amount of
$10.00 in cash for each $1,000 in principal amount of Notes for which a validly
delivered and unrevoked consent has been received by the Depositary on or prior
to 5:00 p.m., New York City time, on the date which is 10 calendar days
following the effective date of the registration statement of which this
prospectus is a part, unless Pathnet extends the solicitation (referred to in
this section as the "expiration date"). If Pathnet extends the solicitation, the
term "expiration date" will mean the latest date and time to which the exchange
offer is extended.
CERTAIN CONDITIONS TO THE SOLICITATION
Pathnet will not be required to accept the delivery of consents or make any
consent payments, and we will not be required to deliver the Guarantees, if:
- Pathnet and the Trustee have not received validly delivered and unrevoked
consents from the holders as at the record date of a majority in
aggregate principal amount of the Notes outstanding on that date;
- Any of the conditions to closing the Contribution and Reorganization
Transaction (as listed under the heading "DESCRIPTION OF CONTRIBUTION AND
REORGANIZATION TRANSACTION -- Conditions to Closing the Contribution and
Reorganization Transaction" above) has not been satisfied;
- The Supplemental Indenture providing for the proposed amendments has not
been executed by the Trustee;
- The Trustee objects in any respect to or takes any action that could, in
our judgment, adversely affect the consummation of the solicitation or
Pathnet's or our ability to effect any of the proposed amendments, or
takes any action that challenges the validity or effectiveness of the
procedures used by Pathnet and us in soliciting the consents to the
waivers described above and to the proposed amendments or in the making
of the solicitations or payment for any of the consents; and
- Any order, statute, rule, regulation, executive order, stay, decree,
judgment or injunction has been proposed, enacted, entered, issued,
promulgated, enforced or deemed applicable by any court or governmental
regulatory or administrative agency or instrumentality that:
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- in our judgment might prohibit, prevent, restrict or delay
consummation of the solicitation or any part of the Contribution and
Reorganization Transaction; or
- is, or is reasonably likely to be, materially adverse to our
business, operations, properties, condition (financial or
otherwise), assets, liabilities or prospects.
PROCEDURE FOR DELIVERING CONSENTS
DELIVERY OF CONSENTS. To accept your consent in the solicitation, the
Depository must receive it before the expiration date at the address given in
the Consent and Letter of Transmittal. Except as otherwise provided below, the
delivery will be deemed made only when actually received or confirmed by the
Depositary. You should send your Consent only to the Depositary, not to Pathnet,
Pathnet Telecom, the Trustee, the Information Agent or the Solicitation Agent.
Pathnet intends to cause the execution of a Supplemental Indenture
providing for the proposed amendments on the initial expiration date set out
above if, as of such date, it has obtained the consents of at least a majority
in aggregate principal amount of the holders of outstanding Notes to the
proposed amendments, or, if later, promptly upon obtaining such consents. When
executed, the Supplemental Indenture will be binding upon you as a holder of
Notes as at the record date, whether or not you have given a consent with
respect to the proposed amendments.
REVOCATION OF CONSENT. All properly completed and executed consents (1)
waiving Pathnet's compliance with the Change of Control Offer obligation, (2)
waiving Pathnet's compliance with the Excess Proceeds Offer obligation, and (3)
consenting to the proposed amendments that are received by the Depositary will
be counted as consents with respect to the waiver of the Change of Control Offer
obligation, the waiver of the Excess Proceeds Offer obligation and the proposed
amendments, unless the Depositary receives, prior to the consent date, a written
notice of revocation. You may revoke your consent by delivering a written notice
of revocation in accordance with the procedures described in the consent form.
To be effective, a notice of revocation of consent must (1) contain the name of
the person who delivered the consent and the description of the Notes to which
it relates, the certificate number or numbers of such Notes and the aggregate
principal amount represented by such Notes, (2) be signed by the record holder
thereof in the same manner as the original signature on the consent or be
accompanied by evidence, satisfactory to Pathnet, Pathnet Telecom, the Trustee
and the Depositary that the holder of the Notes revoking the consent has
succeeded to the beneficial ownership of the Notes, and (3) be received prior to
the expiration date by the Depositary at the address given on the front page of
the Consent and Letter of Transmittal. A purported notice of revocation that
lacks any of the required information or is dispatched to any other address will
not be effective to revoke a consent previously given.
RECORD HOLDERS ENTITLED TO CONSENT. Only a record holder (or his or her
duly authorized proxy) or a beneficial owner who has complied with the
procedures set out in this section may deliver a consent. If you beneficially
own Notes that are registered in the name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to deliver a consent, you should
contact the record holder promptly and instruct the record holder to execute and
deliver the consent on your behalf.
The Consent and Letter of Transmittal (available from the Solicitation
Agent and the Information Agent identified below) contain additional details
concerning signatures, payment, delivery instructions and tax information
necessary to complete the consent.
IRREGULARITIES. All questions as to the form of all documents and the
validity (including time of receipt) of deliveries and revocations of consents
will be determined by Pathnet, in its sole discretion, which determination will
be final and binding. Alternative, conditional or contingent consents will not
be considered valid. Pathnet reserves the absolute right to reject any or all
consents that are not in
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proper form or the acceptance of which would, in Pathnet's opinion, be unlawful.
Pathnet also reserves the right to waive any defects, irregularities or
conditions of delivery as to particular consents. Pathnet's interpretation of
the terms and conditions of the solicitation (including the instructions in the
consent) will be final and binding. Any defect or irregularity in connection
with deliveries of consents must be cured within such time as Pathnet
determines, unless waived by Pathnet. Deliveries of consents will not be deemed
to have been made until all defects and irregularities have been waived by
Pathnet or cured. None of Pathnet, the Trustee, the Depositary, the Information
Agent, the Solicitation Agent or any other person will be under any duty to give
notice of any defects or irregularities in deliveries of consents, or will incur
any liability to record holders for failure to give any such notice.
WAIVER OF CONDITIONS. Pathnet has expressly reserved the absolute right,
in its sole discretion, to amend or waive any of the conditions to the
solicitation in the case of any consents delivered, in whole or in part, at any
time and from time to time.
SOLICITATION AGENTS
Pathnet has retained Lazard Freres & Co. LLC to act as Solicitation Agent
in connection with the solicitation. In their capacity as Solicitation Agent,
Lazard Freres & Co. LLC may contact the holders of outstanding Notes regarding
the solicitation and may request brokers, dealers and other nominees to forward
this prospectus and related materials to beneficial owners of Notes.
Pathnet has agreed to pay Lazard Freres & Co. LLC a usual and customary fee
for their services as Solicitation Agent in connection with the solicitation.
DEPOSITARY AND INFORMATION AGENT
The Bank of New York has been appointed Depositary for the solicitation.
All deliveries and correspondence sent to the Depositary should be directed to
the address set forth on the back cover of the Statement. Requests for
additional copies of the Statement and the Letter of Consent and Transmittal
should be directed to MacKenzie Partners, Inc., as Information Agent, at the
address set forth on the Letter of Consent and Transmittal. Pathnet has agreed
to pay the Depositary and the Information Agent reasonable and customary fees
for their services and to reimburse the Depositary and the Information Agent for
their reasonable and out-of-pocket expenses in connection therewith. These fees,
together with the expenses of counsel to the bondholders, counsel to the
Solicitation Agent and fees of counsel, and accountants to Pathnet and Pathnet
Telecom, are in addition to the consent fee payable to the holders of the Notes
consenting to the transaction.
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DESCRIPTION OF THE NOTES AND THE INDENTURE
Terms that are used in this section but not previously defined are defined
under the caption "-- certain definitions" below.
Pathnet issued $350 million in aggregate principal amount of 12 1/4% Senior
Notes due 2008 under an Indenture dated April 8, 1998 between Pathnet and The
Bank of New York, as trustee. The Indenture is subject to and governed by the
Trust Indenture Act of 1939, as amended.
The description below is a summary of certain provisions of the current
terms of the Indenture and the Notes that we believe will be relevant for your
review before making a decision about accepting the Guarantees. The description
does not restate the Indenture or the Notes in their entirety and is subject to
and qualified in its entirety by reference to the Indenture and the Notes
(including the definitions of certain terms contained in the Indenture and those
terms made a part of the Indenture by reference to the Trust Indenture Act as in
effect on the date of the Indenture), which are incorporated by reference into
this prospectus. Please note that this summary excludes certain terms of the
Notes and the Indenture which have been summarized in Pathnet's Registration
Statement No. 333-53467 filed with the Securities and Exchange Commission on May
22, 1998. We urge you to read the Indenture and a sample Note, which have been
filed as an exhibit to the Registration Statement No. 333-52247, filed with the
Securities and Exchange Commission on May 8, 1998. Capitalized terms used in
this description have the meanings given to them in the Indenture and the Notes,
and section references refer to sections of the Indenture. For definitions of
certain capitalized terms used in the following summary, see "-- Certain
Definitions." Parenthetical section references herein refer to the section or
sections summarized.
Upon issuance of the Guarantees, the Indenture as described below will be
modified by the Supplemental Indenture. See "THE PATHNET SENIOR NOTEHOLDER
WAIVERS AND OTHER PROPOSED INDENTURE AMENDMENTS -- Proposed Indenture
Amendments" for a description of the modifications.
GENERAL
The Notes will mature on April 15, 2008, and are limited to an aggregate
principal amount of $350 million. The Notes are issued in fully registered form,
without coupons, in denominations of $1,000 and integral multiples of $1,000.
Payments in respect of the Notes are made, and the Notes are exchangeable and
transferable, at Pathnet's office or agency in The City of New York maintained
for such purposes. That office or agency is currently the office of the Bank of
New York located at 101 Barclay Street, Floor 7 East, New York, New York 10286.
No service charge is made for any registration of transfer, exchange or
redemption of Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed. (Sections 202, 203, 301 and 305)
INTEREST
The Notes bear interest at the rate of 12 1/4% per annum, payable in
arrears on April 15 and October 15 of each year to holders of record of the
Notes at the close of business on the April 1 or October 1 immediately preceding
such interest payment date. Interest is calculated on the basis of a 360-day
year comprised of twelve 30-day months. If Pathnet defaults on any payment of
principal, whether at Stated Maturity, upon redemption or otherwise, interest
will continue to accrue and, to the extent permitted by law, interest will
accrue on overdue installments of interest at the rate of interest borne by the
Notes. (Sections 202, 301, 307 and 310)
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RANKING
The Notes are general unsecured obligations of Pathnet, except for the
pledge by Pathnet of the Pledged Securities under the pledge agreement. The
Indebtedness evidenced by the Notes ranks equally in right of payment with all
other existing and future unsubordinated senior obligations of Pathnet and
senior in right of payment to all existing and future obligations of Pathnet
expressly subordinated in right of payment to the Notes. The Notes, however, are
effectively subordinated to secured senior obligations of Pathnet with respect
to the assets of Pathnet securing such obligations, including Telecommunications
Indebtedness, which is or may be secured by substantially all of the assets of
Pathnet.
As of September 30, 1999 Pathnet had approximately $0.2 million in
outstanding Indebtedness other than the Notes and approximately $33.4 million of
other liabilities. Subject to certain limitations, Pathnet and its Restricted
Subsidiaries may incur additional Indebtedness in the future, including secured
Indebtedness.
SINKING FUND
The Notes are not entitled to the benefit of any sinking fund.
REDEMPTION
Pathnet may not redeem the Notes before April 15, 2003, except in the
limited circumstances described in the next paragraph. Beginning April 15, 2003,
the Notes are redeemable at the option of Pathnet, in whole or in part, on not
less than 30 nor more than 60 days prior notice. The redemption prices for the
Notes are listed below and are expressed as percentages of principal amount, if
redeemed during the 12-month period beginning on April 15 of the years listed
below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2003........................................................ 106.125%
2004........................................................ 104.083
2005........................................................ 102.042
2006 and thereafter......................................... 100.000
</TABLE>
Accrued and unpaid interest, if any, to the redemption date must also be
paid. (Sections 203, 1101 and 1102)
In addition, at any time on or before April 15, 2001, Pathnet may redeem up
to 35% of the aggregate principal amount of the Notes originally issued with the
net cash proceeds of one or more Public Equity Offerings at a redemption price
equal to 112.25% of the principal amount of the Notes, plus any accrued and
unpaid interest to the redemption date. Redemption must occur within 60 days of
the closing date of the Public Equity Offering and, immediately after the
redemption, at least 65% of the principal amount of the Notes originally issued
must remain outstanding. (Sections 203 and 1102)
If less than all the Notes are redeemed at any time, the Trustee will
select, not more than 60 days prior to the redemption date, by such method as it
deems fair and appropriate, the particular Notes to be redeemed. No partial
redemption will reduce the principal amount of a Note not redeemed to less than
$1,000. Notice of redemption will be mailed, first-class postage prepaid, at
least 30 but not more than 60 days before the redemption date to each holder of
Notes whose notes are to be redeemed at its registered address. On and after the
date of redemption, interest will cease to accrue on Notes or the portions of
the Notes that are called for redemption and accepted for payment. (Sections
1104, 1105 and 1107)
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SECURITY
Pathnet purchased and pledged to the Trustee, in accordance with the terms
of the Indenture and a pledge agreement, certain United States Treasury
securities as security for the benefit of the holders of the Notes with respect
to the payment of the first four scheduled interest payments on the Notes. These
securities are held by the Trustee in an escrow account. Immediately before any
date on which an interest payment is to be made, Pathnet may either (1) deposit
with the Trustee, from funds otherwise available to Pathnet, cash sufficient to
pay the interest scheduled to be paid on such date, or (2) direct the Trustee to
release from the escrow account proceeds sufficient to pay such scheduled
interest amount. If Pathnet exercises the former option, it may direct the
Trustee to release to Pathnet from the escrow account a sum of money or United
States Treasury securities equal to the amount of the deposit that it makes.
Pathnet has exercised that option in respect of each of the payments that have
been made to date and the value of the securities in the escrow account has been
reduced accordingly. Any failure by Pathnet to pay interest on the Notes in a
timely manner on the fourth scheduled interest payment date, namely April 15,
2000, will constitute an immediate event of default under the Indenture, with no
grace or cure period.
Interest earned on the pledged securities is added to the escrow account.
In the event that, in the opinion of a nationally recognized firm of independent
public accountants selected by Pathnet, the funds or pledged securities held in
the escrow account exceed the sum necessary to provide for payment in full of
the remaining interest payment the Trustee is permitted to release to Pathnet,
at Pathnet's request, any such excess amount.
The Notes are secured by a first priority security interest in the pledged
securities and in the escrow account and, accordingly, the pledged securities
and the escrow account also secure repayment of the principal amount of the
Notes.
Under the pledge agreement, after Pathnet has made the fourth scheduled
interest payment on the Notes in a timely manner, all of the remaining pledged
securities, if any, will be released from the escrow account and thereafter the
Notes will be unsecured.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS. In general, Pathnet will not, and will not
permit any of its Restricted Subsidiaries to, incur any Indebtedness including
any Acquired Indebtedness. However, Pathnet and its Restricted Subsidiaries can
incur Permitted Indebtedness, as defined below. In addition, Pathnet can incur
additional Indebtedness if, after giving effect to such Indebtedness, the
Consolidated Indebtedness to Consolidated Operating Cash Flow Ratio would have
been less than or equal to (i) 6.0 to 1.0 but greater than zero, for
Indebtedness incurred on or prior to December 31, 2001, or (ii) 5.0 to 1.0 but
greater than zero, for Indebtedness incurred after that date.
For the purposes of determining compliance with this covenant, if an item
of Indebtedness or any portion of such item meets the criteria of more than one
of the types of Indebtedness that Pathnet and the Restricted Subsidiaries are
permitted to incur, Pathnet will have the right, in its sole discretion, to
classify such item of Indebtedness or any portion of such item at the time of
its incurrence and will only be required to include the amount and type of such
Indebtedness or portion of such Indebtedness under the clause permitting the
Indebtedness classified in that manner. (Section 1011)
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LIMITATION ON RESTRICTED PAYMENTS. (a) In general, Pathnet will not, and
will not permit any of its Restricted Subsidiaries to take, directly or
indirectly, any of the following actions:
(i) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Capital Stock of Pathnet (other than
dividends or distributions payable solely in shares of its Qualified
Capital Stock or in options, warrants or other rights to acquire such
shares of Qualified Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any shares of Capital Stock of Pathnet or any
Capital Stock of any of its Affiliates (other than Capital Stock of any
Wholly Owned Restricted Subsidiary) or any options, warrants or other
rights to acquire such shares of Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to the Stated Maturity of any
principal payment or any sinking fund payment, any Indebtedness of Pathnet
that is expressly subordinated in right of payment to the Notes; or
(iv) make any Investment (other than any Permitted Investment) in any
Person.
The payments or other actions described in (but not excluded from) the list
above are collectively referred to as "Restricted Payments." However, Pathnet
and its Restricted Subsidiaries will be able to make Restricted Payments if,
immediately after giving effect to the proposed Restricted Payment:
(1) no Default or Event of Default will have occurred and be
continuing;
(2) Pathnet could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the "Limitation on
Indebtedness" covenant; and
(3) the aggregate amount of all Restricted Payments declared or made
after the date of the Indenture shall not exceed the sum of:
(A) (i) 100% of Consolidated Operating Cash Flow less 1.5 times
Consolidated Interest Expense or (ii) if Consolidated Operating Cash
Flow is a negative, minus 100% of such negative amount, in each case on
a cumulative basis for the period beginning on the first day of
Pathnet's first fiscal quarter after the date of the Indenture and
ending on the last day of Pathnet's last fiscal quarter ending prior to
the date of such proposed Restricted Payment; PLUS
(B) the aggregate Net Cash Proceeds and the Fair Market Value of
Telecommunications Assets or Voting Stock of a Person that becomes a
Restricted Subsidiary, the assets of which consist primarily of
Telecommunications Assets, received by Pathnet after the Issue Date as
capital contributions or from the issuance or sale (other than to any
Subsidiary) of shares of Qualified Capital Stock of Pathnet (including
upon the exercise of options, warrants or rights) or warrants, options
or rights to purchase shares of Qualified Capital Stock of Pathnet; PLUS
(C) the aggregate Net Cash Proceeds and the Fair Market Value of
Telecommunications Assets or Voting Stock of a Person that becomes a
Restricted Subsidiary, the assets of which consist primarily of
Telecommunications Assets, received by Pathnet after the Issue Date from
the issuance or sale (other than to any Subsidiary) of debt securities
or Redeemable Capital Stock that have been converted into or exchanged
for Qualified Capital Stock of Pathnet, together with the aggregate Net
Cash Proceeds and the Fair Market Value of Telecommunications Assets or
Voting Stock of a Person that becomes a Restricted
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Subsidiary, the assets of which consist primarily of Telecommunications
Assets, received by Pathnet at the time of such conversion or exchange;
PLUS
(D) to the extent not otherwise included in Consolidated Operating
Cash Flow, an amount equal to the sum of (i) the net reduction in
Investments (other than Permitted Investments) in any Person (other than
a Restricted Subsidiary) resulting from the payment in cash of
dividends, repayments of loans or advances or other transfers of assets,
in each case to Pathnet or any Restricted Subsidiary after the Issue
Date from such Person and (ii) the amount of any net reduction in
Investments resulting from the redesignation of an Unrestricted
Subsidiary as a Restricted Subsidiary (valued as provided in the
definition of "Investment") at the time of such redesignation; provided
that, in the case of (i) or (ii) above, the foregoing sum will not
exceed the total amount of Investments (other than Permitted
Investments) previously made in such Person or Unrestricted Subsidiary
by Pathnet and its Restricted Subsidiaries.
The amount of any such Restricted Payment, if other than cash, shall be
determined by the Board of Directors of Pathnet, whose determination will be
conclusive and evidenced by a Board Resolution.
(b) Notwithstanding paragraph (a) above, Pathnet and any Restricted
Subsidiary may take the following actions so long as with respect to clauses
(ii) through (vi) below no Default or Event of Default shall have occurred and
be continuing:
(i) the payment of any dividend within 60 days after the date of
declaration of such dividend, if at such date of declaration the payment of
such dividend would have complied with the provisions of paragraph (a)
above and such payment will be deemed to have been paid on such date of
declaration for purposes of the calculation required by paragraph (a)
above;
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of Pathnet (x) in exchange for, or out
of the Net Cash Proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of, shares of Qualified Capital Stock of
Pathnet; (y) that are held by former officers, employees or directors (or
their estates or beneficiaries under their estates) of Pathnet or any of
its Subsidiaries; provided that the aggregate amount of such purchase,
redemption or other acquisition or retirement for value under this clause
(y) will not exceed $250,000 in any given fiscal year; or (z) pursuant to
the employment agreement dated August 4, 1997, between Pathnet and Richard
Jalkut, as amended and as in effect on the Issue Date (and any extensions
or renewals thereof); provided that the amount of such purchase, redemption
or other acquisition or retirement for value under this clause (z) will not
exceed $1.0 million in any given fiscal year;
(iii) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Indebtedness of Pathnet that is expressly
subordinated in right of payment to the Notes in exchange for, or out of
the Net Cash Proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of, shares of Qualified Capital Stock of
Pathnet;
(iv) the purchase of any Indebtedness of Pathnet that is expressly
subordinated in right of payment to the Notes at a purchase price not
greater than 101% of the principal amount thereof in the event of a Change
of Control in accordance with provisions similar to the "Purchase of Notes
upon a Change of Control" covenant; provided that prior to such purchase
Pathnet has made the Change of Control Offer as provided in such covenant
with respect to the Notes and has purchased all Notes validly tendered for
payment in connection with such Change of Control Offer;
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(v) the purchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness (other than Redeemable Capital Stock)
of Pathnet that is expressly subordinated in right of payment to the Notes
in exchange for, or out of the Net Cash Proceeds of a substantially
concurrent incurrence (other than to a Subsidiary) of, new Indebtedness of
Pathnet that is expressly subordinated in right of payment to the Notes, so
long as (A) the principal amount of such new Indebtedness does not exceed
the principal amount (or, if such Indebtedness being refinanced provides
for an amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration thereof, such lesser amount as of the
date of determination) of the Indebtedness being so purchased, redeemed,
defeased, acquired or retired, plus the lesser of (x) the amount of any
premium required to be paid in connection with such refinancing pursuant to
the terms of the Indebtedness being refinanced or (y) the amount of any
premium reasonably determined by Pathnet as necessary to accomplish such
refinancing, PLUS, in either case, the amount of expenses of Pathnet
incurred in connection with such refinancing; (B) such new Indebtedness is
subordinated to the Notes to the same extent as such Indebtedness so
purchased, redeemed, defeased, acquired or retired; and (C) such new
Indebtedness has an Average Life longer than the Average Life of the
Indebtedness being refinanced and a final Stated Maturity of principal
later than the final Stated Maturity of the Indebtedness being refinanced;
and
(vi) the payment of cash in lieu of fractional shares of Common Stock
pursuant to the Warrant Agreement.
The actions described in items (i) through (iv) and (vi) above will be
Restricted Payments that will be permitted in accordance with this paragraph (b)
but will reduce the amount that would otherwise be available for Restricted
Payments under clause (3) of paragraph (a) above. The actions described in item
(v) above will be Restricted Payments that will be permitted in accordance with
this paragraph (b) and will not reduce the amount that would otherwise be
available for Restricted Payments under clause (3) of paragraph (a). (Section
1012)
LIMITATION ON ISSUANCE AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. In general, Pathnet will not, and will not permit any Restricted
Subsidiary to, issue or sell any Capital Stock of a Restricted Subsidiary (other
than to Pathnet or to a Restricted Subsidiary). However, this covenant will not
prohibit:
(i) issuances or sales of Capital Stock of a Restricted Subsidiary if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer be a Restricted Subsidiary and any Investment in
such Person remaining after giving effect to such issuance or sale would
have been permitted to be made under the "Limitation on Restricted
Payments" covenant if made on the date of such issuance and sale;
(ii) the ownership by directors of director's qualifying shares or the
ownership by foreign nationals of Capital Stock of any Restricted
Subsidiary, to the extent mandated by applicable law;
(iii) the issuance and sale of Capital Stock of any Restricted
Subsidiary owned by Pathnet and the Restricted Subsidiaries in compliance
with the "Limitation on Sale of Assets" covenant; provided that such
Restricted Subsidiary would remain a Restricted Subsidiary after such
transaction; or
(iv) the issuance and sale of Capital Stock of any Restricted
Subsidiary to any Person that transfers, leases, licenses or grants a right
to use Telecommunications Assets to Pathnet pursuant to an Incumbent
Agreement; provided that, after such issuance and sale, such subsidiary
remains a Restricted Subsidiary and, in the good faith determination of the
Board of Directors of Pathnet, the Fair Market Value of any such transfer,
lease, license or grant is not less than the
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Fair Market Value of the Capital Stock of such Restricted Subsidiary issued
and sold in respect thereof. (Section 1013)
LIMITATION ON TRANSACTIONS WITH AFFILIATES. Pathnet will not, and will not
permit any Restricted Subsidiary to, enter into or suffer to exist, directly or
indirectly, any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property or
services) with, or for the benefit of, any Affiliate of Pathnet or any
Restricted Subsidiary (other than Pathnet or a Restricted Subsidiary so long as
no Affiliate of Pathnet (other than a Restricted Subsidiary) shall beneficially
own Capital Stock in such Restricted Subsidiary) unless:
(i) such transaction or series of related transactions are on terms,
taken as a whole, that are no less favorable to Pathnet or such Restricted
Subsidiary, as the case may be, than those that could have been obtained in
an arms' length transaction with unrelated third parties that are not
Affiliates;
(ii) with respect to any transaction or series of related transactions
involving aggregate consideration equal to or greater than $5 million,
Pathnet will deliver an officers' certificate to the Trustee certifying
that such transaction or series of related transactions complies with
clause (i) above; and
(iii) with respect to any transaction or series of related
transactions involving aggregate consideration in excess of $10 million,
Pathnet will deliver the officers' certificate described in clause (ii)
above which will also certify that such transaction or series of related
transactions has been approved by a majority of the Disinterested Directors
of the Board of Directors of Pathnet or that Pathnet has obtained a written
opinion from a nationally recognized investment banking or public
accounting firm or, if Pathnet believes that an investment banking or
public accounting firm is generally not qualified to give such an opinion,
by a nationally recognized appraisal firm (an "independent financial
expert") certifying that the financial terms of such transaction or series
of related transactions, taken as a whole, are fair to Pathnet or such
Restricted Subsidiary, as the case may be, from a financial point of view;
provided, however, that this covenant will not restrict (1) any transaction
or series of related transactions among Pathnet and one or more of its
Restricted Subsidiaries or among its Restricted Subsidiaries, (2) Pathnet
from paying reasonable and customary regular compensation and fees to
directors of Pathnet or any Restricted Subsidiary who are not employees of
Pathnet or any Restricted Subsidiary, (3) the performance of Pathnet's
obligations under the Investment and Stockholders' Agreement, dated as of
October 31, 1997, among Pathnet, David Schaeffer and the Investors named
therein, as amended; the Investment and Stockholders' Agreement, dated as
of August 28, 1995, by and among Pathnet and the Investors named therein;
the Investment and Stockholders' Agreement, dated as of December 23, 1996,
by and among Pathnet and the Investors named therein; the Non-Qualified
Stock Option Agreement, dated August 4, 1997, between Pathnet and Richard
Jalkut; and the Employment Agreement, dated August 4, 1997, between Pathnet
and Richard Jalkut, in each case as amended through the Issue Date;
provided that any amendments or modifications to the terms of transactions
described in this clause (3) will be (x) no less favorable to Pathnet than
those that could have been obtained in an arm's length transaction with
unrelated third parties who are not Affiliates and (y) approved by the
Board of Directors of Pathnet (including a majority of the Disinterested
Directors), (4) the making of any Restricted Payment not prohibited by the
"Limitations on Restricted Payments" covenant and (5) loans or advances
made to directors, officers or employees of Pathnet or any Restricted
Subsidiary, or guarantees in respect thereof or otherwise made on their
behalf, in respect of expenses incurred in the ordinary course of business,
in an aggregate principal amount not to exceed $500,000 in any calendar
year. (Section 1014)
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Under Delaware law, the Disinterested Directors' fiduciary obligations
require that they act in good faith and in a manner which they reasonably
believe to be in the best interests of Pathnet and its stockholders, which may
not necessarily be the same as the interests of holders of the Notes.
LIMITATION ON LIENS. Pathnet will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist
any Lien (other than Permitted Liens) on or with respect to any of its property
or assets (including, without limitation, any shares of Capital Stock or
Indebtedness of any Restricted Subsidiary) whether owned at the Issue Date or
thereafter acquired, or any income, profits or proceeds therefrom, or assign or
otherwise convey any right to receive income thereon, unless (x) in the case of
any Lien securing Indebtedness of Pathnet that is expressly subordinated in
right of payment to the Notes, the Notes are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Lien and (y) in the case
of any other Lien, the Notes are secured by a Lien on such property, assets or
proceeds that is senior in priority to, or equally and ratably secured with, the
obligation or liability secured by such Lien. (Section 1015)
LIMITATION ON ISSUANCE OF CERTAIN GUARANTEES BY, AND DEBT SECURITIES OF,
RESTRICTED SUBSIDIARIES. Pathnet will not permit any Restricted Subsidiary to:
(i) directly or indirectly guarantee, assume or in any other manner
become liable with respect to any Debt Securities ("Guaranteed
Indebtedness"); or
(ii) issue any Debt Securities, unless, in either such case, such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture providing for the guarantee (a "Subsidiary Guarantee") of payment
of the Notes. If the Guaranteed Indebtedness (A) ranks equally in right of
payment with the Notes, then the guarantee of such Guaranteed Indebtedness
will rank equally in right of payment with, or be subordinated in right of
payment to, the Subsidiary Guarantee or (B) is subordinated in right of
payment to the Notes, then the guarantee of such Guaranteed Indebtedness
will be subordinated in right of payment to the Subsidiary Guarantee at
least to the extent that the Guaranteed Indebtedness is subordinated in
right of payment to the Notes. The obligations of each Restricted
Subsidiary under a Subsidiary Guarantee will be limited to the maximum
amount, and will, after giving effect to all other contingent and fixed
liabilities of such Restricted Subsidiary, result in the obligations of
such Restricted Subsidiary under the Subsidiary Guarantee not constituting
a fraudulent conveyance or fraudulent transfer under applicable law.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary of the Notes will provide by its terms that it shall be automatically
and unconditionally released and discharged upon:
(i) the sale or other disposition, by way of merger or otherwise, to
any Person not an Affiliate of Pathnet, of all of Pathnet's and its
Restricted Subsidiaries' Capital Stock in such Restricted Subsidiary;
(ii) the merger or consolidation of the applicable Restricted
Subsidiary with and into Pathnet or another Restricted Subsidiary that has
guaranteed the Notes and that is the surviving Person in such merger or
consolidation; and
(iii) the release by all of the holders of Debt Securities of Pathnet
of such Restricted Subsidiary's obligations under all of its Guarantees in
respect thereof and the release by all of the holders of Debt Securities of
such Restricted Subsidiary of its obligations thereunder. (Section 1016)
PURCHASE OF NOTES UPON A CHANGE OF CONTROL. If a Change of Control occurs
at any time, then each holder of Notes will have the right to require that
Pathnet purchase all of such holder's Notes,
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in whole or in part in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash in an amount equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, thereon to the date of purchase (the "Change of Control
Purchase Date") pursuant to the procedures described below (the "Change of
Control Offer") and the other procedures set forth in the Indenture.
Within 15 days following any Change of Control, Pathnet will notify the
Trustee thereof and give written notice of such Change of Control to each holder
of Notes by first-class mail, postage prepaid, at the address of such holder
appearing in the security register, stating, among other things:
(i) the purchase price and the purchase date, which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed, or such later date as is necessary to comply with
requirements under the Exchange Act or any applicable securities laws or
regulations;
(ii) that any Note not tendered will continue to accrue interest;
(iii) that, unless Pathnet defaults in the payment of the purchase
price, any Notes accepted for payment pursuant to the Change of Control
Offer will cease to accrue interest and Liquidated Damages, if any, after
the Change of Control Purchase Date; and
(iv) certain other procedures that a holder of Notes must follow to
accept a Change of Control Offer or to withdraw such acceptance. (Section
1010)
If a Change of Control Offer were made, we cannot assure you that Pathnet
would have available funds sufficient to pay the Change of Control Purchase
Price for all of the Notes that might be delivered by holders thereof seeking to
accept the Change of Control Offer. The failure of Pathnet to make or consummate
the Change of Control Offer would result in an Event of Default and would give
the Trustee and the holders of the Notes the rights described under "Events of
Default."
One of the events that constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of Pathnet's assets. This term
has not been interpreted under New York law (which is the governing law of the
Indenture) to represent a specific quantitative test. As a consequence, if
holders of the Notes elect to require Pathnet to purchase the Notes and Pathnet
elects to contest such election, there can be no assurance as to how a court
interpreting New York law would interpret the phrase.
The existence of a holder's right to require Pathnet to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
Pathnet in a transaction that constitutes a Change of Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford holders of Notes the right to
require Pathnet to purchase such Notes in the event of a highly leveraged
transaction or certain transactions with Pathnet's management or its Affiliates,
including a reorganization, restructuring, merger or similar transaction
involving Pathnet (including, in certain circumstances, an acquisition of
Pathnet by management or its Affiliates) that may adversely affect holders of
the Notes, if such transaction is not a transaction defined as a Change of
Control. See "Certain Definitions" for the definition of "Change of Control." A
transaction involving Pathnet's management or its Affiliates, or a transaction
involving a recapitalization of Pathnet, would result in a Change of Control if
it is the type of transaction specified by such definition.
Pathnet will comply with the applicable tender offer rules, including Rule
l4e-l under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer.
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LIMITATION ON SALE OF ASSETS. (a) Pathnet will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, engage in any Asset Sale
unless (i) the consideration received by Pathnet or such Restricted Subsidiary
for such Asset Sale is not less than the Fair Market Value of the shares or
other assets sold (as determined by the board of directors of Pathnet, whose
determination shall be conclusive and evidenced by a resolution thereof) and
(ii) the consideration received by Pathnet or the relevant Restricted Subsidiary
in respect of such Asset Sale consists of at least 75% cash or Cash Equivalents;
provided, however, that for purposes of this covenant, "Cash Equivalents" shall
include (i) the amount of any liabilities (other than liabilities that are by
their terms subordinated to the Notes) of Pathnet or such Restricted Subsidiary
(as shown on Pathnet's or such Restricted Subsidiary's most recent balance sheet
or in the notes thereto) that are assumed by the transferee of any such assets
or other property in such Asset Sale or are no longer a liability of Pathnet or
any Restricted Subsidiary (and excluding any liabilities that are incurred in
connection with or in anticipation of such Asset Sale), but only to the extent
that such assumption is effected on a basis under which there is no further
recourse to Pathnet or any of its Restricted Subsidiaries with respect to such
liabilities and (ii) any securities, notes or other obligations received by
Pathnet or any such Restricted Subsidiary in connection with such Asset Sale
that are converted by Pathnet or such Restricted Subsidiary into cash within 60
days of receipt.
(b) If Pathnet or any Restricted Subsidiary engages in an Asset Sale,
Pathnet may use the Net Cash Proceeds thereof, within 12 months after such Asset
Sale, to (i) permanently repay or prepay the Notes or any then outstanding
Indebtedness of Pathnet that ranks equally with the Notes or Indebtedness of any
Restricted Subsidiary or permanently reduce (without making any prepayment) the
amount that is at the time available to be borrowed under the Notes or any
Indebtedness of Pathnet ranking equally with the Notes or any Indebtedness of a
Restricted Subsidiary or (ii) invest (or enter into a legally binding agreement
to invest) in properties and assets to replace the properties and assets that
were the subject of the Asset Sale or in properties and assets that are or will
be used in the Telecommunications Business of Pathnet or a Restricted
Subsidiary, as the case may be. If any such legally binding agreement to invest
such Net Cash Proceeds is terminated, then Pathnet may, within 60 days of such
termination or within 12 months of such Asset Sale, whichever is later, apply or
invest such Net Cash Proceeds as provided in clause (i) or (ii) (without regard
to the parenthetical contained in such clause (ii)) above. The amount of such
Net Cash Proceeds not so used as set forth above in this paragraph (b)
constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10 million,
Pathnet will, within 15 business days, make an offer to purchase (an "Excess
Proceeds Offer"), on a proportional basis, the Notes and Indebtedness described
in the second succeeding sentence, in accordance with the procedures set forth
below, the maximum principal amount of Notes (expressed as a multiple of $1,000)
and such other Indebtedness that may be purchased with the Excess Proceeds. Any
Excess Proceeds Offer shall include a pro rata offer under similar circumstances
to purchase all other Indebtedness of Pathnet ranking equally with the Notes
which Indebtedness contains similar provisions requiring Pathnet to purchase
such Indebtedness. The offer price as to each Note (the "Excess Proceeds Offer
Price") will be payable in cash in an amount equal to 100% of the principal
amount of such Note, plus accrued and unpaid interest, if any, thereon to the
date of purchase. To the extent that the aggregate principal amount of Notes
validly tendered and not withdrawn by holders thereof pursuant to an Excess
Proceeds Offer is less than the Excess Proceeds, Pathnet may use such deficiency
for general corporate purposes. If the aggregate principal amount of Notes
validly tendered and not withdrawn by holders thereof pursuant to an Excess
Proceeds Offer exceeds the Excess Proceeds, Notes to be purchased will be
selected on a proportional basis. Upon completion of such Exceeds Proceeds
Offer, the amount of Excess Proceeds shall be reset to zero. (Section 1017)
If an Excess Proceeds Offer were made, there can be no assurance that
Pathnet would have available funds sufficient to pay an Excess Proceeds Offer
Price for all of the Notes that might be
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delivered by holders of the Notes seeking to accept an Excess Proceeds Offer.
The failure of Pathnet to make or consummate the Excess Proceeds Offer would
result in an Event of Default and would give the Trustee and the holders of the
Notes the rights described under "Events of Default."
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. Pathnet will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction of any kind on the ability of
any Restricted Subsidiary to:
(a) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of any Capital Stock of such Restricted
Subsidiary owned by Pathnet or any other Restricted Subsidiary;
(b) pay any Indebtedness owed to Pathnet or any other Restricted
Subsidiary;
(c) make Investments in Pathnet or any other Restricted Subsidiary;
(d) transfer any of its property or assets to Pathnet or any other
Restricted Subsidiary; or
(e) guarantee any Indebtedness of Pathnet or any other Restricted
Subsidiary, except for such encumbrances or restrictions existing under or
by reason of (i) any agreement in effect on the Issue Date, (ii) applicable
law, (iii) customary non-assignment provisions in leases entered into in
the ordinary course of business and other agreements of Pathnet or any
Restricted Subsidiary, (iv) any agreement or other instrument of a Person
acquired by Pathnet or any Restricted Subsidiary in existence at the time
of such acquisition (but not created in contemplation thereof), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired, (v) customary restrictions on
transfers of property contained in any security agreement (including a
capital lease obligation) securing Indebtedness of Pathnet or a Restricted
Subsidiary otherwise permitted under the Indenture, (vi) any encumbrance or
restriction with respect to a Restricted Subsidiary of Pathnet entered into
for the sale or disposition of all or substantially all of the Capital
Stock or assets of such Restricted Subsidiary permitted under the
"Limitation on Sale of Assets" covenant, (vii) any agreement or instrument
governing or relating to Indebtedness under any senior financing facility
permitted to be incurred under clause (g), (j) or (m) of the definition of
"Permitted Indebtedness" if such encumbrance or restriction applies only
(A) to amounts which at any point in time (other than during such periods
as are described in the following clause (B)) (1) exceed scheduled amounts
due and payable (or which are to become due and payable within 30 days) in
respect of the Notes or the Indenture for interest, premium and principal
less the amount of cash that is otherwise available to Pathnet at such time
for the payment of interest, premium and principal due and payable in
respect of the Notes or the Indenture or (2) if paid, would result in an
event described in the following clause (B) of this sentence, or (B) during
the pendency of any event that causes, permits or, after notice or lapse of
time, would cause or permit the holder or holders of such Indebtedness to
declare such Indebtedness to be immediately due and payable or to require
cash collateralization or cash cover for such Indebtedness for so long as
such cash collateralization or cash cover has not been provided; (viii) any
encumbrance or restriction under the Vendor Credit Facility; (ix) any
encumbrance or restriction relating to transfer of property or assets
comprising an Initial System pursuant to an Incumbent Agreement, and (x)
any encumbrance or restriction under any agreement that extends, renews,
refinances or replaces agreements containing the encumbrances or
restrictions in the foregoing clauses (i) through (vi) and (viii), so long
as the Board of Directors of Pathnet determines in good faith that the
terms and conditions of any such encumbrances or restrictions, taken as a
whole, are no less favorable to Pathnet, any Restricted
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Subsidiary and the holders of the Notes than those so extended, renewed,
refinanced or replaced. (Section 1018)
PROVISION OF FINANCIAL STATEMENTS AND REPORTS. (a) Pathnet will file on a
timely basis with the Commission, to the extent such filings are accepted by the
Commission and whether or not Pathnet has a class of securities registered under
the Exchange Act, the annual reports, quarterly reports and other documents that
Pathnet would be required to file if it were subject to Section 13 or 15 of the
Exchange Act.
(b) Pathnet will also be required (i) to file with the Trustee, and provide
to each holder of Notes, without cost to such holder, copies of such reports and
documents within 15 days after the date on which Pathnet files such reports and
documents with the Commission or the date on which Pathnet would be required to
file such reports and documents if Pathnet were so required, and (ii) if filing
such reports and documents with the Commission is not accepted by the Commission
or is prohibited under the Exchange Act, to supply at Pathnet's cost copies of
such reports and documents to any prospective holder promptly upon request.
(Section 1009)
CONSOLIDATION, MERGER AND SALE OF ASSETS. Pathnet will not, in a single
transaction or a series of transactions, consolidate with or merge with or into
any other Person or sell, assign, convey, transfer, lease or otherwise dispose
of all or substantially all of its properties and assets to any other Person or
Persons, and Pathnet will not permit any Restricted Subsidiary to enter into any
such transaction or series of transactions if such transaction or series of
transactions, in the aggregate, would result in the sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of Pathnet and its Restricted Subsidiaries on a
consolidated basis to any other Person or Persons, unless at the time and
immediately after giving effect thereto:
(i) either (a) Pathnet will be the continuing corporation or (b) the
Person (if other than Pathnet) formed by such consolidation or into which
Pathnet or such Restricted Subsidiary is merged or the Person that acquires
by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all the properties and assets of Pathnet and its Restricted
Subsidiaries on a consolidated basis, as the case may be (the "Surviving
Entity"), (1) will be a corporation organized and validly existing under
the laws of the United States of America, any state thereof or the District
of Columbia and (2) will expressly assume, by a supplemental indenture to
the Indenture in form satisfactory to the Trustee, Pathnet's obligations
pursuant to the Notes for the due and punctual payment of the principal of,
premium, if any, and interest on all the Notes and the performance and
observance of every covenant of the Indenture on the part of Pathnet to be
performed or observed;
(ii) immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis (and treating
any obligation of Pathnet or any Restricted Subsidiary incurred in
connection with or as a result of such transaction or series of
transactions as having been incurred at the time of such transaction), no
Default or Event of Default will have occurred and be continuing;
(iii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (on the assumption that the transaction
or series of transactions occurred on the first day of the two fiscal
quarter period ending immediately prior to the consummation of such
transaction or series of transactions, with the appropriate adjustments
with respect to the transaction or series of transactions being included in
such pro forma calculation), Pathnet (or the Surviving Entity if Pathnet is
not the continuing obligor under the Indenture) could incur at least $1.00
of additional Indebtedness (other than Permitted Indebtedness) under the
provisions of the "Limitation on Indebtedness" covenant; and
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(iv) Pathnet or the Surviving Entity shall have delivered to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
officers' certificate (attaching the computations to demonstrate compliance
with clause (iii) above) and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, conveyance, transfer, lease or
other disposition, and if a supplemental indenture is required in
connection with such transaction, such supplemental indenture, comply with
the requirements of the Indenture and that all conditions precedent therein
provided for relating to such transaction have been complied with. (Section
801)
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties and
assets of Pathnet in accordance with the immediately preceding paragraphs in
which Pathnet is not the continuing obligor under the Indenture, the Surviving
Entity shall succeed to, and be substituted for, and may exercise every right
and power of, Pathnet under the Indenture with the same effect as if such
successor had been named as Pathnet therein. When a successor assumes all the
obligations of its predecessor under the Indenture, the predecessor shall be
released from those obligations; provided that, in the case of a transfer by
lease, the predecessor shall not be released from the payment of principal of,
premium, if any, and interest on the Notes. (Section 802)
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of interest or Liquidated Damages, if any,
on any Note when it becomes due and payable, and continuance of such
default for a period of 30 days or more (provided that such 30-day grace
period shall not be applicable to the first four interest payments due on
the Notes);
(ii) default in the payment of principal of or premium, if any, on any
Note at its Maturity (upon acceleration, optional redemption, required
purchase or otherwise);
(iii) (A) default in the performance, or breach, of any covenant or
agreement of Pathnet contained in the Indenture (other than a default in
the performance, or breach, of a covenant or agreement which is
specifically dealt with in the immediately preceding clause (i) or (ii) or
in clause (B), (C) or (D) of this clause (iii)) and continuance of such
default or breach for a period of 30 days after written notice shall have
been given to Pathnet by the Trustee or to Pathnet and the Trustee by the
holders of at least 25% in aggregate principal amount of the Notes then
outstanding; (B) default in the performance or breach of the provisions of
the "Limitation on Sale of Assets" covenant; (C) default in the performance
or breach of the provisions of the "Consolidation, Merger and Sale of
Assets" covenant; and (D) default in the performance or breach of the
provisions of the "Purchase of Notes upon a Change of Control" covenant;
(iv) (A) one or more defaults in the payment of principal of or
premium, if any, or interest on Indebtedness of Pathnet or any Significant
Subsidiary aggregating $7.5 million or more, when the same becomes due and
payable at the Stated Maturity thereof, and such default or defaults shall
have continued after any applicable grace period and shall not have been
cured or waived or (B) Indebtedness of Pathnet or any Significant
Subsidiary aggregating $7.5 million or more shall have been accelerated or
otherwise declared due and payable, or required to be prepaid or
repurchased (other than by regularly scheduled required prepayment), prior
to the Stated Maturity thereof);
(v) one or more final judgments, orders or decrees of any court or
regulatory agency shall be rendered against Pathnet or any Significant
Subsidiary or their respective properties for the
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payment of money, either individually or in an aggregate amount, in excess
of $7.5 million and either (A) an enforcement proceeding shall have been
commenced by any creditor upon such judgment or order or (B) there shall
have been a period of 30 days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, was not in
effect;
(vi) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to Pathnet or any Significant Subsidiary; or
(vii) if the Pledge Agreement ceases to be in full force and effect
before payment in full of the obligations thereunder. (Section 501)
If an Event of Default (other than an Event of Default arising from an
event of bankruptcy, insolvency or reorganization as specified in clause (vi)
above) occurs and is continuing, the Trustee or the holders of not less than 25%
in aggregate principal amount of the Notes then outstanding, by written notice
to Pathnet (and to the Trustee if such notice is given by the holders), may, and
the Trustee upon the written request of such holders shall, declare the
principal of, premium, if any, and accrued and unpaid interest and Liquidated
Damages, if any, on all outstanding Notes immediately due and payable, and upon
any such declaration all such amounts payable in respect of the Notes shall
become immediately due and payable. If an Event of Default arising from an event
of bankruptcy, insolvency or reorganization as specified in clause (vi) or (vii)
above occurs and is continuing, then the principal of, premium, if any, and
accrued and unpaid interest and Liquidated Damages, if any, on all of the
outstanding Notes will ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any holder of Notes.
(Section 502)
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to Pathnet and the Trustee, may rescind or
annul such declaration and its consequences if (a) Pathnet has paid or deposited
with the Trustee a sum sufficient to pay (i) all overdue interest and Liquidated
Damages, if any, on all outstanding Notes, (ii) all unpaid principal of and
premium, if any, on any outstanding Notes that have become due otherwise than by
such declaration of acceleration, together with interest on such unpaid
principal at the rate borne by the Notes, (iii) to the extent that payment of
such interest is lawful, interest upon overdue interest and Liquidated Damages,
if any, and overdue principal at the rate borne by the Notes, (iv) all sums paid
or advanced by the Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel; and
(b) all Events of Default, other than the non-payment of amounts of principal
of, premium, if any, or interest and Liquidated Damages, if any, on the Notes
that have become due solely by such declaration of acceleration, have been cured
or waived. No such rescission shall affect any subsequent default or impair any
right consequent thereon. (Section 502)
The holders of not less than a majority in aggregate principal amount of
the outstanding Notes may, on behalf of the holders of all the Notes, waive any
past defaults under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest and Liquidated Damages, if any, on
any Note, or in respect of a covenant or provision which under the Indenture
cannot be modified or amended without the consent of the holder of each Note
outstanding. (Section 513)
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee will mail to each holder of the Notes notice of the
Default or Event of Default within five days after the earlier of receipt from
Pathnet of notice of the occurrence thereof or the date when such Default or
Event of Default becomes known to the Trustee. Except in the case of a Default
or an Event of Default in the payment of the principal of, premium, if any, or
interest on any Notes, the
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Trustee may withhold the notice to the holders of such Notes if a committee of
its trust officers in good faith determines that withholding such notice is in
the interests of the holders of the Notes.
Pathnet is required to furnish to the Trustee annual and quarterly
statements as to the performance by Pathnet of its obligations under the
Indenture and as to any default in such performance. Pathnet is also required to
notify the Trustee within five days of the occurrence of any Default or Event of
Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
Pathnet may, at its option and at any time, terminate its obligations with
respect to the outstanding Notes ("defeasance"). This means that Pathnet will be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Notes and to have satisfied all its other obligations under such
Notes, except for:
(i) the rights of holders of outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest and Liquidated
Damages, if any, on the Notes when such payments are due;
(ii) Pathnet's obligations to issue temporary Notes, register the
transfer or exchange of any such Notes, replace mutilated, destroyed, lost
or stolen Notes, maintain an office or agency for payments in respect of
the Notes and segregate and hold such payments in trust;
(iii) the rights, powers, trusts, duties and immunities of the
Trustee; and
(iv) the defeasance provisions of the Indenture.
In addition, Pathnet may, at its option and at any time, terminate its
obligations with respect to certain covenants set forth in the Indenture, and
any omission to comply with such obligations will not constitute a Default or an
Event of Default with respect to the Notes ("covenant defeasance"). (Sections
1301, 1302 and 1303)
In order to exercise either option:
(i) Pathnet must irrevocably deposit or cause to be deposited with the
Trustee, in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the holders of the Notes, cash in United States
dollars, Government Securities, or a combination or both, that, in the
opinion of a nationally recognized firm of independent public accountants,
will be sufficient to pay and discharge the principal of, premium, if any,
and interest on the outstanding Notes on the Stated Maturity (or upon
redemption, if applicable) of such principal, premium, if any, or
installment of interest and Liquidated Damages, if any;
(ii) no Default or Event of Default with respect to the Notes can have
occurred and be continuing on the date of such deposit or, insofar as an
event of bankruptcy under clause (vi) of "Events of Default" above is
concerned, at any time during the period ending on the 123rd day after the
date of such deposit;
(iii) Pathnet's termination of its obligations must not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which Pathnet is a
party or by which it is bound;
(iv) in the case of termination of its obligations with respect to the
outstanding Notes, Pathnet must have delivered to the Trustee an opinion of
counsel stating that Pathnet has received from, or there has been published
by, the Internal Revenue Service a ruling, or since the date of this
prospectus there has been a change in applicable federal income tax law, in
either case to the effect that, and based thereon such opinion shall
confirm that, the holders of the outstanding Notes will not recognize
income, gain or loss for U.S. federal income tax
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purposes as a result of Pathnet's termination of its obligations under the
Notes and will be subject to U.S. federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such termination had not occurred;
(v) in the case of termination of its obligations under certain
covenants, Pathnet must have delivered to the Trustee an opinion of counsel
to the effect that the holders of the Notes outstanding will not recognize
income, gain or loss for U.S. federal income tax purposes as a result of
the termination of its obligations under such covenants and will be subject
to U.S. federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such termination had not
occurred; and
(vi) Pathnet must deliver to the Trustee an officers' certificate and
an opinion of counsel, each stating that all conditions precedent provided
for relating to either the termination of its obligations under the Notes,
or the termination of its obligations with respect to certain covenants, as
the case may be, have been complied with. (Section 1304)
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes as expressly
provided for in the Indenture), and the Trustee, at the expense of Pathnet, will
execute proper instruments acknowledging satisfaction and discharge of the
Indenture when:
(i) either (A) all the Notes that have previously been authenticated
and delivered (other than destroyed, lost or stolen Notes which have been
replaced or paid and Notes for whose payment money has previously been
deposited in trust or segregated and held in trust by Pathnet, or
discharged) to the Trustee for cancellation or (B) all Notes not previously
delivered to the Trustee for cancellation that (x) have become due and
payable, (y) will become due and payable at their Stated Maturity within
one year or (z) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of Pathnet, and
Pathnet has irrevocably deposited or caused to be deposited with the
Trustee as trust funds in trust for such purpose an amount sufficient to
pay and discharge the entire Indebtedness on the Notes not previously
delivered to the Trustee for cancellation, for the principal of, premium
and Liquidated Damages, if any, and interest on the Notes to the date of
such deposit (in the case of Notes which have become due and payable) or to
the Stated Maturity or date of redemption, as the case may be;
(ii) Pathnet has paid or caused to be paid all sums payable by it
under the Indenture; and
(iii) Pathnet has delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent
provided in the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with. (Section 401)
MODIFICATION AND WAIVER
The Indenture may be modified or amended by a supplemental indenture
entered into by Pathnet and the Trustee with the consent of the holders of a
majority in aggregate outstanding principal amount of the Notes; provided, that
no modification or amendment can do any of the following, without the consent of
the holder of each outstanding Note affected by such modification or amendment:
(i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, or reduce the principal amount of any Note or
premium, if any, or the rate of interest on such Note, alter any redemption
provision with respect to any Note or change the coin or currency in which
the principal of any Note or any premium or the interest thereon is
payable,
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or impair the right to institute suit for the enforcement of any such
payment after the Stated Maturity of any Note (or, in the case of
redemption, on or after the date of redemption);
(ii) amend, change or modify Pathnet's obligation to make and
consummate an Excess Proceeds Offer with respect to any Asset Sale in
accordance with the "Limitation on Sale of Assets" covenant or Pathnet's
obligation to make and consummate a Change of Control Offer in the event of
a Change of Control in accordance with the "Purchase of Notes Upon a Change
of Control" covenant, including, in each case, amending, changing or
modifying any definition relating to such obligations;
(iii) reduce the percentage of the principal amount of outstanding
Notes the consent of whose holders is required for any such supplemental
indenture or the consent of whose holders is required for any waiver of
compliance with certain provisions and defaults of the Indenture and their
consequences provided for in the Indenture;
(iv) modify any of the provisions relating to supplemental indentures
requiring the consent of holders or relating to the waiver of past defaults
or relating to the waiver of certain covenants, except to increase the
percentage of the aggregate principal amount of outstanding Notes required
for such actions or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of
each Note affected thereby;
(v) except as otherwise permitted under "Consolidation, Merger and
Sale of Assets," consent to the assignment or transfer by Pathnet of any of
their rights or obligations under the Indenture; or
(vi) release any Lien created by the Pledge Agreement, except in
accordance with the terms of the Pledge Agreement. (Sections 901 and 902).
Notwithstanding the foregoing, without the consent of any holder of
the Notes, Pathnet and the Trustee may modify or amend the Indenture:
(a) to evidence the succession of another Person to Pathnet or any
other obligor on the Notes, and the assumption by any such successor of
the covenants of Pathnet or such obligor in the Indenture and in the
Notes in accordance with "Consolidation, Merger and Sale of Assets;"
(b) to add to the covenants of Pathnet or any other obligor upon
the Notes for the benefit of the holders of the Notes or to surrender
any right or power conferred upon Pathnet or any other obligor upon the
Notes, as applicable, in the Indenture or in the Notes;
(c) to cure any ambiguity, or to correct or supplement any
provision in the Indenture or in the Notes that may be defective or
inconsistent with any other provision in the Indenture or in the Notes,
or make any other provisions with respect to matters or questions
arising under the Indenture or the Notes; provided that, in each case,
such action will not adversely affect the interests of the holders of
the Notes;
(d) to comply with the requirements of the Commission in order to
effect or maintain the qualification, if any, of the Indenture under the
Trust Indenture Act;
(e) to evidence and provide the acceptance of the appointment of a
successor Trustee under the Indenture;
(f) to mortgage, pledge, hypothecate or grant a security interest
in favor of the Trustee for the benefit of the holders of the Notes as
additional security for the payment and performance of Pathnet's
obligations under the Indenture, in any property or assets, including
any of which are required to be mortgaged, pledged or hypothecated, or
in which
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a security interest is required to be granted to the Trustee pursuant to
the Indenture or otherwise; or
(g) to add a guarantor of the Notes under the Indenture. (Section
901)
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1019)
GOVERNING LAW
The Indenture, the Notes and the pledge agreement are governed by, and
construed in accordance with, the laws of the State of New York.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only the duties that are specifically set
forth in the Indenture. If an Event of Default has occurred and is continuing,
the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of their own
affairs.
The Indenture and provisions of the Trust Indenture Act, which are
incorporated into the Indenture by reference, contain limitations on the rights
of the Trustee, should it become a creditor of Pathnet, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest (as defined) it must eliminate such conflict or resign.
(Sections 601 and 603)
CERTAIN DEFINITIONS
"Accounts Receivable Subsidiary" means any Restricted Subsidiary of Pathnet
that is, directly or indirectly, wholly owned by Pathnet (other than directors'
qualifying shares) and organized for the purpose of and engaged in (i)
purchasing, financing and collecting accounts receivable obligations of
customers of Pathnet or its Restricted Subsidiaries, (ii) the sale or financing
of accounts receivable or interests therein and (iii) other activities directly
related thereto.
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Restricted Subsidiary or (b) assumed in connection
with an acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by, or under direct or
indirect common control with, such specified Person or (ii) any other Person
that owns, directly or indirectly, 10% or more of such specified Person's Voting
Stock or any executive officer or director of any such specified Person or other
Person or, with respect to any natural Person, any other Person in such Person's
immediate family. For the purposes of this definition, "control," when used with
respect to any specified Person, means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. Notwithstanding the
foregoing, no individual shall be deemed to be an Affiliate of a Person solely
by reason of (a) such Person being party to an Incumbent Agreement or (b) such
Person owning an interest in a Restricted Subsidiary pursuant to, or as the
result of, an Incumbent Agreement.
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"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Capital Stock
of any Subsidiary; (ii) all or substantially all of the properties and assets of
Pathnet or any Subsidiary; or (iii) any other properties or assets of Pathnet or
any Subsidiary, other than in the ordinary course of business (it being
understood that the ordinary course of business includes, but is not restricted
to, any transfer or sale of, or the grant of a right to use, an asset to an
Incumbent pursuant to (x) an Incumbent Agreement, (y) applicable law or (z) an
agreement to which such Incumbent is a party which exists on the date of, and is
not entered into in contemplation of, such Incumbent Agreement). For the
purposes of this definition, the term "Asset Sale" shall not include any
transfer of properties or assets (A) that is governed by the provisions of the
Indenture described under "Consolidation, Merger and Sale of Assets," (B) of
Pathnet to any Restricted Subsidiary, or of any Restricted Subsidiary to Pathnet
or any other Restricted Subsidiary in accordance with the terms of the
Indenture, (C) having an aggregate Fair Market Value of less than $2 million in
any given fiscal year, (D) by Pathnet or a Restricted Subsidiary to a Person who
is not an Affiliate of Pathnet in exchange for Telecommunications Assets (or not
less than 66 2/3% of the outstanding Voting Stock of a Person that becomes a
Restricted Subsidiary, the assets of which consist primarily of
Telecommunications Assets) or related telecommunications services where, in the
good faith judgment of the board of directors of Pathnet evidenced by a board
resolution, the Fair Market Value of such Telecommunications Assets (or such
Voting Stock) or services so received is at least equal to the Fair Market Value
of the properties or assets disposed of or, if less, the difference is received
by Pathnet in cash in an amount at least equal to such difference, (E)
constituting Capital Stock of an Unrestricted Subsidiary or other Investment
that was permitted under the "Limitation on Restricted Payments" covenant when
made, (F) constituting accounts receivable of Pathnet or a Restricted Subsidiary
to an Accounts Receivable Subsidiary or in consideration of Fair Market Value
thereof, to Persons that are not Affiliates of Pathnet or any Subsidiary of
Pathnet in the ordinary course of business, including in connection with
financing transactions, (G) in connection with a Sale-Leaseback Transaction
otherwise permitted to be incurred under the "Limitation on Indebtedness"
covenant, (H) to a Permitted Telecommunications Joint Venture if such transfer
of properties or assets is permitted under the definition of "Permitted
Investments," (I) in connection with a Permitted Telecommunications Asset Sale
or (J) to an Unrestricted Subsidiary if permitted under the "Limitation on
Restricted Payments" covenant.
"Attributable Value" means, with respect to any lease at the time of
determination, the present value (discounted at the interest rate implicit in
the lease or, if not known, at Pathnet's incremental borrowing rate) of the
obligations of the lessee of the property subject to such lease for rental
payments during the remaining term of the lease included in such transaction,
including any period for which such lease has been extended or may, at the
option of the lessor, be extended, or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of penalty (in
which case the rental payments shall include such penalty), after excluding from
such rental payments all amounts required to be paid on account of maintenance
and repairs, insurance, taxes, assessments, water, utilities and similar
charges.
"Average Life" means, as of the date of determination with respect to any
Indebtedness, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years from the date of determination to the date or dates of
each successive scheduled principal payment (including, without limitation, any
sinking fund requirements) of such Indebtedness multiplied by (ii) the amount of
each such principal payment by (b) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participations, rights in or other equivalents
(however designated and whether voting or non-voting) in equity of such Person,
including, without limitation, all common stock or Preferred Stock,
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and any rights (other than debt securities convertible into capital stock),
warrants or options exchangeable for or convertible into such capital stock,
whether now outstanding or issued after the Issue Date.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation of such Person under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed) that is required to
be classified and accounted for as a capital lease obligation under GAAP, and,
for the purposes of the Indenture, the amount of such obligation at any date
shall be the capitalized amount thereof at such date, determined in accordance
with GAAP.
"Cash Equivalents" means (a) any evidence of Indebtedness with a maturity
of 180 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (b) certificates of deposit or acceptances with a maturity of 180 days
or less of any financial institution that is a member of the Federal Reserve
System, in each case having combined capital and surplus and undivided profits
of not less than $500 million; (c) commercial paper with a maturity of 180 days
or less issued by a corporation that is not an Affiliate of Pathnet and is
organized under the laws of any state of the United States or the District of
Columbia and rated at least A-1 by S&P or at least P-l by Moody's; and (d) money
market mutual funds that invest substantially all of their assets in securities
of the type described in the preceding clauses.
"Change of Control" means any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than Permitted Holders, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and l3d-5 under the
Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 50% of the total outstanding
Voting Stock of Pathnet;
(b) Pathnet consolidates with, or merges with or into, another Person
or conveys, transfers, leases or otherwise disposes of all or substantially
all of its assets to any Person, or any Person consolidates with, or merges
with or into, Pathnet, in any such event pursuant to a transaction in which
the outstanding Voting Stock of Pathnet is converted into or exchanged for
cash, securities or other property, other than any such transaction
(i) where the outstanding Voting Stock of Pathnet is not converted
or exchanged at all (except to the extent necessary to reflect a change
in the jurisdiction of incorporation of Pathnet) or is converted into or
exchanged for (A) Voting Stock (other than Redeemable Capital Stock) of
the surviving or transferee corporation or (B) cash, securities and
other property (other than Capital Stock of the Surviving Entity) in an
amount that could be paid by Pathnet as a Restricted Payment as
described under the "Limitation on Restricted Payments" covenant; and
(ii) immediately after such transaction, no "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act),
other than Permitted Holders, is the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall
be deemed to have "beneficial ownership" of all securities that such
Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly,
of more than 50% of the total outstanding Voting Stock of the surviving
or transferee corporation;
(c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of Pathnet
(together with any new directors whose election to
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such Board of Directors, or whose nomination for election by the
stockholders of Pathnet, was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of Pathnet then in office; or
(d) Pathnet is liquidated or dissolved or adopts a plan of liquidation
or dissolution other than in a transaction which complies with the
provisions described under "Consolidation, Merger and Sale of Assets."
"Consolidated Adjusted Net Income" means, for any period, the consolidated
net income (or loss) of Pathnet and all Restricted Subsidiaries for such period
as determined in accordance with GAAP, adjusted by excluding, without
duplication,
(a) any net after-tax extraordinary gains or losses (less all fees and
expenses relating thereto),
(b) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to asset dispositions other than in the
ordinary course of business,
(c) the portion of net income (or loss) of any Person (other than
Pathnet or a Restricted Subsidiary), including Unrestricted Subsidiaries,
in which Pathnet or any Restricted Subsidiary has an ownership interest,
except to the extent of the amount of dividends or other distributions
actually paid to Pathnet or any Restricted Subsidiary in cash dividends or
distributions during such period,
(d) the net income (or loss) of any Person combined with Pathnet or
any Restricted Subsidiary on a "pooling of interests" basis attributable to
any period prior to the date of combination,
(e) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary is not at the date of determination permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Restricted Subsidiary or its
stockholders (except, for purposes of determining compliance with the
"Limitation on Indebtedness" covenant, any restriction permitted under
clause (vii) or (viii) of "Limitations on Dividend and other Payment
Restrictions Affecting Restricted Subsidiaries"), and
(f) any net income (or loss) from any Restricted Subsidiary that was
an Unrestricted Subsidiary at any time during such period other than any
amounts actually received from such Restricted Subsidiary.
"Consolidated Indebtedness" means, with respect to any period, the
aggregate amount of Indebtedness of Pathnet and its Restricted Subsidiaries
outstanding at the date of determination as determined on a consolidated basis
in accordance with GAAP.
"Consolidated Indebtedness to Consolidated Operating Cash Flow Ratio"
means, at any date of determination, the ratio of (i) Consolidated Indebtedness
to (ii) Consolidated Operating Cash Flow for the two preceding fiscal quarters
for which financial information is available immediately prior to the date of
determination multiplied by two; provided that any Indebtedness incurred or
retired by Pathnet or any of its Restricted Subsidiaries during the fiscal
quarter in which the transaction date occurs shall be calculated as if such
Indebtedness were so incurred or retired on the first day of the fiscal quarter
in which the date of determination occurs (provided that, in making any such
computation, the aggregate amount of Indebtedness under any revolving credit or
similar facility will be deemed to include an amount of funds equal to the
average daily balance of such Indebtedness
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during such two fiscal quarter period); and provided further that (x) if the
transaction giving rise to the need to calculate the Consolidated Indebtedness
to Consolidated Operating Cash Flow Ratio would have the effect of increasing or
decreasing Consolidated Indebtedness or Consolidated Operating Cash Flow in the
future, Consolidated Indebtedness and Consolidated Operating Cash Flow shall be
calculated on a pro forma basis as if such transaction had occurred on the first
day of such two fiscal quarter period preceding the date of determination; (y)
if during such two fiscal quarter period, Pathnet or any of its Restricted
Subsidiaries shall have engaged in any Asset Sale in respect of any company,
entity or business, Consolidated Operating Cash Flow for such period shall be
reduced by an amount equal to the Consolidated Operating Cash Flow (if
positive), or increased by an amount equal to the Consolidated Operating Cash
Flow (if negative), directly attributable to Pathnet, entity or business that is
the subject of such Asset Sale and any related retirement of Indebtedness as if
such Asset Sale and any related retirement of Indebtedness had occurred on the
first day of such period; or (z) if during such two fiscal quarter period
Pathnet or any of its Restricted Subsidiaries shall have acquired any company,
entity or business, Consolidated Operating Cash Flow shall be calculated on a
pro forma basis as if such acquisition and related financing had occurred on the
first day of such period.
"Consolidated Interest Expense" means, for any period, without duplication,
the sum of (a) the interest expense of Pathnet and its Restricted Subsidiaries
for such period, including, without limitation, (i) amortization of debt
discount, (ii) the net cost of Interest Rate Agreements (including amortization
of discounts), (iii) the interest portion of any deferred payment obligation,
(iv) accrued interest, (v) the consolidated amount of any interest capitalized
by Pathnet and (vi) amortization of debt issuance costs, plus (b) the interest
component of Capitalized Lease Obligations of Pathnet and its Restricted
Subsidiaries paid, accrued and/or scheduled to be paid or accrued during such
period; excluding, however, any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Consolidated Adjusted Net Income pursuant to clause (e) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Consolidated Adjusted
Net Income pursuant to clause (e) of the definition thereof); provided that in
making such computation, (x) the Consolidated Interest Expense attributable to
interest on any Indebtedness computed on a pro forma basis and (A) bearing a
floating interest rate shall be computed as if the rate in effect on the date of
computation had been the applicable rate for the entire period and (B) which was
not outstanding during the period for which the computation is being made but
which bears, at the option of Pathnet, a fixed or floating rate of interest,
shall be computed by applying, at the option of Pathnet, either the fixed or
floating rate, (y) the Consolidated Interest Expense attributable to interest on
any Indebtedness under a revolving credit facility computed on a pro forma basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period and (z) the interest rate with respect to any
Indebtedness covered by an Interest Rate Agreement shall be deemed to be the
effective interest rate with respect to such Indebtedness after taking into
account such Interest Rate Agreement.
"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Adjusted Net Income for such period (a) increased by (to the extent
deducted in computing Consolidated Adjusted Net Income) the sum of (i) the
Consolidated Tax Expense for such period (other than taxes attributable to
extraordinary, unusual or non-recurring gains or losses); (ii) Consolidated
Interest Expense for such period; (iii) depreciation of Pathnet and the
Restricted Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP; (iv) amortization of Pathnet and its Restricted
Subsidiaries for such period, determined on a consolidated basis in accordance
with GAAP; and (v) any other non-cash charges that were deducted in computing
Consolidated Adjusted Net Income (excluding any non-cash charge which requires
an accrual or reserve for cash charges for any future period) of Pathnet and its
Restricted Subsidiaries
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for such period in accordance with GAAP and (b) decreased by any non-cash gains
that were included in computing Consolidated Adjusted Net Income.
"Consolidated Tax Expense" means, for any period, the provision for U.S.
federal, state, provincial, local and foreign income taxes of Pathnet and all
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"Credit Facilities" means, with respect to Pathnet or its Restricted
Subsidiaries, one or more debt facilities or commercial paper facilities with
banks or other institutional lenders providing for revolving credit loans, term
loans, receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
"Currency Agreement" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by Pathnet or any of its Restricted Subsidiaries.
"Debt Securities" means any debt securities (including any Guarantee of
such securities) issued by Pathnet and/or any Restricted Subsidiary in
connection with a public offering (whether or not underwritten) or a private
placement (provided that such private placement is underwritten for resale
pursuant to Rule 144A, Regulation S or otherwise under the Securities Act or
sold on an agency basis by a broker-dealer or one of its Affiliates to 10 or
more non-affiliated beneficial holders); it being understood that the term "Debt
Securities" shall not include any evidence of indebtedness under the Vendor
Credit Facility, any financing by a Restricted Subsidiary similar to the Vendor
Credit Facility or any Credit Facility or other commercial bank borrowings, any
vendor equipment financing facility or any similar financings, recourse
transfers of financial assets, capital leases or other types of borrowings
incurred in a manner not customarily viewed as a "securities offering."
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors of Pathnet is
required to deliver a resolution thereof under the Indenture, a member of the
board of directors of Pathnet who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of
transactions. For purposes of this definition, no Person shall be deemed not to
be a Disinterested Director solely because such Person or an Affiliate of such
Person holds or beneficially owns Capital Stock of Pathnet or any of its
Restricted Subsidiaries.
"Escrow Account" means an account established with the Trustee in its name
as Trustee pursuant to the terms of the Pledge Agreement for the deposit of the
Pledged Securities purchased by Pathnet with a portion of the net proceeds from
the initial offering of the Notes made pursuant to an Offering Memorandum of
April 1, 1998.
"Event of Default" has the meaning set forth under "Events of Defaults"
herein.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy. Unless otherwise specified in the Indenture, Fair
Market Value shall be determined by the Board of Directors of Pathnet acting in
good faith and as of the date on which such determination is made.
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"GAAP" means generally accepted accounting principles in the United States
that are in effect on the date of the Indenture.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which obligations
or guarantees the full faith and credit of the United States of America is
pledged which, in any case, are not callable or redeemable at the option of the
issuer of the issuer thereof.
"Guarantee" or "guarantee" means, as applied to any obligation, (a) a
guarantee (other than by endorsement of negotiable instruments for collection in
the ordinary course of business), direct or indirect, in any manner, of any part
or all of such obligation and (b) an agreement, direct or indirect, contingent
or otherwise, the practical effect of which is to assure in any way the payment
or performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. When used as a verb,
"Guarantee" or "guarantee" shall have a corresponding meaning.
"Incumbent" means any railroad, utility, governmental entity, pipeline or
other licensed owner (which ownership is determined immediately prior to any
transaction with Pathnet or a Restricted Subsidiary) of Telecommunications
Assets to be used in Pathnet's network pursuant to an Incumbent Agreement (and
any subsidiary or affiliate of such Person that is a party to an Incumbent
Agreement for the sole purpose of receiving payments from Pathnet or a
Restricted Subsidiary pursuant to such agreement).
"Incumbent Agreement" means an agreement between an Incumbent and Pathnet
or a Restricted Subsidiary pursuant to which, among other things, such Incumbent
receives a payment equal to a percentage of Pathnet's or such Restricted
Subsidiary's revenues, if any, attributable, in whole or in part, to
Telecommunications Assets transferred or leased, or with respect to which a
right of use has been granted, by such Incumbent to Pathnet or such Restricted
Subsidiary and upon or with respect to which Pathnet or such Restricted
Subsidiary has constructed or intends to construct a portion of its network.
"Incur" or "incur" means, with respect to any Indebtedness, to incur,
create, issue, assume, guarantee or otherwise become directly or indirectly
liable or responsible for the payment of, or otherwise incur, such Indebtedness,
contingently or otherwise; provided that neither the accrual of interest nor the
accretion of original issue discount shall be considered an incurrence of
Indebtedness. With respect to Indebtedness to be borrowed under a binding
commitment previously entered into that provides for Pathnet to Incur
Indebtedness on a revolving basis, Pathnet shall be deemed to have Incurred the
greater of (a) the Indebtedness actually Incurred or (b) all or a portion of the
amount of such unborrowed commitment that Pathnet shall have so designated to be
Incurred in an Officer's Certificate delivered to the Trustee (in which case
Pathnet shall not be deemed to incur such unborrowed amount at the time or times
it is actually borrowed).
"Indebtedness" means, with respect to any Person at any date of
determination, without duplication:
(a) all liabilities, contingent or otherwise, of such Person: (i) for
borrowed money (including overdrafts), (ii) in connection with any letters
of credit and acceptances issued under letter of credit facilities,
acceptance facilities or other similar facilities (including reimbursement
obligations with respect thereto), (iii) evidenced by bonds, notes,
debentures or other similar instruments, (iv) for the deferred and unpaid
purchase price of property or services or created or arising under any
conditional sale or other title retention agreement with respect to
property acquired by such Person or (v) for Capitalized Lease Obligations
(including any Sale-Leaseback Transaction);
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(b) all obligations of such Person under or in respect of Interest
Rate Agreements and Currency Agreements;
(c) all Indebtedness referred to in (but not excluded from) the
preceding clauses of other Persons and all dividends of other Persons, the
payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien upon or with respect to any property (including, without
limitation, accounts and contract rights) owned by such Person, whether or
not such Person has assumed or become liable for the payment of such
Indebtedness (the amount of such obligation being deemed to be the lesser
of (i) the Fair Market Value of such property or asset and (ii) the amount
of such obligation so secured);
(d) all guarantees by such Person of Indebtedness referred to in this
definition of any other Person; and
(e) all Redeemable Stock of such Person valued at the greater of its
voluntary or involuntary maximum fixed repurchase price, plus accrued and
unpaid dividends.
The amount of Indebtedness of any Person at any date will be the
outstanding balance at such date (or, in the case of a revolving credit or other
similar facility, the total amount of funds outstanding and/or designated as
incurred and certified by an officer of Pathnet to have been Incurred on such
date pursuant to clause (b) of the last sentence of the definition of "Incur")
of all unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation; provided (i) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
equals the face amount of such Indebtedness less the remaining unamortized
portion of the original issue discount of such Indebtedness at such time as
determined in conformity with GAAP and (ii) that Indebtedness shall not include
any liability for U.S. federal, state, local or other taxes owed by such Person.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the Fair Market Value of such Redeemable Capital
Stock, such Fair Market Value will be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock. Notwithstanding the
foregoing, trade accounts and accrued liabilities arising in the ordinary course
of business will not be considered Indebtedness for purposes of this definition.
"Initial System" means all property, rights and assets necessary to own and
operate an Incumbent's base microwave network system and shall include, without
limitation, the initial microwave radio and protect microwave radio, software,
antennae, waveguide, multiplexors, towers, shelters, licenses (including Federal
Communications Commission and Federal Aviation Administration licenses),
permits, leases, rights-of-way, easements and other related assets. An Initial
System shall not include any additional microwave radios and related equipment
installed as part of an expansion of an Initial System.
"Interest Rate Agreement" means any interest rate protection agreements and
other types of interest rate hedging agreements or arrangements (including,
without limitation, interest rate swaps, caps, floors, collars and other similar
agreements).
"Invested Capital" means the sum of (a) 75% of the aggregate net cash
proceeds received by Pathnet from the issuance of (or capital contributions with
respect to) any Qualified Capital Stock subsequent to the Issue Date, other than
the issuance of Qualified Capital Stock to a Restricted Subsidiary of Pathnet,
and (b) 75% of the aggregate net cash proceeds from sales of Redeemable
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Capital Stock of Pathnet or Indebtedness of Pathnet convertible into Qualified
Capital Stock of Pathnet, in each case upon such redemption or conversion
thereof into Qualified Capital Stock.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit or capital contribution to (by means
of any transfer of cash or other property to others or any payment for property
or services for the account or use of others), or any purchase, acquisition or
ownership by such Person of any Capital Stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued or owned by, any other Person and
all other items that would be classified as investments on a balance sheet
prepared in accordance with GAAP. In addition, the portion (proportionate to
Pathnet's equity interest in such Subsidiary) of the Fair Market Value of the
net assets of any Subsidiary at the time that such Subsidiary is designated an
Unrestricted Subsidiary shall be deemed to be an "Investment" made by Pathnet in
such Unrestricted Subsidiary at such time and the portion (proportionate to
Pathnet's equity interest in such Subsidiary) of the Fair Market Value of the
net assets of any Subsidiary at the time that such Subsidiary is designated a
Restricted Subsidiary shall be considered a reduction in outstanding
Investments. "Investments" shall exclude extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices.
"Issue Date" means the date of the Indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A Person shall be deemed to own subject to a Lien any property which
such Person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as provided therein or in the Indenture,
whether at the Stated Maturity with respect to such principal or by declaration
of acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means: (a) with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents, including payments in respect
of deferred payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to Pathnet or any Restricted
Subsidiary), net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of legal counsel and investment banks) related to
such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset
Sale, (iii) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties which are the subject of
such Asset Sale, (iv) amounts required to be paid to any Person (other than
Pathnet or any Restricted Subsidiary) owning a beneficial interest in the assets
subject to the Asset Sale and (v) appropriate amounts to be provided by Pathnet
or any Restricted Subsidiary, as the case may be, as a reserve required in
accordance with GAAP against any liabilities associated with such Asset Sale and
retained by Pathnet or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale, all as reflected in an officers' certificate delivered to the Trustee; and
(b) with respect to any issuance or sale of Capital Stock or options, warrants
or rights to purchase Capital Stock, or debt securities or Redeemable Capital
Stock that has been converted into or exchanged for Qualified Capital Stock, as
referred to under the "Limitation on Restricted Payments" covenant, the proceeds
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of such issuance or sale in the form of cash or Cash Equivalents, including
payments in respect of deferred payment obligations when received in the form
of, or stock or other assets when disposed for, cash or Cash Equivalents (except
to the extent that such obligations are financed or sold with recourse to
Pathnet or any Subsidiary of Pathnet), net of fees, commissions and expenses
actually incurred in connection with such issuance or sale and net of taxes paid
or payable as a result thereof.
"Permitted Holder" means Spectrum Equity Investors, L.P., New Enterprise
Associates VI, Limited Partnership, Onset Enterprise Associates II, L.P., FBR
Technology Venture Partners L.P., Toronto Dominion Capital (USA), Inc. and
Grotech Partners IV, L.P., any general partner of any such Person on the Issue
Date, any Person controlled by any such general partner, David Schaeffer or
Richard A. Jalkut.
"Permitted Indebtedness" means:
(a) Indebtedness of Pathnet pursuant to the Notes or of any Restricted
Subsidiary pursuant to a Guarantee of the Notes;
(b) Indebtedness of Pathnet or any Restricted Subsidiary outstanding
on the Issue Date;
(c) Indebtedness of Pathnet owing to any Restricted Subsidiary (but
only so long as such Indebtedness is held by such Restricted Subsidiary);
provided that any Indebtedness of Pathnet owing to any such Restricted
Subsidiary is subordinated in right of payment from and after such time as
the Notes shall become due and payable (whether at Stated Maturity, by
acceleration or otherwise) to the payment and performance of Pathnet's
obligations under the Notes; and provided further that any transaction
pursuant to which any Restricted Subsidiary to which such Indebtedness is
owed ceases to be a Restricted Subsidiary shall be deemed to be an
incurrence of Indebtedness by Pathnet that is not permitted by this clause
(c);
(d) Indebtedness of any Restricted Subsidiary to Pathnet or of any
Restricted Subsidiary to another Restricted Subsidiary;
(e) Indebtedness of Pathnet or any Restricted Subsidiary in respect of
performance, surety or appeal bonds or under letter of credit facilities
provided in the ordinary course of business and, in the case of letters of
credit, under which recourse to Pathnet is limited to the cash securing
such letters of credit;
(f) Indebtedness of Pathnet under Currency Agreements and Interest
Rate Agreements entered into in the ordinary course of business; provided
that such agreements are designed to protect Pathnet or any Restricted
Subsidiary against, or manage exposure to, fluctuations in currency
exchange rates and interest rates, respectively, and that such agreements
do not increase the Indebtedness of the obligor outstanding at any time
other than as a result of fluctuations in foreign currency exchange rates
or interest rates or by reason of fees, indemnities and compensation
payable thereunder;
(g) Telecommunications Indebtedness and any Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund
such Telecommunications Indebtedness in an amount not to exceed the amount
so refinanced or refunded (plus premiums, accrued interest, and reasonable
fees and expenses);
(h) Indebtedness of Pathnet or any Restricted Subsidiary consisting of
guarantees, indemnities or obligations in connection with
Telecommunications Indebtedness, Indebtedness permitted under clause (j) or
(m) of the "Permitted Indebtedness" definition or in respect of purchase
price adjustments in connection with the acquisition of or disposition of
assets, including, without limitation, shares of Capital Stock;
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(i) Indebtedness of Pathnet not to exceed, at any time outstanding,
2.0 times the Net Cash Proceeds from the issuance and sale after the Issue
Date, other than to a Restricted Subsidiary, of Qualified Capital Stock of
Pathnet, to the extent such Net Cash Proceeds have not been used to make
Restricted Payments pursuant to clause (a)(3)(B) or clauses (b)(ii) and
(iii) of the "Limitation on Restricted Payments" covenant to make a
Restricted Payment or to make any Permitted Investments under clause (h) of
the definition of Permitted Investments; provided that such Indebtedness
does not mature prior to the Stated Maturity of the Notes and has an
Average Life longer than the Notes;
(j) Indebtedness of Pathnet or any Restricted Subsidiary under one or
more Credit Facilities; provided that the aggregate principal amount of any
Indebtedness incurred pursuant to this clause (j) (including any amounts
refinanced or refunded under this clause (j)) does not exceed at any time
outstanding the greater of (x) 80% of eligible accounts receivable of
Pathnet as of the last fiscal quarter for which financial statements are
prepared or (y) $50.0 million; and any Indebtedness issued in exchange for,
or the net proceeds of which are used to refinance or refund, Indebtedness
issued under this clause (j) in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, and reasonable
fees and expenses);
(k) Indebtedness of Pathnet or a Restricted Subsidiary issued in
exchange for, or the net proceeds of which are used to refinance or refund,
then outstanding Indebtedness of Pathnet or a Restricted Subsidiary,
incurred under the ratio test set forth in clause (i) or (ii) of the
"Limitation on Indebtedness" covenant or under clauses (b) through (f),
(h), (i) and (m) of this definition of "Permitted Indebtedness," and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, and reasonable fees and
expenses); provided that such new Indebtedness shall only be permitted
under this clause (k) if (A) in case the Notes are refinanced in part, or
the Indebtedness to be refinanced ranks equally with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new indebtedness is issued or remains outstanding,
is expressly made to rank equally with, or subordinate in right of payment
to, the remaining Notes, (B) in case the Indebtedness to be refinanced is
subordinated in right of payment to the Notes, such new Indebtedness, by
its terms or by the terms of any agreement or instrument pursuant to which
such new Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the Notes at least to the same extent
that the Indebtedness to be refinanced is subordinated to the Notes and (C)
such new Indebtedness, determined as of the date of incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the
Indebtedness being refinanced or refunded; provided further that no
Indebtedness incurred under this clause (k) in exchange for, or the
proceeds of which refinance or refund any Indebtedness incurred under the
ratio test set forth under clause (i) or (ii) of the "Limitation on
Indebtedness" covenant will mature prior to the Stated Maturity of the
Notes or have an Average Life shorter than the Notes; provided further that
in no event may Indebtedness of Pathnet be refinanced by means of any
Indebtedness of any Restricted Subsidiary issued pursuant to this clause
(k);
(l) Indebtedness arising by reason of the recharacterization of a sale
of accounts receivable to an Accounts Receivable Subsidiary; and
(m) Indebtedness of Pathnet or any Restricted Subsidiary in addition
to that permitted to be incurred pursuant to clauses (a) through (l) above
in an aggregate principal amount not in excess of $30.0 million at any time
outstanding.
"Permitted Investment" means any of the following:
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(a) Investments in Cash Equivalents; provided that the term "with a
maturity of 180 days or less" in clauses (a), (b) and (c) of the definition
of "Cash Equivalents" is changed to "with a maturity of one year or less"
for the purposes of this definition of "Permitted Investments" only;
(b) Investments in Pathnet or any Restricted Subsidiary;
(c) Investments by Pathnet or any Restricted Subsidiary in another
Person if, as a result of such Investment, (i) such other Person becomes a
Restricted Subsidiary or (ii) such other Person is merged or consolidated
with or into, or transfers or conveys all or substantially all of its
assets to, Pathnet or a Restricted Subsidiary;
(d) Investments in the form of intercompany Indebtedness to the extent
permitted under clauses (c) and (d) of the definition of "Permitted
Indebtedness;"
(e) Investments in existence on the Issue Date;
(f) Investments in the Pledged Securities to the extent required by
the Pledge Agreement;
(g) Investments in an amount not to exceed $1.0 million at any one
time outstanding;
(h) Investments in an aggregate amount not to exceed the sum of (1)
Invested Capital, (2) the Fair Market Value of Qualified Capital Stock of
Pathnet, Redeemable Capital Stock of Pathnet, or Indebtedness of Pathnet
convertible into Qualified Capital Stock of Pathnet, in the latter two
cases upon such redemption or conversion thereof into Qualified Capital
Stock of Pathnet, issued by Pathnet or any Restricted Subsidiary of Pathnet
as consideration for any such Investments made pursuant to this clause (h),
and (3) in the case of the disposition or repayment of any Investment made
pursuant to this clause (h) after the Issue Date (including by
redesignation of an Unrestricted Subsidiary of Pathnet to a Restricted
Subsidiary of Pathnet), an amount equal to the lesser of the return of
capital with respect to such Investment and the initial amount of such
Investment, in either case, less the cost of the disposition of such
Investment; provided, however, that the amount of any Permitted Investments
under this clause (h) shall be excluded from the computation of the amount
of any Restricted Payment under the "Limitation on Restricted Payments"
covenant;
(i) Investments in trade receivables, prepaid expenses, negotiable
instruments held for collection and lease, utility and worker's
compensation, performance and other similar deposits or escrow;
(j) Loans, advances and extensions of credit to employees made in the
ordinary course of business of Pathnet not in excess of $500,000 in any
fiscal year;
(k) Bonds, notes, debentures or other securities received as a result
of Asset Sales permitted under the covenant described in "Certain Covenants
Limitation on Asset Sales";
(l) Endorsements for collection or deposit in the ordinary course of
business by such Person of bank drafts and similar negotiable instruments
of such other person received as payment for ordinary course of business
trade receivables;
(m) Investments deemed to have been made as a result of the
acquisition of a Person that at the time of such acquisition held
instruments constituting Investments that were not acquired in
contemplation of, or in connection with, the acquisition of such Person;
(n) Investments in or acquisitions of Capital Stock, indebtedness,
securities or other property of Persons (other than Affiliates of Pathnet)
received by Pathnet or any of its Restricted Subsidiaries in the bankruptcy
or reorganization of or by such Person or any exchange
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of such Investment with the issuer thereof or taken in settlement of or
other resolution of claim or disputes, and, in each case, extensions,
modifications and renewals thereof;
(o) Investments in any Person to which Telecommunications Assets used
in an Initial System have been transferred and which person has provided to
Pathnet or a Restricted Subsidiary the right to use such assets pursuant to
an Incumbent Agreement; provided that, in the good faith determination of
the Board of Directors, the present value of the future payments expected
to be received by Pathnet in respect of any such Investment plus the Fair
Market Value of any capital stock or other securities received in
connection therewith is at least equal to the Fair Market Value of such
Investment; and
(p) Investments in one or more Permitted Telecommunications Joint
Ventures; provided that the total original cost of all such Permitted
Telecommunications Joint Ventures plus the cost or Fair Market Value, as
applicable, of all additions thereto less the sum of all amounts received
as returns thereon shall not exceed $20.0 million.
"Permitted Liens" means:
(a) Liens existing on the Issue Date;
(b) Liens on any property or assets of a Restricted Subsidiary granted
in favor of Pathnet or any Restricted Subsidiary;
(c) Liens on any property or assets of Pathnet or any Restricted
Subsidiary securing the Notes or any Guarantees thereof;
(d) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease permitted by the Indenture;
(e) Liens securing Indebtedness incurred under clauses (g), (j) or (m)
of the definition of "Permitted Indebtedness";
(f) statutory Liens of landlords and carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen or other like Liens arising in
the ordinary course of business of Pathnet or any Restricted Subsidiary and
with respect to amounts not yet delinquent or being contested in good faith
by appropriate proceeding, if a reserve or other appropriate provision, if
any, as required in conformity with GAAP shall have been made therefor;
(g) Liens for taxes, assessments, government charges or claims that
are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor;
(h) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance bonds, escrows and other obligations of a
like nature incurred in the ordinary course of business (other than
contracts for the payment of money);
(i) easements, rights-of-way, restrictions and other similar charges
or encumbrances not interfering in any material respect with the business
of Pathnet or any Restricted Subsidiary incurred in the ordinary course of
business;
(j) Liens arising by reason of any judgment, decree or order of any
court so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired;
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(k) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the incurrence of such Indebtedness
by Pathnet or any Restricted Subsidiary; provided that such Lien does not
extend to any property or assets of Pathnet or any Restricted Subsidiary
other than the assets acquired in connection with the incurrence of such
Acquired Indebtedness;
(l) Liens securing obligations of Pathnet under Interest Rate
Agreements or Currency Agreements permitted to be incurred under clause (f)
of the definition of "Permitted Indebtedness" or any collateral for the
Indebtedness to which such Interest Rate Agreements or Currency Agreements
relate;
(m) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security;
(n) Liens securing reimbursement obligations of Pathnet or any
Restricted Subsidiary with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the
products and proceeds thereof;
(o) Liens arising from purchase money mortgages and purchase money
security interests; provided that (i) the related Indebtedness shall not be
secured by any property or assets of Pathnet or of any Restricted
Subsidiary other than the property and assets so acquired and (ii) the Lien
securing such Indebtedness shall be created within 60 days of such
acquisition;
(p) Liens securing the Escrow Account, the Pledged Securities and the
proceeds thereof and the security interest created by the Pledge Agreement;
(q) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (a) through (o); provided that any
such extension, renewal or replacement shall be no more restrictive in any
material respect than the Lien so extended, renewed or replaced and shall
not extend to any additional property or assets;
(r) Liens with respect to the equipment and related assets of Pathnet
installed on its network in favor of Persons that have licensed, leased,
transferred or granted to Pathnet or any Restricted Subsidiary a right to
use Telecommunications Assets or financed the purchase of
Telecommunications Assets or securing the obligations of Pathnet or such
Restricted Subsidiary under an Incumbent Agreement; provided that such
Liens will (1) be created on terms that Pathnet reasonably believes to be
no less favorable to Pathnet than Liens granted under clause (e) of this
definition and (2) not secure any Indebtedness in excess of the Fair Market
Value of the equipment and assets so secured;
(s) Liens relating to revenues of Pathnet or any Restricted Subsidiary
arising as a result of obligations under an Incumbent Agreement; and
(t) Liens on the property or assets or Capital Stock of Accounts
Receivable Subsidiaries and Liens arising out of any sale of Accounts
Receivable in the ordinary course of business (including in connection with
a financing transaction) to or by an Accounts Receivable Subsidiary or to
Persons that are not Affiliates of Pathnet.
"Permitted Telecommunications Asset Sale" means any transfer, conveyance,
sale, lease or other disposition of a capital asset that is a Telecommunications
Asset, the proceeds of which are treated as revenues (including deferred
revenues) by Pathnet in accordance with GAAP.
"Permitted Telecommunications Joint Venture" means a corporation,
partnership or other entity engaged in one or more Telecommunications Businesses
in which Pathnet owns, directly or indirectly, an equity interest.
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"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, business
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Pledge Agreement" means the Pledge Agreement dated as of the Issue Date,
by and between the Trustee and Pathnet, governing the disbursement of funds from
the Escrow Account.
"Pledged Securities" means the securities purchased by Pathnet with a
portion of the net proceeds from the initial offering of the Notes made pursuant
to an Offering Memorandum of April 1, 1998, which shall consist of Government
Securities, to be deposited in the Escrow Account.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations, rights or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference stock,
whether now outstanding or issued after the Issue Date, including, without
limitation, all series and classes of such preferred or preference stock of such
Person.
"Public Equity Offering" means an offer and sale of Common Stock (which is
Qualified Capital Stock) of Pathnet pursuant to a registration statement that
has been declared effective by the Commission pursuant to the Securities Act
(other than a registration statement on Form S-8 or otherwise relating to equity
securities issuable under any employee benefit plan of Pathnet) and resulting in
Net Cash Proceeds to Pathnet of not less than $45 million.
"Qualified Capital Stock" means, with respect to any Person, any and all
Capital Stock of such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is or, upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes or is redeemable at the option of the holder
thereof at any time prior to such final Stated Maturity, or is convertible into
or exchangeable for debt securities at any time prior to such final Stated
Maturity; provided that any Capital Stock that would not otherwise constitute
Redeemable Capital Stock but for provisions giving holders thereof the right to
require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Notes shall not constitute Redeemable Capital Stock if
the "asset sale" or "change of control" provisions applicable to such Capital
Stock are no more favorable in any material respect to holders of such Capital
Stock than the provisions contained in the "Limitation on Asset Sales" and
"Purchase of Notes upon a Change of Control" covenants are to holders of the
Notes, and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such Capital Stock pursuant to any such provision prior
to Pathnet's repurchase of such Notes as are required to be repurchased pursuant
to the "Limitation on Asset Sales" and "Purchase of Notes upon a Change of
Control" covenants.
"Restricted Subsidiary" means any Subsidiary of Pathnet other than an
Unrestricted Subsidiary.
"S&P" means Standard and Poor's Ratings Services, a division of
McGraw-Hill, Inc., and its successors.
"Sale-Leaseback Transaction" means any direct or indirect arrangement, or
series of related arrangements, with any Person (other than Pathnet or a
Restricted Subsidiary) or to which any Person (other than Pathnet or a
Restricted Subsidiary) is a party, providing for the leasing to Pathnet or to a
Restricted Subsidiary of any property for an aggregate term exceeding three
years, whether owned by Pathnet or by any Subsidiary of Pathnet at the Issue
Date or later acquired, which has been or is to be sold or transferred by
Pathnet or such Restricted Subsidiary to such Person or to any other Person from
whom funds have been or are to be advanced by such Person on the security of
such property; provided that the transfer by Pathnet or any Restricted
Subsidiary of Telecommunica-
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tions Assets to, and the leasing by Pathnet or any Restricted Subsidiary of such
assets from, a Permitted Telecommunications Joint Venture shall not constitute a
Sale-Leaseback Transaction.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of Pathnet, accounted for more than 10% of the consolidated
revenues of Pathnet and its Restricted Subsidiaries, (ii) as of the end of such
fiscal year, was the owner of more than 10% of the consolidated assets of
Pathnet and its Restricted Subsidiaries, or (iii) owns one or more FCC licenses
the aggregate cost or Fair Market Value of which represents 5% or more of the
net asset value of Pathnet and its Restricted Subsidiaries on a consolidated
basis as of the end of such fiscal year, in the case of (i), (ii) or (iii) as
set forth on the most recently available consolidated financial statements of
Pathnet for such fiscal year.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest
thereon, is due and payable.
"Subsidiary" means any Person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by Pathnet or by
one or more other Subsidiaries or by Pathnet and one or more other Subsidiaries.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses) other
than current assets that are utilized by such Person, directly or indirectly,
for the design, development, construction, installation, integration or
provision of Pathnet's network, including, without limitation, any businesses or
services in which Pathnet is currently engaged and including any computer
systems used in a Telecommunications Business. Telecommunications Assets shall
also include 66 2/3% of the Voting Stock of another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided further such Voting Stock shall be held
by Pathnet or a Restricted Subsidiary, such other Person either is, or
immediately following the relevant transaction shall become, a Restricted
Subsidiary of Pathnet pursuant to the Indenture or a Permitted
Telecommunications Joint Venture subject to the limitations set forth under
clause (p) of the definition of "Permitted Investment." The determination of
what constitutes Telecommunications Assets shall be made by the Board of
Directors and evidenced by a board resolution delivered to the Trustee.
"Telecommunications Business" means, the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) constructing, creating,
developing, acquiring or marketing Telecommunication Assets or other
communications related network equipment, software and other devices for use in
a telecommunications business or (iii) evaluating, participating or pursuing any
other activity or opportunity that is primarily related to those identified in
clause (i) or (ii) above; provided that the determination of what constitutes a
Telecommunications Business shall be made in good faith by the Board of
Directors of Pathnet.
"Telecommunications Indebtedness" means Indebtedness of Pathnet or any
Restricted Subsidiary incurred at any time within 315 days of, and for the
purpose of financing all or any part of the cost of, the construction,
expansion, installation, acquisition or improvement by Pathnet or any Restricted
Subsidiary of any new Telecommunications Assets; provided that the proceeds of
such Indebtedness are expended for such purposes within such 315-day period; and
provided further that the Net Cash Proceeds from the issuance of such
Indebtedness does not exceed, as of the date of incurrence
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thereof, 100% of the lesser of the cost or Fair Market Value of such
Telecommunications Assets; provided further that, to the extent an Incumbent
Agreement is characterized as a Capitalized Lease Obligation, it shall be
considered Telecommunications Indebtedness.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means (a) any Subsidiary that at the time of
determination shall be an Unrestricted Subsidiary (as designated by the Board of
Directors of Pathnet, as provided below) and (b) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors of Pathnet may designate any
Subsidiary (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary so long as (i) neither Pathnet nor any other Subsidiary
is directly or indirectly liable for any Indebtedness of such Subsidiary, (ii)
no default with respect to any Indebtedness of such Subsidiary would permit
(upon notice, lapse of time or otherwise) any holder of any other Indebtedness
of Pathnet or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity, (iii) any Investment in such Subsidiary made as a result of
designating such Subsidiary an Unrestricted Subsidiary will not violate the
provisions of the "Limitation on Restricted Payments" covenant, (iv) neither
Pathnet nor any Restricted Subsidiary has a contract, agreement, arrangement,
understanding or obligation of any kind, whether written or oral, with such
Subsidiary other than those that might be obtained at the time from persons who
are not Affiliates of Pathnet, and (v) neither Pathnet nor any other Subsidiary
has any obligation (1) to subscribe for additional shares of Capital Stock or
other equity interest in such Subsidiary, or (2) to maintain or preserve such
Subsidiary's financial condition or to cause such Subsidiary to achieve certain
levels of operating results. Any such designation by the Board of Directors of
Pathnet shall be evidenced to the Trustee by filing a board resolution with the
Trustee giving effect to such designation. The Board of Directors of Pathnet may
designate any Unrestricted Subsidiary as a Restricted Subsidiary if, immediately
after giving effect to such designation, there would be no Default or Event of
Default under the Indenture and Pathnet could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the "Limitation on
Indebtedness" covenant.
"Vendor Credit Facility" means, collectively, (i) the revolving credit
facility to be entered into by and among Pathnet, the Finance Subsidiary and
NEC, substantially in the form outlined by the commitment letter dated October
14, 1997; (ii) the revolving credit facility to be entered into by and among
Pathnet, the Finance Subsidiary and Andrew, substantially in the form outlined
by the commitment letter dated December 8, 1997; and (iii) the takeout credit
facility substantially in the form of the Commitment Letters dated October 7,
1997 and October 8, 1997, among Pathnet, the Finance Subsidiary and each of the
financial institutions party thereto.
"Voting Stock" means, with respect to any Person, any class or classes of
Capital Stock pursuant to which the holders thereof have the general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of any Person (irrespective of whether or not,
at the time, stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency).
"Wholly Owned" means, with respect to the Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
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DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING ARRANGEMENTS
PROPOSED CREDIT FACILITY WITH LUCENT
Pathnet has been negotiating with Lucent Technologies, Inc., over the terms
of a senior secured credit facility that would provide us with vendor financing
for fiber optic cable purchases. The credit facility would be executed in
connection with a fiber optic cable purchase agreement where we agree to make
Lucent our exclusive provider of fiber optic cable. Neither party has signed the
definitive agreements governing the proposed financing, but we expect to execute
definitive agreements in the next several weeks. We describe below the material
terms of the proposed Lucent credit facility, based on the current drafts of the
agreements. We cannot assure you that we will enter into any financing
agreements with Lucent, or that any agreements that we execute will be on these
terms. However, we currently expect that we will enter into a vendor financing
agreement with Lucent on terms similar to those outlined below.
The first tranche of the proposed facility will be $60 million and will be
available to be drawn after the facility becomes effective until January 31,
2001. The proceeds of any loans by Lucent must be used to finance fiber optic
cable that we purchase under the fiber optic cable purchase agreement between us
and Lucent. The loans will not cover the entire invoice cost of those purchases.
Under the Lucent credit facility, we will be required to pay various customary
arrangement, commitment and other fees. To preserve exclusivity, Lucent must
offer additional tranches on similar terms to the first tranche.
If executed as currently drafted, we expect the proposed credit facility
with Lucent to have these terms:
- The first tranche loans would mature on December 31, 2005;
- Mandatory prepayments are required in connection with dark fiber sales
and other dispositions;
- Lucent's obligation to loan any funds under the facility is conditioned
on, among other things:
-- We must purchase and pay for a specified minimum dollar value of
Lucent products;
-- A newly-formed vendor financing subsidiary of Pathnet or Pathnet
Telecom would be the borrower under the credit facility and must be
capitalized with assets having a value of at least $60 million;
-- We must obtain the necessary permits (including any required rights of
way) required to build the network segment in which the financed fiber
will be installed; and
- The loans would bear interest at floating rates based on an index plus a
specified margin.
The indebtedness outstanding under the Lucent credit facility is expected
to be guaranteed by the borrower (a newly formed vendor financing subsidiary of
Pathnet or Pathnet Telecom). The indebtedness will be secured by all property
and assets owned by, and all capital stock of and inter-company indebtedness
owed to, the borrower.
We anticipate that the Lucent credit facility will contain various
covenants typical for facilities of this nature. Some of those covenants will
restrict the vendor financing subsidiary and its subsidiaries, if any, from,
among other things:
- Incurring indebtedness;
- Entering into merger or consolidation transactions;
- Disposing of their assets;
- Acquiring assets; and
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- Making certain restricted payments;
- Paying interest or principal on the Notes if excess cash is available at
Pathnet Telecom or Pathnet for Note repayment;
- Creating any liens on its assets;
- Making investments;
- Entering into sale and leaseback transactions; and
- Entering into non-arms'-length basis transactions with affiliates.
As currently drafted, the Lucent credit facility also requires that the
vendor financing subsidiary comply with various customary financial covenants,
including required ratios for:
- Consolidated Indebtedness to Total Capitalization;
- Consolidated Indebtedness to Consolidated EBITDA;
- Consolidated EBITDA to Consolidated Debt Service;
- Consolidated EBITDA to Consolidated Interest Expense; and
- Minimum annual revenues to the vendor financing subsidiary.
The draft Lucent credit facility contains a number of events of default,
including:
- Nonpayment of principal, interest, fees or other amounts;
- The occurrence of a default on other material indebtedness of the vendor
financing subsidiary and its subsidiaries (if any) and, in certain
circumstances, of Pathnet Telecom and our subsidiaries including a
termination by Lucent as the result of our default on the fiber supply
agreement with Lucent;
- Failure to comply with certain covenants, conditions or provisions under
the credit facility;
- The existence of certain judgments;
- The occurrence of any default under material agreements that could result
in a material adverse effect on the vendor financing subsidiary;
- The breach of representations or warranties;
- Commencement of reorganization, bankruptcy, insolvency or similar
proceedings;
- The occurrence of certain ERISA events; and
- A change of control of Pathnet Telecom or the vendor financing
subsidiary.
If the borrowing subsidiary defaults on its obligations under the Lucent
credit facility, all of those obligations could be declared to be immediately
due and payable. Upon a payment default or upon any acceleration of the
obligations under the Lucent credit facility, assuming those obligations
exceeded $7.5 million, any amounts then owing under the Notes would become
immediately due and payable.
Under the Lucent credit facility, the vendor financing subsidiary is not
permitted to offer any guarantee of any indebtedness of Pathnet Telecom or
Pathnet. In addition to the Lucent credit facility, we intend to enter into
similar financing arrangements with other of our equipment vendors. We expect
that other vendor financing participants will demand similar restrictions.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the structure and terms of our capital stock is
not complete, and you should refer to our certificate of incorporation and
bylaws for more information. See "WHERE YOU CAN FIND MORE INFORMATION" to locate
copies of those documents.
GENERAL
Our capital stock consists of 60 million shares of common stock, $.01 par
value per share, and 39,620,860 shares of preferred stock, $.01 par value per
share.
OUR CAPITAL STOCK
<TABLE>
<CAPTION>
ISSUED AND
AUTHORIZED SHARES OUTSTANDING SHARES*
----------------- -------------------
<S> <C> <C>
COMMON STOCK:....................................... 60,000,000 2,977,593
PREFERRED STOCK:
Series A Convertible Preferred Stock........... 2,899,999 2,899,999
Series B Convertible Preferred Stock........... 4,788,030 4,788,030
Series C Convertible Preferred Stock........... 8,176,686 8,176,686
Series D Convertible Preferred Stock........... 9,250,000 8,511,607
Series E Convertible Preferred Stock........... 4,506,145 1,729,631**
Blank Check Preferred Stock.................... 10,000,000 --
---------- ----------
Total Preferred Stock.......................... 39,620,860 26,105,953
TOTAL OF ALL STOCK........................ 99,620,860 29,083,546
========== ==========
</TABLE>
- ---------------
* After close of the Contribution and Reorganization Transaction.
** Assuming no additional Series E Convertible Preferred shares are issued under
the Colonial option agreement. Subsequent to the initial closing, and upon
receipt of the $25 million cash payment from Colonial upon the completion of
the Chicago-Aurora fiber build, we will issue 1,137,915 shares of our Series
E Convertible Preferred Stock. At that time, an aggregate of 2,867,546 shares
of our Series E Convertible Preferred Stock will be issued and outstanding
(again, assuming no additional Series E shares have been issued under the
Colonial option agreement).
We describe in the sections below the important terms our capital stock and
our certificate of incorporation and bylaws.
COMMON STOCK
Our common stockholders are entitled to one vote per share of common stock
on all matters to be voted upon by the stockholders generally. Holders of common
stock also will be entitled to receive dividends, if any, declared from time to
time by the board of directors out of funds legally available for dividends. If
we are liquidated, dissolved or wound-up, holders of common stock will share
proportionately in all assets available for distribution. However, both dividend
and distribution rights of our common stockholders are subject to the rights of
our preferred stockholders as described below. Our common stockholders have no
preemptive or conversion rights (other than the preemptive rights granted to Mr.
Schaeffer under our stockholders agreement). Our common stock does not have
cumulative voting rights. All shares of common stock outstanding immediately
following the closing of the Contribution and Reorganization Transaction will be
fully paid and will not be subject to further calls or assessments. There are no
redemption or sinking fund provisions applicable to our common stock.
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BLANK CHECK PREFERRED STOCK
Subject to the limitations described below, our certificate of
incorporation gives our board of directors the authority, without further
stockholder action, to issue up to 10 million shares of preferred stock in one
or more series and to fix the relative powers, preferences, rights,
qualifications, limitations or restrictions of our preferred stock, including:
- Dividend rates;
- Conversion rights;
- Voting powers;
- Terms of redemption;
- Redemption prices;
- Amounts payable upon liquidation; and
- The number of shares constituting any series or the designation of those
series.
Our issuance of preferred stock may have the effect of delaying, deferring
or preventing our "change in control" and may adversely affect the voting and
other rights of our common and preferred stockholders. These effects may include
the loss of voting control to others. Other than the issuance of the Series A,
B, C, D and E Convertible Preferred Stock in the Contribution and Reorganization
Transaction (including shares that may be issued under the Colonial Option
Agreement), we currently have no plans to issue any shares of preferred stock.
In addition, our certificate of incorporation forbids us from issuing any equity
security, other than as set forth in the stockholders agreement, without the
affirmative vote or written consent of 67% of the outstanding shares of all
preferred stock, voting as a single class.
SERIES A, B, C, D AND E CONVERTIBLE PREFERRED STOCK
References in this discussion to "our preferred stockholders" mean the
holders of any of our Series A, B, C, D and E Convertible Preferred Stock, and
"our preferred stock" means any of our Series A, B, C, D and E Convertible
Preferred Stock.
VOTING. Our preferred stock is voted on an "as converted" basis with our
common stock. This means that each share of Series A, B, C, D and E Convertible
Preferred Stock will initially have one vote, representing the number of votes
that those shares would have if they were converted into shares of our common
stock. In the event that the number of shares of common stock into which the
shares of any series of preferred stock may be converted is adjusted in the
future, the number of votes which shares of that series of preferred stock may
exercise will be adjusted accordingly. Upon the closing of the Contribution and
Reorganization Transaction, our Series A, B, C, D and E Convertible Preferred
Stock will together represent approximately 90% of our total outstanding voting
stock.
VETO RIGHTS. The consent of holders of 67% of our Series A, B, C, D and E
Convertible Preferred Stock voting together as a single class is required for
actions that:
- Redeem or otherwise acquire for value any shares of our capital stock or
capital stock of our subsidiaries, except for certain redemption rights
provided in our certificate of incorporation for the holders of our
Series E Convertible Preferred Stock and other redemptions in accordance
with stockholders agreements, option agreements or employment agreements
approved by our board of directors;
- Issue any equity securities or securities convertible into our equity
securities other than as provided in our stockholders agreement;
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- Increase or decrease the total number of authorized shares of preferred
stock, other than by conversion as permitted under the certificate of
incorporation;
- Pay or declare any dividends on any capital stock;
- Enter into a merger, consolidation, reorganization or recapitalization
transaction;
- Amend our certificate of incorporation or bylaws in any way that
adversely affects the rights or preferences of our preferred
stockholders; or
- Incur indebtedness, other than indebtedness existing on the completion of
the Contribution and Reorganization Transaction, indebtedness of $5
million or less or indebtedness incurred in the ordinary course of
business.
DIVIDENDS. We cannot pay any dividends on our common stock unless we have
first paid a corresponding dividend on our preferred stock.
LIQUIDATION PREFERENCE. Our preferred stockholders are entitled to a
liquidation preference equal to their initial purchase price for their preferred
shares (as adjusted for stock splits, stock dividends, recapitalizations and
similar events) plus any declared but unpaid dividends. Our Series E Convertible
Preferred Stock ranks prior to all of our other shares of capital stock upon
liquidation, including the other shares of all preferred stock. Following
payment to the holders of our Series E Convertible Preferred Stock, the
remaining shares of all preferred stock are ranked prior to our common stock,
and on a parity with each other. This preference currently entitles our
stockholders to payments of the following amounts upon our liquidation:
- $0.34 for each share of Series A Convertible Preferred Stock;
- $1.13 for each share of Series B Convertible Preferred Stock;
- $3.67 for each share of Series C Convertible Preferred Stock;
- $21.97 for each share of Series D Convertible Preferred Stock; and
- $21.97 for each share of Series E Convertible Preferred Stock.
REDEMPTION. The holders of our Series E Convertible Preferred Stock have
the right to require us to redeem some or all of their shares of Series E
Convertible Preferred Stock at a price equal to the original purchase price paid
for our Series E Convertible Preferred Stock if we have not either undergone an
IPO, listed our common stock for trading on a national securities exchange, or
had our stock traded in an over-the-counter market and quoted in an automated
quotation system of the National Association of Securities Dealers, Inc. on or
before November 3, 2001. (In each case, we will also need to meet certain
proceeds and valuation requirements as well.) This right is subject to the
limitations on redemptions contained in the Indenture and proposed to be
contained in the Supplemental Indenture, which will prohibit our making this
redemption for so long as this prohibition is in effect and the Notes are
outstanding.
Except in circumstances involving an acquisition, merger or similar
transaction in which the holders of the shares of Series A, B, C or D
Convertible Preferred Stock would receive as consideration for their shares
payment of an amount less than their applicable liquidation preference, we are
not required to redeem our Series A, B, C or D Convertible Preferred Stock.
Accordingly, the holders of Pathnet's Series A, B, and C Convertible Preferred
Stock who agreed to exchange their Pathnet stock for our stock in connection
with the Contribution and Reorganization Transaction will lose their existing
redemption rights under the Pathnet certificate of incorporation, except in
respect to such extraordinary transactions. These existing Pathnet redemption
rights are currently subject to the same contractual restrictions under the
Indenture, and Pathnet cannot effect the redemption of any of its shares so long
as this covenant remains in effect and the Notes are outstanding. In addition
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to the redemption rights described in the preceding paragraph, our Series E
shares have similar rights to elect to have their shares redeemed in the event
of an extraordinary corporate transaction for consideration less than the
applicable liquidation preference.
CONVERSION AND ANTI-DILUTION. Our preferred stockholders may convert each
share of their preferred stock at any time into one share of our common stock.
The conversion ratio may be increased or decreased as a result of stock splits,
dividends, recapitalizations and similar events. If we issue shares of our
common stock for prices less than the applicable conversion prices (which,
immediately following the closing of the Contribution and Reorganization
Transaction, will be equal to the liquidation preferences indicated above),
anti-dilution provisions in our certificate of incorporation will increase the
number of shares of our common stock into which each share of the affected
series of preferred stock would be converted. The shares of Series E Convertible
Preferred Stock possess more favorable conversion rights than do the Series A,
B, C and D Convertible Preferred Stock. In the event of any sale of shares of
our common stock (or securities convertible into shares and our common stock) at
a price less than the applicable conversion price, the conversion formula for
the shares of Series E Convertible Preferred Stock will adjust on a so-called
"full ratchet" basis. This means that holders of shares of Series E Convertible
Preferred Stock will be able to convert their shares of Series E Convertible
Preferred Stock into that number of shares of common stock that would have been
available to those holders if they had originally purchased their shares of
Series E Preferred Stock for any reduced price at which we issue any shares of
our common stock or securities convertible into common stock.
The shares of our Series A, B, C and D Convertible Preferred Stock also
have anti-dilution protection, which provides for adjustments based on a
volume-adjusted weighted average of any issue of our shares of common stock (or
securities convertible into common stock) at a price lower than the applicable
conversion price for the shares of that Series. You can review this formula in
the copy of our certificate of incorporation attached as an exhibit to the
registration statement filed in connection with this offering. If we were to
sell shares of our common stock (or securities convertible into common stock) at
a price lower than the applicable conversion value for any of the series of
convertible preferred stock, the dilutive effect (on the shares of our common
stock or any shares of preferred stock not participating in an adjustment) of an
anti-dilution adjustment under this formula may be substantially more pronounced
than the more commonly employed "weighted average" anti-dilution formula. Under
our volume-adjusted weighted average approach, we take account of the dilutive
effect of the "full ratchet" anti-dilution protection afforded to our Series E
shares, so that even a small issue of new shares of common stock at a low price
will have a significant effect on the conversion ratios of any of our Series A,
B, C or D Convertible Preferred shares for which the conversion ratio is also
adjusted. The anti-dilution provisions generally will not apply to our issue of
common stock pursuant to the exercise of employee stock options or the Pathnet
warrants that we plan to assume. See "Warrants" below.
Our preferred stock automatically converts into common stock if we complete
an IPO or if our common stock is either listed for trading on a national
securities exchange or is traded in an over-the-counter market and quoted in an
automated quotation system of the National Association of Securities Dealers,
Inc. and, in each case, we satisfy certain proceeds and valuation requirements.
REGISTRATION RIGHTS. We have granted registration rights to some holders
of our common stock, preferred stock, options and warrants for the shares of our
common stock already held or to be acquired upon conversion or exercise of these
securities. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Our
Stockholders Agreement" for a description of these registration rights.
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OTHER PROVISIONS OF THE PATHNET TELECOM CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation and bylaws contain a number of provisions
relating to our governance and internal operations, including these provisions:
- Following our issuance of the applicable classes of capital stock, the
holders of our Series A Convertible Preferred Stock will be entitled to
elect two directors by a separate class vote, the holders of our Series B
Convertible Preferred Stock will be entitled to elect one director by a
separate class vote; the holders of our Series C Convertible Preferred
Stock will be entitled to elect one director by a separate class vote;
and the holders of our Series D Convertible Preferred Stock and our
Series E Convertible Preferred Stock will be entitled to elect three
directors, voting together as a single class;
- Our CEO will also serve as a director;
- Subject to the rights of the holders of our preferred stock to elect
directors by class, the directors in office will fill any vacancy or
newly created directorship on our board of directors, with any new
director to serve until his or her successor is elected and qualified;
- Directors may be removed by the vote of stockholders holding a majority
of the voting power of our issued and outstanding capital stock, except
that, if directors are elected by a voting group of stockholders, only
that voting group may participate in the vote to remove them. In
addition, the board of directors may remove one or more directors for
cause (as defined in our bylaws) by a majority vote of all other
directors; and
- Special meetings of stockholders may be called by our board of directors,
the Chairman of our board of directors, our President or, at any time
before a public offering, by stockholders holding shares entitled to cast
at least 25% of the total votes cast by all stockholders at a meeting of
the stockholders, and the business permitted to be conducted at a special
meeting is limited to the business stated in the notice of the special
meeting or business that is related to the purpose of the special meeting
that is brought before the meeting by our board of directors.
The provisions of our certificate of incorporation and bylaws described
above relating to the removal of directors may discourage or make the
acquisition of control of us by means of a tender offer, open market purchase or
proxy contest more difficult. These provisions may also discourage specific
types of coercive takeover practices and inadequate takeover bids and may
encourage persons seeking to acquire control of us to first negotiate with our
board of directors. We believe that these provisions will benefit us and our
stockholders by enhancing our ability to negotiate with the proponent of any
unfriendly or unsolicited proposal to acquire or restructure us. We also believe
that the benefits of discouraging these proposals outweighs the disadvantages of
doing so, because, among other things, negotiation of these proposals could
result in better terms for our stockholders.
WARRANTS
Pathnet issued 1,116,500 warrants for its common stock to the initial
purchasers of the Notes in April 1998. In a separate and private transaction
that Pathnet proposes to conduct only with the qualified institutional buyers
permitted to hold those warrants, Pathnet will propose to amend the terms of the
existing warrants to clarify that upon the closing of the Contribution and
Reorganization Transaction, we will assume Pathnet's obligations under the
warrants and they will become exercisable for shares of our common stock. If
Pathnet fails to obtain the required consent of the holders of the Pathnet
warrants to amend the warrants as proposed, the Pathnet warrants will remain
outstanding and will be exercisable upon closing of the Contribution and
Reorganization Transaction.
143
<PAGE> 146
Pathnet's warrants currently permit the holders to purchase a total of
1,116,500 shares of Pathnet common stock at $0.01 per share. If Pathnet obtains
the consent of the qualified institution buyers permitted to holds its warrants,
we will have outstanding warrants permitting the holders to purchase a total of
1,116,500 shares of our common stock at $0.01 per share.
DIVIDEND POLICY
Pathnet has never declared or paid any cash dividends on its capital stock.
We have no plans to pay dividends on our common stock in the future, and
presently intend to retain any earnings to fund the growth of our business. Our
board of directors will determine the payment of any future dividends in light
of conditions then existing, including the results of our operations, financial
condition, cash requirements, restrictions in financing agreements, business
conditions and other factors. However, covenants contained in the Indenture (and
those proposed to be contained in the Supplemental Indenture) significantly
restrict our ability to pay dividends.
144
<PAGE> 147
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain anticipated federal income
tax consequences under present law to holders of the Notes if the proposed
Indenture amendments are approved, the waivers are obtained and Pathnet pays the
consent fee to holders entitled thereto. This discussion is based on the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), final
and temporary Treasury regulations thereunder (the "Regulations"), and
administrative and judicial interpretations thereof, all as in effect as of the
date hereof and all of which are subject to change (possibly on a retroactive
basis). Legislative, judicial, or administrative changes or interpretations
could alter or modify the tax discussion set forth below. This discussion does
not purport to deal with all aspects of federal income taxation that may be
relevant to holders of the Notes. The discussion does not address any aspects of
state, local or foreign taxation. Finally, substantial uncertainties resulting
from the lack of definitive judicial or administrative authority and
interpretations apply to various tax issues addressed herein, including certain
tax consequences arising in connection with the waivers, the proposed Indenture
amendments and payment of the consent fee pursuant to this solicitation. Pathnet
has not sought, nor does it intend to seek, any rulings from the Internal
Revenue Service relating to such issues or any other issues.
This discussion does not attempt to address all issues that may be relevant
to a particular holder of the Notes in light of such holder's personal
investment circumstances and does not apply to holders subject to special
treatment under the federal income tax laws such as financial institutions,
broker-dealers, insurance companies, foreign persons and entities, tax-exempt
organizations or taxpayers subject to the alternative minimum tax. This
discussion assumes that holders hold their Notes as a "capital asset"
(generally, property held for investment) within the meaning of Section 1221 of
the Code.
THE FOLLOWING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS
INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. THE TAX TREATMENT OF A HOLDER OF
THE NOTES MIGHT BE SUBJECT TO SPECIAL RULES NOT DISCUSSED BELOW. ACCORDINGLY,
EACH HOLDER OF THE NOTES SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE
SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO SUCH HOLDER THAT
MAY ARISE IN CONNECTION WITH THIS SOLICITATION.
PROPOSED WAIVERS AND INDENTURE AMENDMENTS
Under general principles of tax law, the modification of a debt instrument
creates a deemed exchange (upon which gain or loss is realized) if the modified
debt instrument differs materially either in kind or in extent from the original
debt instrument.
Under the Regulations, the modification of a debt instrument is a
"significant" modification (i.e., upon which gain or loss is realized) if, based
on all the facts and circumstances and taking into account all modifications of
the debt instrument collectively, the legal rights or obligations that are
altered and the degree to which they are altered are "economically significant."
A modification that adds a guarantor is not a significant modification unless
such modification results in a change in payment expectations. The addition of a
guarantor results in a change in payment expectations if it results in a
substantial enhancement of the obligor's capacity to meet the payment
obligations under the debt instrument, and that capacity was primarily
speculative prior to the guarantee and is adequate after the guarantee. In
addition, a change in the yield of a debt instrument is a significant
modification under the Regulations if the yield of the modified instrument
(determined by taking into account any payments made to the holder as
consideration for the modification) varies from the yield on the unmodified
instrument (determined as of the date of the modification) by more than the
greater of 1/4 of one percent (25 basis points) or five percent of the annual
yield of the unmodified instrument.
145
<PAGE> 148
As discussed above, the proposed Indenture amendments would change several
terms of the Notes, and the holders would waive certain rights in connection
with the solicitation. Whether the legal rights or obligations that would be
altered and the degree to which they would be altered by the proposed Indenture
amendments and the waivers would be "economically significant" is not
specifically addressed by existing guidance and therefore is uncertain. However,
the legal rights and obligations that would be changed (other than the changes
resulting from the Pathnet Telecom Guarantees and the payment of the consent fee
discussed below) as a result of the proposed Indenture amendments principally
would impose new obligations on Pathnet Telecom and generally would change
Pathnet's obligations and rights only in minor respects. Similarly, although it
is uncertain, the one time waiver of the Excess Proceeds Offer obligation and
the Change of Control repurchase obligation should not constitute an
economically significant modification. Hence, the waivers and the proposed
Indenture amendments (other than the Guarantees and payment of the consent fee
described below) should not collectively result in a deemed exchange of the
Notes for "new" Notes ("New Notes").
The payment of the consent fee should not change the yield of the Notes by
an amount that will cause a significant modification under the Regulations. The
effect of the Pathnet Telecom Guarantees is less clear. It is expected that the
addition of the Pathnet Telecom Guarantees will enhance Pathnet's capacity to
meet its payment obligations under the Notes. Whether Pathnet's capacity to meet
the payment obligations will change from "primarily speculative" prior to the
Pathnet Telecom Guarantees to "adequate" after the Guarantees is a question of
fact that cannot be answered in advance with certainty. If Pathnet's capacity to
meet the payment obligations under the Notes does not change from "primarily
speculative" to "adequate," the Pathnet Telecom Guarantees should not create a
deemed exchange of the Notes for New Notes. In such case, except as described
below with respect to the consent fee, a holder should not recognize any gain or
loss as a result of the proposed Indenture amendments.
It is possible, however, that Pathnet's capacity to meet the payment
obligations will change from "primarily speculative" to "adequate," thereby
creating a deemed exchange of the Notes for New Notes. Even if a deemed exchange
results, the Notes and the New Notes have a maturity of more than five years,
and thus likely should be treated as "securities." As a result, the deemed
exchange of the Notes for New Notes should be characterized as a tax-free
recapitalization under Section 368(a)(1)(E) of the Code. In such case, except as
described below with respect to the consent fee, a holder should not recognize
gain or loss as a result of the deemed exchange.
If an exchange were deemed to occur under general principles of tax law or
under the standards set forth in the Regulations, and if the deemed exchange did
not constitute a tax-free recapitalization as described above, then a holder
generally would recognize gain or loss in an amount equal to the difference
between the holder's amount realized and the holder's adjusted tax basis in the
Notes deemed to have been exchanged. The holder's amount realized generally
would be the "issue price" of the New Notes. The "issue price" of the New Notes
likely would equal the stated redemption price at maturity of the New Notes,
assuming the New Notes are not "publicly traded" within the meaning of the
Regulations. It is uncertain whether the New Notes will be considered publicly
traded because, among other things, certain events after the date of the deemed
exchange could cause the New Notes to satisfy the publicly traded test set forth
in the Regulations. If the New Notes are publicly traded, the issue price would
be equal to the fair market value of the New Notes at the time of the deemed
exchange. All or a portion of any gain from the deemed exchange would constitute
ordinary income to the extent the holder purchased the Notes at a market
discount, i.e., at an amount less than the stated redemption price at maturity
of the Notes.
146
<PAGE> 149
If a deemed exchange occurs, regardless of whether the exchange qualifies
as a tax-free recapitalization, the New Notes may be treated as issued with
original issue discount. The New Notes generally would have original issue
discount if they have an issue price that is less than their stated redemption
price at maturity. As discussed above, the issue price of the New Notes will
depend in part on whether they are "publicly traded" within the meaning of the
Regulations. If there is a deemed exchange and the New Notes are publicly
traded, the New Notes likely will have significant original issue discount. If
the New Notes are treated as issued with original issue discount, holders
thereof generally will be required to include such discount in income as it
accrues, in advance of the receipt of cash attributable to such income. In
addition, a holder may be entitled to claim a dividends received deduction with
respect to a portion of such original issue discount in the event that the New
Notes qualify as "applicable high yield discount obligations" under Section 163
of the Code. If a holder's tax basis in the New Notes deemed received exceeds
the stated redemption price at maturity of the Notes deemed to be exchanged
therefor, a holder generally may elect to amortize such premium.
RECEIPT OF CONSENT FEE
Although there is no authority on point, holders of Notes should be
required to treat the consent fee as a fee paid for their consent. Accordingly,
the holders should recognize ordinary income for federal income tax purposes in
an amount equal to the consent fee to which they are entitled, when the consent
fee is received or accrued, in accordance with their method of accounting.
However, if a deemed exchange does occur, as discussed above the exchange should
constitute a tax-free recapitalization under Section 368(a)(1)(E) of the Code.
In such case, the Internal Revenue Service might treat the consent fee as part
of the recapitalization exchange rather than as a separate fee, and a holder
receiving a consent fee generally would recognize taxable gain to the extent of
the lesser of (1) the consent fee received or (2) the gain realized by the
holder on the deemed exchange.
BACKUP WITHHOLDING
The receipt of a consent fee by a holder may be subject to backup
withholding at a rate of 31% of the consent fee payable to a particular holder
of a Note unless (1) the holder is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (2) the holder
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. The amount of any backup withholding from a
payment to a holder generally will be allowed as a credit against such holder's
federal income tax liability.
TAX CONSEQUENCES TO PATHNET
Assuming the waivers, the proposed Indenture amendments and payment of the
consent fee do not constitute a significant modification of the Notes resulting
in a deemed exchange for federal income tax purposes of the Notes for New Notes,
Pathnet will not recognize any gain or loss as a result of the waivers, the
amendments and payment of the consent fee. If a deemed exchange does occur,
Pathnet should not recognize gain or loss except that Pathnet will recognize
cancellation of indebtedness income to the extent that the "issue price" of the
New Notes is less than the principal amount of the Notes. As discussed above,
the issue price of the New Notes will depend, among other things, upon whether
the New Notes are publicly traded within the meaning of the Regulations. If, as
discussed above, the Notes bear original issue discount as a result of the
deemed exchange, Pathnet would have additional interest deductions available to
it by reason of such original issue discount. However, Pathnet's ability to
deduct the original issue discount may be deferred (or even disallowed in part)
if the New Notes have significant original issue discount and satisfy other
requirements set forth in Section 163 of the Code with respect to "applicable
high yield discount obligations." The
147
<PAGE> 150
New Notes should have significant original issue discount only if there is a
deemed exchange of the Notes for New Notes, and the New Notes are publicly
traded within the meaning of the Regulations.
However, Pathnet's ability to deduct the original issue discount may be limited
if the New Notes are "applicable high yield discount obligations" under Section
163(i) of the Code. Under this provision, any debt instrument that has a term of
more than five years and a yield that exceeds the "applicable federal rate" (as
defined in Section 1274(d) of the Code) for the month in which the debt
instrument is issued by five or more percentage points and that has "significant
original issue discount" will be treated as an "applicable high yield discount
obligation." An obligation has significant original issue discount if the
aggregate amount includible in the gross income of a holder (including accruals
of original issue discount) before the close of any "accrual period" (within the
meaning of Section 1272(a)(5) of the Code) more than five years after the date
of issue of the obligation exceeds the sum of the aggregate amount of interest
paid in cash through such period, plus the product of the issue price of such
instrument and its yield to maturity. If the New Notes constitute "applicable
high yield discount obligations," Pathnet would be permitted to deduct original
issue discount only as it is paid in cash, and Pathnet would not be allowed to
deduct the "disqualified portion" of the original issue discount. The
"disqualified portion" of the original issue discount, if any, would be equal to
the lesser of (i) the amount of the original issue discount on the New Notes,
and (ii) the product of (a) the amount that would have been original issue
discount on the New Notes if the stated interest payments under such New Notes
were included in the stated redemption price at maturity, and (b) a fraction,
the numerator of which is the yield to maturity of the New Notes minus the sum
of 6 percent and the applicable federal rate, and the denominator of which is
the yield to maturity of the New Notes.
HOLDERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISOR TO DETERMINE THE
SPECIFIC TAX CONSEQUENCES TO SUCH HOLDERS OF THIS SOLICITATION, INCLUDING THE
LIKELIHOOD THAT THE WAIVERS, THE PROPOSED INDENTURE AMENDMENTS OR THE RECEIPT OF
THE CONSENT FEE WILL RESULT IN A DEEMED EXCHANGE OF THE NOTES, AS WELL AS THE
APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
148
<PAGE> 151
PLAN OF DISTRIBUTION
Pathnet will solicit consents from and offer payment of the consent fee to
all holders of the Notes. If the consent solicitation is successful and Pathnet
obtains, before the expiration of the consent solicitation process, the required
consents from the holders of a majority in outstanding principal amount of the
Notes, we will execute the Supplemental Indenture and issue our Guarantees to
all holders of the Notes.
LEGAL MATTERS
Certain legal matters relating to the Guarantees offered in this prospectus
will be passed upon on our behalf by Covington & Burling. Covington & Burling
has from time to time represented, and may continue to represent, us and our
affiliates in certain legal matters.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and for each of
three years in the period ended December 31, 1998 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent public accountants, given on the authority of the firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, a registration statement on Form S-1 under
the Securities Act of 1933 regarding the offering. As permitted by the rules and
regulations of the Securities and Exchange Commission, this prospectus does not
contain all the information contained in the registration statement. For further
information about us and the offering, you can read the registration statement
and the exhibits and financial schedules filed with the registration statement.
The statements contained in this prospectus about the contents of any contract
or other document are not necessarily complete. You can read a copy of each
contract or other document filed as an exhibit to the registration statement.
Pathnet is currently subject to the informational reporting requirements of
the Securities Exchange Act of 1934 and files periodic reports and other
information with the Securities and Exchange Commission. We are filing Form 10
to become a reporting company under the Securities Exchange Act of 1934. As a
reporting company, we will file periodic reports and other information with the
Securities and Exchange Commission. Pathnet plans to deregister as a reporting
company under the rules of the Securities and Exchange Commission when possible.
You can inspect the registration statement and the exhibits and schedules
to the registration statement, as well as the periodic reports, proxy statements
and other information we file with the Securities and Exchange Commission,
without charge at the Public Reference Section of the Securities and Exchange
Commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Section of the Securities and Exchange Commission by calling
the Securities and Exchange Commission at 1-800-SEC-0330. You can also inspect
and copy these filings at the regional offices of the Securities and Exchange
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You can obtain copies of all or any portion of these filings
from the Public Reference Section of the Securities and Exchange Commission upon
payment of prescribed fees. Electronic
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<PAGE> 152
filings made through the Electronic Data Gathering, Analysis, and Retrieval
system are also publicly available through the Securities and Exchange
Commission's Web site (http://www.sec.gov).
Pathnet is required under the terms of the Indenture to provide the
periodic reports it files with the Securities and Exchange Commission to each
holder of the Notes and to the Trustee under the Indenture. Upon the
effectiveness of the Supplemental Indenture, we will be required to provide the
periodic reports to holders of the Notes and the Trustee, and Pathnet will be
relieved of these obligations, subject to the requirements of applicable law.
150
<PAGE> 153
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PATHNET INC. AND SUBSIDIARIES -- AUDITED FINANCIAL
STATEMENTS
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996, and for the period
August 25, 1995 (date of inception) to December 31,
1998................................................... F-4
Consolidated Statements of Comprehensive Loss for the
years ended December 31, 1998, 1997 and 1996, and for
the period August 25, 1995 (date of inception) to
December 31, 1998...................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996, and for the period
August 25, 1995 (date of inception) to December 31,
1998................................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1998, 1997 and 1996,
and for the period August 25, 1995 (date of inception)
to December 31, 1998................................... F-7
Notes to Consolidated Financial Statements................ F-8
PATHNET INC. AND SUBSIDIARIES -- UNAUDITED INTERIM FINANCIAL
STATEMENTS
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998...................... F-25
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.................................. F-26
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.............. F-27
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..................................... F-28
Notes to Unaudited Interim Consolidated Financial
Statements............................................. F-29
</TABLE>
F-1
<PAGE> 154
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Pathnet, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Pathnet, Inc. and its subsidiaries (a development stage enterprise)
(the Company) at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 and for the period August 25, 1995 (date of inception) to December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 14, 1999,
except for Note 14 for
which the date is November 22, 1999
F-2
<PAGE> 155
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 57,321,887 $ 7,831,384
Note receivable............................................. 3,206,841 --
Interest receivable......................................... 3,848,753 --
Marketable securities available for sale, at market......... 97,895,773 --
Prepaid expenses and other current assets................... 205,505 48,571
------------ -----------
Total current assets................................... 162,478,759 7,879,955
Property and equipment, net................................. 47,971,336 7,207,094
Deferred financing costs, net............................... 10,508,251 250,428
Restricted cash............................................. 10,731,353 760,211
Marketable securities available for sale, at market......... 71,899,757 --
Pledged marketable securities held to maturity.............. 61,824,673 --
------------ -----------
Total assets........................................... $365,414,129 $16,097,688
============ ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable............................................ $ 10,708,263 $ 5,592,918
Accrued interest............................................ 8,932,294 --
Accrued expenses and other liabilities...................... 639,688 300,000
------------ -----------
Total current liabilities.............................. 20,280,245 5,892,918
12 1/4% Senior Notes, net of unamortized bond discount of
$3,787,875................................................ 346,212,125 --
------------ -----------
Total liabilities...................................... 366,492,370 5,892,918
------------ -----------
Series A convertible preferred stock, $0.01 par value,
1,000,000 shares authorized, issued and outstanding at
December 31, 1998 and 1997, 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
December 31, 1998 and 1997, 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; 2,819,549 and 939,850 shares
issued and outstanding at December 31, 1998 and 1997,
respectively (liquidation preference $30,000,052)......... 29,961,272 9,961,274
------------ -----------
Total mandatorily redeemable preferred stock........... 35,969,639 15,969,641
------------ -----------
Common stock, $0.01 par value, 60,000,000 and 7,500,000
shares authorized at December 31, 1998 and 1997,
respectively; 2,902,358 and 2,900,000 shares issued and
outstanding at December 31, 1998 and 1997, respectively... 29,024 29,000
Common stock subscription receivable........................ -- (9,000)
Deferred compensation....................................... (978,064) --
Additional paid-in capital.................................. 6,156,406 381,990
Accumulated other comprehensive income...................... 208,211 --
Deficit accumulated during the development stage............ (42,463,457) (6,166,861)
------------ -----------
Total stockholders' equity (deficit)................... (37,047,880) (5,764,871)
------------ -----------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity (deficit)............. $365,414,129 $16,097,688
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 156
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 25, 1995
FOR THE YEAR ENDED DECEMBER 31, (DATE OF INCEPTION)
------------------------------------------ TO DECEMBER 31,
1998 1997 1996 1998
------------ ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Revenue..................... $ 1,583,539 $ 162,500 $ 1,000 $ 1,747,039
------------ ----------- ----------- ------------
Operating expenses:
Cost of revenue........... 7,547,620 -- -- 7,547,620
Selling, general and
administrative......... 9,615,867 4,247,101 1,333,294 15,625,349
Depreciation expense...... 732,813 46,642 9,024 788,831
------------ ----------- ----------- ------------
Total operating
expenses............. 17,896,300 4,293,743 1,342,318 23,961,800
------------ ----------- ----------- ------------
Net operating loss.......... (16,312,761) (4,131,243) (1,341,318) (22,214,761)
Interest expense............ (32,572,454) -- (415,357) (32,987,811)
Interest income............. 13,940,240 159,343 13,040 14,115,236
Write-off of initial public
offering costs............ (1,354,534) -- -- (1,354,534)
Other income (expense),
net....................... 2,913 (5,500) -- (2,587)
------------ ----------- ----------- ------------
Net loss............... $(36,296,596) $(3,977,400) $(1,743,635) $(42,444,457)
============ =========== =========== ============
Basic and diluted net loss
per common share.......... $ (12.51) $ (1.37) $ (0.60) $ (14.63)
============ =========== =========== ============
Weighted average number of
common shares
outstanding............... 2,902,029 2,900,000 2,900,000 2,900,605
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 157
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 25, 1995
FOR THE YEAR ENDED DECEMBER 31, (DATE OF INCEPTION)
------------------------------------------ TO DECEMBER 31,
1998 1997 1996 1998
------------ ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Net loss.................... $(36,296,596) $(3,977,400) $(1,743,635) $(42,444,457)
Other comprehensive income
Net unrealized gain on
marketable securities
available for sale.......... 208,211 -- -- 208,211
------------ ----------- ----------- ------------
Comprehensive loss.......... $(36,088,385) $(3,977,400) $(1,743,635) $(42,236,246)
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 158
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 25, 1995
DECEMBER 31, (DATE OF INCEPTION)
----------------------------------------- TO DECEMBER 31,
1998 1997 1996 1998
------------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (36,296,596) $(3,977,400) $(1,743,635) $ (42,444,457)
Adjustment to reconcile net loss to net cash used in
operating activities
Depreciation expense................................ 732,813 46,642 9,024 788,831
Amortization of deferred financing costs............ 842,790 -- -- 842,790
Loss on disposal of asset........................... -- 5,500 -- 5,500
Write-off of deferred financing costs............... 581,334 -- -- 581,334
Interest expense resulting from amortization of
discount on the bonds payable..................... 307,125 -- -- 307,125
Stock based compensation............................ 701,295 -- -- 701,295
Interest expense for beneficial conversion feature
of bridge loan.................................... -- -- 381,990 381,990
Accrued interest satisfied by conversion of bridge
loan to Series B convertible preferred stock...... -- -- 33,367 33,367
Changes in assets and liabilities:
Interest receivable..................................... (4,846,952) -- -- (4,846,952)
Prepaid expenses and other current assets............... (156,935) (46,876) (1,695) (205,505)
Accounts payable........................................ 6,709 386,106 110,094 507,614
Accrued interest........................................ 8,932,294 -- -- 8,932,294
Accrued expenses and other liabilities.................. 339,688 269,783 17,572 639,687
------------- ----------- ----------- -------------
Net cash used in operating activities................. (28,856,435) (3,316,245) (1,193,283) (33,775,087)
------------- ----------- ----------- -------------
Cash flows from investing activities:
Expenditures for network in progress...................... (33,619,342) (1,739,782) -- (35,359,124)
Expenditures for property and equipment................... (2,769,076) (381,261) (46,653) (3,205,893)
Purchase of marketable securities available for sale...... (169,587,319) -- -- (169,587,319)
Purchase of marketable securities -- pledged as
collateral.............................................. (83,097,655) -- -- (83,097,655)
Sale of marketable securities -- pledged as collateral.... 22,271,181 -- -- 22,271,181
Restricted cash........................................... (9,971,142) (760,211) -- (10,731,353)
Issuance of note receivable to incumbent.................. (3,206,841) -- -- (3,206,841)
Repayment of note receivable.............................. 9,000 -- -- 9,000
------------- ----------- ----------- -------------
Net cash used in investing activities................. (279,971,194) (2,881,254) (46,653) (282,908,004)
------------- ----------- ----------- -------------
Cash flows from financing activities:
Issuance of voting and non-voting common stock............ -- -- -- 1,000
Proceeds from sale of preferred stock..................... 19,999,998 12,000,054 2,500,000 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................................................... -- -- 300,000 300,000
Proceeds from bond offering............................... 350,000,000 -- -- 350,000,000
Proceeds from bridge loan................................. -- -- 700,000 700,000
Exercise of employee common stock options................. 81 -- -- 81
Payment of issuance costs for preferred stock offerings... -- (38,780) (25,000) (63,780)
Payment of deferred financing costs....................... (11,681,947) (250,428) -- (11,932,375)
------------- ----------- ----------- -------------
Net cash provided by financing activities............. 358,318,132 11,710,846 3,475,000 374,004,978
------------- ----------- ----------- -------------
Net increase in cash and cash equivalents................... 49,490,503 5,513,347 2,235,064 57,321,887
Cash and cash equivalents at the beginning of period........ 7,831,384 2,318,037 82,973 --
------------- ----------- ----------- -------------
Cash and cash equivalents at the end of period.............. $ 57,321,887 $ 7,831,384 $ 2,318,037 $ 57,321,887
============= =========== =========== =============
Supplemental disclosure:
Cash paid for interest.................................... $ 22,271,234 $ -- $ -- $ 22,271,234
============= =========== =========== =============
Noncash investing and financing transactions:
Conversion of bridge loan plus accrued interest to
Series B convertible preferred stock.................. $ -- $ -- $ 733,367 $ 733,367
------------- ----------- ----------- -------------
Conversion of non-voting common stock to voting common
stock................................................. $ -- $ -- $ 14,500 $ 500
------------- ----------- ----------- -------------
Issuance of voting and non-voting common stock.......... $ -- $ -- $ -- $ 9,000
------------- ----------- ----------- -------------
Acquisition of network equipment financed by accounts
payable............................................... $ 10,200,650 $ 5,092,013 $ -- $ 10,200,650
------------- ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 159
PATHNET INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM AUGUST 25, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995 AND FOR THE
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
NOTE ACCUMULATED
RECEIVABLE ADDITIONAL OTHER
COMMON STOCK FROM DEFERRED PAID-IN COMPREHENSIVE
SHARES AMOUNT STOCKHOLDER COMPENSATION CAPITAL INCOME
---------- -------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 25, 1995................. -- $ -- $ -- $ -- $ -- $ --
Issuance of Voting common stock............ 1,450,000 14,500 (4,500) -- -- --
Issuance of Non-voting common stock........ 1,450,000 14,500 (4,500) -- -- --
Net loss................................... -- -- -- -- -- --
---------- -------- ------- ----------- ---------- --------
BALANCE AT DECEMBER 31, 1995............... 2,900,000 29,000 (9,000) -- -- --
Cancellation of Non-voting common stock.... (1,450,000) (14,500) -- -- -- --
Issuance of Voting common stock............ 1,450,000 14,500 -- -- -- --
Interest expense for beneficial conversion
feature of bridge loan................... -- -- -- -- 381,990 --
Net loss................................... -- -- -- -- -- --
---------- -------- ------- ----------- ---------- --------
BALANCE AT DECEMBER 31, 1996............... 2,900,000 29,000 (9,000) -- 381,990 --
Net loss................................... -- -- -- -- -- --
---------- -------- ------- ----------- ---------- --------
BALANCE AT DECEMBER 31, 1997............... 2,900,000 29,000 (9,000) -- 381,990 --
Exercise of stock options.................. 2,358 24 -- -- 57 --
Repayment of note receivable............... -- -- 9,000 -- -- --
Deferred compensation expense related to
issuance of employee common stock
options.................................. -- -- -- (1,679,359) 1,679,359 --
Compensation expense related to issuance of
employee common stock options............ -- -- -- 701,295 -- --
Fair value of warrants to purchase common
stock.................................... -- -- -- -- 4,095,000 --
Net unrealized gain on marketable
securities available for sale............ -- -- -- -- -- 208,211
Net loss................................... -- -- -- -- -- --
---------- -------- ------- ----------- ---------- --------
Balance at December 31, 1998 2,902,358 $ 29,024 $ -- $ (978,064) $6,156,406 $208,211
========== ======== ======= =========== ========== ========
<CAPTION>
DEFICIT
ACCUMULATED
DURING
DEVELOPMENT
STAGE TOTAL
------------ ------------
<S> <C> <C>
BALANCE AT AUGUST 25, 1995................. $ -- $ --
Issuance of Voting common stock............ (9,500) 500
Issuance of Non-voting common stock........ (9,500) 500
Net loss................................... (426,826) (426,826)
------------ ------------
BALANCE AT DECEMBER 31, 1995............... (445,826) (425,826)
Cancellation of Non-voting common stock.... -- (14,500)
Issuance of Voting common stock............ -- 14,500
Interest expense for beneficial conversion
feature of bridge loan................... -- 381,990
Net loss................................... (1,743,635) (1,743,635)
------------ ------------
BALANCE AT DECEMBER 31, 1996............... (2,189,461) (1,787,471)
Net loss................................... (3,977,400) (3,977,400)
------------ ------------
BALANCE AT DECEMBER 31, 1997............... (6,166,861) (5,764,871)
Exercise of stock options.................. -- 81
Repayment of note receivable............... -- 9,000
Deferred compensation expense related to
issuance of employee common stock
options.................................. -- --
Compensation expense related to issuance of
employee common stock options............ -- 701,295
Fair value of warrants to purchase common
stock.................................... -- 4,095,000
Net unrealized gain on marketable
securities available for sale............ -- 208,211
Net loss................................... (36,296,596) (36,296,596)
------------ ------------
Balance at December 31, 1998 $(42,463,457) $(37,047,880)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 160
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Pathnet, Inc. (Company) is a "carrier's carrier," providing low-cost
digital fiber and wireless communications capacity to under-served and second
and third tier U.S. markets. The Company's strategy is to partner with owners of
telecommunication assets, including utility, pipeline and railroad companies
(Incumbents), to upgrade and aggregate existing infrastructure to a
state-of-the-art SONET network. As of December 31, 1998, the Company had
approximately 2,000 route miles of completed network, approximately 5,000 route
miles of network under construction and approximately 10,000 route miles of
network under contract. Due to demand and opportunity, Pathnet expanded the
scope of its existing business strategy to include fiber. Pathnet offers
telecommunications service to inter-exchange carriers, local exchange carriers,
internet service providers, Regional Bell Operating Companies, cellular
operators and resellers.
The Company's business has been funded primarily through equity investments
by the Company's stockholders and a private placement in April 1998 of units
consisting of 12 1/4% Senior Notes due 2008 (Restricted Notes) and warrants
(Warrants) to purchase Common Stock (Debt Offering). On September 2, 1998, the
Company commenced an offer to exchange (Exchange Offer) all outstanding
Restricted Notes for up to $350.0 million aggregate principal amount of 12 1/4%
Senior Notes due 2008 (Registered Notes) which have been registered under the
Securities Act of 1933, as amended (Securities Act). The terms of the Registered
Notes are identical in all material respects to the terms of the Restricted
Notes, except that the Registered Notes have been registered under the
Securities Act and are generally freely transferable by holders thereof and are
issued without any covenant upon the Company regarding registration under the
Securities Act. The Exchange Offer expired on October 2, 1998 and all
outstanding Restricted Notes were exchanged for Registered Notes. (The
Restricted Notes and the Registered Notes are collectively referred to herein as
the "Senior Notes.")
A substantial portion of the Company's activities to date has involved
developing strategic relationships with Incumbents and building its network.
Accordingly, a majority 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 10% of its total revenues) was derived from the sale of
bandwidth along the Company's digital network. The Company has also been engaged
in constructing network, developing operating systems, constructing a network
operations center, raising capital and hiring management and other key
personnel. 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. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
While 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 Incumbents, designing and constructing network segments,
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
F-8
<PAGE> 161
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
CONSOLIDATION
The consolidated financial statements include the accounts of Pathnet, Inc.
and its wholly owned subsidiaries, Pathnet Finance I, LLC, Pathnet/Idaho Power
License, LLC, Pathnet Fiber Optics, LLC and Pathnet/BNSF Equipment, LLC. All
material intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. The estimates involve judgments with
respect to, among other things, various future factors which are difficult to
predict and are beyond the control of the Company. Actual amounts could differ
from these estimates.
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 2,885,833 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 December 31, 1998, 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents and accounts payable, approximate
fair value due to the relatively short maturity of these instruments. As of
December 31, 1998, the value of the Company's 12 1/4% Senior Notes was
approximately $245 million.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents, marketable
securities and associated interest receivable, note
F-9
<PAGE> 162
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receivable, and restricted cash. Marketable securities and associated interest
receivable include U.S. Treasury securities and debt securities of U.S.
Government agencies, certificates of deposit and money market funds, and
corporate debt securities. The note receivable is guaranteed by the parent
company of the note holder, a leading utility company. The Company has invested
its excess cash in a money market fund with a commercial bank. The money market
fund is collateralized by the underlying assets of the fund. The Company's
restricted cash is maintained in an escrow account (see Note 5) at a major bank.
The Company has not experienced any losses on its cash and cash equivalents and
restricted cash.
MARKETABLE SECURITIES
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Debt securities are classified as
held to maturity when the Company has the positive intent and ability to hold
the securities to maturity. The Company has classified certain securities as
held to maturity pursuant to a pledge agreement. Held to maturity securities are
stated at amortized cost. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale,
along with any investments in equity securities. Securities are classified as
current or non-current based on the maturity date. Securities available for sale
are carried at fair value based on quoted market prices at the balance sheet
date, with unrealized gains and losses reported as part of accumulated other
comprehensive income.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and interest
are included in interest income or expense. Realized gains and losses are
included in other income (expense), net in the consolidated statements of
operations. The cost of securities sold is based on the specific identification
method. The Company's investments in debt and equity securities are diversified
among high credit quality securities in accordance with the Company's investment
policy.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of network in progress, communications
network, office and computer equipment, furniture and fixtures and leasehold
improvements, is stated at cost. Network in progress costs incurred during
development are capitalized. Depreciation of the completed communications
network commences when the network equipment is ready for its intended use and
is computed using the straight-line method with estimated useful lives of
network assets ranging between three to ten years. Depreciation of the office
and computer equipment and furniture and fixtures is computed using the
straight-line method, generally over three to five years, based upon estimated
useful lives, commencing when the assets are available for service. Leasehold
improvements are amortized over the lesser of the useful lives of the assets or
the lease term. Expenditures for maintenance and repairs are expensed as
incurred. When assets are retired or disposed, the cost and the related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in operations for the period.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of its long-lived
assets. This evaluation consists of a comparison of the carrying value of the
assets with the assets' expected future cash
F-10
<PAGE> 163
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
flows, undiscounted and without interest costs. Estimates of expected future
cash flows represent management's best estimate based on reasonable and
supportable assumptions and projections. If the expected future cash flow,
undiscounted and without interest charges, exceeds the carrying value of the
asset, no impairment is recognized. Impairment losses are measured as the
difference between the carrying value of long-lived assets and their fair value.
DEFERRED INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year-end,
based on enacted laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established when necessary, to reduce net deferred tax assets to the amount
expected to be realized. The provision for income taxes consists of the
Company's current provision for federal and state income taxes and the change in
the Company's net deferred tax assets and liabilities during the period.
REVENUE RECOGNITION
The Company earns revenue from the sale of telecommunication 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 over the related
project period as milestones are achieved. The Company defers revenue when
contractual payments are received in advance of the performance of services.
During 1998, one customer accounted for 98% of the Company's total revenue.
DEFERRED FINANCING COSTS
The Company has incurred costs related to the Debt Offering together with
costs associated with obtaining future debt financing arrangements. Such costs
are amortized over the term of the debt or financing arrangement other than when
financing has not been obtained, in which case, the costs are expensed
immediately.
COMPREHENSIVE LOSS
Effective March 31, 1998, the Company adopted Statement of Statement of
Financial Accounting Standards No 130 which requires additional reporting with
respect to certain changes in assets and liabilities that previously were
reported in stockholders' equity (deficit). Accordingly, the Company has
included Consolidated Statements of Comprehensive Loss for the years ended
December 31, 1998, 1997 and 1996, and for the period August 25, 1995 (date of
inception) to December 31, 1998 in the accompanying financial statements.
3. MARKETABLE SECURITIES
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. Realized gains or losses from the sale of marketable securities are
based on the specific identification method.
F-11
<PAGE> 164
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the investments in marketable securities at
December 31, 1998:
<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.......................... $ 20,684,791 $ 11,436 $ -- $ 20,696,227
Certificates of deposit and
money market funds........... 7,098,225 116 878 7,097,463
Corporate debt securities....... 141,804,303 225,972 28,435 142,001,840
------------ -------- ------- ------------
$169,587,319 $237,524 $29,313 $169,795,530
============ ======== ======= ============
</TABLE>
Proceeds from the sales of available for sale securities and gross realized
gains and gross realized losses on sales of available for sale securities were
immaterial during the year ended December 31, 1998.
The amortized cost and estimated fair value of available for sale
securities by contractual maturity at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
COST MARKET VALUE
------------ ------------
<S> <C> <C>
Due in one year or less......................... $ 97,863,395 $ 97,895,773
Due after one year through two years............ 71,723,924 71,899,757
------------ ------------
$169,587,319 $169,795,530
============ ============
</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 (see note 8) and are
classified as non-current assets on the consolidated balance sheet. As of
December 31, 1998 pledged marketable securities consisted of U.S. Treasury
securities classified as held to maturity with an amortized cost of
approximately $60.8 million, interest receivable on the pledged marketable
securities of approximately $998,000 and cash and cash equivalents of
approximately $41,000. Approximately $40.1 million of the investments
contractually mature prior to December 31, 1999 and approximately $20.7 million
contractually mature after December 31, 1999 and prior to April 30, 2000.
4. NOTE RECEIVABLE
Under the terms of a promissory note with an incumbent, the Company agreed
to advance up to $10 million principal for the purpose of funding the
incumbent's equipment expenditures under a Fixed Point Microwave Services
agreement. Expenses are initially incurred by the Company and are recharged at
cost to the incumbent as principal under the promissory note. The principal
amount of the promissory note is due and payable on March 31, 1999. Interest on
the promissory note accrues at the rate of 5 per cent per annum computed from
the date of commissioning of the network, which had not occurred as of December
31, 1998. Commissioning of the network occurs when the network
F-12
<PAGE> 165
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has been completed and is performing in accordance with agreed upon
specifications. Approximately $3.2 million was outstanding under the promissory
note as of December 31, 1998.
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Network in progress................................ $38,669,088 $6,831,795
Communications network............................. 6,890,686 --
Office and computer equipment...................... 2,267,647 248,880
Furniture and fixtures............................. 766,013 120,093
Leasehold improvements............................. 166,733 62,344
----------- ----------
48,760,167 7,263,112
Less: accumulated depreciation..................... (788,831) (56,018)
----------- ----------
Property and equipment, net........................ $47,971,336 $7,207,094
=========== ==========
</TABLE>
Network construction costs include all direct material and labor costs
together with related allocable interest costs, necessary to construct
components of a high capacity digital network which is owned and maintained by
the Company. During 1998, a portion of network was completed and made available
for use by the Company, and was transferred from network in process to
communications network. Network construction in progress at December 31, 1998
and 1997 respectively included approximately $10.2 million and $5.1 million,
respectively, of telecommunications equipment not yet paid for by the Company.
Corresponding amounts are included in accounts payable at December 31, 1998 and
1997, respectively.
6. DEFERRED FINANCING COSTS
During 1998, the Company incurred total issuance costs of approximately
$11.3 million in connection with the Debt Offering. For the year ended December
31, 1998, amortization of the costs of approximately $843,000 was charged to
interest expense.
As of December 31, 1997, debt-financing costs comprised approximately
$250,000 related to costs incurred in anticipation of obtaining debt-financing
arrangements with a vendor. During the year ended December 31, 1998, these
costs, together with additional debt financing costs incurred during the year of
approximately $364,000, were charged to interest expense as the related
financing arrangements were not consummated.
7. RESTRICTED CASH
Restricted cash comprises amounts held in escrow to collateralize the
Company's obligations under certain of its Fixed Point Microwave Services (FPM)
agreements. The funds in each escrow account are available only to fund the
projects to which the escrow is related. Generally, funds are released from
escrow to pay project costs as incurred. During the year ended December 31,
1998, the Company deposited approximately $10.3 million in escrow and no funds
were released from escrow.
F-13
<PAGE> 166
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
During 1998, the Company completed the Debt Offering for total gross
proceeds of $350.0 million less total issuance costs of approximately $11.3
million. Upon issuance, approximately $345.9 million of the gross proceeds were
allocated to the Senior Notes and approximately $4.1 million were allocated to
the Warrants based upon estimated fair values. The Warrants expire on April 15,
2008. The estimated value attributed to the Warrants has been recorded as a
discount on the face value of the Senior Notes and as additional paid-in
capital. This discount is amortized as an increase to interest expense and the
carrying value of the debt over the related term using the interest method. The
Company has recorded approximately $307,000 of expense for the year ended
December 31, 1998, related to the amortization of this discount. Interest on the
Senior Notes accrues at an annual rate of 12 1/4%, payable semiannually, in
arrears, beginning October 15, 1998, with principal due in full on April 15,
2008. Interest expense, exclusive of the amortization of the discount, for the
year ended December 31, 1998 was $31.3 million. The Company used approximately
$81.1 million of the proceeds related to the Debt Offering to purchase U.S.
Government debt securities, which are restricted and pledged as collateral for
repayment of all interest due on the Senior Notes through April 15, 2000. The
Company made its first interest payment of approximately $22.3 million on
October 15, 1998. The Senior Notes are redeemable, in whole or part, at any time
on or after April 15, 2003 at the option of the Company, at the following
redemption prices plus accrued and unpaid interest (1) on or after April 15,
2003; 106% of the principal amount, (2) on or after April 15, 2004; 104% of the
principal amount, (3) on or after April 15, 2005; 102% of the principal amount
and (4) on or after April 15, 2006; 100% of the principal amount. In addition,
at any time prior to April 15, 2001, the Company may redeem within sixty days,
with the net cash proceeds of one or more public equity offerings, up to 35% of
the aggregate principal amount of the Senior Notes at a redemption price equal
to 112.25% of the principal amount plus accrued and unpaid interest provided
that at least 65% of the original principal amount of the Senior Notes remain
outstanding. Upon a change in control, as defined, each holder of the Senior
Notes may require the Company to repurchase all or a portion of such holder's
Senior Notes at a purchase price of cash equal to 101% of the principal amount
plus accrued and unpaid interest and liquidated damages if any.
The Senior Notes contain certain covenants which restrict the activities of
the Company including limitations of indebtedness, restricted payments,
issuances and sales of capital stock, affiliate transactions, liens, guarantees,
sale of assets and dividends.
9. CAPITAL STOCK TRANSACTIONS
COMMON STOCK
The initial capitalization of the Company, on August 28, 1995, occurred
through the issuance by the Company of 1,450,000 shares of voting common stock
and 1,450,000 shares of non-voting common stock.
On May 8, 1998, the Company filed a registration statement with the
Securities and Exchange Commission for an initial public offering of common
stock (Initial Public Offering). The Company subsequently postponed the Initial
Public Offering. In relation to the postponement of the Initial Public Offering,
the Company wrote off approximately $1.4 million in expenses, consisting
primarily of legal and accounting fees, printing costs, and Securities and
Exchange Commission and NASDAQ Stock Market fees. On July 24, 1998, the
Company's stockholders approved a 2.9-for-1 stock split
F-14
<PAGE> 167
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which was effected on August 3, 1998, the record date. All share information has
been adjusted for this stock split for all periods presented.
PREFERRED STOCK
As part of its initial capitalization on August 25, 1995, the Company
initiated a private offering of 1 million shares of Series A convertible
preferred stock for $1 million. Pursuant to the terms of the Investment and
Stockholders' Agreement by and among the Company and certain stockholders of the
Company (Investment and Stockholders Agreement), the offering closed in two
phases of $500,000 each. As of the signing of the Investment and Stockholders
Agreement, the Company received $500,000, representing the first closing on this
offering in 1995. In addition, the offering provided for a convertible bridge
loan in the amount of $1 million. The bridge loan carried an interest rate of
12% per annum and was due and payable in full on the earlier to occur of the
anniversary date of the bridge loan issuance or the closing date of the
Company's next equity financing. The bridge loan was converted into Series B
preferred stock at 73% of the price of the Series B convertible preferred stock
issued in the next equity financing.
In February 1996, the Company issued 500,000 shares of Series A convertible
preferred stock to the original investors in exchange for $500,000, representing
the second closing under the Investment and Stockholders Agreement. In August
1996, the Company drew $700,000 on a bridge loan with the original investors.
On December 23, 1996, the Company consummated a private offering of 609,756
shares of Series B convertible preferred stock for $2 million less issuance
costs of $25,000 pursuant to the Investment and Stockholders Agreement. In
addition, simultaneously, the $700,000 bridge loan plus $33,367 of accrued
interest was converted into 306,242 shares of Series B convertible preferred
stock. The Company recognized $271,107 of interest expense to account for the
beneficial conversion feature of the bridge loan. In addition, $300,000
representing the committed but undrawn portion of the bridge loan, was paid to
the Company for the sale of 125,292 shares of Series B convertible preferred
stock at a discounted rate. The Company recognized $110,883 of interest expense
to account for the beneficial conversion feature of the committed but undrawn
bridge loan. On June 18, 1997, pursuant to the Investment and Stockholders
Agreement, the Company received an additional $2 million in a second closing in
exchange for 609,756 shares of Series B convertible preferred stock. There were
no issuance costs associated with the second closing.
On October 31, 1997, pursuant to the Investment and Stockholders Agreement,
the Company consummated a private offering of 939,850 shares of Series C
convertible preferred stock for approximately $10 million, less issuance costs
of $38,780. On April 8, 1998, pursuant to the Investment and Stockholders
Agreement, the Company consummated a second closing of 1,879,699 shares of
Series C convertible preferred stock for an aggregate purchase price of
approximately $20.0 million. There were no issuance costs associated with the
second closing.
Each share of Series A, Series B and Series C convertible preferred stock
entitles each holder to a number of votes per share equal to the number of
shares of Common Stock into which each share of Series A, Series B and Series C
convertible preferred stock is currently convertible.
The holders of the Series A, Series B and Series C convertible preferred
stock are entitled to receive dividends in preference to and at the same rate as
dividends are paid with respect to the common stock. In the event of any
liquidation, dissolution or winding up of the Company, whether
F-15
<PAGE> 168
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
voluntary or involuntary, holders of each share of Series A, Series B and Series
C convertible preferred stock outstanding are entitled to be paid before any
payment shall be made to the holders of any class of common stock or any stock
ranking on liquidation junior to the convertible preferred stock, an amount, in
cash, equal to the original purchase price paid by such holder plus any declared
but unpaid dividends.
In the event the assets of the Company are insufficient to pay liquidation
preference amounts, then all of the assets available for distribution shall be
distributed pro rata so that each holder receives that portion of the assets
available for distribution as the number of shares of convertible preferred
stock held by such holder bears to the total number of shares of convertible
preferred stock then outstanding.
Shares of the Series A, Series B, and Series C convertible preferred stock
may be converted at any time, at the option of the holder, into voting common
stock. The number of shares of voting common stock entitled upon conversion is
the quotient obtained by dividing the face value of the Series A, Series B and
Series C convertible preferred stock by the Applicable Conversion Rate, defined
as the Applicable Conversion Value of $0.34, $1.13 or $3.67 per share,
respectively.
Each share of convertible preferred stock shall automatically be converted
into the number of shares of voting common stock which such shares are
convertible upon application of the Applicable Conversion Rate immediately upon
the closing of a qualified underwritten public offering covering the offer and
sale of capital stock which is defined as: (1) the Company is valued on a
pre-money basis at greater than $50 million, (2) the gross proceeds received by
the Company exceed $20 million, and (3) the Company uses a nationally recognized
underwriter approved by holders of a majority interest of the Series A, Series B
and Series C convertible preferred stock voting together.
If the Company issues any additional shares of common stock of any class at
a price less than the Applicable Conversion Value, in effect for the Series A,
Series B or Series C convertible preferred stock immediately prior to such
issuance or sale, then the Applicable Conversion Value shall be adjusted
accordingly.
In the event a qualified public offering has not occurred prior to December
23, 2000, the holder of shares of Series A or Series B preferred stock can
require the Company to redeem the shares of Series A and Series B convertible
preferred stock. After receipt from any one holder of an election to have any
shares redeemed, the Company is required to send a notice to the Series A and
Series B preferred stockholders on December 24, 2000 of the redemption price. If
after sending the redemption notice to Series A and Series B preferred
stockholders, the Company receives requests for redemption on or prior to
January 11, 2001, from the holders of at least 67% of the Series A and Series B
convertible preferred stock taken together, the Company must redeem all shares
of Series A and Series B convertible preferred stock. Payment of the redemption
price is due on January 23, 2001, for a cash price equal to the original
purchase price paid by such holders for each share of Series A and Series B
convertible preferred stock as adjusted for any stock split, stock distribution
or stock dividends with respect to such shares. The successful completion of a
qualified public offering is not within the control of the Company. Therefore,
the Company does not present the Series A and Series B preferred stock as a
component of stockholders' equity.
In the event that a qualified public offering has not occurred prior to
November 3, 2001, the holder of shares of Series C preferred stock can require
the Company to redeem the shares of Series C convertible preferred stock. After
receipt from any one holder of an election to have any
F-16
<PAGE> 169
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares redeemed, the Company is required to send a notice to the Series C
preferred stockholders on November 4, 2001 of the redemption price. If after
sending the redemption notice to Series C preferred stockholders, the Company
receives requests for redemption on or prior to November 21, 2001, from the
holders of at least 67% of the Series C convertible preferred stock, the Company
must redeem all shares of Series C convertible preferred stock. Payment of the
redemption price is due on December 3, 2001 for a cash price equal to the
original purchase price paid by such holders for each share of Series C
convertible preferred stock as adjusted for any stock split, stock distribution
or stock dividends with respect to such shares. The successful completion of a
qualified public offering is not within the control of the Company. Therefore,
the Company does not present the Series C preferred stock as a component of
stockholders' equity.
Notwithstanding the provisions for optional redemption described above,
pursuant to a Consent Waiver and Amendment effective March 24, 1998 among the
Company and certain stockholders of the Company, the holders of the Series A,
Series B and Series C convertible preferred stock agreed that no optional
redemption of the Series A, Series B or Series C convertible preferred stock may
be made by the Company prior to 90 days after (1) the final maturity dated of
the Senior Notes (2) or such earlier date (after the redemption date specified
for such preferred stock) as the Senior Notes shall be paid in full.
10. STOCK OPTIONS
On August 28, 1995, the Company adopted the 1995 Stock Option Plan (1995
Plan), under which incentive stock options and non-qualified stock options could
be granted to the Company's employees and certain other persons and entities in
accordance with law. The Compensation Committee, which administers the 1995
Plan, determined the number of options granted, the vesting period and the
exercise price of each award made under the 1995 Plan. The 1995 Plan will
terminate August 28, 2005 unless terminated earlier by the Board of Directors.
During 1998, the Compensation Committee determined that no further awards would
be granted under the 1995 Plan.
Options granted to date under the 1995 Plan generally vest over a three
period and expire either 30 days after termination of employment or 10 years
after date of grant. As of December 31, 1998, a total of 70,731 non-qualified
stock options and 424,393 incentive stock options were issued at an exercise
price of $0.03 per share, an amount estimated to equal or exceed the per share
fair value of the common stock at the time of grant. As of December 31, 1998,
the options issued at an exercise price of $0.03 had a weighted average
contractual life of 6.68 years. As of December 31, 1998, 490,410 of the options
issued at an exercise price of $0.03 were exercisable.
On August 1, 1997, the Company adopted the 1997 Stock Incentive Plan (1997
Plan), under which incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, performance awards and certain other
types of awards may be granted to the Company's employees and certain other
persons and entities in accordance with the law. To date, only non-qualified
stock options have been granted under the 1997 Plan. The Compensation Committee,
which administers the 1997 Plan, determines the number of options granted, the
vesting period and the exercise price of each award granted under the 1997 Plan.
The 1997 Plan will terminate July 31, 2007 unless earlier terminated by the
Board of Directors.
Options granted under the 1997 Plan generally vest over a three to seven
year period and expire: (1) ten years after the date of grant, (2) two years
after the date of the participant's termination without cause, disability or
death, (3) three months after the date of the participant's resignation,
F-17
<PAGE> 170
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) on the date of the participant's termination with cause or (5) on the date
of any material breach of any confidentiality or non-competition covenant or
agreement entered into between the participant and the Company.
The options issued on October 31, 1997, at $3.67, vest on October 31, 2004
provided, however (1) if the Company has met 80% of its revenue and Earnings
Before Interest, Taxes, Depreciation and Amortization (EBITDA) budget for the
calendar year ended December 31, 1998, which budget is approved by the Board of
Directors of the Company, 50% of the shares covered by the options shall vest
and become exercisable on January 1, 1999, (2) if the Company has met 80% of its
revenue and EBITDA budget for the calendar year ending December 31, 1999, which
budget is approved by the Board of Directors of the Company, the remaining 50%
of the shares covered by the options shall vest and become exercisable on
January 1, 2000, and (3) in the event that the first 50% of the shares covered
by the options did not vest on January 1, 1999 as set forth in (1) above and the
Company not only meets 80% of its revenue and EBITDA budget for the year ending
December 31, 1999 but exceeds 80% of its revenue and EBITDA budget for the year
ending December 31, 1999, which budget is approved by the Board of Directors of
the Company, in an amount at least equal to the deficiency that occurred in the
year ending December 31, 1998, 100% of the shares covered by the options shall
vest and become exercisable on January 1, 2000. Unvested and uncancelled options
issued at $3.67 immediately become fully vested and exercisable upon a change of
control or a qualified public offering, as defined in the option agreement.
The options issued at $1.13 vest ratably over three or four consecutive
years subject to certain acceleration provisions set forth in an employment
agreement such as the immediate vesting upon a change in control or a qualified
initial public offering. Under certain circumstances and subject to the terms of
the Senior Notes, upon the election of the employee upon termination of
employment, the Company will be required to pay the employee the fair value of
the vested options held on the date of such termination.
As of December 31, 1998, a total of 2,390,707 non-qualified options were
issued and outstanding, 1,523,323 at an exercise price of $1.13 per share,
520,134 at an exercise price of $3.67 per share and 347,250 at an exercise price
of $5.20 per share. Of the options issued at $1.13, 425,790 shares were
exercisable at December 31, 1998. None of the options issued at $3.67 or $5.20
were exercisable at December 31, 1998. As of December 31, 1998, the weighted
average contractual life of the options issued at $1.13, $3.67 and $5.20 was 8.9
and 8.9 and 9.9 years, respectively.
During the year ended December 31, 1998, 667,373 and 89,721 options were
issued at an exercise price of $1.13 and $3.67 per share, respectively. The
estimated fair value of the Company's underlying common stock in each case was
determined to be $1.99 per share and $16.00, respectively. Accordingly, the
Company calculated deferred compensation expense of approximately $1.7 million
related to the options granted during the year and recognized compensation
expense of approximately $701,000. The Company will recognize the balance of the
compensation expense over the remainder of the vesting period of the options.
F-18
<PAGE> 171
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity was as follows:
<TABLE>
<CAPTION>
1995 PLAN 1997 PLAN
-------------------------------- ------------------------
NON- NON- WEIGHTED
INCENTIVE QUALIFIED QUALIFIED AVERAGE
STOCK STOCK STOCK EXERCISE
OPTIONS OPTIONS PRICE OPTION PRICE PRICE
--------- --------- ------ --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
December 31,
1995............... 410,248 70,731 $0.034 -- -- $0.034
Granted.............. 14,147 7,074 $0.034 -- -- $0.034
Exercised............ -- -- -- -- -- --
Canceled............. -- -- -- -- -- --
------- ------ ---------
Options outstanding,
December 31,
1996............... 424,395 77,805 $0.034 -- -- $0.034
Granted.............. -- -- -- 1,289,167 $1.13-$3.67 $1.980
Exercised............ -- -- -- -- -- --
Canceled............. -- -- -- -- -- --
------- ------ ---------
Options outstanding,
December 31,
1997............... 424,395 77,805 $0.034 1,289,167 $1.13-$3.67 $1.430
Options granted...... -- -- -- 1,107,094 $1.13-$5.20 $2.622
Options exercised.... -- (2,358) $0.034 -- -- --
Options cancelled.... -- (4,716) $0.034 (5,554) $1.13-$5.20 $3.145
------- ------ ---------
Options outstanding
at December 31,
1998............... 424,395 70,731 $0.034 2,390,707 $1.13-$5.20 $1.888
======= ====== =========
</TABLE>
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method and provides pro forma disclosures
of net loss as if the fair value method had been applied in measuring
compensation expense. Under the intrinsic value method of accounting for
stock-based compensation, when the exercise price of options granted to
employees is less than the fair value of the underlying stock on the date of
grant, compensation expense is to be recognized over the applicable vesting
period
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net loss as reported....................... $36,296,596 $3,977,400 $1,743,635
Pro forma net loss......................... $36,859,594 $3,978,164 $1,747,570
Basic and diluted net loss per share as
reported................................. $ (12.51) $ (1.37) $ (0.60)
Pro forma basic and diluted net loss per
share.................................... $ (12.70) $ (1.37) $ (0.60)
</TABLE>
The fair value of each option is estimated on the date of grant using a
type of Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 1997 and 1996,
respectively: dividend yield of 0%, expected volatility of
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<PAGE> 172
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
0%, risk-free interest rate of 6.55% and 6.35% and expected terms of 5.0 and 5.8
years. The following weighted-average assumptions were used for grants during
the year ended December 31, 1998: dividend yield of 0%, expected volatility of
0%, risk-free interest rate of 5.18% and expected terms of 5.5 years.
As of December 31, 1998 and 1997, the weighted average remaining
contractual life of the options is 8.63 years and 9.21 years, respectively. As
of December 31, 1998 and 1997 the pro forma tax effects would include an
increase to the deferred tax asset and the valuation allowance of approximately
$225,000, and $300 respectively; therefore, there is no pro forma tax effect.
11. VENDOR AGREEMENTS
Pursuant to a Master Agreement entered into by the Company and NEC on
August 8, 1997, as amended, the Company has the option to acquire, by March 31,
2003, a total of $200 million worth of certain equipment, services and licensed
software to be used by the Company in its network under pricing and payment
terms that the Company believes are favorable. In addition, NEC has agreed,
subject to certain conditions, to warranty equipment purchased by the Company
from NEC for three years, if defective, to repair or replace certain equipment
promptly and to maintain a stock of critical spare parts for up to 15 years. The
Company's agreement with NEC provides for fixed prices during the first three
years of its term. As of December 31, 1998, the Company had purchased $31.1
million of equipment under this agreement.
Pursuant to a supply agreement entered into by the Company and Lucent
Technologies (Lucent) on December 18, 1998, the Company agreed that Lucent
should be its exclusive supplier of fiber optic cable for its nationwide, voice
and data network. Lucent may provide financing of up to approximately $400
million of fiber purchases for the construction of the Company's network and may
provide or arrange financing for future phases of the fiber portion of the
Company's network. The total amount of financing over the life of this
seven-year agreement is not to exceed $1.8 billion. Certain material terms of
the Company's transactions with Lucent are currently under review by Lucent and
the Company. There can be no assurance that the financing contemplated by the
supply agreement will be consummated or, if consummated, consummated on the
terms and conditions described above. The supply agreement provides that Lucent
will provide the Company with a broad level of support, including fiber optic
equipment, network planning and design, technical and marketing support, and
financing. As of December 31, 1998, no purchases were made by the Company under
this agreement.
12. COMMITMENTS AND CONTINGENCIES
The Company maintains office space in Washington, D.C., Kansas and Texas.
The most significant lease relates to the Company's headquarters facility in
Washington, D.C. The partnership leasing the space in Washington, D.C. is
controlled by a director of the Company. The lease expires on August 31, 1999,
and is renewable by the Company for two additional one-year periods. Rent paid
to this related party during the year ended December 31, 1998, 1997 and 1996,
was $281,890, $60,980 and $0, respectively. The Company has no amounts due to
the related party as of December 31, 1998.
On December 30, 1998, the Company entered into a lease agreement for the
lease of tower site space, sufficient to perform its obligations under a fixed
point microwave agreement (FPMA) with an incumbent. Under the terms of the
lease, the Company is obligated to rent of $130,000 per month for
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<PAGE> 173
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a period expiring on the later of (1) the expiration of the FPMA as to that
site, or (2) ten years from the effective date of the agreement. The agreement
provides for an increase in the rent payable commencing on December 1, 1999 and
on each succeeding year thereafter to December 1, 2008, by an amount equal to 4
per cent of the rent then in effect.
The Company's future minimum rental payments under noncancellable operating
leases are as follows:
<TABLE>
<S> <C>
1999............................................... $ 2,177,440
2000............................................... 1,913,822
2001............................................... 1,967,214
2002............................................... 2,033,577
2003 and thereafter................................ 12,089,432
-----------
Total......................................... $20,181,485
===========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997, and 1996 was
$389,969, $114,673 and $4,399, respectively.
The Company earns microwave telecommunication capacity revenue under an
indefeasible right of use (IRU) agreement dated December 1, 1998, of $137,000
per month commencing December 1998 and expiring on the later of (1) the
expiration of the FPMA as to that site, or (2) ten years from the effective date
of the agreement. The IRU agreement provides for an increase in the rent
receivable commencing on December 1, 1999 and on each succeeding year thereafter
to December 1, 2008, by an amount equal to 4 per cent of the rent then in
effect.
In exchange for a non-compete agreement, the Company has agreed to pay a
senior management employee a severance payment of $275,000, if such employee's
employment with the Company is terminated.
As at December 31, 1998, the Company had capital commitments of
approximately $28.0 million relating to telecommunications and transmission
equipment.
F-21
<PAGE> 174
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
The tax effect of temporary differences that give rise to significant
portions of the deferred tax asset at December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Deferred revenue.................................... $ 949 $ 117,000
Capitalized start-up costs.......................... 1,370,937 1,271,227
Capitalized research and development costs.......... 66,111 79,333
Net operating loss carryforward..................... 15,325,484 754,458
16,763,481 2,222,018
Less valuation allowance............................ (16,763,481) (2,222,018)
------------ -----------
Net deferred tax asset.............................. $ -- $ --
============ ===========
</TABLE>
Capitalized costs represent expenses incurred in the organization and
start-up of the Company. For federal income tax purposes, these costs are being
amortized over sixty months.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income in the periods in which those temporary
differences are deductible. The Company has provided a valuation allowance
against its deferred tax assets as they are long-term in nature and their
ultimate realization cannot be determined.
14. SUBSEQUENT EVENT
On November 4, 1999, the Company, together with Pathnet Telecommunications
Inc. (PTI) a Delaware company formed on November 1, 1999, entered into
agreements providing for strategic investments from Colonial Pipeline Company,
Burlington Northern and Santa Fe Corporation and CSX Corporation to PTI. Upon
the closing of this transaction, PTI will receive the right to develop over
12,000 miles of the investors' rights of way with an estimated value of $187.0
million in return for 8,511,607 shares of PTI's Series D convertible preferred
stock. In addition to providing a portion of the right of way access, Colonial
Pipeline will pay $68.0 million of cash to PTI comprised of $38.0 million at the
initial closing for 1,729,631 shares of PTI's Series E redeemable preferred
stock, $25.0 million for 1,137,915 shares of PTI's Series E redeemable preferred
stock (upon the completion of a fiber optic network segment build that the
Company expects to complete during the first calendar quarter of 2000), $1.0
million for the issuance of an option to purchase 1,593,082 shares of PTI's
Series E redeemable preferred stock for $21.97 per share and shares of PTI's
common stock in connection with an initial public offering and $4.0 million for
rights in 2,200 conduit miles of our future network. Further, upon the closing
of this transaction, all of the Company's common stock will be exchanged for
common stock of PTI. In addition, all of the Company's 5,470,595 shares of
mandatorily redeemable preferred stock will be converted into 15,864,715 of
PTI's convertible preferred stock. The new investors collectively will receive
an approximate one-third equity stake in PTI, as well as proportionate
representation on the PTI 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.
F-22
<PAGE> 175
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
As a result, on November 22, 1999, PTI filed a preliminary prospectus with the
Securities and Exchange Commission, to offer all holders of the Senior Notes a
guarantee of the obligations of the Company to make interest and principal
payments. Concurrent with this offer, the Company is seeking consents from the
holders of the Senior Notes to the waiver and the amendment of certain
provisions of the Indenture. Pathnet expects to close this transaction
immediately following receipt of the required consents and other required
regulatory approvals.
In November 1999, the Company executed a lease for 40,000 square feet of
office space in Reston, Virginia which will become the Company's new
headquarters in the first half of 2000. The lease term is 10 years with annual
rent of approximately $1.0 million.
F-23
<PAGE> 176
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-24
<PAGE> 177
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
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.
F-25
<PAGE> 178
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED AUGUST 25, 1995
SEPTEMBER 30, SEPTEMBER 30, (DATE OF INCEPTION)
--------------------------- --------------------------- 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.
F-26
<PAGE> 179
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED AUGUST 25, 1995
SEPTEMBER 30, SEPTEMBER 30, (DATE OF INCEPTION)
--------------------------- --------------------------- TO SEPTEMBER 30,
1999 1998 1999 1998 1999
------------ ------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C>
Net loss.................... $(15,927,206) $(11,820,199) $(40,409,110) $(25,014,744) $(82,853,567)
Other comprehensive income
(loss):
Net unrealized gain (loss)
on marketable
securities available
for sale............... 75,759 488,345 (253,676) 436,490 (45,465)
------------ ------------ ------------ ------------ ------------
Comprehensive loss.......... $(15,851,447) $(11,331,854) $(40,662,786) $(24,578,254) $(82,899,032)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE> 180
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE NINE MONTHS ENDED AUGUST 25, 1995
SEPTEMBER 30, (DATE OF INCEPTION)
----------------------------- 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
Profit 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:
Accounts receivable..................................... -- -- --
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 securities held for resale............. 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.
F-28
<PAGE> 181
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM 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 Albuquerque, 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, the majority of
its revenues to date reflect 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 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
F-29
<PAGE> 182
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The interim financial data as of September 30, 1999 and for the nine months
ended September 30, 1999 and September 30, 1998 is unaudited; however, in the
opinion of the Company, the interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for the interim periods. 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.
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.
F-30
<PAGE> 183
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-31
<PAGE> 184
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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).
F-32
<PAGE> 185
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
On November 4, 1999, the Company, together with Pathnet Telecommunications
Inc. (PTI) a Delaware company formed on November 1, 1999, entered into
agreements providing for strategic investments from Colonial Pipeline Company,
Burlington Northern and Santa Fe Corporation and CSX Corporation to PTI. Upon
the closing of this transaction, PTI will receive the right to develop over
12,000 miles of the investors' rights of way with an estimated value of $187.0
million in return for 8,511,607 shares of PTI's Series D convertible preferred
stock. In addition to providing a portion of the right of way access, Colonial
Pipeline will pay $68.0 million of cash to PTI comprised of $38.0 million at the
initial closing for 1,729,631 shares of PTI's Series E redeemable preferred
stock, $25.0 million for 1,137,915 shares of PTI's Series E redeemable preferred
stock (upon the completion of a fiber optic network segment build that the
Company expects to complete during the first calendar quarter of 2000), $1.0
million for the issuance of an option to purchase 1,593,082 shares of PTI's
Series E redeemable preferred stock for $21.97 per share and shares of PTI's
common stock in connection with an initial public offering and $4.0 million for
rights in 2,200 conduit miles of our future network. Further, upon the closing
of this transaction, all of the Company's common stock will be exchanged for
common stock of PTI. In addition, all of the Company's 5,470,595 shares of
mandatorily redeemable preferred stock will be converted into 15,864,715 of
PTI's convertible preferred stock. The new investors collectively will receive
an approximate one-third equity stake in PTI, as well as proportionate
representation on the PTI 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.
As a result, on November 22, 1999, PTI filed a preliminary prospectus, with the
Securities and Exchange Commission, to offer all holders of the Senior Notes a
guarantee of the obligations of the Company to make interest and principal
payments. Concurrent with this offer, the Company is seeking consents from the
holders of the Senior Notes to the waiver and the amendment of certain
provisions of the Indenture. Pathnet expects to close this transaction
immediately following receipt of the required consents and other required
regulatory approvals.
F-33
<PAGE> 186
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1999, the Company executed a lease for 40,000 square feet of
office space in Reston, Virginia which will become the Company's new
headquarters in the first half of 2000. The lease term is 10 years with annual
rent of approximately $1.0 million.
F-34
<PAGE> 187
GLOSSARY OF SELECTED TERMS
Bandwidth..................... Refers to the maximum amount of data that can
be transferred through a communication channel
in a given time.
CAP (Competitive Access
Provider)................... An alternative, competitive local exchange
carrier.
Carrier....................... A provider of telecommunications services to
the public.
Carrier's Carrier............. A provider of communications transmission
services that specializes in the wholesale
provision of telecommunications bandwidth and
services to other carriers and service
providers.
Cellular Operators............ A provider of wireless radio telephone service
which operates using multiple transceiver sites
linked to a central computer for coordination.
Central Offices............... A telecommunications center where switches and
other telecommunications facilities are housed.
CAPs may connect with ILEC networks either at
this location or through a remote location.
Circuit....................... An electronic, radio or optical connection over
which communications may occur.
CLEC (Competitive Local
Exchange Carrier)........... A category of telephone service provider that
offers services similar to the former monopoly
local telephone company, as recently allowed by
changes in telecommunications law and
regulation. A competitive telecommunications
company may also provide other types of
telecommunications services (long distance,
Internet access, etc.)
CLEC Certification............ Granted by a state public service commission or
public utility commission, this certification
provides telecommunications services providers
with the legal standing to offer local exchange
telephone services in direct competition with
the ILEC and other competitive
telecommunications companies. Such
certifications are granted on a state-by-state
basis.
Collocation................... A location where a carrier's or customer's
equipment interconnects with the network of a
carrier inside the carrier's facility.
Communications Act of 1934.... The first major federal legislation that
established rules for broadcast and
non-broadcast communications, including both
wireless and wire line telephone service.
Conduit....................... A pipe that is installed to house the fiber
optic cable installed as part of the network.
Dark Fiber.................... Fiber optic cables which do not have connected
to them the electronics required to transmit
voice or data signals.
A-1
<PAGE> 188
Dialing Parity................ A technology employed so that end user
customers will not detect a difference in
quality and is ease of dialing telephone
numbers or accessing operators and emergency
services.
Digital....................... Describes a method of storing, processing and
transmitting information through the use of
distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital
transmission and switching technologies employ
a sequence of these pulses to convey
information, as opposed to the continuously
variable analog signal. The precise digital
numbers minimize distortion, such as graininess
or "snow," in the case of video transmission,
or static or other background distortion in the
case of audio transmission.
Digital Divide................ The growing disparity between telecommunication
services available in the largest markets and
those services available in second and third
tier markets.
DSL (Digital Subscriber
Line)......................... A transmission technology enabling high-speed
access in the local copper loop, often for the
last mile between the network service
provider -- i.e., an ILEC, CLEC or an
ISP -- and end user.
DSLAM (Digital Subscriber Line
Access Multiplexer)......... A multiplexer which houses individual circuit
cards used to provide DSL service.
DS-0, DS-1, DS-3.............. Standard telecommunications industry digital
signal formats, which are distinguishable by
bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-0 service has a bit
rate of up to 64 kilobits per second. DS-1
service has a bit rate of 1.544 megabits per
second and DS-3 service has a bit rate of 45
megabits per second. DS-0 is also equivalent to
one standard telephone line.
DWDM (Dense Wavelength
Division Multiplexing)...... A technology that allows multiple optical
signals to be combined so that they can be
aggregated as a group and transported over a
single fiber to increase capacity.
Existing Local Telephone
Company....................... An ILEC.
Facilities Based.............. A carrier owning the physical network assets or
a portion of the physical network assets
necessary to provide telecommunication
services.
56.6 Kbps..................... Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56.6 Kbps of data. Currently in
widespread use by medium and large businesses
primarily for entry level high-speed data and
very low-speed video applications.
FAA (Federal Aviation
Agency)....................... The United States government federal regulatory
agency with the authority to oversee air
traffic originating or terminating in the
United States.
A-2
<PAGE> 189
FCC (Federal Communications
Commission)................. The United States government federal regulatory
agency with the authority to regulate all
interstate and international communications
media (i.e., radio, television, wire, etc.)
originating or terminating in the United
States.
Fiber Optics.................. Fiber optic technology involves sending laser
light pulses across glass stands in order to
transmit digital information. Fiber is immune
to electrical interference and environmental
factors that effect copper wiring and satellite
transmission.
ILEC (Incumbent Local Exchange
Carrier).................... The existing local telephone company; one of
the RBOCs or GTE, or one of such companies'
successors.
Interconnection Agreement..... A contract between an ILEC and a CLEC for the
interconnection of the ILEC's and CLEC's networks, for the purpose of mutual
passing of traffic between the networks,
allowing customers of one of the networks to
call users served by the other network. These
agreements set out the financial and
operational aspects of such interconnection.
Internet...................... The name used to describe the global open
network of computers that permits a person with
access to the Internet to exchange information
with any other computer connected to the
network.
IRU........................... Indefeasible right to use. A long-term lease of
approximately 10 or 20 years to specific
strands of fiber optic cable or to conduit.
ISP (Internet Service
Provider)..................... A telecommunications service provider who
provides access to the Internet for dial access
and/or dedicated access.
IXC (Interexchange Carrier)... A provider of telecommunications services
between exchanges, or cities; also called long
distance carrier. A long distance carrier may
offer services over its own or another
carrier's facilities.
Lit Fiber..................... Fiber activated or equipped with the requisite
optical transmission equipment necessary to use
the fiber for transmission.
Local Access Services......... Our access services which allow our customers
to serve their customers in second and third
tier markets using our network components
including our collocations in the ILECs central
offices.
Local Loops................... The physical wires that run from the end user's
telephone set to the ILEC's central office.
Long Distance Carriers
(Interexchange Carriers).... Long distance carriers providing services
between LATAs, on an interstate or intrastate
basis. A long distance carrier may be
facilities-based or offer service by reselling
the services of a facilities-based carrier.
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<PAGE> 190
Multiplexing.................. An electronic or optical process that combines
several lower speed transmission signals into
one higher speed signal.
Network....................... An integrated system designed to provide for
the direction, transport and recording of
telecommunications traffic.
NOC........................... Our Network Operations Center.
Number Portability............ The ability of a local exchange service
customer of an ILEC to keep their existing
telephone number, while moving their service to
a CLEC.
OC-3.......................... OC-3 SONET high capacity optical
telecommunications line capable of transmitting
data at 155.52 Mbps.
OC-12......................... OC-12 SONET high capacity optical
telecommunications line capable of transmitting
data at 622.08 Mbps.
OC-48......................... OC-48 SONET high capacity optical
telecommunications line capable of transmitting
data at 2488.32 Mbps.
OC-192........................ OC-192 SONET high capacity optical
telecommunications line capable of transmitting
data at 9.6 Gbps.
OC............................ OC is a measure of SONET transmission optical
carrier level, which is equal to the
corresponding number of DS-3s (e.g. OC-3 is
equal to 3 DS-3s (DS-3 service has a bit rate
of 45 megabits per second and typically
transmits 672 simultaneous voice conversations)
and OC-48 is equal to 48 DS-3s).
Packet/Cell Switching
Network....................... A method of transmitting messages as digitized
bits, assembled in groups called packets or
cells. These packets and cells contain
industry-standard defined numbers of data bits,
along with addressing information and data
integrity bits. Packet/Cell Switching networks,
originally used only for the transmission of
digital data, are being implemented by carriers
to transport digitized voice, along with other
data. The switching (or routing) of the packets
or cells of data replace the "circuit-
switching" or traditional voice telephone
calls. Packet and cell switching is considered
to be a more cost efficient method of
delivering voice and data traffic.
Physical Collocation.......... A collocation where we or a similarly licenced
common carrier has installed and maintains
network termination equipment at IGC central
offices.
POP (Point-of-Presence)....... A location where a carrier has installed
transmission equipment in a service areas that
serves as, or relays calls to, a network
switching center of the carrier, or location in
customer buildings where a carrier has
installed electronics and/or facilities.
Private Line.................. A private, dedicated telecommunications link
between different customer locations (excluding
long distance carrier POPs).
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Reciprocal Compensation....... The compensation paid by one carrier to send
traffic to another carrier's network.
RBOC (Regional Bell Operating
Company).................... The five remaining local telephone companies
(formerly part of AT&T) established as a result
of the AT&T divestiture decree. These include
BellSouth, Bell Atlantic, US West and SBC.
Reseller...................... A carrier that does not own transmission
facilities, but obtains communications services
from another carrier on a wholesale basis for
resale to the public.
Route Mile.................... One mile of the actual geographic length of the
high capacity telecommunications fiber route.
ROW (Right of Way)............ Rights of way licenses and permits (creating a
contractual interest and not an interest in
land) from third party landowners and
governmental authorities which permit the
holder to install conduit and fiber.
Smart Build................... A strategy for building network where routes
are prioritized for development based on demand
for dark fiber and conduit and the availability
of suitable co-development partners.
SONET (Synchronous Optical
Network).................... A set of standards for optical communications
transmission systems that define the optical
rates and formats, signals characteristics,
performance, management and maintenance
information to be embedded within the signals
and the multiplexing techniques to be employed
in optical communications transmission systems.
SONET facilities the interoperability of
dissimilar vendors equipment. SONET benefits
customers by minimizing the equipment necessary
for various telecommunications applications and
supports networking diagnostic and maintenance
features.
Telecommunications Act........ The Telecommunications Act of 1996.
Telecommunications Service
Providers................... Our customer base which includes IXCs, CLECs,
ISPs, ILECs, cellular operators and resellers.
TELRIC (Total Element Long Run
Incremental Cost)........... Under the FCC Rules, implementing the
Telecommunications Act, the forward-looking,
cost-based methodology pursuant to which prices
for interconnection with and unbundled access
to local telephone networks is to be
determined.
Time Division Multiplexing.... An electronic process that combines multiple
communications channels onto a single,
higher-speed channel by interleaving portions
of each in a consistent manner over time.
UNEs.......................... An unbundled network element; an individual
facility, piece of equipment or feature or
functionality of such facility or equipment
used in the provision of a telecommunications
service, that a existing local telephone
company is required to
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provide to requesting telecommunications
companies at incremental cost based rates.
Universal Service............. The goal of providing telephone service to
every household in the U.S. with at least one
access line for basic telephone service, funded
by a surcharge on prime lines.
VPOP (Virtual Point of
Presence)..................... Our VPOP service is comprised of a bundle of
services which combines our wholesale transport
services and our local access services.
Year 2000..................... The potential computer system and software
application problem posed by the improper
recognition of the year 2000 or the inability
to process data that includes that date.
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<PAGE> 193
[Pathnet Logo]
PATHNET TELECOMMUNICATIONS, INC.
SENIOR GUARANTEES OF PATHNET, INC.
12 1/4% SENIOR NOTES DUE 2008
------------------------
PROSPECTUS (SUBJECT TO COMPLETION)
------------------------
, 1999
THROUGH AND INCLUDING , 1999 (THE 40TH DAY AFTER THE DATE OF
THIS PROSPECTUS), THE SOLICITATION AGENT AND ANY OTHERS EFFECTING TRANSACTIONS
IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE SOLICITATION
AGENT'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. THIS IS IN ADDITION TO A
SOLICITATION AGENT'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO AN UNSOLD ALLOTMENT OR SUBSCRIPTION.
<PAGE> 194
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable in connection
with the offering of the shares being registered hereby, other than underwriting
discounts and commissions. All the amounts shown are estimates, except the
Securities and Exchange Commission registration fee and Blue Sky fees and
expenses. We will bear all of these expenses*:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $60,326
Blue Sky fees and expenses.................................. $ 1,300
Accounting fees and expenses................................ **
Legal fees and expenses..................................... **
Printing and engraving fees................................. **
Solicitation Agent fees and expenses........................ **
Information Agent fees and expenses......................... **
Miscellaneous............................................... **
Trustee fees and expenses...................................
-------
Total.................................................. $ **
=======
</TABLE>
- ---------------
** To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
For a description of provisions under our charter documents and other
agreements and under Delaware law addressing indemnification of our directors
and officers, please refer to "MANAGEMENT -- Limitation of Liability and
Indemnification" in the prospectus.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Pathnet Telecom was incorporated on November 1, 1999. Before the execution
of the contribution agreements implementing the Contribution and Reorganization
Transaction, there were no sales of our unregistered securities. In connection
with the execution of the contribution agreements implementing the Contribution
and Reorganization Transaction, we agreed to issue an aggregate of 26,105,953
shares of our preferred stock to BNSF, CSX, Colonial and the existing holders of
Pathnet preferred stock, and 2,977,593 shares of our common stock to the
existing holders of Pathnet common stock. The shares of preferred stock do not
include any additional shares of Series E Convertible Preferred Stock that may
be issued under the Colonial option agreement. Following the initial closing and
receipt of the $25 million cash payment from Colonial upon the completion of the
Chicago-Aurora (a suburb of Denver), Colorado fiber build, we will issue
additional shares of our Series E Convertible Preferred Stock to Colonial under
the Colonial contribution agreement. At that time an aggregate of 27,245,868
shares of our preferred stock will be issued. These shares of stock will be
issued in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act and Regulation D thereunder. The issue of shares
pursuant to the contribution agreements is subject to no conditions within the
control of the acquiring parties, and the registrant takes the position that
transactions are completed within the meaning of Rule 152 under the Securities
Act. Please refer to "DESCRIPTION OF CAPITAL STOCK" and "DESCRIPTION OF THE
CONTRIBUTION AND REORGANIZATION TRANSACTION" in the
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<PAGE> 195
prospectus for more information on the issuance of shares in the Contribution
and Reorganization Transaction.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
NO. NAME OF AGREEMENT
--- -----------------
<C> <S>
3.1(1) Certificate of Incorporation of Pathnet Telecommunications,
Inc.
3.2(1) Bylaws of Pathnet Telecommunications, Inc.
4.1(1) Form of Stockholders Agreement, by and among Pathnet
Telecommunications, Inc. and certain stockholders of Pathnet
Telecommunications, Inc.
4.2+ Indenture, dated as of April 8, 1998, between Pathnet, Inc.
and The Bank of New York, Inc. as Trustee
4.3* Supplemental Indenture
4.4+ Form of Note
4.5+ Pledge Agreement, dated as of April 8, 1998, among Pathnet,
Inc., The Bank of New York as Trustee and The Bank of New
York as the Securities Intermediary
4.6* Certificate for the Restricted Guarantee (comprised of
Restricted Notes and Restricted Warrants)
5.1* Opinion of Covington & Burling, regarding legality of
securities
8.1* Opinion of Covington & Burling, regarding tax matters
10.1(1)(2) Pathnet Telecommunications, Inc. 1995 Stock Option Plan, as
amended (as adopted by Pathnet Telecommunications, Inc.)
10.2(1)(2) Pathnet Telecommunications, Inc. 1997 Stock Incentive Plan,
as amended by Amendment No. 1 to 1997 Plan dated March 24,
1998 (as adopted by Pathnet Telecommunications, Inc.)
10.3+++++ Contribution Agreement, dated November 4, 1999, by and among
Pathnet Telecommunications, Inc., Pathnet, Inc. and The
Burlington Northern Santa Fe Railway Company
10.4(1)(3) Form of Optic Access Agreement, by and between Pathnet
Telecommunications, Inc. and The Burlington Northern Santa
Fe Railway Company
10.5(1)(3) Form of Optic Lease Agreement, by and between Pathnet
Telecommunications, Inc. and The Burlington Northern Santa
Fe Railway Company
10.6+++++ Contribution Agreement, dated November 4, 1999, by and among
Pathnet Telecommunications, Inc., Pathnet, Inc. and Colonial
Pipeline Company
10.7(1)(3) Form of Master Right of Way Lease Agreement, by and between
Pathnet Telecommunications, Inc. and Colonial Pipeline
Company
10.8(1)(3) Form of Fiber Optic Access and Purchase Agreement, by and
between Pathnet Telecommunications, Inc. and Colonial
Pipeline Company
10.9(1) Form of Option Agreement, by and between Pathnet
Telecommunications, Inc. and Colonial Pipeline Company
10.10+++++ Contribution Agreement, dated November 4, 1999, by and among
Pathnet Telecommunications, Inc., Pathnet, Inc. and CSX
Transportation, Inc.
</TABLE>
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<PAGE> 196
<TABLE>
<CAPTION>
NO. NAME OF AGREEMENT
--- -----------------
<C> <S>
10.11(1)(3) Form of Fiber Optic License Agreement, by and between
Pathnet Telecommunications, Inc. and CSX Transportation,
Inc.
10.12(1)(3) Form of Right of Way Operating Agreement, by and between
Pathnet Telecommunications, Inc. and CSX Transportation,
Inc.
10.13+++++ Contribution Agreement, dated November 4, 1999, by and among
Pathnet Telecommunications, Inc., Pathnet, Inc. and The
Preferred Stockholders of Pathnet, Inc.
10.14+++++ Contribution Agreement, dated November 4, 1999, by and among
Pathnet Telecommunications, Inc., Pathnet, Inc. and Common
Stockholders of Pathnet, Inc.
10.15+++++ Contribution Agreement, dated November 4, 1999, by and among
Pathnet Telecommunications, Inc., Pathnet, Inc. and David
Schaeffer
10.16+ Warrant Agreement, dated as of April 8, 1998, between
Pathnet, Inc. and The Bank of New York, as warrant agent
10.17+ Warrant Registration Rights Agreement, dated as of April 8,
1998, among Pathnet, Inc., Spectrum Equity Investors, L.P.,
New Enterprise Associates VI, Limited Partnership, Onset
Enterprise Associates II, L.P., FBR Technology Venture
Partners, L.P., Toronto Dominion Capital (U.S.A.) Inc.,
Grotech Partners IV, L.P., Richard A. Jalkut, David
Schaeffer and the Initial Purchasers
10.18+ Lease Agreement, dated August 9, 1997, by and between
Pathnet, Inc. and 6715 Kenilworth Avenue General Partnership
relating to Pathnet Inc.'s offices in Georgetown, including
Amendment to Lease Agreement dated March 5, 1998, and Second
Amendment to Lease dated June 1, 1998
10.19+++ Amendment No. 3 to Lease Agreement, dated September 1, 1998,
by and between Pathnet, Inc. and 6715 Kenilworth Avenue
General Partnership
10.20+ Notes Registration Rights Agreement, dated April 8, 1998, by
and among Pathnet, Inc. and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Bear Stearns &
Co. Inc., TD Securities (USA) Inc. and Salomon Brothers
10.21+(2) Employment Agreement, dated August 4, 1997, by and between
Pathnet, Inc. and Richard A. Jalkut, as amended by Amendment
to Employment Agreement, dated April 6, 1998
10.22++++++(2) Letter Agreement, dated April 7, 1999, between Pathnet, Inc.
and Robert Rouse, relating to Mr. Rouse's employment with
Pathnet, Inc.
10.23+(2) Non-Disclosure, Assignment of Inventions and Non Competition
Agreement, dated February 2, 1998, by and between Pathnet,
Inc. and Kevin Bennis.
10.24* Assignment and Acceptance, by and between Pathnet, Inc. and
Pathnet Telecommunications, Inc.
10.25+(2) Non-Qualified Stock Option Agreement, dated August 4, 1997,
by and between Pathnet, Inc. and Richard A. Jalkut
10.26+(2) Non-Qualified Stock Option Agreement, dated October 31,
1997, by and between Pathnet, Inc. and David Schaeffer
10.27 [Intentionally Omitted]
</TABLE>
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<PAGE> 197
<TABLE>
<CAPTION>
NO. NAME OF AGREEMENT
--- -----------------
<C> <S>
Alliance Program Agreements:
10.28(1)(3) IXC Master Services Agreement, dated June 17, 1999, by and
between IXC Communications Services, Inc. and Pathnet, Inc.,
as amended by Amendment No. 1 dated August 26, 1999 and
Amendment No. 2, dated October 13, 1999
10.29(1)(3) Capacity Agreement, dated August 10, 1999, between Frontier
Communications of the West, Inc. and Pathnet, Inc.
Collocation and Interconnection Agreements:
10.30(1) Collocation Agreement, dated July 29, 1999, by and between
BellSouth Telecommunications, Inc. and Pathnet, Inc.
10.31(1) Interim Collocation Agreement, dated August 12, 1999,
between U S West Communications, Inc. and Pathnet, Inc.
Equipment Supply Contracts:
10.32+ Master Agreement, dated August 8, 1997, between Pathnet,
Inc. and NEC America, Inc. as amended by Amendment No. 1 to
Master Agreement, dated November 9, 1997, Amendment No. 2 to
Master Agreement, dated April 2, 1998, Amendment No. 3 to
Master Agreement, dated May 4, 1998, and Amendment No. 4 to
Master Agreement, dated July 10, 1998
10.33+++ Amendment No. 5 to Master Agreement, dated November 20,
1998, by and between Pathnet, Inc. and NEC America, Inc.
10.34+ Purchase Agreement, dated July 1, 1995, between Andrew
Corporation and Path Tel, Inc., as amended by Amendment One,
dated September 16, 1996 and Amendment Two, dated July 1,
1997
10.35 [Intentionally Omitted]
10.36+++++ Agreement, dated March 31, 1999, between Pacific Fiber Link,
LLC and Pathnet, Inc.
10.37+++++ Marketing Agreement, dated March 31, 1999, between Pacific
Fiber Link, LLC and Pathnet, Inc.
10.38+++++ Dark Fiber Network Agreement, dated August 5, 1999, by and
among Pathnet, Inc., Tri-State Generation and Transmission
Association, Inc., Empire Electric Association, Inc., La
Plata Electric Association, Inc., Delta-Montrose Electric
Association, Inc. and San Miguel Power Association, Inc.
10.39(1) Form of Letter agreement, dated November 4, 1999, by and
among Pathnet, Inc., David Schaeffer, Spectrum Equity
Investors, L.P., Spectrum Equity Investors II, L.P., New
Enterprise Associates VI, Limited Partnership and Grotech
Partners IV, L.P.
10.40(1) Licence of Marks, dated November 10, 1999, by and between
Pathnet, Inc. and Pathnet Telecommunications, Inc.
12(1) Statement re: Computation of Ratios
21* List of Subsidiaries of Pathnet Telecommunications, Inc.
23.1(1) Consent of PricewaterhouseCoopers LLP
23.2(1) Consent of Covington & Burling
24(1) Power of Attorney (included on signature page)
</TABLE>
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<PAGE> 198
<TABLE>
<CAPTION>
NO. NAME OF AGREEMENT
--- -----------------
<C> <S>
25* Statement of the eligibility and qualification of the Bank
of New York as Trustee under the Indenture relating to
Pathnet, Inc.'s 12 1/4% Senior Notes due 2008 on Form T-1
27(1) Financial Data Schedule
99.1(1) Consent of the Yankee Group
99.2* Consent Solicitation Documentation
</TABLE>
- ---------------
* To be filed by amendment.
+ Incorporated by reference to the corresponding exhibit to Pathnet,
Inc.'s Registration Statement on Form S-1 (Registration No. 333-52247)
filed by Pathnet, Inc. with the Securities and Exchange Commission (the
"Commission") on May 8, 1998, as amended by Amendment No. 1 to such
Registration Statement filed with the Commission on July 16, 1998, and
as further amended by Amendment No. 2 to such Registration Statement
filed with the Commission on July 27, 1998, and as further amended by
Amendment No. 3 to such Registration Statement filed with the
Commission on August 10, 1998.
++ Incorporated by reference to Pathnet Inc.'s Form 10-K (File No.
000-24745) filed by Pathnet, Inc. with the Commission on March 18,
1999.
+++ Incorporated by reference to Pathnet Inc.'s Form 10-Q (File No.
000-24745) filed by Pathnet, Inc. with the Commission on May 17, 1999.
++++ Incorporated by reference to Pathnet Inc.'s Form 10-Q (File No.
000-24745) filed by Pathnet, Inc. with the Commission on August 9, 1999.
+++++ Incorporated by reference to Pathnet, Inc.'s Form 10-Q (File No.
000-24745) filed by Pathnet, Inc. with the Commission on November 15,
1999.
++++++ Incorporated by reference to Pathnet Inc.'s Form 8-K (File No.
000-24745) filed by Pathnet, Inc. with the Commission on April 29, 1999.
(1) Filed herewith.
(2) Constitutes management contract or compensatory arrangement.
(3) Certain portions of this exhibit have been omitted based on a request
for confidential treatment filed separately with the Commission.
(b) Financial Statement Schedule
Schedule II -- Valuation and qualifying accounts and report of
PricewaterhouseCoopers LLP thereon.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required, are
inapplicable or have been disclosed in the notes to other financial statements
and therefore have been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant under the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of
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<PAGE> 199
the registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
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<PAGE> 200
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Washington, District of
Columbia on the twenty-second day of November, 1999.
PATHNET TELECOMMUNICATIONS, INC.
By: /s/ MICHAEL A. LUBIN
--------------------------------------
Michael A. Lubin
Vice President, General Counsel and
Secretary
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<PAGE> 201
POWER OF ATTORNEY
The undersigned individuals, in their capacity as a director or officer, or
both, of Pathnet Telecommunications, Inc., a Delaware corporation ("Pathnet
Telecom"), hereby constitute and appoint each of Michael A. Lubin, James M.
Craig, and William R. Smedberg, V their true and lawful attorneys-in-fact and
each of them (with full power to act without the others) their true and lawful
attorneys-in-fact for them and in their name and in their capacity as a director
or officer, or both, of Pathnet Telecom, as hereinafter listed below their
signature, to sign a registration statement on Form S-1 for the registration of
the Guarantees of Pathnet Telecom (including post-effective amendments) to said
registration statement, and all additional registration statements pursuant to
Rule 462(b) relating to the registration statement on Form S-1, and to file the
same, with all exhibits thereto, and any and all amendments to said registration
statement and any and all other instruments necessary or incidental in
connection therewith, with the Securities and Exchange Commission; and
Each of said attorneys-in-fact shall have full power of substitution and
resubstitution, and said attorneys-in-fact or any of them or any substitute
appointed by any of them hereunder shall have full power and authority to do and
perform in the name and on behalf of each of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully to all intents and purposes as each of the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys-in-fact or any of them or of any such substitute pursuant
hereto.
IN WITNESS WHEREOF, the undersigned have executed this instrument, all as
of the twenty-second day of November, 1999.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD A. JALKUT President, Chief November 22, 1999
- --------------------------------------------------- Executive Officer
Richard A. Jalkut (Principal Executive
Officer) and Director
/s/ JAMES M. CRAIG Executive Vice President November 22, 1999
- --------------------------------------------------- Chief Financial Officer
James M. Craig and Treasurer (Principal
Financial Officer and
Controller)
/s/ PETER J. BARRIS Director November 22, 1999
- ---------------------------------------------------
Peter J. Barris
/s/ KEVIN J. MARONI Director November 22, 1999
- ---------------------------------------------------
Kevin J. Maroni
/s/ PATRICK J. KERINS Director November 22, 1999
- ---------------------------------------------------
Patrick J. Kerins
/s/ STEPHEN A. REINSTADTLER Director November 22, 1999
- ---------------------------------------------------
Stephen A. Reinstadtler
</TABLE>
II-8
<PAGE> 1
EXHIBIT 3.1
Certificate Of Incorporation
Of
PATHNET TELECOMMUNICATIONS, INC.
1. Name. The name of the corporation is PATHNET TELECOMMUNICATIONS,
INC. (the "Corporation").
2. Address; Registered Office and Agent. The registered office of
the Corporation in the State of Delaware is located at Corporation Trust Center,
1209 Orange Street in the City of Wilmington, County of New Castle. The name and
address of the Corporation's registered agent is The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801.
3. Purpose. The purpose of the Corporation is to engage in, carry on
and conduct any lawful act or activity for which corporations may be organized
under the Delaware General Corporation Law (the "General Corporation Law").
4. Number of Shares. The number of shares of stock that the
Corporation shall have authority to issue is 99,620,860, divided as follows:
10,000,000 shares of Preferred Stock, par value of $0.01 per share (the
"Preferred Stock"); 2,899,999 shares of Series A Convertible Preferred Stock,
par value of $0.01 per share (the "Series A Preferred Stock"); 4,788,030 shares
of Series B Convertible Preferred Stock, par value of $0.01 per share (the
"Series B Preferred Stock"); 8,176,686 shares of Series C Convertible Preferred
Stock, par value of $0.01 per share (the "Series C Preferred Stock"); 9,250,000
shares of Series D Convertible Preferred Stock, par value of $0.01 per share
(the "Series D Preferred Stock"); 4,506,145 shares of Series E Convertible
Preferred Stock, par value of $0.01 per share (the "Series E Preferred Stock,"
and together with the Series A Preferred Stock, the Series B Preferred Stock,
the Series C Preferred Stock and the Series D Preferred Stock, the "Series
Preferred Stock"); and 60,000,000 shares of Common Stock, par value of $0.01 per
share (the "Common Stock").
5. Designation of Classes; Relative Rights, Etc. The designation,
relative rights, preferences and limitations of the shares of each class are as
follows:
5.1 Preferred Stock. The shares of Preferred Stock may be issued
from time to time in one or more series of any number of shares, provided that
the aggregate number of shares issued and not cancelled of any and all such
series shall not exceed the total number of shares of Preferred Stock
hereinabove authorized, and with such powers, preferences and rights and
qualifications, limitations or restrictions thereof, and such distinctive serial
designations, all as shall hereafter be stated and expressed in the resolution
or resolutions providing for the issue of such shares of Preferred Stock from
time to time adopted by the Board of Directors of the Corporation (the "Board of
Directors") pursuant to authority so to do, and such authority is hereby vested
in the Board of Directors. Each series of shares of Preferred Stock (a) may have
such voting rights or powers, full or limited, or may be without voting rights
or powers; (b) may be subject to redemption at such time or times and at such
prices; (c) may be entitled to receive dividends (which may be cumulative or
non-cumulative) at such rate or rates, on such conditions and at such times, and
payable in preference to, or in such relation to, the dividends payable on
<PAGE> 2
2
any other class or classes or series of stock; (d) may have such rights upon
the voluntary or involuntary liquidation, winding up or dissolution of, or upon
any distribution of the assets of, the Corporation; (e) may be made convertible
into or exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the Corporation at
such price or prices or at such rates of exchange and with such adjustments;
(f) may be entitled to the benefit of a sinking fund to be applied to the
purchase or redemption of shares of such series in such amount or amounts; (g)
may be entitled to the benefit and/or burdens of conditions and restrictions
upon the creation of indebtedness of the Corporation or any subsidiary, upon
the issue of any additional shares (including additional shares of such series
or of any other series) and upon the payment of dividends or the making of
other distributions on, and the purchase, redemption or other acquisition by
the Corporation or any subsidiary of, any outstanding shares of the
Corporation; and (h) may have such other relative, participating, optional or
other special rights, qualifications, limitations or restrictions thereof; all
as shall be stated in said resolution or resolutions providing for the issue of
such shares of Preferred Stock and as may be permitted by the General
Corporation Law. Any of the voting powers, designations, preferences, rights
and qualifications, limitations or restrictions of any such series of Preferred
Stock may be made dependent upon facts ascertainable outside of the resolution
or resolutions providing for the issue of such Preferred Stock adopted by the
Board of Directors pursuant to the authority vested in it by this Section 5.1,
provided that the manner in which such facts shall operate upon the voting
powers, designations, preferences, rights and qualifications, limitations or
restrictions of such series of Preferred Stock is clearly and expressly set
forth in the resolution or resolutions providing for the issue of such
Preferred Stock. The term "facts" as used in the preceding sentence shall have
the meaning given to it in Section 151(a) of the General Corporation Law.
Shares of Preferred Stock of any series that have been redeemed (whether
through the operation of a sinking fund or otherwise) or that if convertible or
exchangeable, have been converted into or exchanged for shares of any other
class or classes shall have the status of authorized and unissued shares of
Preferred Stock undesignated as to series and may be reissued as a part of the
series of which they were originally a part or as part of a new series of
shares of Preferred Stock to be created by resolution or resolutions of the
Board of Directors or as part of any other series of shares of Preferred Stock,
all subject to the conditions or restrictions on issuance set forth in the
resolution or resolutions adopted by the Board of Directors providing for the
issue of any series of shares of Preferred Stock. The Board of Directors is
hereby expressly authorized to increase or decrease (but not below the number
of shares of such series then outstanding) the number of shares of any series
of Preferred Stock (but, for the avoidance of doubt, such authority shall not
extend to any series of the Series Preferred Stock). In the event of any such
decrease in the number of shares of any series of Preferred Stock, the shares
included in such decrease shall have the status of authorized and unissued
shares of Preferred Stock undesignated as to series and may be reissued as a
part of the series of which they were originally a part or as part of a new
series of shares of Preferred Stock to be created by resolution or resolutions
of the Board of Directors or as part of any other series of shares of Preferred
Stock, all subject to the conditions or restrictions on issuance set forth in
the resolution or resolutions adopted by the Board of Directors providing for
the issue of any series of shares of Preferred Stock.
5.2 Common Stock. Subject to the provisions of any applicable
law or of the Bylaws of the Corporation, as from time to time amended (the
"Bylaws"), with respect to the closing of the transfer books or the fixing of a
record date for the determination of
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stockholders entitled to vote and except as otherwise provided herein with
respect to any shares of Series Preferred Stock, by law or by the resolution or
resolutions providing for the issue of any series of shares of Preferred Stock,
the holders of outstanding shares of Common Stock shall exclusively possess
voting power for the election of directors and for all other purposes, each
holder of record of shares of Common Stock being entitled to one vote for each
share of Common Stock standing in his or her name on the books of the
Corporation. Except as otherwise provided herein with respect to any shares of
Series Preferred Stock or by the resolution or resolutions providing for the
issue of any series of shares of Preferred Stock, the holders of shares of
Common Stock shall be entitled, to the exclusion of the holders of Preferred
Stock of any and all series, to receive such dividends as from time to time may
be declared by the Board of Directors. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
after payment shall have been made to the holders of shares of any Series
Preferred Stock and any Preferred Stock of the full amount to which they shall
be entitled pursuant to this Certificate of Incorporation or the resolution or
resolutions providing for the issue of any series of shares of Preferred Stock,
the holders of shares of Common Stock shall be entitled, to the exclusion of
the holders of shares of Series Preferred Stock and Preferred Stock of any and
all series, to share, ratably according to the number of shares of Common Stock
held by them, in all remaining assets of the Corporation available for
distribution to its stockholders.
5.3 Series Preferred Stock.
5.3.1 Shares.
(a) Authorized Shares. The Corporation shall have
authority to issue Twenty Nine Million Six Hundred Twenty Thousand Eight Hundred
Sixty (29,620,860) shares of Series Preferred Stock, of which Two Million Eight
Hundred Ninety Nine Thousand Nine Hundred Ninety Nine (2,899,999) shares shall
be designated the Series A Preferred Stock, Four Million Seven Hundred
Eighty-Eight Thousand Thirty (4,788,030) shares shall be designated the Series B
Preferred Stock, Eight Million One Hundred Seventy Six Thousand Six Hundred
Eighty Six (8,176,686) shares shall be designated the Series C Preferred Stock,
Nine Million Two Hundred Fifty Thousand (9,250,000) shares shall be designated
the Series D Preferred Stock and Four Million Five Hundred Six Thousand One
Hundred Forty Five (4,506,145) shares shall be designated the Series E Preferred
Stock.
(b) Dividends. The holders of the Series Preferred
Stock shall be entitled to receive, out of funds legally available therefor,
dividends (other than dividends paid in additional shares of Common Stock) in
preference to and at the same rate as dividends are paid with respect to the
Common Stock (treating each share of Series Preferred Stock as being equal to
the number of shares of Common Stock into which each such share of Series
Preferred Stock could be converted pursuant to the provisions of Section 5.3.4
hereof, with such number determined as of the record date for determination of
holders of Common Stock entitled to receive such dividend). Such dividends shall
be payable only when, as, and if declared by the Board of Directors. No
dividends (other than those payable in additional shares of Common Stock) shall
be paid on or declared and set apart for the shares of any Series Preferred
Stock, any series of Preferred Stock, or the Common Stock, unless at the same
time a dividend is paid with respect to all outstanding shares of Series
Preferred Stock in an amount for
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each such share of Series Preferred Stock equal to or greater than the
aggregate amount of such dividends for all shares of Common Stock into which
each such share of Series Preferred Stock could then be converted. In the
event that the Corporation shall declare a distribution (other than in
furtherance of a liquidation as provided in Article 5.3.2 hereof or a
redemption as provided in Article 5.3.5 hereof) payable in securities of other
persons, evidences of indebtedness issued by the Corporation or other persons,
assets (excluding cash dividends) or options or rights to purchase any such
securities or evidences of indebtedness, then, in each such case the holders of
the Series Preferred Stock shall be entitled to a proportionate share of any
such distribution as though the holders of the Series Preferred Stock were the
holders of the number of shares of Common Stock of the Corporation into which
their respective shares of Series Preferred Stock are convertible as of the
record date fixed for the determination of the holders of Common Stock entitled
to receive such distribution.
5.3.2 Liquidation, Dissolution or Winding Up.
(a) Distributions to Holders of Series Preferred
Stock. In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the Series E Preferred Stock
shall rank prior to the Series A Preferred Stock, the Series B Preferred Stock,
the Series C Preferred Stock and the Series D Preferred Stock in respect of the
original purchase price paid by the holders of the Series E Preferred Stock for
each such share of Series E Preferred Stock held (appropriately adjusted for
stock splits, stock dividends, and the like), and thereafter the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and
the Series D Preferred Stock shall rank on a parity with each other and shall
rank prior to the Common Stock or any class stock ranking junior to the Series
Preferred Stock. Upon such liquidation:
(i) each share of Series E Preferred Stock
outstanding shall be entitled to be paid, out of the assets of the
Corporation available for distribution to stockholders and before any
payment shall be made to the holders of any other Series Preferred
Stock, series of Preferred Stock, any class of Common Stock, or any
other stock ranking on liquidation junior to the Series E Preferred
Stock, an amount in cash equal to the original purchase price paid by
the initial holders of the Series E Preferred Stock for each such
share of Series E Preferred Stock held (appropriately adjusted for
stock splits, stock dividends, and the like) plus any declared but
unpaid dividends thereon;
(ii) each share of Series D Preferred Stock
outstanding shall be entitled to be paid, out of the assets of the
Corporation available for distribution to stockholders and before any
payment shall be made to the holders of any class of Common Stock or
any other stock ranking on liquidation junior to the Series D
Preferred Stock, an amount in cash equal to $21.97 per share for each
such share of Series D Preferred Stock held (appropriately adjusted
for stock splits, stock dividends, and the like) plus any declared but
unpaid dividends thereon; and
(iii) each other share of Series Preferred Stock
outstanding shall be entitled to be paid, out of the assets of the
Corporation
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available for distribution to stockholders and before any payment
shall be made to the holders of any class of Common Stock or of any
stock ranking on liquidation junior to the Series Preferred Stock, an
amount in cash equal to the original purchase price paid by the
initial holder for each such other share of Series Preferred Stock
held (appropriately adjusted for stock splits, stock dividends and the
like) plus any declared but unpaid dividends thereon.
If upon any liquidation, dissolution or winding up of the Corporation, the
assets to be distributed to the holders of the Series Preferred Stock hereunder
shall be insufficient to permit payment to such stockholders of the full
preferential amounts aforesaid, then all of the assets of the Corporation
available for distribution to such holders under such sentence shall be
distributed among the holders of Series Preferred Stock, first to the holders
of the Series E Preferred Stock to the extent of the original purchase price
paid by the initial holders of the Series E Preferred Stock for each such share
of Series E Preferred Stock held (appropriately adjusted for stock splits,
stock dividends, and the like) plus any declared but unpaid dividends thereon,
and second pro rata in accordance with the total amount of preference which
would have been payable to such holders of other shares of Series Preferred
Stock if funds had been available to pay the full preference under the previous
sentence. After payment of the preferential amounts described in clauses (i)
through (iii) above shall have been made in full to such holders of Series
Preferred Stock, or funds necessary for such payment shall have been set aside
by the Corporation in trust for the account of such holders so as to be
available for such payment, the holders of the outstanding shares of Common
Stock and any class of stock ranking junior to the Series Preferred Stock shall
share ratably in the distribution of the remaining assets and funds of the
Corporation available for distribution to shareholders.
(b) Extraordinary Transactions. In the case of (i) a
consolidation or merger of the Corporation (other than a consolidation or merger
upon consummation of which the holders of voting securities of the Corporation
immediately prior to such transaction continue to own directly or indirectly not
less than a majority of the voting power of the surviving corporation) or a sale
of all or substantially all of the assets of the Corporation or other similar
transaction (each an "Extraordinary Transaction") and (ii) either receipt by the
Corporation for payment to the holders of Series Preferred Stock of (A)
consideration less than the equivalent of $0.34 per share (appropriately
adjusted for stock splits, stock dividends and the like) of Series A Preferred
Stock plus any declared but unpaid dividends, (B) consideration less than the
equivalent of $1.13 per share (appropriately adjusted for stock splits, stock
dividends and the like) of Series B Preferred Stock plus any declared but unpaid
dividends, (C) consideration less than the equivalent of $3.67 per share
(appropriately adjusted for stock splits, stock dividends and the like) of
Series C Preferred Stock plus any declared but unpaid dividends, (D)
consideration less than the equivalent of $21.97 per share (appropriately
adjusted for stock splits, stock dividends and the like) of Series D Preferred
Stock plus any declared but unpaid dividends, or (E) consideration less than the
equivalent of $21.97 per share (appropriately adjusted for stock splits, stock
dividends and the like) of Series E Preferred Stock plus any declared but unpaid
dividends, then in any such case, the Corporation shall, upon the election of
the holders of a majority of the then outstanding shares of each class of Series
Preferred Stock for which the conditions set forth in clauses (ii)(A) through
(ii)(E) shall have been met, in each case voting separately as a class, and with
respect only to those classes of Series Preferred Stock who are so affected and
who so elect, on the effective date of such
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Extraordinary Transaction, redeem all (but not less than all) of the outstanding
shares of such class of Series Preferred Stock at a price per share equal to the
applicable liquidation amount otherwise payable to such class in the event of a
liquidation pursuant to Section 5.3.2(a) above, such amount to be payable in
cash or, at the election of holders of a majority of the then outstanding shares
of such class of Series Preferred Stock, in the same form of consideration as is
paid to the holders of Common Stock in such Extraordinary Transaction, and no
payment shall be made to the holders of any class of Common Stock or of any
other class of stock ranking on liquidation junior to such class of Series
Preferred Stock unless such amount is paid in full, or otherwise as agreed to by
holders of a majority of the then outstanding shares of such class of Series
Preferred Stock. Any remaining proceeds shall be allocated to the Corporation
and/or among the holders of the remaining securities of the Corporation as
otherwise set forth in the instruments relating to such transaction.
Notwithstanding the foregoing, each holder of Series Preferred Stock shall have
the right to elect the benefits of the provisions of Section 5.3.4(h) hereof in
lieu of receiving payment pursuant to the immediately preceding paragraph of
this Section 5.3.2(b). For purposes of this Section 5.3.2 and Section 5.3.6
hereof, a sale of substantially all of the assets of the Corporation shall mean
(x) the sale or other disposition of more than fifty percent (50%) of such
assets, as determined by reference to either (1) the book value or (2) the fair
market value, of such assets, or (y) any issuance of Common Stock by the
Corporation or transfer of Common Stock by the holders thereof to any person or
persons acting in concert or a group of affiliated persons, which issuance or
transfer results in such person or persons or group holding in the aggregate
more than fifty percent (50%) of the issued and outstanding Common Stock after
giving effect to such issuance or transfer.
(c) Non-Cash Distributions. In the event of a
liquidation, dissolution or winding up of the Corporation resulting in the
availability of assets other than cash for distribution to the holders of the
Series Preferred Stock, the holders of the Series Preferred Stock shall be
entitled to a distribution of cash and/or assets equal in value to the
liquidation preference and other distribution rights stated in Section 5.3.2(a)
and Section 5.3.2(b) hereof. In the event that such distribution to the holders
of the Series Preferred Stock shall include any assets other than cash, the
following provisions shall govern. The Board of Directors shall first determine
the value of such assets for such purpose, and shall notify all holders of
shares of Series Preferred Stock of such determination. The value of such assets
for purposes of the distribution under this Section 5.3.2(c) shall be the value
as determined by the Board of Directors in good faith and with due care, unless
the holders of a majority of the outstanding shares of Series Preferred Stock
shall object thereto in writing within 15 business days after the date of such
notice. In the event of such objection, the valuation of such assets for
purposes of such distribution shall be determined by an arbitrator selected by
the objecting stockholders and the Board of Directors, or in the event a single
arbitrator cannot be agreed upon within 10 business days after the written
objection sent by the objecting stockholders in accordance with the previous
sentence, the valuation of such assets shall be determined by arbitration in
which (i) the objecting stockholders shall name in their notice of objection one
arbitrator, (ii) the Board of Directors shall name a second arbitrator within 15
business days from the receipt of such notice, (iii) the two arbitrators thus
selected shall select a third arbitrator within 15 business days thereafter, and
(iv) the three arbitrators thus selected shall determine the valuation of such
assets within 15 business days thereafter for purposes of such distribution by
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majority vote. The costs of such arbitration shall be borne by the Corporation
or by the holders of the Series Preferred Stock (on a pro rata basis out of the
assets otherwise distributable to them) as follows: (i) if the valuation as
determined by the arbitrators is less than 105% of the valuation as determined
by the Board of Directors, the holders of the Series Preferred Stock shall pay
the costs of the arbitration, and (ii) otherwise, the Corporation shall bear
the costs of the arbitration.
5.3.3 Voting Rights.
(a) General. Except as otherwise expressly provided
herein or as required by law, the holder of each share of the Series Preferred
Stock shall be entitled to vote on any matters presented to the holders of the
Common Stock. Each share of Series Preferred Stock shall entitle the holder
thereof to such number of votes per share as shall equal the number of shares of
Common Stock into which such share of Series Preferred Stock is convertible in
accordance with the terms of Section 5.3.4 hereof at the record date for the
determination of stockholders entitled to vote on such matter or, if no record
date is established, at the date such vote is taken or any written consent of
stockholders is solicited, and shall have the voting rights, powers of consent
and/or dissent, and such other powers equal to the voting and other rights of
the Common Stock (except as otherwise expressly provided herein or as may be
required by law). Except as otherwise expressly provided herein (including,
without limitation, the provisions of Sections 5.3.6 and 5.3.7 hereof) or as
required by law, the holders of shares of Series Preferred Stock and the Common
Stock shall vote together as a single class on any matters presented to the
holders of the Common Stock, and the holders of the shares of Series Preferred
Stock shall be entitled to notice of any stockholders' meeting in accordance
with the Bylaws of the Corporation applicable to the holders of the Common
Stock.
(b) Special Voting Rights. The holders of the Series
Preferred Stock shall be entitled to the special voting rights set forth in
Sections 5.3.6 and 5.3.7 hereof.
5.3.4 Conversion. The holders of the Series Preferred Stock
shall have the following conversion rights:
(a) Right to Convert. Subject to and in compliance
with the provisions of this Section 5.3.4, all or any shares of the Series
Preferred Stock may, at any time or from time to time at the option of the
holder thereof, be converted into fully-paid and non-assessable shares of Common
Stock. The number of shares of Common Stock to which a holder of the Series
Preferred Stock shall be entitled upon conversion shall be the product obtained
by multiplying the Applicable Conversion Rate (determined as provided in Section
5.3.4(c)) by the number of shares of Series Preferred Stock being converted.
(b) Automatic Conversion.
(i) Each share of the Series Preferred Stock
outstanding shall automatically be converted into the number of shares of Common
Stock into which such shares are convertible upon application of the then
effective Applicable Conversion Rate (determined as provided in Section
5.3.4(c)) immediately upon the earliest to occur, as to
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each such Series, of the following events (each of such events being referred to
hereinafter as a "Liquidity Event"):
(A) the closing of an underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), or under such other applicable
securities regulations covering the offer and sale of capital stock of the
Corporation (other than a registration relating solely to Rule 145 under such
Act (or any successor thereto) or to an employee benefit plan of the
Corporation) (i) immediately prior to the consummation of which, the Corporation
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 offering) at greater than $600,000,000, (ii) in which the proceeds received
by the Corporation, net of underwriting discounts and commissions, exceed
$75,000,000, and (iii) in which the Corporation uses a nationally recognized
underwriter approved by holders of a majority in interest of the Series
Preferred Stock, voting together as a single class; or
(B) the date on which (i) the Common
Stock or any successor security is listed for trading on a national securities
exchange registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or traded in an over-the-counter market and quoted in an
automated quotation system of the National Association of Securities Dealers,
Inc., and (ii) (x) the proceeds received by the Company from underwritten public
offering(s) of Common Stock, net of underwriting discounts and commissions, is
equal to or exceeds $75,000,000 and (y) the value of the outstanding Common
Stock of the Company as based on the average per-share trading price of the
shares of Common Stock or such successor security on such exchange or
over-the-counter market for the ten-day period immediately prior to the date of
measurement is greater than $600,000,000.
(ii) Upon the occurrence of any Liquidity Event,
the outstanding shares of Series Preferred Stock shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided, however, that the Corporation shall
not be obligated to issue certificates evidencing such shares of the Common
Stock unless certificates evidencing such shares of the Series Preferred Stock
being converted are either delivered to the Corporation or any transfer agent,
as hereinafter provided, or the holder notifies the Corporation, or any transfer
agent, as hereinafter provided, that such certificates have been lost, stolen or
destroyed and executes an agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection therewith.
Upon the occurrence of the automatic conversion of all of the outstanding Series
Preferred Stock, the holders of the Series Preferred Stock shall surrender the
certificates representing such shares at the office of the Corporation or of any
transfer agent for the Common Stock. Thereupon, there shall be issued and
delivered to each such holder, promptly at such office and in his name as shown
on such surrendered certificate or certificates, a certificate or certificates
for the number of shares of Common Stock into which the shares of the Series
Preferred Stock surrendered were convertible on the date on which such automatic
conversion occurred and cash as provided in Section 5.3.4(k) below in respect of
any fraction of a share of Common Stock issuable upon such automatic conversion.
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With respect to any automatic conversion of the Series Preferred Stock pursuant
to a Liquidity Event, solely for purposes of determining the number of shares of
Common Stock into which such Series Preferred Stock is convertible, the
Liquidity Event shall be deemed to have closed immediately prior to the
conversion, such that in the event the shares issued and sold in connection with
the Liquidity Event are sold at a price less than the Applicable Conversion
Value in effect for the applicable Series Preferred Stock, the Applicable
Conversion Value shall be adjusted in accordance with Section 5.3.4(f) below to
reflect such issuance and sale.
(c) Applicable Conversion Rate. The conversion rate in
effect at any time for the applicable series of Series Preferred Stock (the
"Applicable Conversion Rate") shall be determined as follows: one share of
Series Preferred Stock shall convert into a number of shares of Common Stock
equal to the quotient obtained by dividing $0.34 in the case of Series A
Preferred Stock, $1.13 in the case of Series B Preferred Stock, $3.67 in the
case of Series C Preferred Stock, $21.97 in the case of Series D Preferred Stock
and $21.97 in the case of Series E Preferred Stock (such dollar amounts in each
case being referred to as the "Base Amount"), in each case by the Applicable
Conversion Value, calculated as hereinafter provided.
(d) Applicable Conversion Value. The Applicable
Conversion Value in effect initially, and until first adjusted in accordance
with Section 5.3.4(e) or Section 5.3.4(f) hereof, shall be $0.34 in the case of
Series A Preferred Stock, $1.13 in the case of Series B Preferred Stock, $3.67
in the case of Series C Preferred Stock, $21.97 in the case of Series D
Preferred Stock, and $21.97 in the case of Series E Preferred Stock.
(e) Adjustment for Common Stock Dividends,
Subdividends and Combinations of Common Stock, Etc. Upon the happening of any of
the following: (i) the declaration or payment, without consideration, of any
dividend on the Common Stock of the Corporation payable in Common Stock or any
right to acquire Common Stock for no consideration, (ii) the other issuance of
additional shares of Common Stock (other than the issue of any Excluded Shares)
for no consideration, (iii) the subdivision of outstanding shares of Common
Stock of any class into a greater number of shares of Common Stock (by stock
split, reclassification, or otherwise than by those events described in clauses
(i) and (ii) hereof), or (iv) the combination, by reclassification or otherwise,
of the outstanding shares of Common Stock of any class into a smaller number of
shares of Common Stock (each of (i), (ii), (iii) or (iv) an "Extraordinary
Common Stock Event"), the Applicable Conversion Value shall, simultaneously with
the happening of such Extraordinary Common Stock Event, be adjusted (and such
adjusted Applicable Conversion Value shall be determined to the nearest cent) by
dividing the then effective Applicable Conversion Value by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
(excluding treasury stock and Excluded Shares) immediately after such
Extraordinary Common Stock Event (treating as outstanding, for such purpose in
the event of the issue or payment as provided in clause (i) hereof of any rights
to acquire Common Stock of the Corporation for no consideration, the maximum
number of shares issuable upon the exercise of such right to acquire Common
Stock) and the denominator of which shall be the number of shares of Common
Stock outstanding (excluding treasury stock and Excluded Shares) immediately
prior to such Extraordinary Common Stock Event, and the quotient so obtained
shall thereafter be the Applicable Conversion Value. The
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Applicable Conversion Value, as so adjusted, shall be readjusted in the same
manner upon the happening of any successive Extraordinary Common Stock Event or
Events.
(f) Adjustments for Diluting Issues.
(i) Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. Except
as provided in Section 5.3.4(e) above or for the issue of Excluded Shares (as
defined below), if the Corporation shall at any time or from time to time while
there are any shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock outstanding issue or sell,
or be deemed to issue and sell any additional shares of Common Stock of any
class at a cash price per share less than the Applicable Conversion Value in
effect for each applicable series of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock or the Series D Preferred Stock
immediately prior to such issuance or sale, then in each such case (except as
otherwise specifically provided herein), such Applicable Conversion Value shall
be adjusted as of the opening of business on the date of any such issue or sale
to a price (calculated to the nearest cent) equal to the quotient obtained by
dividing (1) the Prior Applicable Conversion Value, by (2) the Volume Adjusted
Weighted Average Amount.
For purposes of this Section 5.3.4(f)(i):
the "Determination Date" shall be date of issue of any additional
shares of Common Stock to which the provisions of this Section
5.3.4(f)(i) apply;
the "Determination Date Outstanding Amount" shall be the fully diluted
number of shares of Common Stock outstanding on the Determination
Date, assuming (x) the exercise immediately prior to such date of all
options, warrants and other rights to purchase of Common Stock
outstanding on that date and (y) the full conversion or exchange
immediately prior to such date of all shares of stock of the
Corporation convertible into or exchangeable for shares of Common
Stock (but, for the avoidance of doubt, excluding from such amount any
additional shares of Common Stock issuable with respect to such
conversion or exchange by reason of the adjustment of the Applicable
Conversion Value resulting from the issuance of shares causing the
adjustment under this clause 5.3.4(f)(i));
"Excluded Shares" shall mean (i) any shares (A) issued or delivered
from treasury or (B) in connection with stock option, restricted
stock, or similar stock incentive plans (and shares of Common Stock
issued upon the exercise thereof) granted by the Corporation, in each
case, with the approval of the Board of Directors or a Compensation
Committee of outside directors with respect to each such grant, to
directors, officers, employees, agents or consultants of the
Corporation (as adjusted for stock splits, stock dividends and the
like); (ii) shares issuable upon the exercise of warrants to purchase
shares of Common Stock (and any shares of Common Stock issued upon the
exercise thereof) issued by the Corporation in connection with
Pathnet, Inc.'s offering of units, each such unit consisting of $1,000
principal amount at maturity of Senior Notes due 2008 (the "Senior
Notes") of Pathnet, Inc. (which Senior Notes are guaranteed by the
Corporation) and warrants to purchase shares of Common Stock of
Pathnet, Inc.; (iii) shares issuable upon the exercise of warrants
approved by the Board of Directors to purchase shares of Common Stock
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(and any shares of Common Stock issued upon the exercise thereof)
issued by the Corporation in connection with the credit facilities
among the Corporation and/or its subsidiaries, its equipment vendors
and certain other senior lenders; and (iv) shares of Common Stock
issued upon the conversion of any of the Series Preferred Stock;
the "New Issue Amount" shall mean the number of shares of Common Stock
being issued and requiring an adjustment to the Applicable Conversion
Value pursuant to the terms of this Section 5.3.4(f);
the "Prior Applicable Conversion Value" shall mean the Applicable
Conversion Value, as adjusted in accordance with the provisions of
this Section 5.3.4(f) and Section 5.3.4(e) hereof, in effect
immediately prior to the events requiring an adjustment to the
Applicable Conversion Value pursuant to the terms of this Section
5.3.4(f);
the "Weighted Average Conversion Ratio" shall mean, in the case of any
of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock and the Series D Preferred Stock, the
quotient obtained by dividing (i) the Prior Applicable Conversion
Value applicable to such Series, by (ii) the Weighted Average Value;
the "Weighted Average Value" shall mean, in the case of any of the
Series A Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock and the Series D Preferred Stock, the product obtained
by multiplying (i) the Prior Applicable Conversion Value in respect of
such Series by a fraction:
(1) the numerator of which shall be (a) the number of shares of
Common Stock equal to the Determination Date Outstanding
Amount of Common Stock, plus (b) the number of shares of
Common Stock which the aggregate consideration, if any,
received by the Corporation (net of any commissions or
underwriting expenses incurred in connection with the
issuance thereof) for the additional shares of Common Stock
so issued would purchase at the Prior Applicable Conversion
Value, and
(2) the denominator of which shall be (a) the number of shares
of Common Stock equal to the Determination Date Outstanding
Amount of Common Stock, plus (b) the New Issue Amount; and
the "Volume Adjusted Weighted Average Amount" shall mean, in the case
of any of the Series A Preferred Stock, the Series B Preferred Stock,
the Series C Preferred Stock and the Series D Preferred Stock, an
amount equal to the sum of (i) 1.00, plus (ii) the product obtained by
multiplying (A) the amount, if any, by which the Weighted Average
Conversion Ratio exceeds 1.00, by (B) a fraction, (x) the numerator of
which is the Determination Date Outstanding Amount and (y) the
denominator of which is the New Issue Amount.
(ii) Series E Preferred Stock. Except as
provided in Section 5.3.4(e) above or for Excluded Shares, if the Corporation
shall at any time or from time to time while there are any shares of Series E
Preferred Stock outstanding, issue or sell, or be deemed to issue or sell, any
additional shares of Common Stock of any class for no
<PAGE> 12
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consideration or at a price per share less than the Applicable Conversion Value
in effect for the Series E Preferred Stock immediately prior to such issuance or
sale, then in each such case such Applicable Conversion Value shall be reduced
as of the opening of business on the date of any such issue or sale to such
lower price.
(iii) Warrants, Options and Rights to Purchase
Common Stock. For the purpose of this Section 5.3.4(f), the issuance of any
warrants, options or other subscription or purchase rights with respect to
shares of Common Stock of any class and the issuance of any securities
convertible into shares of Common Stock of any class (or the issuance of any
warrants, options or any rights with respect to such convertible securities)
shall be deemed an issuance at such time of such Common Stock if the Net
Consideration Per Share which may be received by the Corporation for such Common
Stock (as hereinafter determined) shall be less than the Applicable Conversion
Value at the time of such issuance and, except as hereinafter provided, an
adjustment in the Applicable Conversion Value shall be made upon each such
issuance to the extent required by (and in the manner provided in) paragraph (i)
or (ii) of this Section 5.3.4(f), as applicable, as if such Common Stock were
issued at such Net Consideration Per Share. No adjustment of the Applicable
Conversion Value shall be made under this Section 5.3.4(f) upon the issuance of
any additional shares of Common Stock which are issued pursuant to the exercise
of any warrants, options or other subscription or purchase rights or pursuant to
the exercise of any conversion or exchange rights in any convertible securities
if any adjustment shall previously have been made upon the issuance of such
warrants, options or other rights. Any adjustment of the Applicable Conversion
Value with respect to this paragraph (iii) of this Section 5.3.4(f) shall be
disregarded if, as and when the rights to acquire shares of Common Stock upon
exercise or conversion of the warrants, options, rights or convertible
securities which gave rise to such adjustment expire or are cancelled without
having been exercised, so that the Applicable Conversion Value effective
immediately upon such cancellation or expiration shall be equal to the
Applicable Conversion Value in effect immediately prior to the time of the
issuance of the expired or cancelled warrants, options, rights or convertible
securities, with such additional adjustments as would have been made to that
Applicable Conversion Value had the expired or cancelled warrants, options,
rights or convertible securities not been issued; provided, however, that no
such readjustment of the Applicable Conversion Value shall have the effect of
increasing the Applicable Conversion Value to an amount which exceeds the lower
of (x) the Applicable Conversion Value on the original adjustment date, or (y)
the Applicable Conversion Value that would have resulted from any issuance of
any additional shares of Common Stock pursuant to such warrants, options, rights
or convertible securities between the original adjustment date and such
readjustment date. In the event that the terms of any warrants, options, other
subscription or purchase rights or convertible securities previously issued by
the Corporation are changed (whether by their terms or for any other reason) so
as to change the Net Consideration Per share payable with respect thereto
(whether or not the issuance of such warrants, options, rights or convertible
securities originally gave rise to an adjustment of the applicable Conversion
Value), the Applicable Conversion Value shall, if otherwise required under
paragraphs (i) or (ii) hereof, be recomputed as of the date of such change, so
that the Applicable Conversion Value effective immediately upon such change
shall be equal to the Applicable Conversion Value in effect at the time of the
issuance of the warrants, options, rights or convertible securities subject to
such change, adjusted for the issuance thereof in accordance with the terms
thereof after giving effect to such change, and with such additional adjustments
as would have been made to that Applicable Conversion
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Value had the warrants, options, rights or convertible securities been issued on
such changed terms. For purposes of this paragraph (iii), the Net Consideration
Per Share which may be received by the Corporation shall be determined as
follows:
(A) The Net Consideration Per Share shall
mean the amount equal to the total amount of consideration, if any, received by
the Corporation for the issuance of such warrants, options, rights or
convertible securities, plus the minimum amount of consideration, if any,
payable to the Corporation upon exercise or conversion thereof, divided by the
aggregate number of shares of Common Stock that would be issued if all such
warrants, options, subscriptions, or other purchase rights or convertible
securities were exercised or converted at such net consideration per share.
(B) The Net Consideration Per Share which
may be received by the Corporation shall be determined in each instance as of
the date of issuance of warrants, options, rights or convertible securities
without giving effect to any possible future price adjustments or rate
adjustments which may be applicable with respect to such warrants, options,
rights or convertible securities and which are contingent upon future events;
provided that in the case of an adjustment to be made as a result of a change in
terms of such warrants, options, rights or convertible securities, the Net
Consideration Per Share shall be determined as of the date of such change.
(g) Adjustments for Reclassification. If the Common
Stock issuable upon the conversion of the Series Preferred Stock shall be
changed into the same or different number of shares of any class or classes of
stock, whether by reclassification or otherwise (other than an Extraordinary
Common Stock Event, or a reorganization, merger, consolidation or sale of assets
provided for elsewhere in this Section 5.3.4), then and in each such event the
holder of each share of Series Preferred Stock shall have the right thereafter
to convert such share into the kind and amount of shares of stock and other
securities and property receivable upon such reorganization, reclassification or
other change by holders of the number of shares of Common Stock into which such
shares of Series Preferred Stock might have been converted immediately prior to
such reorganization, reclassification or change, all subject to further
adjustment as provided herein. Without limiting the generality of the foregoing,
the Applicable Conversion Rate, as defined in this Section 5.3.4, in respect of
such other shares or securities so receivable upon conversion of shares of
Series Preferred Stock shall thereafter be adjusted, and shall be subject to
further adjustment from time to time, in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Common Stock
contained in this Section 5.3.4, and the remaining provisions herein with
respect to the Common Stock shall apply on like or similar terms to any such
other shares or securities.
(h) Adjustment for Reorganization. If at any time or
from time to time there shall be a capital reorganization of the Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this Section 5.3.4) or a merger or consolidation of
the Corporation with or into another corporation or the sale of all or
substantially all of the Corporation's properties and assets to any other
person, then, as part of and as a condition to the effectiveness of such
reorganization, merger, consolidation or sale, lawful and adequate provision
shall be made so that if the Corporation is not the surviving corporation, the
Series Preferred Stock shall be converted into preferred stock
<PAGE> 14
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of the surviving corporation having equivalent preferences, rights and
privileges except that in lieu of being able to convert into shares of Common
Stock of the Corporation or the successor corporation the holders of the Series
Preferred Stock (including any such preferred stock issued upon conversion of
the Series Preferred Stock) shall thereafter be entitled to receive upon
conversion of the Series Preferred Stock (including any such preferred stock
issued upon conversion of the Series Preferred Stock) the number of shares of
stock or other securities or property of the Corporation or of the successor
corporation resulting from such merger or consolidation or sale, to which a
holder of the number of shares of Common Stock deliverable upon conversion of
the Series Preferred Stock immediately prior to the capital reorganization,
merger, consolidation or sale would have been entitled on such capital
reorganization, merger, consolidation, or sale. In any such case, appropriate
provisions shall be made with respect to the rights of the holders of the Series
Preferred Stock (including any such preferred stock issued upon conversion of
the Series Preferred Stock) after the reorganization, merger, consolidation or
sale to the end that the provisions of this Section 5.3.4 (including, without
limitation, provisions for adjustment of the Applicable Conversion Value and the
number of shares purchasable upon conversion of the Series Preferred Stock or
such preferred stock) shall thereafter be applicable, as nearly as may be, with
respect to any shares of stock, securities or assets to be deliverable
thereafter upon the conversion of the Series Preferred Stock or such preferred
stock.
Each holder of Series Preferred Stock upon
the occurrence of a capital reorganization, merger or consolidation of the
Corporation or the sale of all or substantially all of its assets and properties
as such events are more fully set forth in the first paragraph of this Section
5.3.4(h), shall have the option of electing treatment of his shares of Series
Preferred Stock under either this Section 5.3.4(h) or Section 5.3.2(b) hereof,
and except as otherwise provided in said Section 5.3.2(b), notice of which
election shall be submitted in writing to the Corporation at its principal
offices no later than 10 days before the effective date of such event; provided
that any such notice shall be effective if given not later than 15 days after
the date of the Corporation's notice, pursuant to Section 5.3.9, with respect to
such event.
(i) Certificate as to Adjustments. In each case of an
adjustment or readjustment of the Applicable Conversion Rate, the Corporation
will promptly furnish each holder of Series Preferred Stock with a certificate,
prepared by the chief financial officer of the Corporation, showing such
adjustment or readjustment, and stating in detail the facts upon which such
adjustment or readjustment is based.
(j) Mechanics of Conversion. To exercise its
conversion privilege, a holder of Series Preferred Stock shall surrender the
certificate or certificates representing the shares being converted to the
Corporation at its principal office, and shall give written notice to the
Corporation at that office that such holder elects to convert such shares. Such
notice shall also state the name or names (with address or addresses) in which
the certificate or certificates for shares of Common Stock issuable upon such
conversion shall be issued. The certificate or certificates for shares of Series
Preferred Stock surrendered for conversion shall be accompanied by proper
assignment thereof to the Corporation or in blank. The date when such written
notice is received by the Corporation together with the certificate or
certificates representing the shares of Series Preferred Stock being converted,
shall be the "Conversion Date." As promptly as practicable after the Conversion
Date, the Corporation shall issue and shall deliver to the holder of the shares
of Series Preferred Stock being converted, a
<PAGE> 15
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certificate or certificates in such denominations as it may request in writing
for the number of full shares of Common Stock issuable upon the conversion of
such shares of Series Preferred Stock in accordance with the provisions of this
Section 5.3.4 and cash as provided in Section 5.3.4(k) below in respect of any
fraction of a share of Common Stock issuable upon such conversion. Such
conversion shall be deemed to have been effected immediately prior to the close
of business on the Conversion Date, and at such time the rights of the holder as
holder of the converted shares of Series Preferred Stock shall cease and the
person or persons in whose name or names any certificate or certificates for
shares of Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of shares of Common Stock
represented thereby.
(k) Fractional Shares. No fractional shares of Common
Stock or scrip representing fractional shares shall be issued upon conversion of
Series Preferred Stock. Instead of any fractional shares of Common Stock that
would otherwise be issuable upon conversion of Series Preferred Stock, the
Corporation shall pay to the holder of the shares of Series Preferred Stock that
were converted a cash adjustment in respect of such fraction in an amount equal
to the same fraction of the market price per share of the Common Stock (as
determined in a manner prescribed in good faith by the Board of Directors) at
the close of business on the Conversion Date.
(l) Partial Conversion. In the event some but not all
of the shares of Series Preferred Stock represented by a certificate or
certificates surrendered by a holder are converted, the Corporation shall
execute and deliver to or on the order of the holder, at the expense of the
Corporation, a new certificate representing the number of shares of Series
Preferred Stock which were not converted.
(m) Reservation of Common Stock. The Corporation shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series Preferred Stock, such number of shares of Common Stock
as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series Preferred Stock, and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series Preferred
Stock, the Corporation shall take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose.
5.3.5 Redemption.
(a) Optional Redemption.
(i) Optional Redemption of Series E Preferred
Stock. In the event that there shall not have occurred a Liquidity Event (as
defined in Section 5.3.4(b) hereof) on or before November 3, 2001, at the
election of any holder of Series E Preferred Stock outstanding as of November 4,
2001, the holders of the shares of Series E Preferred Stock shall have the right
to require the Corporation redeem all or any shares of Series E Preferred Stock
then held by such holder at a price equal to the original purchase price paid to
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the Corporation by such holder (the "Series E Redemption Price"). Payment of the
Series E Redemption Price to the holders of Series E Preferred Stock shall be
made by the Corporation on February 3, 2002 (the "Series E Redemption Date"). On
or after November 4, 2001, but not later than December 3, 2001, any holder of
shares of the Series E Preferred Stock wishing to exercise such redemption right
shall give written notice (the "Series E Redemption Notice") by mail, postage
prepaid, to the Corporation of such holders' intention to exercise such
redemption right. Such notice shall state the intention of such holder to
exercise its redemption rights and shall set forth the number of shares of
Series E Preferred Stock in respect of which redemption is demanded. On or after
December 3, 2001 (but prior to payment of the Series E Redemption Price), each
holder of shares of Series E Preferred Stock who shall have requested that such
holder's shares of Series E Preferred Stock be so redeemed shall surrender the
certificate or certificates evidencing such shares to the Corporation. In the
case of any certificate or certificates which have been lost, stolen or
destroyed, the holder of such certificate or certificates shall make and deliver
an affidavit of that fact to the Corporation without the necessity of giving the
Corporation a bond. Except as specifically provided in Section 5.3.5(a)(iii),
any right of redemption arising under this Section 5.3.5(a)(i) and not exercised
by the holder thereof on or before December 3, 2001 shall irrevocably terminate.
(ii) No Optional Redemption of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock. The Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock shall have no optional redemption
rights, except as specifically provided in Section 5.3.2(b).
(iii) Extension of Series E Redemption Date.
Notwithstanding the foregoing Section 5.3.5(a)(i), in the event that any
indebtedness under the Senior Notes (as defined in Section 5.3.4(f)(i) above)
shall remain outstanding, or any other indebtedness of the Corporation incurred
at any time or from time to time in connection with the Refinancing of the
Senior Notes, whether issued pursuant to senior notes, indentures, or other
evidences of indebtedness of the Corporation (hereinafter, the "Notes") shall
remain outstanding and the terms of such Refinancing shall prohibit or otherwise
restrict the Corporation from effecting, or the right of the holders of the
Series E Preferred Stock to require the Corporation to effect, any redemption of
its shares of Series E Preferred Stock, then, in any of such events, the right
of the holders of the shares of Series E Preferred Stock to require the
Corporation to redeem any of such shares of Series E Preferred Stock shall be
suspended and shall not be available for exercise until the date which is ninety
(90) days after the later of (x) the date on which the Senior Notes shall be
indefeasibly paid in full and (y) the date on which any such prohibition or
other restriction under the Refinancing on the ability of the Corporation to
effect such redemption shall have terminated, lapsed or otherwise expired (the
"Extension Date"). A "Refinancing" shall mean a financing in which the proceeds
of the financing are paid directly to the holders (or to the trustee of such
holders, for the benefit of such holders) of the Senior Notes. Any right of
redemption arising on the Extension Date and not exercised by the holder thereof
within thirty (30) days following the Extension Date shall irrevocably
terminate.
(b) Termination of Rights. From and after the Series E
Redemption Date, unless there shall have been a default in payment or tender by
the Corporation of the Series E Redemption Price, all rights of the holders with
respect to such redeemed shares
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of the Series E Preferred Stock (except the right to receive the Series E
Redemption Price upon surrender or their certificate) shall cease and such
shares shall not thereafter be transferred on the books of this Corporation or
be deemed to be outstanding for any purpose whatsoever.
(c) Insufficient Funds. If the funds of the
Corporation legally available for redemption of shares of the Series E Preferred
Stock on the Series E Redemption Date are insufficient to redeem the applicable
number of shares of Series E Preferred Stock on such Series E Redemption Date
(or the Extension Date, as applicable), the Corporation will use its best
efforts to engage in recapitalization or the sale of its business or businesses
to generate sufficient funds to redeem the applicable number of shares of the
Series E Preferred Stock. The Corporation shall use those funds which are
legally available to redeem the maximum possible number of such shares ratably
among the holders of such shares to be redeemed. At any time thereafter when
additional funds of the Corporation are legally available for the redemption of
shares of the Series E Preferred Stock, such funds will immediately be used to
redeem the balance of the shares which the Corporation has become obligated to
redeem on the Series E Redemption Date but which it has not redeemed at the
Series E Redemption Price. If any shares of the Series E Preferred Stock are not
redeemed for the foregoing reason or because the Corporation otherwise failed to
pay or tender to pay the aggregate Series E Redemption Price on all outstanding
shares of Series E Preferred Stock to be redeemed, all shares which have not
been redeemed shall remain outstanding and entitled to all the rights and
preferences provided herein, and the Corporation shall pay interest on the
Series E Redemption Price for the unredeemed portion at an aggregate per annum
rate from the Series E Redemption Date (or the Extension Date, as applicable)
equal to the greater of (i) twelve percent (12%) or (ii) the Base Rate or any
similar lending rate announced from time to time by The First National Bank of
Boston or any successor entity plus five percent (5%), increased, in each case,
by one percent (1%) at the end of each calendar quarter thereafter. All
provisions hereof are hereby expressly limited so that in no contingency or
event whatsoever shall the amount paid or agreed to be paid to the holders of
the Series E Preferred Stock exceed the maximum amount which the holder is
permitted to receive under applicable law. If fulfillment of any provision
hereof shall involve exceeding such amount, then the obligation to be fulfilled
shall automatically be reduced to the limit of such maximum amount. As used
herein, the term "applicable law" shall mean the law in effect as of the date
hereof, provided, however, that in the event that there is a change in the law
which results in a higher permissible rate of interest, then these provisions
shall be governed by such new law as of its effective date.
5.3.6 Restrictions and Limitations. The Corporation shall
not without the affirmative vote or written consent of the holders of
sixty-seven percent (67%) of the then outstanding shares of the Series Preferred
Stock voting together as a single class:
(i) Redeem, purchase or otherwise acquire for value
(or pay into or set aside for a sinking fund for such purpose), any share or
shares of Series Preferred Stock other than pursuant to Section 5.3.5 hereof;
(ii) Redeem, purchase or otherwise acquire for value
(or pay into or set aside for a sinking fund for such purpose) any of the Common
Stock of any class or any other capital stock of the Corporation other than the
Series Preferred Stock or any of the Corporation's options, warrants or
convertible or exchangeable securities, except that these
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provisions will not prohibit the Corporation from repurchasing or redeeming any
shares of capital stock from individuals and entities who have entered into
stockholder agreements, stock option agreements, employment agreements or other
similar agreements with the Corporation in each case approved by resolution of
the Board of Directors under which the Corporation has the option to repurchase
such shares upon the occurrence of certain events, including the termination of
employment and involuntary transfers by operation of law (and their permitted
transferees);
(iii) Redeem, purchase or otherwise acquire for
value (or pay into or set aside for a sinking fund for such purpose) any capital
stock of any class of any subsidiary of the Corporation or any options, warrants
or convertible or exchangeable securities of any subsidiary of the Corporation;
(iv) Authorize or issue, or obligate itself to
issue, any other equity security (or debt security convertible into any equity
security), other than as provided in that certain Stockholders' Agreement, by
and among the Corporation and the Stockholders named therein, to be entered into
pursuant to those certain Contribution Agreements, dated as of November 2, 1999,
by and between the Corporation and certain holders and purchasers of the voting
capital stock of the Corporation (the "Contribution Agreements");
(v) Increase or decrease (other than by
conversion as permitted hereby) the total number of authorized shares of Series
Preferred Stock;
(vi) Pay or declare any dividend or distribution
on any of its capital stock;
(vii) Authorize any merger, consolidation of the
Corporation with or into any other company or entity, or authorize the
reorganization or sale of the Corporation or the sale of substantially all of
the assets of the Corporation;
(viii) Amend the charter documents of the
Corporation or amend the Bylaws of the Corporation in any manner that adversely
affects the preferences, powers, rights or privileges of the holders of Series
Preferred Stock;
(ix) Authorize any reclassification or
recapitalization of the outstanding capital stock of the Corporation; or
(x) Incur, create, assume or become liable in
any manner (by way of guarantee, surety, or otherwise) any new or additional
indebtedness for borrowed money, whether by the issue of notes, other debt
securities, or otherwise, except that the Corporation may so incur, create,
assume or become liable for: (A) indebtedness (and any refinancing thereof)
existing within the Corporation or its Subsidiaries upon the completion of the
transactions contemplated in the Contribution Agreements; or (B) any
indebtedness the principal amount of which so incurred, created, assumed by, or
otherwise becoming a liability of, the Corporation in any one transaction or
series of related transaction is less than or equal to $5 million; or (C)
indebtedness incurred, created, or assumed by the Corporation in the ordinary
course of its business.
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5.3.7 Modification of Terms of any Series of Preferred
Stock. The Company shall not modify the terms of any Series of Preferred Stock
as set forth herein without, in addition to any other consent required, the
consent of the holders of a majority of such Series of Preferred Stock. The
Company shall not amend this Certificate of Incorporation in a manner that
materially and adversely affects the rights of any Series of Preferred Stock,
relative to the rights of any other Series of Preferred Stock, without, in
addition to any other consent required, the consent of the holders of a majority
of such adversely affected Series of Preferred Stock. Any increase in the
authorized number of any class of shares of the Company shall not be deemed to
be adverse to any Series of Preferred Stock by reason of the effects of
differing levels of protection against dilution as set forth herein.
5.3.8 No Reissuance of Series Preferred Stock. No share or
shares of the Series Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion, or otherwise shall be reissued, and all such
shares shall be canceled, retired, and eliminated from the shares which the
Corporation shall be authorized to issue. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of the Series Preferred Stock accordingly.
5.3.9 Notice of Record Date. In the event (i) the
Corporation establishes a record date to determine the holders of any class of
securities who are entitled to receive any dividend or other distribution, or
(ii) there occurs any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the Corporation,
any merger or consolidation of the Corporation, or any transfer of all or
substantially all of the assets of the Corporation to any other company, or any
other entity or person, or any voluntary or involuntary dissolution, liquidation
or winding up of the Corporation, the Corporation shall mail to each holder of
Series Preferred Stock at least twenty (20) days prior to the record date
specified therein, a notice specifying (a) the date of such record date for the
purpose of such dividend or distribution and a description of such dividend or
distribution, (b) the date on which any such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding up is
expected to become effective, and (c) the time, if any, that is to be fixed, as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up.
5.3.10 Other Rights. Except as otherwise provided in this
Certificate of Incorporation shares of each series of the Series Preferred Stock
and shares of Common Stock shall be identical in all respects (each share of
Series Preferred Stock having equivalent rights to the number of shares of
Common Stock into which it is then convertible), shall have the same powers,
preferences and rights, without preference of any such class or share over any
other such class or share, and shall be treated as a single class of stock for
all purposes.
5.3.11 Ranking. Except as otherwise provided in this
Certificate of Incorporation, each series of Series Preferred Stock shall rank
on a parity with the other series of Series Preferred Stock as to the
distribution of assets on liquidation, dissolution and winding up of the
Corporation. The Series Preferred Stock shall rank senior to the Common Stock as
to the distribution of assets on liquidation, dissolution and winding up of the
Corporation.
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5.3.12 Miscellaneous.
(a) All notices referred to herein shall be in
writing, and all notices hereunder shall be deemed to have been given, upon the
earlier of delivery thereof by hand delivery, by courier, or by standard form of
telecommunication, addressed: (i) if to the Corporation, to its principal
executive office (Attention: President) and to the transfer agent, if any, for
the Series Preferred Stock or other agent of the Corporation designated as
permitted hereby or (ii) if to any holder of the Series Preferred Stock or
Common Stock, as the case may be, to such holder at the address of such holder
as listed in the stock record books of the Corporation (which may include the
records of any transfer agent for the Series Preferred Stock or Common Stock, as
the case may be) or (iii) to such other address as the Corporation or any such
holder, as the case may be, shall have designated by notice similarly given.
(b) The Corporation shall pay any and all stock
transfer and documentary stamp taxes that may be payable in respect of any
issuance or delivery of shares of Series Preferred Stock or shares of Common
Stock or other securities issued on account of Series Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax which may be payable in
respect of any transfer involved in the issuance or delivery of shares of Series
Preferred Stock or Common Stock or other securities in a name other than that in
which the shares of Series Preferred Stock with respect to which such shares or
other securities are issued or delivered were registered, or in respect of any
payment to any person with respect to any such shares or securities other than a
payment to the registered holder thereof, and shall not be required to make any
such issuance, delivery or payment unless and until the person otherwise
entitled to such issuance, delivery or payment has paid to the Corporation the
amount of any such tax or has established, to the satisfaction of the
Corporation, that such tax has been paid or is not payable.
(c) The Corporation may appoint, and from time to
time discharge and change, a transfer agent of the Series Preferred Stock. Upon
any such appointment or discharge of a transfer agent, the Corporation shall
send notice thereof by hand delivery, by courier, by standard form of
telecommunication or by first class mail (postage prepaid), to each holder of
record of the Series Preferred Stock.
5.4 Subject to the provisions of this Certificate of
Incorporation and except as otherwise provided by law, the stock of the
Corporation, regardless of class, may be issued for such consideration and for
such corporate purposes as the Board of Directors may from time to time
determine.
6. Compromise, Arrangement or Reorganization. Whenever a compromise
or arrangement is proposed between this Corporation and its creditors or any
class of them and/or between this Corporation and its stockholders or any class
of them, any court of equitable jurisdiction within the State of Delaware may,
on the application in a summary way of this Corporation or of any creditor or
stockholder thereof or on the application of any receiver or receivers appointed
for this Corporation under the provisions of Section 291 of the General
Corporation Law or on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the provisions of
Section 279 of General Corporation Law order a meeting of the creditors or class
of creditors, and/or of the stockholders or class of
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21
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all stockholders or class of
stockholders of this Corporation, as the case may be, and also on this
Corporation.
7. Limitation of Liability. No director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (a) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (c) under Section 174 of the General
Corporation Law or (d) for any transaction from which the director derived any
improper personal benefits. If the General Corporation Law is hereafter amended
to authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
8. Indemnification.
8.1 Indemnity Undertaking. To the extent not prohibited by law,
the Corporation shall indemnify any person (an "Eligible Person") who is or was
made, or threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding (a "Proceeding"), whether civil, criminal,
administrative or investigative, including, without limitation, an action by or
in the right of the Corporation to procure a judgment in its favor, by reason of
the fact that such person, or a person of whom such person is the legal
representative, is or was a Director or officer of the Corporation or, while a
Director or officer of the Corporation, is or was serving, at the request of the
Corporation, as a director or officer of any other corporation or in a capacity
with comparable authority or responsibilities for any partnership, joint
venture, trust, employee benefit plan or other enterprise (an "Other Entity"),
against judgments, fines, penalties, excise taxes, amounts paid in settlement
and costs, charges and expenses (including attorneys' fees, disbursements and
other charges).
8.2 Payment of Expenses. The Corporation shall, from time to time
pay to an Eligible Person the funds necessary for payment of expenses, including
attorneys' fees and disbursements, incurred by or on behalf of such Eligible
Person in connection with any Proceeding, as such expenses are incurred in
advance of the final disposition of such Proceeding; provided, however, that, if
required by the General Corporation Law, such expenses incurred by or on behalf
of such Eligible Person may be paid in advance of the final disposition of a
Proceeding only upon receipt by the Corporation of an undertaking, by or on
behalf of such Eligible Person, to repay any such amount so advanced if it shall
ultimately be determined by
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22
final judicial decision from which there is no further right of appeal that such
Eligible Person is not entitled to be indemnified for such expenses.
8.3 Certain Exclusions. Sections 8.1 and 8.2 shall not include
any Proceeding commenced by any Eligible Person without the advance approval of
the Board of Directors.
8.4 Binding Effect. The provisions of this Section 8 shall be a
contract between the Corporation, on the one hand, and each Eligible Person, on
the other hand, pursuant to which the Corporation and each such Eligible Person
intend to be, and shall be, legally bound. No repeal or modification of this
Section 8 shall affect any rights or obligations with respect to any state of
facts then or theretofore existing or any proceeding theretofore or thereafter
brought or threatened based in whole or in part upon any such state of facts.
8.5 Procedural Rights. The rights to indemnification and payment
of expenses provided by, or granted pursuant to, this Section 8 shall be
enforceable by an Eligible Person entitled to such indemnification or payment of
expenses in any court of competent jurisdiction. The burden of proving that such
indemnification or payment of expenses is not appropriate shall be on the
Corporation. Neither the failure of the Corporation (including the disinterested
Directors on its Board of Directors, a committee of such disinterested
Directors, the Corporation's independent legal counsel and its stockholders) to
have made a determination prior to the commencement of such action that such
indemnification or payment of expenses is proper in the circumstances, nor an
actual determination by the Corporation (including the disinterested Directors
on its Board of Directors, a committee of such disinterested Directors, the
Corporation's independent legal counsel and its stockholders) that such person
is not entitled to such indemnification or payment of expenses shall constitute
a defense to the action or create a presumption that such person is not so
entitled. Notwithstanding anything to the contrary in Section 8.3, such Eligible
Person shall also be indemnified for any expenses incurred in connection with
successfully establishing his or her right to such indemnification or payment of
expenses, in whole or in part, in any such proceeding.
8.6 Service Deemed at Corporation's Request. Any Director or
officer of the Corporation serving (a) as a director or officer of another
corporation of which a majority of the shares entitled to vote in the election
of its directors is held, directly or indirectly, by the Corporation or (b) any
employee benefit plan of the Corporation or any corporation referred to in
clause (a) shall be deemed to be doing so at the request of the Corporation.
8.7 Election of Applicable Law. Any person entitled to be
indemnified or to payment of expenses as a matter of right pursuant to this
Section 8 may elect to have the right to indemnification or payment of expenses
interpreted on the basis of the applicable law in effect at the time of the
occurrence of the event or events giving rise to the applicable Proceeding, to
the extent permitted by law, or on the basis of the applicable law in effect at
the time such indemnification or payment of expenses is sought. Such election
shall be made, by a notice in writing to the Corporation, at the time
indemnification or payment of expenses is sought; provided, however, that if no
such notice is given, the right to Indemnification or payment of expenses shall
be determined by the law in effect at the time indemnification or payment of
expenses is sought.
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8.8 Rights Not Exclusive. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Section 8 shall not be deemed exclusive of any other rights to which a
person seeking indemnification or reimbursement or advancement of expenses may
have or hereafter be entitled under any statute, this Certificate of
Incorporation, the Bylaws, any agreement, any vote of stockholders or
disinterested Directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
8.9 Continuation of Benefits. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Section 8 shall continue as to a person who has ceased to be a Director or
officer (or other person indemnified hereunder) and shall inure to the benefit
of the executors, administrators, legatees and distributees of such person.
8.10 Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of an Other Entity,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability under the provisions of this Section 8 or under Section 145 of the
General Corporation Law or any other provision of law.
9. Directors. This Section is inserted for the management of the
business and for the conduct of the affairs of the Corporation and it is
expressly provided that it is intended to be in furtherance of and not in
limitation or exclusion of the powers conferred by applicable law.
9.1 Number, Election, and Terms of Office of Board of Directors.
The business of the Corporation shall be managed by a Board of Directors
consisting of not less than three or more than 15 members. The exact number of
directors within the minimum and maximum limitations specified in the preceding
sentence shall be fixed from time to time by resolution adopted by a majority of
the entire Board of Directors then in office, whether or not present at a
meeting. Directors need not be stockholders of the Corporation. During any
period when the holders of the Series Preferred Stock or any series of Preferred
Stock have the right to elect additional Directors as provided for or fixed
pursuant to the provisions of this Certificate of Incorporation or any
certificates of designation related thereto, then upon commencement and for the
duration of the period during which such right continues:
(i) the then otherwise total authorized number
of Directors of the Corporation shall automatically be increased by such
specified number of Directors, and the holders of such Series Preferred Stock or
other Preferred Stock, as the case may be, shall be entitled to elect the
additional Directors so provided for or fixed pursuant to said provisions, and
(ii) each such additional Director shall serve
until such Director's successor shall have been duly elected and qualified, or
until such Director's
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24
right to hold such office terminates pursuant to said provisions, whichever
occurs earlier, subject to such Director's earlier death, disqualification,
resignation or removal.
Except as otherwise provided by the Board of Directors in the resolution or
resolutions establishing such series, whenever the holders of the Series
Preferred Stock or any other series of Preferred Stock having such right to
elect additional Directors are divested of such right pursuant to the
provisions of such stock, the terms of office of all such additional Directors
elected by the holders of such stock, or elected to fill any vacancies
resulting from the death, resignation, disqualification or removal of such
additional Directors, shall forthwith terminate and the total and authorized
number of Directors of the Corporation shall be reduced accordingly.
9.2 Tenure. Notwithstanding any provisions to the contrary contained
herein, (i) each director shall hold office until his or her successor is
elected and qualified, or until the earlier of such director's death,
resignation or removal and (ii) the term of any director who is also an officer
of the corporation shall terminate if he or she ceases to be an officer of the
Corporation.
9.3 Newly Created Directorships and Vacancies. Subject to the rights
of the holders of the Series Preferred Stock or any other series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause shall be filled by a majority vote of the remaining
directors then in office although less than a quorum, or by a sole remaining
director and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of the class to which they have
been elected expires or, in each case, until their respective successors are
duly elected and qualified. Any vacancy in any directorship appointed by a class
or classes of Series Preferred Stock shall be filled by the vote of the holders
of a majority of the issued and outstanding shares of such class or classes of
Series Preferred Stock. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. When any
director shall give notice of resignation effective at a future date, the Board
of Directors (or, where applicable, the holders of a majority of the shares of
any class or classes of Series Preferred Stock) may fill such vacancy to take
effect when such resignation shall become effective. In the event of a vacancy
in the Board of Directors, the remaining Directors, except as otherwise provided
by law, may exercise the powers of the full Board of Directors until the vacancy
is filled.
9.4 Election of Series Preferred Directors. Following the issuance of
the relevant class of stock of the Corporation:
(a) The holders of the Series A Preferred Stock shall
be entitled to vote as a class separately from all other classes of stock of the
Corporation in any vote for the election of directors of the Corporation, and
shall be entitled to elect by such class vote two directors (the "Series A
Investor Directors"), to be designated by the holders of a majority of the
issued and outstanding shares of Series A Preferred Stock.
(b) The holders of the Series B Preferred Stock shall
be entitled to vote as a class separately from all other classes of stock of the
Corporation in any vote
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25
for the election of directors of the Corporation, and shall be entitled to elect
by such class vote one director (the "Series B Investor Director"), to be
designated by the holders of a majority of the issued and outstanding shares of
Series B Preferred Stock.
(c) The holders of the Series C Preferred Stock shall
be entitled to vote as a class separately from all other classes of stock of the
Corporation in any vote for the election of directors of the Corporation, and
shall be entitled to elect by such class vote one director (the "Series C
Investor Director"), to be designated by the holders of a majority of the issued
and outstanding shares of Series C Preferred Stock.
(d) The holders of the Series D Preferred Stock and
the Series E Preferred Stock shall be entitled to vote together as a single
class separately from all other classes of stock of the Corporation in any vote
for the election of directors of the Corporation, and shall be entitled to elect
by such class vote three directors (the "Series D/E Investor Directors"), to be
designated by the holders of a majority of the issued and outstanding shares of
Series D Preferred Stock and Series E Preferred Stock voting together as a
single class.
9.5 Election of the Officer Director. The Chief Executive Officer
(and any replacement or successor Chief Executive Officer) duly selected and
hired by the Board of Directors shall be elected to the Company's Board of
Directors (the "Officer Director").
9.6 Election of Other Directors. All other directors of the
Corporation shall be elected by the vote of the holders of a majority of the
shares of the various classes of voting stock of the Corporation, voting
together as a single class.
9.7 Removal of Directors. The removal of any director of the
Corporation shall be as set forth in the Bylaws of the Corporation.
10. Adoption, Amendment and/or Repeal of Bylaws. The board of Directors
may from time to time adopt, amend or repeal the Bylaws; provided, however, that
any Bylaws adopted or amended by the Board of Directors may be amended or
repealed, and any Bylaws may be adopted, by a vote of the stockholders having at
least sixty-seven percent of the voting power of the then issued and outstanding
shares of capital stock of the Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Incorporation this 1st day of November, 1999.
By: /s/ PETER ZERN
-----------------------------
Peter Zern
Sole Incorporator
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
PATHNET TELECOMMUNICATIONS, INC.
A Delaware Corporation
------------------
ARTICLE 1
DEFINITIONS
As used in these Bylaws, unless the context otherwise
requires, the term:
1.1 "Assistant Secretary" means an Assistant Secretary of the
Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the
Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "Business Day" means any day which is not a Saturday, a Sunday, or
a day on which banks are authorized to close in the City of New York.
1.5 "Bylaws" means the bylaws of the Corporation, as amended from time
to time.
1.6 "Certificate of Incorporation" means the certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.7 "Chairman" means the Chairman of the Board of the Corporation.
1.8 "Chief Executive Officer" means the Chief Executive Officer of the
Corporation.
1.9 "Corporation" means Pathnet Telecommunications, Inc.
1.10 "Directors" means directors of the Corporation.
1.11 "Entire Board" means all Directors of the Corporation in office,
whether or not present at a meeting of the Board, but disregarding vacancies.
1.12 "Executive Vice President" means an Executive Vice President of
the Corporation.
1.13 "General Corporation Law" means the General Corporation Law of
the State of Delaware, as amended from time to time.
<PAGE> 2
1.14 "Office of the Corporation" means the executive office of the
Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
1.15 "President" means the President of the Corporation.
1.16 "Secretary" means the Secretary of the Corporation.
1.17 "Stockholders" means stockholders of the Corporation.
1.18 "Treasurer" means the Treasurer of the Corporation.
1.19 "Vice President" means a Vice President of the Corporation.
ARTICLE 2
STOCKHOLDERS
2.1 Place of Meetings. Every meeting of Stockholders shall be held at
the Office of the Corporation or at such other place within or without the State
of Delaware as shall be designated, from time to time, by the Board, the
Chairman or the President, and specified or fixed in the notice of such meeting
or in the waiver of notice thereof.
2.2 Annual Meeting. A meeting of Stockholders shall be held annually
for the election of Directors and the transaction of other business at such hour
and on such business day in each year as may be determined by resolution adopted
by affirmative vote of a majority vote of the Entire Board and designated in the
notice of meeting.
2.3 Deferred Meeting for Election of Directors, Etc. If the annual
meeting of Stockholders for the election of Directors and the transaction of
other business is not held on the date designated therefor or at any adjournment
of a meeting convened on such date, the Board shall call a meeting of
Stockholders for the election of Directors and the transaction of other business
as soon thereafter as convenient.
2.4 Special Meetings. A special meeting of Stockholders, unless
otherwise prescribed by statute, may be called at any time by the Board, the
Chairman or by the President, and, at any time prior to a Qualified Public
Offering, may be called by one or more Stockholders who, in the aggregate, hold
stock entitled to cast at least 25% of the total votes cast by all Stockholders
at a meeting of the Stockholders. At any such special meeting of Stockholders,
no business may be transacted other than (i) such business stated in the notice
thereof given pursuant to Section 2.6 hereof or in any waiver of notice thereof
given pursuant to Section 2.7 hereof (in a form prepared by the Secretary) or
(ii) such business as is related to the purpose or purposes of such meeting and
which is properly brought before the meeting by or at the direction of the
Board.
2.5 Fixing Record Date. For the purpose of (a) determining the
Stockholders entitled (i) to notice of or to vote at any meeting of Stockholders
or any adjournment thereof or (ii) to receive payment of any dividend or other
distribution or allotment of any rights, or to
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exercise any rights in respect of any change, conversion or exchange of stock;
or (b) any other lawful action, the Board may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
was adopted by the Board and which record date shall not be (x) in the case of
clause (a)(i) above, more than sixty nor less than ten days before the date of
such meeting and (y) in the case of clause (a)(ii) or (b) above, more than sixty
days prior to such action. If no such record date is fixed:
2.5.1 the record date for determining Stockholders entitled to
notice of or to vote at a meeting of Stockholders shall be at the close
of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; and
2.5.2 the record date for determining Stockholders entitled to
express consent to corporate action in writing without a meeting
(unless otherwise provided in the Certificate of Incorporation), when no
prior action by the Board is required under the General Corporation Law,
shall be the first day on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to the Corporation
by delivery to its registered office in the State of Delaware, its
principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of
Stockholders are recorded; and when prior action by the Board is
required under the General Corporation Law, the record date for
determining Stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the date
on which the Board adopts the resolution taking such prior action; and
2.5.3 the record date for determining Stockholders for any
purpose other than those specified in Section 2.5.1 and 2.5.2 hereof
shall be at the close of business on the day on which the Board adopts
the resolution relating thereto.
When a determination of Stockholders entitled to notice of or to vote at any
meeting of Stockholders has been made as provided in this Section 2.5, such
determination shall apply to any adjournment thereof unless the Board fixes a
new record date for the adjourned meeting.
Delivery made to the Corporation's registered office in accordance
with Section 2.5.2 shall be by hand or by certified or registered mail, return
receipt requested.
2.6 Notice of Meeting of Stockholders. Except as otherwise provided in
Section 2.7 hereof, whenever under the provisions of any statute, the
Certificate of Incorporation or these Bylaws, Stockholders are required or
permitted to take any action at a meeting, written notice shall be given stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. Unless otherwise
provided by any statute, the Certificate of Incorporation or these Bylaws, a
copy of the notice of any meeting shall be given, personally or by mail, not
less than ten nor more than sixty days before the date of the meeting, to each
Stockholder entitled to notice of or to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
with postage prepaid, directed to the Stockholder at his or her address as it
appears on the records of the Corporation. An affidavit of the Secretary or an
Assistant Secretary or of the transfer agent of
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the Corporation that the notice required by this Section 2.6 has been given
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. When a meeting is adjourned to another time or place, notice need not
be given of the adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken, and at the adjourned meeting any
business may be transacted that might have been transacted at the meeting as
originally called. If, however, the adjournment is for more than thirty days, or
if after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each Stockholder of record
entitled to vote at the meeting.
2.7 Waivers of Notice. Whenever the giving of any notice is required
by statute, the Certificate of Incorporation, or these Bylaws, a waiver thereof,
in writing, signed by the Stockholder or Stockholders entitled to said notice,
whether before or after the event as to which such notice is required, shall be
deemed equivalent to notice. Attendance by a Stockholder at a meeting shall
constitute a waiver of notice of such meeting except when the Stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting has
not been lawfully called or convened.
2.8 List of Stockholders. The Secretary shall prepare and make, or
cause to be prepared and made, at least ten days before every meeting of
Stockholders, a complete list of the Stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
Stockholder and the number of shares registered in the name of each Stockholder.
If any voting group exists, such list shall be arranged by voting group and
within each voting group by series or class of shares. Such list shall be open
to the examination of any Stockholder, the Stockholder's agent or attorney, at
the Stockholder's expense, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any Stockholder who is present. The Corporation shall maintain the
list of Stockholders in written form or in another form capable of conversion
into written form within a reasonable time. Upon the willful neglect or refusal
of the Directors to produce such a list at any meeting for the election of
Directors, they shall be ineligible for election to any office at such meeting.
The stock ledger, absent manifest error, shall be the only evidence as to who
are the Stockholders entitled to examine the stock ledger, the list of
Stockholders or the books of the Corporation, or to vote in person or by proxy
at any meeting of Stockholders.
2.9 Quorum of Stockholders; Adjournment. Except as otherwise provided
by any statute, the Certificate of Incorporation or these Bylaws, the holders of
a majority of all outstanding shares of stock entitled to vote at any meeting of
Stockholders, present in person or represented by proxy, shall constitute a
quorum for the transaction of any business at such meeting. When a quorum is
once present to organize a meeting of Stockholders, it is not broken by the
subsequent withdrawal of any Stockholders. The holders of a majority of the
shares of stock present in person or represented by proxy at any meeting of
Stockholders, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. Shares of its own
stock belonging to the Corporation or to another corporation,
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<PAGE> 5
if a majority of the shares entitled to vote in the election of Directors of
such other corporation is held, directly or indirectly, by the Corporation,
shall neither be entitled to vote nor be counted for quorum purposes; provided,
however, that the foregoing shall not limit the right of the Corporation to vote
stock, including but not limited to its own stock, held by it in a fiduciary
capacity.
2.10 Voting; Proxies. Unless otherwise provided in the Certificate of
Incorporation or these Bylaws, every Stockholder of record shall be entitled at
every meeting of Stockholders to one vote for each share of capital stock
standing in his or her name on the record of Stockholders determined in
accordance with Section 2.5 hereof. If the Certificate of Incorporation provides
for more or less than one vote for any share on any matter, each reference in
the Bylaws or the General Corporation Law to a majority or other proportion of
stock shall refer to such majority or other proportion of the votes of such
stock. The provisions of Sections 212 and 217 of the General Corporation Law
shall apply in determining whether any shares of capital stock may be voted and
the persons, if any, entitled to vote such shares; but the Corporation shall be
protected in assuming that the persons in whose names shares of capital stock
stand on the stock ledger of the Corporation are entitled to vote such shares.
Holders of redeemable shares of stock are not entitled to vote after the notice
of redemption is mailed to such holders and a sum sufficient to redeem the
stocks has been deposited with a bank, trust company, or other financial
institution under an irrevocable obligation to pay the holders the redemption
price on surrender of the shares of stock. At any meeting of Stockholders (at
which a quorum was present to organize the meeting), all matters, except as
otherwise provided by statute or by the Certificate of Incorporation or by these
Bylaws, shall be decided by a majority of the votes cast at such meeting by the
holders of shares present in person or represented by proxy and entitled to vote
thereon, whether or not a quorum is present when the vote is taken. Where a
separate vote by a class or classes of stock is required by statute, the
Certificate of Incorporation or these Bylaws, a majority of the outstanding
shares of class or classes present in person or representative, constitute a
quorum entitled to take action with respect to that vote on that matter, and
such matter shall be decided by a majority of the votes of such class or classes
present in person or represented by proxy at the meeting. Directors may be
elected either by written ballot or by voice vote. In voting on any other
question on which a vote by ballot is required by law or is demanded by any
Stockholder entitled to vote, the voting shall be by ballot. Each ballot shall
be signed by the Stockholder voting or the Stockholder's proxy shall state the
number of shares voted. On all other questions, the voting may be by voice vote.
Each Stockholder entitled to vote at a meeting of Stockholder may authorize
another person, or persons to act for such Stockholder by proxy. The validity
and enforceability of any proxy shall be determined in accordance with Section
212 of the General Corporation Law. A Stockholder may revoke any proxy that is
not irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or by delivering a proxy in accordance
with applicable law bearing a later date to the Secretary.
2.11 Voting Procedures and Inspectors of Election at Meetings of
Stockholders. The Corporation, in advance of any meeting of Stockholders, shall
appoint one or more inspectors to act at the meeting and make a written report
thereof. The Corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting, the person presiding at the meeting shall
appoint one or more inspectors to act at the meeting. Each inspector, before
entering upon the
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discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspectors shall (a) ascertain the number of
shares outstanding and the voting power of each, (b) determine the shares
represented at the meeting and the validity of proxies and ballots, (c) count
all votes and ballots, (d) determine and retain for a reasonable period a record
of the disposition of any challenges made to any determination by the
inspectors, and (e) certify their determination of the number of shares
represented at the meeting and their count of all votes and ballots. The
inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of their duties. The date and time of the opening
and the closing of the polls for each matter upon which the Stockholders will
vote at a meeting shall be determined by the person presiding at the meeting and
shall be announced at the meeting. No ballot, proxies or votes, or any
revocation thereof, or change thereto, shall be accepted by the inspectors after
the closing of the polls unless the Court of Chancery of the State of Delaware
upon application by a Stockholder shall determine otherwise.
2.12 Conduct of Meetings. (a) At each meeting of Stockholders, the
President, or in the absence of the President, the Chairman, or if there is no
Chairman or if there be one and the Chairman is absent, an Executive Vice
President, and in case more than one Executive Vice President shall be present,
that Executive Vice President designated by the Board (or in the absence of any
such designation, in the order of their first election, present), or it there is
no Executive Vice President or if there be one and the Executive Vice President
is absent, a Vice President, and in case more than one Vice President shall be
present, that Vice President designated by the Board (or in the absence of any
such designation, in the order of their first election, present), shall act as
chairman of the meeting. The Secretary, or in his or her absence one of the
Assistant Secretaries, shall act as secretary of the meeting. In case none of
the officers above designated to act as chairman or secretary of the meeting,
respectively, shall be present, a chairman or a secretary of the meeting, as the
case may be, shall be chosen by a majority of the votes cast at such meeting by
the holders of shares of capital stock present in person or represented by proxy
and entitled to vote at the meeting.
2.13 Order of Business. The order of business at all meetings of
Stockholders shall be as determined by the chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
2.14 Written Consent of Stockholders Without a Meeting. Unless
otherwise provided in the Certificate of Incorporation, any action required or
permitted by the General Corporation Law to be taken at any annual or special
meeting of Stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted and shall be delivered (by hand or by certified or registered mail,
return receipt requested) to the Corporation by delivery to its registered
office in the State of Delaware, its principal place of business, or an officer
or agent of the Corporation having custody of the book in which proceedings of
the meetings of stockholders are recorded. Every written consent shall bear the
date of signature of
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each stockholder who signs the consent and no written consent shall be effective
to take the corporate action referred to therein unless, within 60 days of the
earliest dated consent delivered in the manner required by this Section 2.14,
written consents signed by a sufficient number of Stockholders to take action
are delivered to the Corporation as aforesaid. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those Stockholders who have not consented in writing and who,
if the action had been taken at a meeting, would have been entitled to notice of
the meeting if the record date for such meeting had been the date that written
consent signed by a sufficient number of Stockholders to take the action were
delivered to the Corporation as aforesaid.
ARTICLE 3
DIRECTORS
3.1 General Powers. Except as otherwise provided in the Certificate of
Incorporation, the business and affairs of the Corporation shall be managed by
or under the direction of the Board. The Board may adopt such rules and
regulations, not inconsistent with the Certificate of Incorporation or these
Bylaws or applicable laws, as it may deem proper for the conduct of its meetings
and the management of the Corporation. In addition to the powers expressly
conferred by these Bylaws, the Board may exercise all powers and perform all
acts that are not required, by these Bylaws or the Certificate of Incorporation
or by statute, to be exercised and performed by the Stockholders.
3.2 Number; Qualification. The Board shall consist of not less than
three or more than 15 members. The exact number of Directors within the minimum
and maximum limitations specified in the preceding sentence shall be fixed from
time to time by resolution adopted by a majority of the Entire Board then in
office, whether or not present at a meeting. Directors need not be Stockholders.
3.3 Tenure. Notwithstanding any provisions to the contrary contained
herein (i) each Director shall hold office until his or her successor is elected
and qualified, or until the earlier of such Director's death, resignation or
removal and (ii) the term of any director who is also an officer of the
Corporation shall terminate if he or she ceases to be an officer of the
Corporation.
3.4 Election. Directors shall, except as otherwise required by statute
or by the Certificate of Incorporation, be elected by a plurality of the votes
cast at a meeting of Stockholders by the holders of shares present in person or
represented by proxy at the meeting and entitled to vote in the election.
Directors shall be elected at the annual meeting of the Stockholders, except as
provided in Article 3.5 hereof and except that the first Directors of the
Corporation shall be elected by the Incorporator.
3.5 Newly Created Directorships and Vacancies. Subject to the rights
of the holders of any series of preferred stock of the Corporation then
outstanding, newly created directorships resulting from any increase in the
authorized number of Directors or any vacancies in the Board resulting from
death, resignation, retirement, disqualification, removal from office
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or other cause shall be filled by a majority vote of the remaining Directors
then in office although less than a quorum, or by a sole remaining Director and
Directors so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of the class to which they have been elected
expires or, in each case, until their respective successors are duly elected and
qualified. No decrease in the number of Directors constituting the Board shall
shorten the term of any incumbent Director. When any Director shall give notice
of resignation effective at a future date, the Board may fill such vacancy to
take effect when such resignation shall become effective.
3.6 Resignation. Any Director may resign at any time by written notice
to the Corporation. Such resignation shall take effect at the time therein
specified, and, unless otherwise specified in such resignation, the acceptance
of such resignation shall not be necessary to make it effective.
3.7 Removal. Any one or more or all of the Directors may be removed,
at any time by the Stockholders having at least a majority in voting power of
the then issued and outstanding shares of capital stock of the Corporation. If
pursuant to the Certificate of Incorporation a Director is elected by a voting
group of Stockholders, only the Stockholders of the voting group may participate
in the vote to remove such Director. Notwithstanding the foregoing, the Board
may remove any one or more Directors for cause by a majority vote of all other
Directors. As used in this Article 3.7, "cause" shall mean willful misconduct or
gross negligence with respect to the business and affairs of the Corporation or
conviction of a felony involving an act of moral turpitude. Upon the removal for
cause of a Director elected pursuant to the Certificate of Incorporation by a
voting group of Stockholders, the voting group of Stockholders possessing such
election right shall thereupon be entitled to elect a replacement Director for
such removed Director.
3.8 Compensation. Each Director, in consideration of his or her
service as such, may receive from the Corporation such amount per annum or such
fees for attendance at Directors' meetings, or both, as the Board may from time
to time determine, together with reimbursement for the reasonable out-of-pocket
expenses, if any, incurred by such Director in connection with the performance
of his or her duties. Each Director who shall serve as a member of any committee
of Directors in consideration of serving as such may receive such additional
amount per annum or such fees for attendance at committee meetings, or both, as
the Board may from time to time determine, together with reimbursement for the
reasonable out-of-pocket expense, if any, incurred by such Director in the
performance of his or her duties. Nothing contained in this Section 3.8 shall
preclude any Director from serving the Corporation or its subsidiaries in any
other capacity and receiving proper compensation therefor.
3.9 Times and Places of Meetings. The Board may hold meetings, both
regular and special, either within or without the State of Delaware. The times
and places for holding meetings of the Board may be fixed from time to time by
resolution of the Board or (unless contrary to a resolution of the Board) in the
notice of the meeting.
3.10 Annual Meetings. On the day when and at the place where the
annual meeting of Stockholders for the election of Directors is held, and as
soon as practicable thereafter, the Board may hold its annual meeting, without
notice of such meeting, provided a
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quorum shall be present, for the purposes of organization, the election of
officers and the transaction of other business. The annual meeting of the Board
may be held at any other time and place specified in a notice given as provided
in Section 3.12 hereof for special meetings of the Board or in a waiver of
notice thereof.
3.11 Regular Meetings. Regular meetings of the Board may be held
without notice at such times and at such places as shall from time to time be
determined by the Board.
3.12 Special Meetings. Special meetings of the Board may be called by
the President or by any three Directors then serving on at least one day's
notice to each Director given by one of the means specified in Section 3.15
hereof other than by mail, or on at least three days' notice if given by mail.
3.13 Telephone Meetings. Directors or members of any committee
designated by the Board may participate in a meeting of the Board or of such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 3.13 shall constitute
presence in person at such meeting.
3.14 Adjourned Meetings. A majority of the Directors present at any
meeting of the Board, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. At least one day's
notice of any adjourned meeting of the Board shall be given to each Director
whether or not present at the time of the adjournment, if such notice shall be
given by one of the means specified in Section 3.15 hereof other than by mail,
or at least three days' notice if by mail. Any business may be transacted at an
adjourned meeting that might have been transacted at the meeting as originally
called.
3.15 Notice Procedure. Subject to Sections 3.13 and 3.16 hereof,
whenever, under the provisions of any statute, the Certificate of Incorporation
or these Bylaws, notice is required to be given to any Director, such notice
shall be deemed given effectively if given in person or by telephone, by mail
addressed to such Director at such Director's address as it appears on the
records of the Corporation, with postage thereon prepaid, or by telegram, telex,
telecopy or similar means addressed as aforesaid.
3.16 Waiver of Notice. Whenever the giving of any notice is required
by statute, the Certificate of Incorporation or these Bylaws, a waiver thereof,
in writing, signed by the person or persons entitled to said notice, whether
before or after the event as to which such notice is required, shall be deemed
equivalent to notice. Attendance by a person at a meeting shall constitute a
waiver of notice of such meeting except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting has not been lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Directors or a committee of Directors
need be specified in any written waiver of notice unless so required by statute,
the Certificate of Incorporation or these Bylaws.
3.17 Organization. At each meeting of the Board, the Chairman, or in
the absence of the Chairman, the President, or in the absence of the President,
a chairman chosen by
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a majority of the Directors present, shall preside. The Secretary shall act as
secretary at each meeting of the Board. In case the Secretary shall be absent
from any meeting of the Board, an Assistant Secretary shall perform the duties
of secretary at such meeting; and in the absence from any such meeting of the
Secretary and all Assistant Secretaries, the person presiding at the meeting may
appoint any person to act as secretary of the meeting.
3.18 Quorum of Directors. Except as otherwise expressly provided by
statute or the Certificate of Incorporation, the presence of a majority of the
Entire Board shall be necessary and sufficient to constitute a quorum for the
transaction of business at any meeting of the Board, but a smaller number may by
majority vote adjourn to a later date any such meeting at which a quorum is not
present.
3.19 Action by Majority Vote. Except as otherwise expressly required
by statute, the Certificate of Incorporation or these Bylaws, the act of a
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board.
3.20 Action Without Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if all Directors or members of such committee, as the case may
be, consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
ARTICLE 4
COMMITTEES OF THE BOARD
The Board, by resolution adopted by a majority of the Entire Board,
may designate one or more committees, each committee to consist of one or more
of the Directors of the Corporation. The Board may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of such committee. If a member of a committee
shall be absent from any meeting, or disqualified from voting thereat, the
remaining member or members present and not disqualified from voting, whether or
not such member or members constitute a quorum, may, by a unanimous vote,
appoint another member of the board to act at the meeting in the place of any
such absent or disqualified member. Any such committee, to the extent provided
in the resolution of the Board or these Bylaws, shall have and may exercise all
the powers and authority of the Board in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
impressed on all papers that may require it, but no such committee shall have
the power or authority of the Board in reference to: (i) approving, or
recommending to the Stockholders, any action that the Delaware General
Corporation Law requires to be approved by the Stockholders; (ii) filling
vacancies on the Board or on any of its committees; (iii) amending the
Certificate of Incorporation; (iv) adopting, amending, or repealing these
Bylaws; (v) approving a plan of merger not requiring approval of the
Stockholders; (vi) authorizing or approving a distribution, except according to
a general formula or method prescribed by the Board; or (vii) authorizing or
approving the redemption, issuance or sale or contract for sale of shares, or
determine the designation and relative rights, preferences, and limitations of a
class or
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series of shares, except that the Board may authorize a committee, or a senior
executive officer of the Corporation, to do so within limits specifically
prescribed by the Board. Unless otherwise specified in the resolution of the
Board designating a committee, at all meetings of such committee a majority of
the total number of members of the committee shall constitute a quorum for the
transaction of business, and the vote of a majority of the members of the
committee present at any meeting at which there is a quorum shall be the act of
the committee. Each committee shall keep regular minutes of its meetings and
report the same to the Board when required. Unless the Board otherwise provides,
each committee designated by the Board may make, alter and repeal rules for the
conduct of its business. In the absence of such rules each committee shall
conduct its business in the same manner as the Board conducts its business
pursuant to Article 3 of these Bylaws.
ARTICLE 5
OFFICERS
5.1 Positions. The officers of the Corporation shall be a President; a
Secretary, a Treasurer and such other officers as the Board may appoint,
including a Chairman, a Chief Executive Officer, one or more Executive Vice
Presidents, one or more Vice Presidents and one or more Assistant Secretaries
and Assistant Treasurers, who shall exercise such powers and perform such duties
as shall be determined from time to time by the Board. The Board may use
descriptive words or phrases to designate the standing, seniority or areas of
special competence of the Vice Presidents elected or appointed by it. Any number
of offices may be held by the same person unless the Certificate of
Incorporation or these Bylaws otherwise provide.
5.2 Appointment. The officers of the Corporation shall be chosen by
the Board at its annual meeting or at such other time or times as the Board
shall determine.
5.3 Compensation. The compensation of all officers of the Corporation
shall be fixed by, or in the manner prescribed by, the Board. No officer shall
be prevented from receiving a salary or other compensation by reason of the fact
that the officer is also a Director.
5.4 Term of Office. Each officer of the Corporation shall hold office
for the term for which he or she is elected and until such officer's successor
is chosen and qualifies or until such officer's earlier death, resignation or
removal. Any officer may resign at any time upon written notice to the
Corporation. Such resignation shall take effect at the date of receipt of such
notice or at such later time as is therein specified, and, unless otherwise
specified, the acceptance of such resignation shall not be necessary to make it
effective. The resignation of an officer shall be without prejudice to the
contract rights of the Corporation, if any. Any officer elected or appointed by
the Board may be removed at any time, with or without cause, by vote of a
majority of the Entire Board. Any vacancy occurring in any office of the
Corporation shall be filled by the Board. The removal of an officer without
cause shall be without prejudice to the officer's contract rights, if any. The
election or appointment of an officer shall not of itself create contract
rights.
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5.5 Fidelity Bonds. The corporation may secure the fidelity of any or
all of its officers or agents by bond or otherwise.
5.6 Chairman. The Chairman, if so appointed by the Board, shall
exercise such duties as are and may be prescribed from time to time by the
Board. In the absence of or disability of the Chairman, an officer appointed by
the Chairman, or if the Chairman fails to make such appointment, by the Board,
shall perform the duties and exercise the powers of the Chairman. The Chairman
shall preside at all meetings the Board at which he is present, and shall
perform such other duties as may be prescribed from time to time by the Board or
these Bylaws.
5.7 Chief Executive Officer. The Chief Executive Officer shall
exercise such duties as are and may be prescribed from time to time by the
Board. The Chief Executive Officer may sign, execute and deliver, in the name of
the Corporation, powers of attorney, contracts, bonds and other obligations
which implement policies established by the Board.
5.8 President. The President shall be responsible to, and shall
exercise such duties as are and may be prescribed from time to time by, the
Board. The President may sign, execute and deliver, in the name of the
Corporation, powers of attorney, contracts, bonds and other obligations which
implement policies established by the Board.
5.9 Executive Vice President. In the absence of the President or in
the event of his death, inability or refusal to act, the Executive Vice
Presidents, if any, or in the event there be more than one Executive Vice
President, the Executive Vice President, in the order designated, or in the
absence of any designation, then in the order of their first election, shall
perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. The
Executive Vice President shall generally assist the President and shall perform
such other duties and have such other powers as the Board may from time to time
prescribe.
5.10 Vice President. In the absence of the Executive Vice President or
in the event of his death, inability or refusal to act, the Vice President, if
any, or in the event there be more than one Vice President, the Vice Presidents,
in the order designated, or in the absence of any designation, then in the order
of their first election, shall perform the duties of the Executive Vice
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Executive Vice President. The Vice President shall
generally assist the President and shall perform such duties and have such other
powers as the Board may from time to time prescribe.
5.11 Secretary. The Secretary shall attend all meetings of the Board
and all meetings of the stockholders and shall record all the proceedings of the
meetings of the stockholders and of the Board in a book to be kept for that
purpose and shall perform like duties for the standing committees when requested
by such committees. The Secretary shall give, or cause to be given, required
notice of all meetings of the stockholders and the Board, and shall perform such
other duties as may be prescribed by the Board or assigned by the President. The
Secretary shall have custody of the stock certificate books and stockholder
records and such other books and records as the Board may direct. The Secretary
shall have custody of the corporate seal of the Corporation and shall have
authority to affix the same to any instrument,
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and when so affixed, it may be attested by the Secretary's signature. The Board
may give general authority to any other officer to affix the seal of the
Corporation and to attest to the affixing thereof by his signature.
5.12 Assistant Secretary. Any Assistant Secretary elected by the Board
shall have the same duties as prescribed for the Secretary and shall perform
such duties at the direction of the Secretary, to assist the Secretary, and in
the absence of the Secretary, at the direction of the President or any Vice
President, and otherwise as directed from time to time by the President or the
Board.
5.13 Treasurer or Chief Financial Officer. The Treasurer or Chief
Financial Officer shall have custody of the corporate funds and securities and
shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation, and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board, and shall disburse the funds of the Corporation,
as may be ordered by the Board, taking proper vouchers for such disbursements,
and shall render to the President and the Board at its regular meetings, or when
the Board so requires, an account of all his transactions as treasurer and of
the financial condition of the Corporation, and shall perform such other duties
and have such other powers as the Board or the President may from time to time
prescribe.
5.14 Assistant Treasurer. Any Assistant Treasurer elected by the Board
shall have the same duties as prescribed for the Treasurer and shall perform
such duties at the direction of the Treasurer, to assist the Treasurer, and in
the absence of the Treasurer, at the direction of the President or any Vice
President, and otherwise as directed from time to time by the President or the
Board.
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
6.1 Execution of Contracts. The Board, except as otherwise provided in
these Bylaws, may prospectively or retroactively authorize any officer or
officers, employee or employees or agent or agents, in the name and on behalf of
the Corporation, to enter into any contract or execute and deliver any
instrument, and any such authority may be general or confined to specific
instances, or otherwise limited.
6.2 Loans. The Board may prospectively or retroactively authorize the
President or any other officer, employee or agent of the Corporation to effect
loans and advances at any time for the Corporation from any bank, trust company
or other institution, or from any firm, corporation or individual, and for such
loans and advances the person so authorized may make, execute and deliver
promissory notes, bonds or other certificates or evidences of indebtedness of
the Corporation, and, when authorized by the Board so to do, may pledge and
hypothecate or transfer any securities or other property of the Corporation as
security for any such loans or advances. Such authority conferred by the Board
may be general or confined to specific instances or otherwise limited.
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6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
payment of money out of the funds of the Corporation and all evidences of
indebtedness of the Corporation shall be signed on behalf of the Corporation in
such manner as shall from time to time be determined by resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise employed
shall be deposited from time to time to the order of the Corporation with such
banks, trust companies, investment banking firms, financial institutions or
other depositaries as the Board may select or as may be selected by an officer,
employee or agent of the Corporation to whom such power to select may from time
to time be delegated by the Board.
ARTICLE 7
STOCK AND DIVIDENDS
7.1 Certificates Representing Shares. The shares of capital stock of
the Corporation shall be represented by certificates in such form (consistent
with the provisions of Section 158 of the General Corporation Law) as shall be
approved by the Board. Such certificates shall be signed by the Chairman, the
President, an Executive Vice President or a Vice President and by the Secretary
or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be
impressed with the seal of the Corporation or a facsimile thereof. If the
Corporation is authorized to issue direct classes of shares or different series
within a class, the designations, relative rights, preferences, and limitations
applicable to each class and the variations in rights, preferences, and
limitations determined for such series (and the authority of the Board to
determine variations for future series) shall be summarized on the front or back
of each certificate of shares or such class or series. Alternatively, each
certificate may state conspicuously on its front or back that the Corporation
will furnish the Stockholder this information on request in writing and without
charge. All certificates for shares shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares represented
thereby are issued, with the number of shares and date of issue, shall be
entered on the stock transfer books of the Corporation. The signatures of the
officers upon a certificate may be facsimiles, if the certificate is
countersigned, manually or by facsimile signature, by a transfer agent or
registrar other than the Corporation itself or its employee. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon any certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, such certificate
may, unless otherwise ordered by the Board, be issued by the Corporation with
the same effect as if such person were such officer, transfer agent or registrar
at the date of issue.
7.2 Transfer of Shares. Transfers of shares of capital stock of the
Corporation shall be made only on the books of the Corporation by the holder
thereof or by the holder's duly authorized attorney appointed by a power of
attorney duly executed and filed with the Secretary or a transfer agent of the
corporation, and on surrender of the certificate or certificates representing
such shares of capital stock properly endorsed for transfer and upon payment of
all necessary transfer taxes. Every certificate exchanged, returned or
surrendered to the Corporation shall be marked "Canceled," with the date of
cancellation, by the Secretary or an Assistant
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Secretary or the transfer agent of the Corporation. A person in whose name
shares of capital stock shall stand on the books of the Corporation shall be
deemed the owner thereof to receive dividends, to vote as such owner and for all
other purposes as respects the Corporation. No transfer of shares of capital
stock shall be valid as against the Corporation, its Stockholders and creditors
for any purpose, except to render the transferee liable for the debts of the
Corporation to the extent provided by law, until such transfer shall have been
entered on the books of the Corporation by an entry showing from and to whom
transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to
time maintain one or more transfer offices or agents and registry offices or
agents at such place or places as may be determined from time to time by the
Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder of
any shares of capital stock of the Corporation shall immediately notify the
Corporation of any loss, destruction, theft or mutilation of the certificate
representing such shares, and the Corporation may issue a new certificate to
replace the certificate alleged to have been lost, destroyed, stolen or
mutilated. The Board may, in its discretion, as a condition to the issue of any
such new certificate, require the owner of the lost, destroyed, stolen or
mutilated certificate, or his or her legal representatives, to make proof
satisfactory to the Board of such loss, destruction, theft or mutilation and to
advertise such fact in such manner as the Board may require, and to give the
Corporation and its transfer agents and registrars, or such of them as the Board
may require, a bond in such form, in such sums and with such surety or sureties
as the Board may direct, to indemnify the Corporation and its transfer agents
and registrars against any claim that may be made against any of them on account
of the continued existence of any such certificate so alleged to have been lost,
destroyed, stolen or mutilated and against any expense in connection with such
claim.
7.5 Rules and Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws or with
the Certificate of Incorporation, concerning the issue, transfer and
registration of certificates representing shares of its capital stock.
7.6 Restriction on Transfer of Stock. A written restriction on the
transfer or registration of transfer of capital stock of the Corporation, if
permitted by Section 202 of the General Corporation Law and noted conspicuously
on the certificate representing such capital stock, may be enforced against the
holder of the restricted capital stock or any successor or transferee of the
holder, including an executor, administrator, trustee, guardian or other
fiduciary entrusted with like responsibility for the person or estate of the
holder. Unless noted conspicuously on the certificate representing such capital
stock, a restriction, even though permitted by Section 202 of the General
Corporation Law, shall be ineffective except against a person with actual
knowledge of the restriction. A restriction on the transfer or registration of
transfer of capital stock of the Corporation may be imposed either by the
Certificate of Incorporation or by an agreement among any number of Stockholders
or among such Stockholders and the Corporation. No restriction so imposed shall
be binding with respect to capital stock issued prior to the adoption of the
restriction unless the holders of such capital stock are parties to an agreement
or voted in favor of the restriction.
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7.7 Dividends, Surplus, Etc. Subject to the provisions of the
Certificate of Incorporation and of law, the Board:
7.7.1 may declare and pay dividends or make other distributions
on the outstanding shares of capital stock in such amounts and at such
time or times as it, in its discretion, shall deem advisable giving due
consideration to the conditions of the affairs of the Corporation;
7.7.2 may use and apply, in its discretion, any of the surplus of
the Corporation in purchasing or acquiring any shares of capital stock
of the Corporation, or purchase warrants therefor, in accordance with
law, or any of its bonds, debentures, notes, scrip or other securities
or evidences of indebtedness; and
7.7.3 may set aside from time to time out of such surplus or net
profits such sum or sums as, in its discretion, it may think proper, as
a reserve fund to meet contingencies, or for equalizing dividends or for
the purpose of maintaining or increasing the property or business of the
Corporation, or for any purpose it may think conducive to the best
interests of the Corporation.
ARTICLE 8
BOOKS AND RECORDS
8.1 Books and Records. There shall be kept at the Office of the
Corporation correct and complete records and books of account recording the
financial transactions of the Corporation and minutes of the proceedings of the
Stockholders, the Board and any committee of the Board. The Corporation shall
keep at its principal office, or at the office of the transfer agent or
registrar of the corporation, a record containing the names and addresses of
all Stockholders, the number and class of shares held by each and the dates
when they respectively became the owners of record thereof.
8.2 Form of Records. Any records maintained by the Corporation in the
regular course of its business, including its stock ledger, books of account,
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs, or any other information storage device,
provided that the records so kept can be converted into clearly legible written
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
8.3 Inspection of Books and Records. Except as otherwise provided by
law, the Board shall determine from time to time whether, and, if allowed, when
and under what conditions and regulations, the accounts, books, minutes and
other records of the Corporation, or any of them, shall be open to the
Stockholders for inspection.
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ARTICLE 9
SEAL
The Corporate seal, if the Board elects to adopt one, shall have
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or otherwise reproduced.
ARTICLE 10
FISCAL YEAR
The fiscal year of the Corporation shall end on December 31 of each
calendar year, and may be changed, by resolution of the Board.
ARTICLE 11
PROXIES AND CONSENTS
Unless otherwise directed by the Board, the President, any Executive
Vice President, any Vice President, the Secretary or the Treasurer, or any one
of them, may execute and deliver on behalf of the Corporation proxies respecting
any and all shares or other ownership interests of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise (an
"Other Entity") owned by the Corporation appointing such person or persons as
the officer executing the same shall deem proper to represent and vote the
shares or other ownership interests so owned at any and all meetings of holders
of shares or other ownership interests, whether general or special, and/or to
execute and deliver consents respecting such shares or other ownership
interests; or any of the aforesaid officers may attend any meeting of the holder
of shares or other ownership interests of such Other Entity and thereat vote or
exercise any or all other powers of the Corporation as the holder of such shares
or other ownership interests.
ARTICLE 12
OFFICES
12.1 Registered Office. The registered office of the Corporation in
the State of Delaware is located at Corporation Trust Center, 1209 Orange Street
in the City of Wilmington, County of New Castle. The name and address of the
Corporation's registered agent is The Corporation Trust Company, Corporation
Trust Center, 1209 Orange Street, Wilmington, Delaware 19801.
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12.2 Other Offices. The Corporation may also have offices, including
its principal office, at such other places both within and without the State of
Delaware as the Board of Directors may from time to time determine or the
business of the Corporation may require.
ARTICLE 13
EMERGENCY BYLAWS
Unless the Certificate of Incorporation provides otherwise, the
following provisions of this Article 13 shall be effective during an emergency
resulting from an attack on the United States or during any nuclear or atomic
disaster or during the existence of a similar catastrophe. During such
emergency:
13.1 Notice to Board Members. Any one member of the Board or any one
of the following officers: Chairman, President, any Executive Vice President,
any Vice President, Secretary, or Treasurer, may call a meeting of the Board.
Such person shall use reasonable efforts to notify all members of the Board, but
notice of such meeting need be given only to those directors whom after
reasonable effort it is practicable to reach, and may be given in any practical
manner, including by publication and radio. Such notice shall be given at least
six hours prior to commencement of the meeting.
13.2 Temporary Directors and Quorum. One or more officers of the
Corporation present at the emergency Board meeting, as is necessary to achieve a
quorum, shall be considered to be Directors for the meeting, and shall so serve
in order of rank, and within the same rank, in order of seniority. In the event
that less than a quorum of the Directors are present (including any officers who
are to serve as Directors for the meeting), those Directors present (including
the officers serving as Directors) shall constitute a quorum. Notwithstanding
the foregoing, no meeting of the Board shall take place pursuant to this Article
13 without the presence of at least three Directors (not including officers
serving as Directors for the meeting).
13.3 Actions Permitted To Be Taken. The Board as constituted in
Section 13.2 hereof, and after notice as set forth in Section 13.1 hereof may:
13.3.1 prescribe emergency powers to any officer of the
Corporation;
13.3.2 delegate to any officer or Director, any of the powers of
the Board;
13.3.3 designate lines of succession of officers and agents, in
the event that any of them are unable to discharge their duties.
13.3.4 relocate the principal place of business, or designate
successive or simultaneous principal places of business; and
13.3.5 take any other action reasonably necessary to carry on the
business of the Corporation.
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13.4 Effectiveness of Emergency Bylaws. To the extent that they are
not inconsistent with the provisions of this Article 13, all other provisions of
these Bylaws shall remain in effect during an emergency. Upon termination of the
emergency, the provisions of this Article 13 shall cease to be operative.
ARTICLE 14
AMENDMENTS
Except as otherwise expressly specified in the Certificate of
Incorporation or these Bylaws, the Board may from time to time adopt, amend or
repeal the Bylaws; provided, however, that any Bylaws adopted or amended by the
Board may be amended or repealed, and any Bylaws may be adopted, by a vote of
the Stockholders having at least two-thirds of the voting power of the then
issued and outstanding shares of capital stock of the Corporation.
* * *
CERTIFICATION
The undersigned, in his capacity as Secretary of the Corporation,
hereby certifies that the foregoing is the Bylaws of the Corporation adopted by
the Board of the Corporation on this 2 day of November, 1999.
/s/ MICHAEL A. LUBIN
-----------------------------
Michael A. Lubin
Secretary
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EXHIBIT 4.1
STOCKHOLDERS' AGREEMENT
This STOCKHOLDERS' AGREEMENT (the "Agreement") is made as of this ____ day
of __________________, 1999, by and among PATHNET TELECOMMUNICATIONS, INC., a
Delaware corporation (the "Company"); and the undersigned parties identified on
Exhibit A (collectively the "Stockholders").
W I T N E S S E T H:
WHEREAS, the Company has entered into the following contribution agreements
(collectively, the "Contribution Agreements"): (i) Contribution Agreement (the
"BNSF Contribution Agreement") by and among the Company and The Burlington
Northern and Santa Fe Railway Company and certain affiliates thereof
(collectively, "BNSF"); (ii) Contribution Agreement (the "CSX Contribution
Agreement") by and between the Company and CSX Transportation, Inc. ("CSX");
(iii) Contribution Agreement (the "Colonial Contribution Agreement") by and
between the Company and Colonial Pipeline Company, a Delaware and Virginia
corporation ("Colonial"); and (iv) Contribution Agreements (the "Pathnet
Stockholders Contribution Agreements") by and among the Company and the
stockholders (the "Pathnet Stockholders") of Pathnet, Inc., a Delaware
corporation ("Pathnet"). Each of BNSF, CSX, Colonial and certain individual
Pathnet Stockholders, together with Jalkut (as defined below), is a Stockholder
under this Agreement.
WHEREAS, pursuant to the Contribution Agreements, the Company and the
Stockholders have agreed to enter into this Agreement to provide certain rights
to the Stockholders of shares of the Company's Series A Convertible Preferred
Stock (the "Series A Preferred Stock"), Series B Convertible Preferred Stock
(the "Series B Preferred Stock"), Series C Convertible Preferred Stock (the
"Series C Preferred Stock"), Series D Convertible Preferred Stock (the "Series D
Preferred Stock") and Series E Convertible Preferred Stock (the "Series E
Preferred Stock" and, collectively with the other aforementioned series, the
"Series Preferred Stock") in the amounts set forth in Exhibit A, which shall be
convertible into shares of the Company's common stock, $.01 par value per share
(the "Common Stock") in accordance with the terms of the Company's Certificate
of Incorporation.
WHEREAS, the undersigned Stockholders wish to enter into this Agreement in
order better to regulate the conduct of the business of the Company and to
provide for certain voting and stock transfer arrangements both before and after
the conversion of the Series Preferred Stock into shares of the Common Stock as
contemplated in the Certificate of Incorporation of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties hereto agree as follows:
SECTION 1 DEFINED TERMS
1.1. Certain Definitions.
For purposes of this Agreement, the following defined terms shall have the
meanings set forth below:
<PAGE> 2
"Affiliate" of a party or other person (whether a natural person,
corporation, partnership, association, company, or other entity) shall mean (i)
the spouse, child, parent, sibling, or other familial relation of any natural
person, and (ii) any natural person, corporation, partnership, association,
company or other entity, in each case controlled by or operating at the
direction of, under common control or operating in conjunction with, or
controlling or otherwise directing, any such party or other person;
"Board of Directors" shall mean the Board of Directors of the Company, as
duly elected and qualified from time to time;
"Bylaws" shall mean the duly adopted bylaws of the company, as such Bylaws
may be amended from time to time hereafter;
"Certificate of Incorporation" shall mean the Company's Certificate of
Incorporation, as such Certificate may be amended from time to time hereafter;
"Electing Purchasers" shall mean those Eligible Stockholders electing, by
notice in writing to the Company delivered within the thirty-day notice period
set forth in Section 8.1(c) hereof, to purchase additional securities of the
Company pursuant to the exercise of their rights to purchase such additional
securities pursuant to Section 8.1 hereof;
"Eligible Stockholder" shall mean each and all of such of the Series
Preferred Stockholders and the Founder as shall in each case and at the
applicable date continue to own at least fifty percent (50%) of the number of
shares of the Company's voting capital stock (as adjusted for any split,
recombination, stock dividend, or other reclassification of the voting capital
stock of the Company, as may be provided in the Company's Certificate of
Incorporation) as such person owned immediately following the closing of the
initial transactions contemplated in the Contribution Agreements including any
shares of voting capital stock held by Affiliates of such Series Preferred
Stockholder;
"Founder" shall mean David Schaeffer, an individual resident of Potomac,
Maryland;
"Founder Securities" shall mean shares of Common Stock issued to the
Founder whether initially or by way of a stock dividend, stock split, or in
connection with any combination of shares, recapitalization, merger,
consolidation or other reorganization; provided, however, that the term "Founder
Securities" shall not include any shares of Common Stock that have previously
been registered with the SEC under the provisions of Article 9 or otherwise, or
which have been sold to the public either pursuant to a registration statement
or SEC Rule 144, or that may be sold by the holder thereof pursuant to SEC Rule
144(k);
"Holder" shall mean a holder of Registrable Securities or Founder
Securities;
"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;
"Jalkut" shall mean Richard A. Jalkut, an individual resident of Bedford,
New York ;
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"Jalkut Employment Agreement" shall mean that certain Employment Agreement,
dated as of August 4, 1997, by and between Jalkut and Pathnet, Inc., as amended
and assigned to the Company as of ________, 1999;
"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.
"Pro Rata Share" shall mean that portion of the total number of securities
proposed to be sold or otherwise issued by the Company determined by a fraction
(i) the numerator of which is the aggregate number of shares of Common Stock
owned by such party immediately prior to any proposed sale or other issuance of
securities (assuming the full conversion of any shares of the capital stock of
the Company held by such party that are convertible into shares of Common
Stock); and (ii) the denominator of which is the total number of shares of
Common Stock owned by all such parties owning Common Stock, assuming the
exercise of all outstanding options, warrants, and other rights to acquire
Common Stock (or securities convertible into Common Stock) and the full
conversion of any shares of the capital stock of the Company convertible into
shares of Common Stock;
"Qualified Public Offering" shall mean the closing of a 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;
"Registrable Securities" shall have the meaning ascribed to such term in
Section 9.4 hereof;
"Required Holders" shall mean: (i) prior to the first Qualified Public
Offering, the holders at any time and from time to time of at least sixty-seven
percent (67%) of the Registrable Securities; and (ii) after the first Qualified
Public Offering, the holders at any time and from time to time of at least
twenty percent (20%) of the Registrable Securities;
"SEC" shall mean the United States Securities and Exchange Commission, or
any successor entity thereto;
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations from time to time promulgated thereunder;
"Series A Preferred Stockholders" shall mean the holders of the shares of
Series A Preferred Stock;
"Series B Preferred Stockholders" shall mean the holders of the shares of
Series B Preferred Stock;
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<PAGE> 4
"Series C Preferred Stockholders" shall mean the holders of the shares of
Series C Preferred Stock;
"Series D Preferred Stockholders" shall mean the holders of the shares of
Series D Preferred Stock;
"Series E Preferred Stockholders" shall mean the holders of the shares of
Series E Preferred Stock;
"Series Preferred Stockholder" shall mean the holder of any shares of any
one or more of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock, the Series D Preferred Stock or the Series E Preferred
Stock;
"Series Preferred Stockholder Director" shall mean any nominee of any of
the Series Preferred Stockholders appointed in accordance with the provisions
hereof and serving from time to time as a director of the Company;
"Shares" shall mean any shares of the capital stock of the Company;
"Stockholder Director" shall mean any of the directors of the Company
appointed pursuant to the provisions of Section 5.1(b)(i) through (v) hereof;
"Stock Incentive Plan" shall mean the Company's 1995 Stock Incentive Plan,
in substantially the form attached as Exhibit B hereto and as contemplated to be
adopted by the Board of Directors as of the date hereof;
"Stock Option Plan" shall mean the Company's 1997 Stock Option Plan, in
substantially the form attached as Exhibit C hereto and as contemplated to be
adopted by the Board of Directors as of the date hereof;
"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" 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.
"Warrant Registration Rights Agreement" shall mean that certain
Supplemental Warrant Registration Rights Agreement, dated as of
________________, 1999, by and among the Company, the [Permitted Holders] named
therein and the Initial Purchasers named therein, relating to certain Warrants
proposed to be issued by the Company in exchange for certain warrants previously
issued by Pathnet pursuant to the terms of the Warrant Agreement, dated April 8,
1998, by and between
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Pathnet and certain other parties thereto, in connection with the placement of
certain senior indebtedness of Pathnet, all as more fully described in such
Supplemental Warrant Registration Rights Agreement, which Supplemental Warrant
Registration Rights Agreement shall be on terms substantially similar to those
of the Warrant Registration Rights Agreement, dated April 8, 1998, by and
between Pathnet and certain other parties thereto.
1.2. Interpretation of Provisions. The definitions of terms herein shall
apply equally to the singular and plural forms of the terms defined. Whenever
the context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". The word "will"
shall be construed to have the same meaning and effect as the word "shall".
Unless the context requires otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any reference
herein to any person (whether natural, corporate, or otherwise) shall be
construed to include such person's successors and assigns, (c) the words
"herein", "hereof" and "hereunder", and words of similar import, shall be
construed to refer to this Agreement in its entirety and not to any particular
provision hereof, (d) all references herein to Sections, Exhibits and Schedules
shall be construed to refer to Sections of, and Exhibits and Schedules to, this
Agreement and (e) the words "asset" and "property" shall be construed to have
the same meaning and effect and to refer to any and all tangible and intangible
assets and properties, including cash, securities, accounts and contract rights.
SECTION 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Stockholders to enter into this Agreement, the Company
represents and warrants, as of the date hereof, to each of the Stockholders as
follows:
2.1. Organization and Corporate Power.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, and is qualified to do
business as a foreign corporation in each jurisdiction in which the failure to
be so qualified would have a material adverse effect on its business, financial
condition or results of operations.
(b) The Company has all required corporate power and authority to
carry on its business as presently conducted, to enter into and perform this
Agreement and to carry out the transactions contemplated hereby.
(c) The Company is not in violation of any term of its Certificate of
Incorporation or Bylaws, each as amended to date, or in violation of any
material term of any agreement, instrument, judgment, decree, order, statute,
rule or government regulation applicable to the Company or to which the Company
is a party, in each case in any manner that could reasonably be expected to have
a material adverse effect on the Company's business, financial condition,
prospects, assets, liabilities or results of operations.
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2.2. Authorization and Non-Contravention.
(a) This Agreement and all documents executed pursuant hereto or
otherwise in connection herewith (including without limitation the Contribution
Agreements and the documents and other agreements executed in connection
therewith) are valid and binding obligations of the Company, enforceable in
accordance with their terms, except as such enforcement may be limited by laws
of general application relating to bankruptcy, reorganization, insolvency,
moratorium or other laws affecting creditors' rights and the availability of
equitable remedies which are subject to the discretion of the court before which
an action may be brought.
(b) The execution, delivery and performance of this Agreement and all
agreements, documents and instruments executed pursuant hereto or otherwise in
connection herewith (including without limitation the Contribution Agreements
and the documents and other agreements executed in connection therewith) have
been duly authorized by all necessary corporate action of the Company.
(c) The execution of this Agreement and the performance of any
transaction contemplated hereby shall not (i) violate, conflict with or result
in a default under any contract or obligation to which the Company or any
Subsidiary is a party or by which it or any Subsidiary or any of their assets
are bound, or any provision of its Certificate of Incorporation or Bylaws, each
as amended to date, or cause the creation of any encumbrance upon any of the
assets of the Company or any Subsidiary; (ii) violate or result in a violation
of, or constitute a default (whether after the giving of notice, lapse of time
or both) under any provision of any law, regulation or rule, or any order of, or
any restriction imposed by, any court or other governmental agency; (iii)
require from the Company or any Subsidiary any notice to, declaration or filing
with, or consent or approval of any governmental authority or other third party;
or (iv) accelerate any obligation under or give rise to a right of termination
of, any material agreement, permit, license or authorization to which the
Company or any Subsidiary is a party or by which the Company or any Subsidiary
is bound.
2.3. Tax-Related Representations.
(a) There is no plan or intention by the Company to dispose of any of
the property contributed to the Company pursuant to the Contribution Agreements
except that the Company may (i) transfer certain contributed property to Pathnet
or another Subsidiary in a transaction that will qualify as a tax-free transfer
pursuant to Section 351, and (ii) effect the conversion of certain shares of
preferred stock of Pathnet into shares of common stock of Pathnet.
(b) 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 set forth in the Contribution Agreements.
(c) The Company intends that the contributions of property to the
Company in exchange for Shares pursuant to the Contribution Agreements will be
treated as part of a single integrated transaction in which gain or loss will
not be recognized pursuant to IRC Section 351 and, in the case of Persons who
contribute Pathnet stock to the Company in exchange for Shares, the
contributions also will qualify as a tax-free reorganization under IRC Section
368(a)(1)(B) pursuant to which gain or loss will not be recognized.
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SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
In order to induce the other Stockholders and the Company to enter into
this Agreement, their respective Contribution Agreements (between the Company
and such other Stockholders), and the other documents being executed in
connection herewith and therewith, each Stockholder individually represents and
warrants, as of the date hereof, to the Company and to each of the other
Stockholders as follows:
3.1. Organization and Corporate, Partnership and Individual Power.
(a) Such Stockholder is either (i) a partnership or corporation duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction, and is qualified to do business as a foreign
partnership or corporation in each jurisdiction in which the failure to be so
qualified would have a material adverse effect on its business, financial
condition or results of operations, (ii) a natural person whose individual net
worth, or joint net worth with such person's spouse, as of the date hereof
exceeds $1,000,000, or (iii) a natural person who has a preexisting personal or
business relationship with one of the directors of the Company, or by reason of
his or her business or financial experience or the business or financial
experience of his or her professional advisors who are unaffiliated with and who
are not compensated by the Company or any selling agent of the Company, directly
or indirectly, could be reasonably assumed to have the capacity to protect his
or her own interests in connection with the transactions contemplated by this
Agreement.
(b) Such Stockholder, if a partnership or a corporation, has all
required corporate or partnership power and authority to carry on its business
as presently conducted, to enter into and perform this Agreement and the
agreements contemplated hereby to which it is a party and to carry out the
transactions contemplated hereby and thereby; provided, however, that no
representation or warranty is made herein with respect to any agreement by any
Stockholder to contribute any assets to the Company. Such Stockholder, if an
individual, has the capacity to enter into and perform this Agreement and the
agreements contemplated hereby to which he is a party and to carry out the
transactions contemplated hereby and thereby.
3.2. Authorization and Non-Contravention.
(a) This Agreement and all documents executed pursuant hereto or
otherwise in connection herewith (including without limitation the applicable
Contribution Agreement and the documents and other agreements executed in
connection therewith) are valid and binding obligations of such Stockholder,
enforceable in accordance with their terms, except as such enforcement may be
limited by laws of general application relating to bankruptcy, reorganization,
insolvency, moratorium or other laws affecting creditors' rights and the
availability of equitable remedies which are subject to the discretion of the
court before which an action may be brought.
(b) The execution, delivery and performance of this Agreement and all
agreements, documents and instruments executed pursuant hereto or otherwise in
connection herewith (including without limitation the respective Contribution
Agreement and the documents and other agreements executed in connection
therewith) have been duly authorized by all necessary corporate, partnership, or
individual action of such Stockholder, and represent the exercise of such
Stockholder's own free will and have not been executed under any compulsion or
duress.
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(c) The execution of this Agreement and the performance of any
transaction contemplated hereby shall not: (i) violate, conflict with or result
in a default under any contract or obligation to which such Stockholder is a
party or by which it or its assets are bound, or, in the case of any Stockholder
that is a partnership or corporation, any provision of such Stockholder's
certificate of incorporation, bylaws, partnership agreement, or other
organizational or voting documents, each as amended to date, or cause the
creation of any encumbrance upon any of the assets of any Stockholder; (ii)
violate or result in a violation of, or constitute a default (whether after the
giving of notice, lapse of time or both) under any provision of any law,
regulation or rule normally applicable to the transactions contemplated hereby
(and excluding any federal, state or local antitrust, tax, environmental,
health, safety or employment laws or laws, regulations or rules applicable to
such Stockholder solely as a result of its business activities), or any order
of, or any restriction imposed by, any court or other governmental agency; (iii)
require from such Stockholder any notice to, declaration or filing with, or
consent or approval of any governmental authority or other third party; or (iv)
accelerate any obligation under or give rise to a right of termination of, any
material agreement, permit, license or authorization to which such Stockholder
is a party or by which such Stockholder is bound; provided, however, that no
representation or warranty is made herein with respect to the contribution to
the Company by any Stockholder of any assets.
3.3. Tax-Related Representations.
(a) Such Stockholder has no present intention or plan, formally or
informally, on the date hereof, to transfer or dispose of any of the Shares
received by such Stockholder pursuant to its Contribution Agreement.
(b) Each Stockholder intends that the contributions of property to the
Company in exchange for Shares pursuant to the Contribution Agreements will be
treated as part of a single integrated transaction in which gain or loss will
not be recognized and, in the case of Persons who contribute Pathnet stock to
the Company in exchange for Shares, the contributions also will qualify as a
tax-free reorganization under IRC Section 368(a)(1)(B) pursuant to which gain or
loss will not be recognized.
SECTION 4 COVENANTS OF THE COMPANY AND THE STOCKHOLDERS
The Company hereby covenants with and for the benefit of the Series
Preferred Stockholders to comply, and, in order to induce the Series Preferred
Stockholders to enter into this Agreement, all of the undersigned Stockholders
shall, if required, vote their shares of the Company's capital stock in a manner
consistent with the covenants set forth in this Section 4, until the earlier of
the date on which no shares of the Series Preferred Stock remain outstanding or
the Company's first Qualified Public Offering, except as otherwise provided
herein, and until such date the Series Preferred Stockholders hereby agree to
comply with the covenants set forth in Section 4.10.
4.1. Financial Statements and Budgetary Information.
(a) The Company shall deliver to the Stockholders internally prepared
unaudited quarterly financial statements and audited annual financial
statements, as well as annual budgetary information. The quarterly financial
information and reports shall be provided to the Stockholders within forty-five
(45) days after the end of each fiscal quarter of the Company's fiscal year.
Annual financial statements audited by a Big Five accounting firm selected by
the Board of Directors shall
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be provided to the Stockholders within ninety (90) days after the end of each
fiscal year of the Company.
(b) The annual budgetary information for each upcoming fiscal year
shall be presented at the Board of Directors' meeting at least 60 days prior to
each fiscal year-end of the Company and shall be subject to approval by the
Board of Directors. Such budgetary information shall include a budget for the
upcoming fiscal year and the succeeding two years describing in detail, at a
minimum, assumptions with respect to revenues, key operating expenses and
capital expenditures and financing. Any material deviations from the budget for
any fiscal year shall be subject to prior approval by the Board of Directors.
(c) The Company shall deliver to the Stockholders such other periodic
information as it may provide to holders of the Company's outstanding debt
obligations.
4.2. Indemnification and Insurance.
For so long as any of the shares of Series Preferred Stock remain
outstanding, the Certificate of Incorporation shall at all times during which
any Series Preferred Stockholder Director serves as a director of the Company,
provide for indemnification of the directors and limitations on the liability of
the directors to the fullest extent permitted under applicable state law. Upon
the reasonable request of any Series Preferred Stockholder Director, and in any
event prior to the effective date of a public offering by the Company of equity
securities registered pursuant to the Securities Act, the Company shall use its
best efforts to obtain and maintain on reasonable business terms directors and
officers liability insurance coverage at a level reasonably suitable for the
Company but in no event less than $1,000,000 per occurrence, including coverage
of knowing violations under federal and state securities laws, which coverage
shall apply to, but not be limited to, the Company's initial public offering.
4.3. Restrictions on other Agreements.
The Company shall not enter into any agreement with any party which
eliminates, amends or restricts the rights and preferences of the Series
Preferred Stock as set forth in the Certificate of Incorporation or otherwise
take any other action that adversely affects the rights of the Series Preferred
Stockholders or any class of Series Preferred Stock.
4.4. Stock Options.
(a) Except as set forth on Schedule 4.4, the Company shall not issue
stock, grant stock options, warrants, or other rights to purchase stock in the
Company, except pursuant to and in accordance with the terms of the Stock Option
Plan and the Stock Incentive Plan. Unless otherwise approved by the Board of
Directors, the Company shall not issue or grant any of such securities with
respect to the purchase of more than 5.5 million shares of Common Stock, or any
shares of Preferred Stock, under the Stock Option Plan and Stock Incentive Plan
(including options issued in exchange for options for shares of Common Stock of
Pathnet which are issued and outstanding as of the date hereof, and as adjusted
for stock splits, stock dividends, reclassification and similar events).
(b) Notwithstanding any of the foregoing clause 4.4(a), the Company
shall be permitted to grant stock options (and issue Common Stock upon the
exercise thereof) of the Company to the individuals and entities listed on
Schedule 4.4 in the amounts and under the terms
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and conditions set forth opposite such individual or entity. Pursuant to the
terms of the Stock Option Plan and the Stock Incentive Plan, qualified incentive
stock options and nonqualified options may be granted to employees, officers,
directors and consultants of the Company pursuant to and in accordance with the
terms of this Agreement and the terms of the Stock Option Plan and the Stock
Incentive Plan as adopted as of the date hereof, and the exercise of any options
shall be conditioned on the optionee making satisfactory provisions for the
payment of any withholding taxes due on such exercise and agreeing to be bound
by the provisions of Section 5 and Section 7 hereof. Neither the Stock Option
Plan nor the Stock Incentive Plan may be amended, revised or waived after the
date hereof without the consent of a majority of the Series Preferred
Stockholder Directors.
(c) Notwithstanding anything set forth in this Section 4.4 to the
contrary, management may change the composition and compensation and
remuneration of existing management, consultants and employees of the Company
and may hire new management, consultants and employees of the Company, provided
the compensation and remuneration of such new and existing management,
consultants and employees (including any capital stock of the Company issued to
such new existing management, consultants or employees and any vesting schedules
relating to the grant of any such capital stock) is within the ranges
established from time to time by the Board of Directors with the approval of a
majority of the Series Preferred Stockholder Directors. Pursuant to the terms of
the Stock Option Plan and the Stock Incentive Plan, all awards under such plans
must be administered by a "Committee" whose members must be designated by the
Board of Directors.
(d) The Company shall cause Pathnet not to issue or grant any options,
warrants, or other rights to purchase, or securities convertible into or
exchangeable for, shares of the capital stock of Pathnet; provided, however,
that the foregoing covenant shall not apply to the existing rights and
obligations of Pathnet under options, warrants, purchaser rights or convertible
securities that are issued and outstanding on the date hereof.
4.5. Conduct of Business.
(a) The Company shall engage principally in the business of acquiring,
constructing, developing and/or operating telecommunications networks in the
United States or a business or businesses similar or otherwise related or
incidental thereto or reasonably compatible therewith. The Company shall keep in
full force and effect its corporate existence and all intellectual property
rights useful in its business and shall use its best efforts to cause (i) each
existing and new employee to execute a Non-Disclosure Agreement in such form as
may from time to time be approved by the Board of Directors, (ii) each new
engineer and information technology professional to execute a Non-Disclosure and
Assignment of Inventions Agreement in such form as may from time to time be
approved by the Board of Directors, and (iii) each new employee holding an
office of vice president or higher of the Company to execute a Non-Disclosure,
Assignment of Inventions and Non-Competition Agreement in such form as may from
time to time be approved by the Board of Directors.
(b) The Company shall maintain all properties used or useful in the
conduct of its business in good repair, working order and condition, ordinary
wear and tear excepted, as necessary to permit such business to be properly and
advantageously conducted.
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4.6. Payment of Taxes, Compliance with Laws, etc.
The Company shall pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon it or upon its income, franchise or
property before the same shall become in default, as well as all lawful claims
for labor, materials and supplies which if not paid when due, might become a
lien or charge upon its property or any part thereof; provided, however, that
the Company shall not be required to pay and discharge any such tax, assessment,
charge, levy or claim so long as the validity thereof is being contested by the
Company in good faith by appropriate proceedings and an adequate reserve
therefor has been established on its books. The Company shall comply with all
applicable laws and regulations in the conduct of its business, including,
without limitation, all applicable federal and state securities laws in
connection with the issuance of any securities.
4.7. Material Events.
The Company will continuously monitor and promptly advise the Series
Preferred Stockholders and the Founder in writing of any event that, in the good
faith judgment of the Company, represents a material adverse change in the
condition, financial or otherwise, or business of the Company, and of each suit
or proceeding commenced or threatened against the Company which, if adversely
determined, in the good faith judgment of the Company, could have a material
adverse effect on the Company or its financial condition, business or prospects.
4.8. Management and Compensation.
The Board of Directors may establish a Compensation Committee, consisting
of such members as the Board shall determine. Subject to the provisions of
applicable law, the Board of Directors may delegate to any such Compensation
Committee all or any part of the authority of the Board of Directors regarding
the employment and compensation of all officers and employees of the Company.
4.9. Inspection.
The Company shall, upon reasonable prior notice to the Company and so long
as not unduly disruptive to the Company's business, permit authorized
representatives of the holders of the Series Preferred Stock to visit and
inspect any of the properties of the Company, including its books or accounts
(and to make copies thereof and take extracts therefrom), and to discuss its
affairs, finances and accounts with its officers, administrative employees and
independent accountants, all at such reasonable times and as often as may be
requested.
4.10. Tax Free Transfers.
(a) The Company and the Stockholders will prepare and file their
Federal and state income tax returns in a manner that characterizes the
contributions set forth in the Contribution Agreements in the manner described
in Sections 2.3(c) and 3.3(b) of this Agreement; provided, however, that neither
the representations in Section 2.3(c) nor the covenants in this Section 4.10
shall apply to any transfers of property or the provision of services to any
Stockholder subsequent to the date of this Agreement.
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<PAGE> 12
(b) The Stockholders agree to file the information required by
Treasury Regulation Section 1.351-3 for their respective Federal income tax
returns for the taxable year of the contribution, and the Company agrees to
furnish to the Stockholders information necessary to enable the Stockholders to
comply with the information reporting requirements of Treasury Regulation
Section 1.351-3.
(c) The Company will exercise reasonable care not to take any action
subsequent to the date hereof that will cause the transfers of property to the
Company in exchange for Shares as set forth in the Contribution Agreements not
to qualify as tax-free transfers pursuant to IRC Sections 351 and 368(a)(1)(B),
as applicable.
(d) Notwithstanding the introductory sentence of this Section 4, the
covenants of the Stockholders and the Company pursuant to this Section 4.10
shall survive the closing of the Company's first Qualified Public Offering and
the conversion of the Series Preferred Stock and shall remain in full force and
effect for a period of 20 years from the date hereof.
SECTION 5 BOARD OF DIRECTORS
5.1. Appointments to the Board of Directors Prior to a Qualified Public
Offering.
Until the earlier of the date on which no shares of the Series Preferred
Stock remain outstanding or the Company's first Qualified Public Offering, the
Company shall comply, and the Stockholders shall vote their shares of the
Company's capital stock in compliance with, and to cause the Company to comply
with, the covenants set forth in this Section 5.1:
(a) Size of Board of Directors. The Company and the Stockholders shall
fix the number of members of the Board of Directors at ten (10) directors.
(b) Composition of Board of Directors
(i) Series A Preferred Stockholder Directors. The holders of the
Series A Preferred Stock shall be entitled to vote as a class
separately from all other classes of stock of the Company in any vote
for the election of directors of the Company, and shall be entitled to
elect by such class vote two directors (the "Series A Stockholder
Directors"), one of which Series A Stockholder Directors shall be
designated by Spectrum Equity Investors, L.P. ("Spectrum") for so long
as it owns shares of Series A Preferred Stock and thereafter by the
holders of a majority of the issued and outstanding shares of Series A
Preferred Stock, and the other of which shall be designated by New
Enterprise Associates VI, Limited Partnership or its affiliates
(collectively, "NEA VI") for so long as it owns shares of Series A
Preferred Stock and thereafter by the holders of a majority of the
issued and outstanding shares of Series A Preferred Stock.
(ii) Series B Preferred Stockholder Director. The holders of the
Series B Preferred Stock shall be entitled to vote as a class
separately from all other classes of stock of the Company in any vote
for the election of directors of the Company, and shall be entitled to
elect by such class vote one director (the "Series B Stockholder
Director"), which shall be designated by Grotech Partners IV, L.P.
("Grotech IV") for
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so long as it owns shares of Series B Preferred Stock, and thereafter
by the holders of a majority of the issued and outstanding shares of
Series B Preferred Stock.
(iii) Series C Preferred Stockholder Director. The holders of the
Series C Preferred Stock shall be entitled to vote as a class
separately from all other classes of stock of the Company in any vote
for the election of directors of the Company and shall be entitled to
elect by such class vote one director (the "Series C Stockholder
Director") to be designated by the holders of a majority of the issued
and outstanding shares of Series C Preferred Stock, provided, however,
that if the holders of a majority of the issued and outstanding shares
of Series C Preferred Stock designate for election as the Series C
Stockholder Director an individual who is not a partner or associate
of a Series C Stockholder or an entity under substantially the same
management as a Series C Stockholder, such designee shall be elected
as a director only with the vote of a majority of the Series A
Stockholder Directors and the Series B Stockholder Director, voting
together. Initially, the Series C Stockholder Director shall be
designated by Toronto Dominion Capital (U.S.A.), Inc. In no event
shall the Series C Stockholder Director be: (A) a partner or associate
of Spectrum or an entity under substantially the same management as
Spectrum for so long as Spectrum has designation rights under this
Section 5.1(b); (B) a partner or associate of NEA VI or an entity
under substantially the same management as NEA VI for so long as NEA
VI has designation rights under this Section 5.1(b); or (C) a partner
or associate of Grotech IV or an entity under substantially the same
management as Grotech IV for so long as Grotech IV has designation
rights under this Section 5.1(b).
(iv) Series D/E Stockholder Directors. The holders of the Series
D Preferred Stock and Series E Preferred Stock, voting together as a
single class, shall be entitled to vote as a class separately from all
other classes of stock of the Company in any vote for the election of
directors of the Company, and shall be entitled to elect by such class
vote three directors (the "Series D/E Stockholder Directors"). The
Series D/E Stockholder Directors shall be designated as follows:
(A) one Series D/E Stockholder Director shall be designated by
CSX for so long as it owns shares of Series D Preferred
Stock, and thereafter shall be designated by the holders of
a majority of the issued and outstanding shares of Series D
Preferred Stock and Series E Preferred Stock, voting
together as a single class;
(B) one Series D/E Stockholder Director shall be designated by
BNSF for so long as it owns shares of Series D Preferred
Stock, and thereafter shall be designated by the holders of
a majority of the issued and outstanding shares of Series D
Preferred Stock and Series E Preferred Stock, voting
together as a single class; and
(C) one Series D/E Stockholder Director shall be designated by
Colonial for so long as it owns shares of Series E Preferred
Stock or Series D Preferred Stock, and thereafter shall be
designated by the holders of a majority of the issued and
outstanding shares of Series D Preferred Stock and Series E
Preferred Stock, voting together as a single class.
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<PAGE> 14
(v) Independent Director. The holders of all classes of Shares,
voting as a single class, shall elect one independent director who is
not an officer or employee of the Company or any Subsidiary and not a
holder or an Affiliate of any holder of Shares of any class as of the
date of such election.
(vi) Chief Executive Officer. The holders of all classes of
Shares, voting as a single class, shall elect the Chief Executive
Officer (and any replacement or successor Chief Executive Officer) as
a director.
5.2. Appointments to the Board of Directors Following a Qualified Public
Offering.
Following the earlier of the date on which no shares of the Series
Preferred Stock remain outstanding or the Company's first Qualified Public
Offering, the Stockholders shall, for so long as they own shares of the
Company's voting capital stock, vote their shares of the Company's voting
capital stock in compliance with the covenants set forth in this Section 5.2;
provided, however, that the terms of this Section 5.2 shall not apply to any
transferee of the shares owned by such Stockholders if such transferee is not an
Affiliate of such Stockholder:
(a) Representative of BNSF. For so long as BNSF shall be the
beneficial owner of not less than five percent (5%) of the outstanding voting
capital stock of the Company, the Stockholders shall cast their votes as the
holders of shares of the voting capital stock of the Company to cause the
designee of BNSF to be elected as a director of the Company.
(b) Representative of CSX. For so long as CSX shall be the beneficial
owner of not less than five percent (5%) of the outstanding voting capital stock
of the Company, the Stockholders shall cast their votes as the holders of shares
of the voting capital stock of the Company to cause the designee of CSX to be
elected as a director of the Company
(c) Representative of Colonial. For so long as Colonial shall be the
beneficial owner of not less than five percent (5%) of the outstanding voting
capital stock of the Company, the Stockholders shall cast their votes as the
holders of shares of the voting capital stock of the Company to cause the
designee of Colonial to be elected as a director of the Company.
5.3. Other Covenants Concerning Officers and Directors.
For so long as a Stockholder is bound by the provisions of Sections 5.1 or
5.2 hereof, such Stockholder shall vote their shares of the Company's capital
stock in compliance with and to cause the Company to comply with the following
covenants:
(a) Selection of Chief Executive Officer. The first Chief Executive
Officer of the Company shall be Jalkut. Upon the termination, resignation, death
or disability of the Chief Executive Officer of the Company, the Company shall
select and hire a successor Chief Executive Officer (and any successor thereto)
by the affirmative vote of a majority of the Board of Directors.
(b) Meetings of Board of Directors. A meeting of the Board of
Directors shall be held at least four times each calendar year at intervals of
not more than three months.
(c) Removal of Directors. Each of the Stockholder Directors shall be
nominated, elected and continued as a director of the Company as provided in
Section 5.1 or Section 5.2, as
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applicable, and shall not be removed for any reason other than in connection
with the designation and election of a successor Series A Stockholder Director
by the Series A Stockholders, a successor Series B Stockholder Director by the
Series B Stockholders, a successor Series C Stockholder Director by the Series C
Stockholders, or a successor Series D/E Stockholder Director by the Series D
Stockholders and Series E Stockholders, as applicable, in each case as provided
in Section 5.1(b) hereof or 5.2 hereof, as applicable. All Stockholders agree to
vote for the removal of a Stockholder Director, if required, by the person or
persons entitled to designate such Stockholder Director, and for the election to
the Board of Directors of a substitute designated by the person or persons
entitled to designate such replacement director under this Section 5.3(c), if
requested by the person or persons entitled to designate such replacement
director.
5.4. Other Matters. For so long as a Stockholder is bound by the
provisions of Section 5.1, 5.2 or 5.3, such Stockholder shall vote all of his or
its shares of the Company and shall take all other necessary or desirable
actions within his or its control in its capacity as a stockholder, (including,
without limitation, attendance at meetings in person or by proxy for purposes of
obtaining a quorum, execution of written consents in lieu of meetings and
placing into nomination the names of the board designees permitted hereunder) to
satisfy its obligations pursuant to this Section 5, and the Company shall take
all necessary or desirable actions within its control (including, without
limitation, calling special board and stockholder meetings and placing into
nomination the names of the board designees permitted hereunder) to enable and
facilitate the satisfaction by the stockholders of their obligations pursuant to
this Section 5 and the election of members of the board of directors as
described herein.
SECTION 6 NEGATIVE COVENANTS OF THE COMPANY
So long as not less than 25% of the shares of Series Preferred Stock
outstanding immediately after the closing of the transactions contemplated in
the Contribution Agreements (as such number may be adjusted for any stock split,
reverse stock split, recombination, reclassification, or other similar
transaction) remain outstanding, the Company shall comply with the following
covenants, except as (i) in the case of Sections 6.1 through 6.5, the holders of
more than two-thirds of the then-outstanding shares of Series Preferred Stock,
voting together as a single class, may otherwise consent, and (ii) in the case
of Section 6.6, as provided therein:
6.1. Mergers, Dispositions, Acquisitions and Other Actions.
The Company shall not: (a) sell, lease or otherwise dispose of (whether in
one transaction or in a series of related transactions) all or substantially all
of its assets; (b) merge with or into or consolidate with another entity; (c)
acquire any other corporation or business concern for more than $5 million,
whether by acquisition of assets, capital stock or otherwise, and whether in
consideration of the payment of cash, the issuance of capital stock or otherwise
whether in one or a series of installments or make any loans to or investments
in any other entities or persons (other than cash equivalents) of more than $5
million in any one or a series of related transactions; (d) voluntarily
liquidate or wind up its operations; (e) issue any shares of its capital stock
which are senior to or on a parity with any shares of Series Preferred Stock
with respect to dividends, liquidation, redemptions or otherwise, or with any
special voting rights; (f) incur, create, assume or become liable in any manner
(by way of guarantee, surety, or otherwise) any new or additional indebtedness
for borrowed money, whether by the issue of notes, other debt securities, or
otherwise, except that the Company may so incur, create, assume or become liable
for: (A) indebtedness (and any refinancing thereof) existing within the Company
or its Subsidiaries upon the completion of the transactions contemplated
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in the Contribution Agreements; or (B) any indebtedness the principal amount of
which so incurred, created, assumed by, or otherwise becoming a liability of,
the Company in any one transaction or series of related transaction is less than
or equal to $5 million; or (C) indebtedness incurred, created, or assumed by the
Company in the ordinary course of its business.
6.2. No Amendments to Certificate of Incorporation or Bylaws.
The Company shall not make any amendment to its Certificate of
Incorporation or Bylaws.
6.3. Restrictions on Other Agreements.
The Company shall not enter into any agreement with any party which by its
terms (a) restricts the payments due the holders of the shares of Series
Preferred Stock, or (b) except as contemplated by Section 10.11, grants any
right relating to the registration of its Common Stock superior to or on a
parity with the rights granted to the Stockholders pursuant to Section 9 hereof.
6.4. Affiliated Transactions.
The Company shall not enter into or amend any transactions, agreements or
arrangements with, or make any payments to, any director, officer or key
employee of the Company or any person or entities which or who are relatives of,
controlled by, or otherwise affiliated with any of the foregoing persons or
entities (an "Affiliate") other than in the ordinary course of business and on
terms no less favorable to the Company than those that would be available from
unaffiliated third parties.
6.5. Issuances of, Distributions on, and Redemptions of, Capital Stock.
Except as otherwise expressly provided in this Agreement and in the
Certificate of Incorporation, the Company shall not authorize or issue, or
obligate itself to issue, any additional shares of capital stock of the Company
of any class, declare or pay any dividends, or make any distributions of cash,
property or securities of the Company with respect to any shares of its Common
Stock or any other class of its capital stock, or directly or indirectly redeem
purchase, or otherwise acquire for consideration, any shares of its Common Stock
or any other class of its capital stock; provided, however, that this
restriction shall not apply to (x) the repurchase of shares of the Common Stock
from individuals and entities who have entered into stockholder agreements when
the Company has the option to repurchase such shares upon the occurrence of
certain events, including the termination of employment and involuntary
transfers by operation of law (and their permitted transferees), provided that
the aggregate amount of repurchase thereunder shall not exceed $250,000 plus the
cash proceeds from the issuance of any stock to employees of the Company other
than pursuant to the Stock Option Plan or the Stock Incentive Plan or (y)
transactions contemplated by the Jalkut Employment Agreement. Any redemption,
repurchase or other acquisition by the Company of any shares of its capital
stock shall be made in compliance with all laws, including but not limited to
federal and state securities laws.
Notwithstanding the foregoing, the Company shall have the right to (i)
enter into and perform the Colonial Option Agreement, including the issuance of
Series E Preferred Stock and Common Stock thereunder, and (ii) issue shares of
the Series D Preferred Stock of the Company in exchange for the contribution of
right-of-way rights on terms acceptable to the Board of Directors of the Company
and add any such purchaser as a "Stockholder" hereunder as contemplated by
Section
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10.11 below, in each case without the consent of the holders of two-thirds of
the shares of Series Preferred Stock as contemplated above, provided, in the
case of clause (ii) above, that such issuance of Series D Preferred Stock in
excess of the amount currently authorized does not materially prejudice the
rights of the existing holders of the Series D Preferred Stock of the Company.
6.6. Adverse Change in Terms or Rights of a Series of Preferred Stock. The
Company shall not modify the terms of any Series of Preferred Stock as set forth
in the Certificate of Incorporation of the Company without, in addition to any
other consent required, the consent of the holders of a majority of such Series
of Preferred Stock. The Company shall not amend the Certificate of Incorporation
or Bylaws in a manner that materially and adversely affects the rights of any
Series of Preferred Stock, relative to the rights of any other Series of
Preferred Stock, without, in addition to any other consent required, the consent
of the holders of a majority of such adversely affected Series of Preferred
Stock. Any increase in the authorized number of any class of shares of the
Company shall not be deemed to be adverse to any Series of Preferred Stock by
reason of the effects of differing levels of protection against dilution as set
forth in the Certificate of Incorporation.
SECTION 7 TRANSFER BY FOUNDER; RIGHTS TO PURCHASE
The following provisions of this Section 7 shall terminate upon the Company's
first Qualified Public Offering:
7.1. General Restrictions on Transfer by the Founder.
(a) The Founder agrees that he will not directly or indirectly offer,
transfer, donate, sell, assign, pledge, hypothecate or otherwise dispose of (any
such action a "Transfer"), all or any portion of the shares of capital stock of
the Company now owned or hereafter acquired by him, except in connection with,
and strictly in compliance with, the conditions of any of the following
(hereinafter "Permitted Transfers"):
(i) Transfers effected pursuant to Section 7.2 and Section 7.3
hereof, in each case made in accordance with the procedures set forth
therein;
(ii) Transfers by the Founder to his spouse or children or to a
trust of which he is the settlor or a trustee for the benefit of his spouse
or children, provided that such trust does not require or permit
distribution of such shares during the term of this Agreement, and
provided, further, that the transferee shall have entered into an
enforceable written agreement satisfactory to the Company and a majority of
the Series Preferred Stockholders (voting together as a single class)
providing that all shares so Transferred shall continue to be subject to
all provisions of this Agreement as if such shares were still held by the
Founder; and
(iii) Transfers upon the Founder's death to his heirs, executors
or administrators or to a trust under his will or Transfers between the
Founder and his guardian or conservator, provided that the transferee shall
have entered into an enforceable written agreement satisfactory to the
Company and the Series Preferred Stockholders, voting together as a single
class, providing that all shares so Transferred shall continue to be
subject to all provisions of this Agreement as if such shares were still
held by the Founder; and
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(iv) Transfers constituting a bona fide pledge, hypothecation or
other granting of a security interest in the Founder Securities to secure a
loan for borrowed money, provided that:
(A) the financial institution making such loan shall have net
assets in excess of $100 million;
(B) neither the purpose nor the effect of such loan shall be to
establish, support, or facilitate any short position in the
Company's securities;
(C) the documentation and structure of such pledge,
hypothecation, or other granting of a security interest and the
underlying loan documentation shall have been reviewed for
compliance with the terms of this Agreement by, and shall be
reasonably satisfactory to, outside counsel to the Company; and
(D) no such Transfer under this clause (iv) shall be permitted
during any period in which the Founder Securities are otherwise
subject to the provisions of Section 9.8 hereof, other than
pursuant to a bona fide pledge, hypothecation or other security
interest outstanding in accordance with the terms of this clause
(iv) on the date that the market stand-off agreement restrictions
imposed by Section 9.8 become effective.
(b) Anything to the contrary in this Agreement notwithstanding,
transferees of the Founder permitted by clauses (ii) and (iii) of Section 7.1(a)
shall take any shares so Transferred subject to all provisions of this Agreement
as if such shares were still held by the Founder, whether or not they so agree
with the Founder.
7.2. Right of Refusal.
If at any time on or after the Closing Date, the Founder (including for all
purposes of this Section 7.2, any permitted transferee of his shares pursuant to
Section 7.1(a)(ii) or Section 7.1(a)(iii)) receives a bona fide offer to
purchase any or all of his shares (the "Offer") from an unaffiliated third party
(the "Offeror") which the Founder wishes to accept (whether initiated by the
Founder or the third party), the Founder may transfer such shares pursuant to
and in accordance with the following provisions of this Section 7.2:
(a) The Founder shall cause the Offer to be reduced to writing and
shall notify the Series Preferred Stockholders in writing of his desire to
accept the Offer and otherwise comply with the provisions of this Section 7.2
and Section 7.3. The Founder's notice shall constitute an irrevocable offer to
sell such shares to the Series Preferred Stockholders at a purchase price equal
to the price contained in, and on the same terms and conditions of, the Offer.
The notice shall be accompanied by a true copy of the Offer (which shall
indemnify the Offeree).
(b) At any time within thirty (30) days after the date of the giving
of notice pursuant to Section 7.2(a) (the "Notice Period"), one or more of the
Series Preferred Stockholders may, subject to the terms hereof, choose to accept
the Offer with respect to all or a portion of the shares covered thereby by
giving written notice to the Founder to such effect; provided, however, that if
two or more Series Preferred Stockholders choose, in the aggregate, to accept
such Offer with respect to an aggregate number of shares which exceeds the
number of shares subject to such Offer
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and available for purchase by the Series Preferred Stockholders taken as a
whole, the number of shares for which the Offer may be accepted by each such
Series Preferred Stockholder shall, in each case, be reduced by the smallest
number of shares as shall be necessary to reduce the aggregate number of shares
for which the Offer may be accepted by the Series Preferred Stockholders as
contemplated herein to the number of shares for which the Offer was made and
which are available for purchase by them; provided, further, that the number of
shares for which any Series Preferred Stockholder may accept such Offer as
contemplated herein shall in no event be reduced to less than the number of
shares which bears the same proportion to the total number of shares for which
the Offer was made and which are available for purchase by the Series Preferred
Stockholders as the number of shares of capital stock of the Company (or other
securities convertible into shares of capital stock of the Company) (any such
shares being referred to hereinafter as "Securities") then held by such Series
Preferred Stockholder bears to the total number of Securities then held by all
Series Preferred Stockholders accepting such Offer; and provided, further, that
the Series Preferred Stockholders who elect to purchase shares may purchase any
shares which other Series Preferred Stockholders do not elect to purchase based
on the relative holdings of such electing Series Preferred Stockholders.
(c) If shares covered by any Offer are purchased pursuant to Section
7.2(b), such purchase shall be (i) at the same price and on the same terms and
conditions as the Offer if the Offer is for cash and/or notes or (ii) if the
Offer includes any consideration other than cash and notes, then at the
equivalent all cash price for such other consideration as determined by the
Board of Directors. The closing of the purchase of the shares subject to an
Offer pursuant to this Section 7.2 shall take place within fifteen (15) days
after the expiration of the Notice Period, or upon satisfaction of any
governmental approval requirements, if later, by delivery by the respective
Series Preferred Stockholders of the purchase price for the shares being
purchased as provided above to the Founder against delivery of the certificates
representing the shares so purchased appropriately endorsed for transfer by the
Founder.
7.3. Sales by the Founder.
Any shares covered by an Offer which are not acquired pursuant to Section
7.2 that the Founder desires to sell following compliance with Section 7.2 may
be sold to the Offeror only during the 90-day period after the expiration of the
Notice Period and only on terms no more favorable to the Founder than those
contained in the Offer. Promptly after such sale, the Founder shall notify the
Series Preferred Stockholders of the consummation thereof and shall furnish such
evidence of the completion and time of completion of such sale and of the terms
thereof as may reasonably be requested by the Series Preferred Stockholders. So
long as the Offeror is neither a party, nor an affiliate or relative of a party
to this Agreement, such Offeror shall take the shares so Transferred free and
clear of the provisions of this Agreement, other than Section 5.1 and 5.3
hereof. If, at the end of such 90-day period, the Founder has not completed the
sale of such shares as aforesaid, all the restrictions on Transfer contained in
this Agreement shall again be in effect with respect to such shares.
SECTION 8 RIGHTS TO PURCHASE
Notwithstanding anything herein to the contrary, the following provisions
of this Section 8 shall not apply to, and shall thereafter terminate immediately
upon, the Company's first Qualified Public Offering.
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8.1 Right to Participate in Certain Sales of Additional Securities.
(a) The Company agrees that it shall not sell or issue any shares of
capital stock of the Company, or other securities convertible into or
exchangeable for capital stock of the Company, or options, warrants or rights
carrying any rights to purchase capital stock of the Company unless the Company
first submits a written offer to each Eligible Stockholder, identifying the
terms of the proposed sale (including cash price, number or aggregate principal
amount of securities and all other material terms).
(b) Pursuant to such notice, the Company shall offer to each Eligible
Stockholder the opportunity to purchase its Pro Rata Share of the securities
proposed to be sold by the Company on terms and conditions, including price, not
less favorable to the Eligible Stockholders than those on which the Company
proposes to sell such securities to a third party. Each Eligible Stockholder
shall have a right of over-allotment such that if any Eligible Stockholder fails
to exercise its right hereunder to purchase its Pro Rata Share, the Electing
Purchasers may purchase the non-purchasing Eligible Stockholder's Pro Rata Share
(allocated among them, pro rata in proportion to the aggregate number of shares
of Common Stock owned by such Electing Purchasers (assuming the full conversion
of any shares of the capital stock of the Company convertible into shares of
Common Stock)).
(c) The Company's offer to the Eligible Stockholders shall remain open
and irrevocable, for a period of thirty (30) days. Any securities so offered
which are not purchased pursuant to such offer may be sold by the Company, at
any time within one hundred twenty (120) days following the termination of the
above-referenced 30-day period, but such securities may not be sold on terms and
conditions, including price, that are more favorable to the purchaser than those
set forth in such offer. No securities may be sold by the Company after such
120-day period without renewed compliance with this Section 8.1.
(d) Notwithstanding the foregoing, the Company may (i) issue options,
warrants or rights to subscribe for shares of its Common Stock (as appropriately
adjusted for stock splits, stock dividend and the like) to officers, employees
and directors of the Company pursuant to the terms of the Stock Option Plan and
the Stock Incentive Plan and Section 4.4 hereof and may issue shares of its
Common Stock upon the exercise of any such stock options, or upon exercise of
warrants outstanding as of the Closing, (ii) issue shares of its Common Stock
upon the conversion of the Series Preferred Stock (as appropriately adjusted for
stock splits, stock dividends and the like); (iii) issue shares of its Common
Stock in connection with the acquisition of another Company approved consistent
with Section 6.1; (iv) issue shares of its Common Stock pursuant to the exercise
of the outstanding options listed on Exhibit D hereto (as appropriately adjusted
for stock splits, stock dividends and the like), and (v) issue shares of its
capital stock as contemplated by the Contribution Agreements and the Colonial
Option Agreement.
SECTION 9 REGISTRATION RIGHTS; STAND-OFF AGREEMENT
9.1. Optional Registrations.
(a) If, at any time or from time to time after the date hereof, the
Company shall determine to register any shares of its capital stock or
securities convertible into capital stock under the Securities Act (whether in
connection with a public offering of securities by the Company (a "primary
offering"), for the account of any security holder or holders of the Company (a
"secondary
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offering"), or both), the Company shall promptly give written notice thereof to
each Series Preferred Stockholder holding Registrable Securities (as hereinafter
defined in Section 9.4 below) then outstanding, Jalkut (for so long as he shall
hold Registrable Securities) and the Founder (for so long as he shall hold
Founder Securities); provided, however, that such notice obligation shall not
apply to any registration:
(i) relating to a public offering pursuant to any demand
registration rights under the Warrant Registration Rights Agreement;
(ii) relating to the registration of any of the Company's
employee benefit plans;
(iii) on any form that does not permit secondary offerings; or
(iv) relating to a corporate reorganization or other transaction
under Rule 145 or any similar rule of the SEC.
(b) If, within thirty (30) days after their receipt of a notice
delivered pursuant to clause (a) of this Section 9.1, one or more Series
Preferred Stockholders, Jalkut or the Founder request the inclusion of some or
all of the Registrable Securities or Founder Securities held by them in such
registration, the Company shall use its best efforts to effect the registration
under the Securities Act of all Registrable Securities and Founder Securities
which such Holders may request in a writing delivered to the Company within such
thirty (30) days.
(c) In the case of the registration of shares of capital stock by the
Company in connection with any underwritten public offering, if the
underwriter(s) shall have informed the Company and the Holders requesting
inclusion in such offering, in writing, that in such underwriter's opinion the
number of Registrable Securities and Founder Securities to be included in the
offering is such as to materially and adversely affect the price at which the
securities can be sold, the Company shall not be required to register
Registrable Securities and Founder Securities of such Holders in excess of the
amount, if any, of shares of the capital stock which the principal underwriter
of such underwritten offering shall reasonably and in good faith agree to
include in such offering in excess of any amount to be registered for the
Company. If any limitation of the number of shares of capital stock to be
registered by the Holders is required pursuant to this clause 9.1(c), the number
of shares that may be included in the registration on behalf of the Holders
shall be allocated among the Holders or the holders of any other registration
rights in proportion, as nearly as practicable, to their relative holdings of
Registrable Securities and Founder Securities, in the aggregate (provided that
for such purpose the Series E Preferred Stockholders shall be deemed to own two
times their actual holdings of Series E Preferred Stock, and provided further
that if any Holder does not register all shares that it is entitled to register
under the foregoing formula, then its unused shares shall be reallocated among
the remaining requesting Holders in proportion to their relative holdings of
Registrable Securities and Founder Securities), after first excluding from such
registration statement all shares of Common Stock, other than Founder
Securities, sought to be included therein by:
(i) any director, officer or employee of the Company, including
Jalkut (unless and until Jalkut has been involuntarily terminated as
an officer of the Company pursuant to Sections 6(d) or 6(f) of the
Jalkut Employment Agreement), pro rata based on the number of shares
of Registrable Securities requested by each such individual to be
included in such registration;
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(ii) any holder thereof not having any such contractual
incidental registration rights; and
(iii) any holder thereof having contractual incidental
registration rights subordinate and junior to the rights of the Series
Preferred Stockholders.
If such underwritten public offering is an initial public offering of the
Company's Common Stock, the Company may limit or exclude, to the extent so
advised by the underwriter as provided above, the amount of Registrable
Securities and Founder Securities to be included in the registration. If such
underwritten public offering is not an initial public offering of the Company's
Common Stock, then the Series Preferred Stockholders holding Registrable
Securities, the Founder, and Jalkut if he has been involuntarily terminated as
an officer of the Company pursuant to Sections 6(d) and 6(f) of the Jalkut
Employment Agreement, shall be allowed to include in the aggregate not less than
thirty-five percent (35%) of the shares subject to such registration statement,
provided, however, that in addition to any limitations imposed by this clause
(c), in connection with any registration that includes securities pursuant to
the Warrant Registration Rights Agreement, the terms of the Warrant Registration
Rights Agreement as in effect on the date hereof shall govern the inclusion (and
limitations on inclusion) of Registrable Securities, Founder Securities and
other securities in such registration.
(d) The Company shall not grant any rights relating to the piggy-back
registration of its capital stock which are superior to or on a parity with the
rights granted to the Series Preferred Stockholders, the Founder and Jalkut in
this Section 9.1 other than pursuant to this Agreement and the Warrant
Registration Rights Agreement.
9.2. Required Registrations.
(a) If on any three (3) occasions after the date hereof the Required
Holders notify the Company in writing that the Required Holders intend to offer
or cause to be offered for public sale all or any portion of its or their
Registrable Securities, the Company shall notify all of the Holders who would be
entitled to notice of a proposed registration under Section 9.1 above of its
receipt of such notification from such Required Holders. Upon the written
request of any such Holder or Holders delivered to the Company within twenty
(20) days after the Company's delivery of such notification to the Holders, the
Company shall either:
(i) elect to make a primary offering, in which case the rights of
such Holders to participate in such offering shall be as set forth in
Section 9.1 above (except that the Company shall not be permitted to
limit the number of shares which may be registered by any Holder, and
Holders holding a majority of the Registrable Securities requested to
be included in such required registration will have the right to
select the underwriter); or
(ii) use its best efforts to cause such of the Registrable
Securities and Founder Securities as may be requested by any Holders
to be registered under the Securities Act in accordance with the terms
of this Section 9.2.
(b) In the event that (i) the Company shall have completed its initial
Qualified Public Offering, and (ii) the registration statement filed by the
Company under the Securities Act in respect of such Qualified Public
Offering shall:
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(A) have ceased to be effective on or before the date which is
thirty (30) days following the expiration of the lock-up
period specified in Section 9.8 hereof; or
(B) not have included pursuant to the provisions of section 9.1
hereof the shares of Common Stock proposed to be registered
by the Founder,
then, in either of such events but only in either of such events (the
"Triggering Event"), the Founder shall have the rights set forth in this Section
9.2(b). If on any one occasion at any time following the Triggering Event, and
subject to the other terms and conditions of this Agreement, the Founder
notifies the Company in writing that the Founder intends to offer or cause to be
offered for public sale all or any portion of his Founder Securities, the
Company shall notify all of the Holders who would be entitled to notice of a
proposed registration under Section 9.1 above of its receipt of such
notification from the Founder. Upon the written request of any such Holder or
Holders delivered to the Company within twenty (20) days after the Company's
delivery of such notification to the Holders, the Company shall either:
(x) elect to make a primary offering, in which case the rights
of all such Holders to participate in such offering shall be
as set forth in Section 9.1 above (except that the Company
shall not be permitted to limit the number of shares which
may be registered by any Holder); or
(y) use its best efforts to cause such of the Registrable
Securities and Founder Securities as may be requested by any
Holders to be registered under the Securities Act in
accordance with the terms of this Section 9.2;
provided, however, that in the event that the notification delivered by the
Founder under this Section 9.2(b) shall have been delivered to the Company on or
before the date which is one year following the completion of the Qualified
Public Offering of the Company, the number of shares of Founder Securities that
may be included in such notification by the Founder hereunder (and in respect of
which the Company shall have the obligations under this Section 9.2(b)) shall be
limited and:
(1) shall not, in the case of an initial Qualified Public
Offering in which shares constituting fewer than fifteen
percent (15%) of the equity capital of the Company on a
fully diluted basis shall have been so registered in
connection with such initial Qualified Public Offering,
exceed thirty percent (30%) of the aggregate number of
shares so registered in connection with such initial
Qualified Public Offering, and
(2) shall not, in all other cases, exceed twenty percent (20%)
of the aggregate number of shares so registered in
connection with such initial Qualified Public Offering.
(c) The Company may postpone the filing of any registration statement
required by this Section 9.2 for a reasonable period of time, not to exceed
sixty (60) days during any twelve month period, if the Company has been advised
by legal counsel that such filing would require a special audit or the
disclosure of a material impending transaction or other matter and the Company
determines reasonably and in good faith that such disclosure would have a
material adverse effect on the Company. The Company shall not be required to
cause a registration statement requested
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pursuant to this Section 9.2 to become effective prior to the later of (i) 90
days following the effective date of a registration statement initiated by the
Company (other than a registration effected solely to implement an employee
benefit plan or a transaction to which Rule 145 or any other similar rule of the
SEC under the Securities Act is applicable), if the request for registration has
been received by the Company subsequent to the giving of written notice by the
Company made in good faith to the Holders holding Registrable Securities and
Founder Securities that the Company is commencing to prepare a Company-initiated
registration statement, and (ii) the end of any 'lock-up" or "black-out" period
imposed on the Company or any of the holders of its securities pursuant to or in
connection with any underwriting or purchase agreement relating to an
underwritten offering under Rule 144A of the Securities Act or a registered
public offering of equity securities of the Company, such period not to exceed
180 days; provided, however, that the Company shall use its best efforts to
achieve such effectiveness promptly following the end of the period set forth in
clause (i) or (ii) of this clause (c), as applicable.
(d) Notwithstanding the provisions of clauses (a), (b) or (c) of
this Section 9.2, the Company shall not be obligated to effect any registration
pursuant to:
(1) Section 9.2(a), if the Required Holders propose to register
Registrable Securities that may be immediately registered on
SEC Form S-3 pursuant to a request made under Section 9.3
hereof;
(2) Section 9.2(a) if the Required Holders do not request that
the offering which is the subject of such registration be
firmly underwritten by underwriters selected by the Required
Holders and reasonably acceptable to the Company;
(3) Section 9.2(b), if the Founder does not request that the
offering which is the subject of such registration be firmly
underwritten by underwriters selected by the Founder and
reasonably acceptable to the Company; or
(4) Section 9.2(a) or 9.2(b), if the Company, after using its
best efforts to do so, is unable to obtain the commitment of
the underwriter selected in clauses (2) or (3) above, as
applicable, to underwrite such offering on a firm commitment
basis.
9.3. Form S-3.
Following its initial public offering, the Company shall timely file all
reports required to be filed with the SEC under the Exchange Act and shall
otherwise use reasonable efforts to qualify for registration on SEC Form S-3 or
any comparable or successor form promulgated by the SEC. If the Company becomes
eligible to use SEC Form S-3 or a comparable successor form, the Company shall
use its best efforts to continue to qualify at all times for registration on
Form S-3 or such successor form. One or more of the Holders other than the
Founder shall have the right to request and have effected one registration per
year of shares of Registrable Securities on Form S-3 or such successor form for
a public offering of shares of Registrable Securities and having an aggregate
proposed offering price exceeding $1,000,000 (such requests shall be in writing
and shall state the number of shares of Registrable Securities to be disposed of
and the intended method of disposition of such shares by such Holder or
Holders). The Company shall give notice to all Holders of the receipt of a
request for registration pursuant to this Section 9.3 and shall provide a
reasonable opportunity for such Holders to participate in the registration. The
Company shall not be required to cause a registration statement requested
pursuant to this Section 9.3 to become effective prior to the later of
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(i) 90 days following the effective date of a registration statement initiated
by the Company (other than a registration effected solely to implement an
employee benefit plan or a transaction to which Rule 145 or any other similar
rule of the SEC under the Securities Act is applicable), if the request for
registration has been received by the Company subsequent to the giving of
written notice by the Company made in good faith to the Holders holding
Registrable Securities and Founder Securities that the Company is commencing to
prepare a Company-initiated registration statement, and (ii) the end of any
"lock-up" or "black out" period imposed on the Company pursuant to or in
connection with any underwriting or purchase agreement relating to an
underwritten SEC Rule 144A or a registered public offering of equity securities
of the Company, such period not to exceed 180 days; provided, however, that the
Company shall use its best efforts to achieve such effectiveness promptly
following the end of the period set forth in clauses (i) or (ii) above, as
applicable, if the request pursuant to this Section 9.3 has been made prior to
the expiration of such period. The Company may postpone the filing of any
registration statement required hereunder for a reasonable period of time, not
to exceed 60 days during any twelve-month period, if the Company has been
advised by legal counsel that such filing would require the disclosure of a
material transaction or other factor and the Company determines reasonably and
in good faith that such disclosure would have a material adverse effect on the
Company. Subject to the foregoing, the Company shall use its best efforts to
effect promptly the registration of all shares of Common Stock on Form S-3 or
such successor form to the extent requested by the Holder or Holders thereof for
purposes of disposition. If so requested by any Holder in connection with a
registration under this Section 9.3, the Company shall take such steps as are
required to register such Holder's Registrable Securities or Founder Securities
for sale on a delayed or continuous basis under SEC Rule 415, and to keep such
registration effective for the shorter of (x) six months or (y) until all of
such Holder's Registrable Securities or Founder Securities registered thereunder
are sold.
9.4. Registrable Securities.
For purposes of this Agreement, the term "Registrable Securities" shall
mean any shares of Common Stock:
(a) purchased by, or issued to, a Series Preferred Stockholder, or
issuable upon conversion of the Series Preferred Stock or other Preferred Stock
of the Corporation;
(b) issued or issuable to Jalkut upon the exercise of options granted
to him by the Company; or
(c) issued by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization, or any exchange or other replacement of the shares referred to
in clauses (i) or (ii) above;
provided, however, that (x) if a Series Preferred Stockholder owns or holds
shares of Series Preferred Stock (or, in the case of Jalkut, owns or holds
options exercisable for shares of Common Stock), such Series Preferred
Stockholder (or optionholder) shall not be required to cause such shares of
Series Preferred Stock to be converted to Common Stock (or, in the case of
Jalkut, shall not be required to exercise such options) until immediately prior
to the effective date of any applicable registration statement pursuant to which
such shares shall be sold, and (y) notwithstanding any other provision of this
Agreement, the term "Registrable Securities" shall not include any shares of
Common Stock which have previously been registered or which have been sold to
the public either pursuant to a
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registration statement or SEC Rule 144, or that may be sold by the holder
thereof pursuant to SEC Rule 144(k).
9.5. Further Obligations of the Company.
Whenever the Company is required hereunder to register any Registrable
Securities or Founder Securities it agrees that it also shall do the following:
(a) Pay all expenses of such registrations and offerings (exclusive of
underwriting discounts and commissions) and the reasonable fees and expenses,
not to exceed $60,000 per offering, of not more than one independent counsel for
the Holders satisfactory to a majority in interest of the Holders with
Registrable Securities included in such registration, voting as a single class.
(b) Use its best efforts (with due regard to management of the ongoing
business of the Company and the allocation of managerial resources) diligently
to prepare and file with the SEC a registration statement and such amendments
and supplements to said registration statement and the prospectus used in
connection therewith as may be necessary to keep said registration statement
effective for at least 90 days (6 months in the case of a Form S-3 registration
statement under Section 9.3) or such earlier date on which the Holder or Holders
have completed the distribution described in such registration statement, and to
comply with the provisions of the Securities Act with respect to the sale of
securities covered by said registration for the period necessary to complete the
proposed public offering;
(c) Furnish to each selling Holder such copies of each preliminary and
final prospectus and such other documents as such Holder may reasonably request
to facilitate the public offering of its Registrable Securities or Founder
Securities, as the case may be;
(d) Enter into any reasonable underwriting agreement required by the
proposed underwriter for the selling Holders, if any, in such form and
containing such terms as are customary; provided, however, that no Holder shall
be required to make any representations or warranties other than with respect to
its title to the Registrable Securities or Founder Securities, as the case may
be, and if the underwriter requires that representations or warranties be made,
the Company shall make all such representations and warranties relating to the
Company;
(e) Use its best efforts to register or qualify the securities covered
by said registration statement under the securities or blue-sky laws of such
jurisdictions as any selling Holder may reasonably request, provided that the
Company shall not be required to register or qualify the securities in any
jurisdictions which require it to qualify to do business therein or in which the
Company would be required to consent generally to service of process in such
jurisdiction unless the Company is already so subject;
(f) Immediately notify each selling Holder, at any time when a
prospectus relating to his Registrable Securities or Founder Securities, as the
case may be, is required to be delivered under the Securities Act, of the
happening of any event as a result of which such prospectus contains an untrue
statement of a material fact or omits any material fact necessary to make the
statements therein not misleading, and, at the request of any such selling
Holder, prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities and
Founder Securities, as the case may be, such prospectus shall not
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contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading.
(g) Cause all such Registrable Securities and Founder Securities, as
the case may be, to be listed on each securities exchange or quotation system on
which similar securities issued by the Company are then listed or quoted:
(h) Otherwise use its best efforts to comply with the applicable
securities laws of the United States and other applicable jurisdictions and all
applicable rules and regulations of the SEC and comparable governmental agencies
in other applicable jurisdictions and make generally available to its Holders,
in each case as soon as practicable, but not later than 45 days after the close
of the period covered thereby, an earnings statement of the Company which shall
satisfy the provisions of Section 11(a) of the Securities Act;
(i) Use best efforts to obtain and furnish to each selling Holder,
immediately prior to the effectiveness of the registration statement (and, in
the case of an underwritten offering, at the time of delivery of any Registrable
Securities or Founder Securities sold pursuant thereto), a cold comfort letter
from the Company's independent public accountants in customary form and covering
such matters of the type customarily covered by cold comfort letters as the
holders of a majority of the Registrable Securities and Founder Securities being
sold may reasonably request;
(j) Make available appropriate management personnel for participation
in the preparation and drafting of such registration statement, for due
diligence meetings and, to the extent that doing so does not interfere with the
operations and management of the Company, for "road show" meetings, in each case
as reasonably requested by the Holders or the lead managing underwriter; and
(k) Otherwise cooperate with the underwriter or underwriters, the
Commission and other regulatory agencies and take all actions and execute and
deliver or cause to be executed and delivered all documents necessary to effect
the registration of any Registrable Securities and Founder Securities under this
Section 9.
9.6. Indemnification; Contribution.
(a) Incident to any registration statement referred to in this Section
9, and subject to applicable law, the Company shall indemnify and hold harmless
each underwriter, each Holder who offers or sells any such Registrable
Securities or Founder Securities in connection with such registration statement
(including its partners (including partners of partners and stockholders of any
such partners)), and directors, officers, employees and agents of any of them (a
"Selling Holder"), and each person who controls any of them within the meaning
of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act
of 1934, as amended (hereinafter the "Exchange Act") (a "Controlling Person")),
from and against any and all losses, claims, damages, expenses and liabilities,
joint or several (including any investigation, legal and other expenses incurred
in connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they, or any of them, may become
subject under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based on (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement (including any related preliminary or definitive
prospectus, or any amendment or supplement to such registration statement
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or prospectus), (ii) any omission or alleged omission to state in such document
a material fact required to be stated in it or necessary to make the statements
in it not misleading, or (iii) any violation by the Company of the Securities
Act, any state securities or blue sky laws or any rule or regulation thereunder
in connection with such registration; provided, however, that the Company shall
not be liable to the extent that such loss, claim, damage, expense or liability
arises from and is based on an untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
furnished in writing to the Company by such underwriter, Selling Holder or
Controlling Person expressly for use in such registration statement. With
respect to such untrue statement or omission or alleged untrue statement or
omission in the information furnished to the Company by such Selling Holder
expressly for use in such registration statement, such Selling Holder shall
indemnify and hold harmless each underwriter, the Company (including its
directors, officers, employees and agents), each other Holder (including its
partners (including partners of partners and stockholders of such partners) and
directors, officers, employees and agents of any of them) whose securities are
so registered, and each person who controls any of them within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, expenses and liabilities, joint or
several, to which they, or any of them, may become subject under the Securities
Act, the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise to the same extent provided in the immediately preceding
sentence. In no event, however, shall the liability of a Selling Holder for
indemnification under this Section 9.6(a) in its capacity as such (and not in
its capacity as an officer or director of the Company) exceed the lesser of (i)
that proportion of the total of such losses, claims, damages or liabilities
indemnified against equal to that proportion of the total securities sold under
such registration statement which is being sold by such Selling Holder or (ii)
the proceeds received by such Selling Holder from its sale of Registrable
Securities (or Founder Securities, as the case may be) under such registration
statement.
(b) If the indemnification provided for in Section 9.6(a) above for
any reason is held by a court of competent jurisdiction to be unavailable to an
indemnified party in respect of any losses, claims, damages, expenses or
liabilities referred to therein, then each indemnifying party under this Section
9.6, in lieu of indemnifying such indemnified party thereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, expenses or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the other
Selling Holders and the underwriters from the offering of the Registrable
Securities and Founder Securities, as applicable, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company, the other
Selling Holders and the underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company, the Selling Holders and the
underwriters shall be deemed to be in the same respective proportions that the
net proceeds from the offering (before deducting expenses) received by the
Company and the Selling Holders and the underwriting discount received by the
underwriters, in each case as set forth in the table on the cover page of the
applicable prospectus, bear to the aggregate public offering price of the
Registrable Securities and Founder Securities, as applicable. The relative fault
of the Company, the Selling Holders and the underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Holders or the
underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
-28-
<PAGE> 29
(c) The Company, the Selling Holders and the underwriters agree that
it would not be just and equitable if contribution pursuant to this Section
9.6(b) were determined by pro rata or per capita allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. In no event, however, shall
a Selling Holder be required to contribute any amount under this Section 9.6(b)
in excess of the lesser of (i) that proportion of the total of such losses,
claims, damages or liabilities indemnified against equal to that proportion of
the total securities sold under such registration statement which is being sold
by such Selling Holder or (ii) the proceeds received by such Selling Holder from
its sale of Registrable Securities or Founder Securities, as the case may be,
under such registration statement. No person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not found guilty of
such fraudulent misrepresentation.
(d) The amount paid by an indemnifying party or payable to an
indemnified party as a result of the losses, claims, damages and liabilities
referred to in this Section 9.6 shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim, payable as the same are incurred. The indemnification and
contribution provided for this Section 9.6 shall remain in full force and effect
regardless of any investigation made by or on behalf of the indemnified parties
or any officer, director, employee, agent or controlling person of the
indemnified parties. Any indemnification of legal fees and costs pursuant to
this Section 9.6 shall be paid by the indemnifying party when and as such fees
and costs are incurred by the indemnified party.
9.7. Rule 144 and Rule 144A Requirements.
In the event that the Company becomes and for so long as it remains subject
to Section 13 or Section 15(d) of the Exchange Act, the Company shall use its
best efforts to take all action as may be required as a condition to the
availability of Rule 144 or Rule 144A under the Securities Act (or any successor
or similar exemptive rules hereafter in effect). The Company shall furnish to
any Series Preferred Stockholder holding Registrable Securities and to the
Founder holding Founder Securities, within fifteen (15) days of a written
request, a written statement executed by the Company as to the steps it has
taken to comply with the current public information requirement of Rule 144 or
Rule 144A or such successor rules.
9.8. Market Stand-off Agreement.
Each and all of the Stockholders party to this Agreement, if so requested
by the underwriter of the Company's securities, shall agree not to sell, pledge,
encumber or otherwise transfer or dispose of any Common Stock (or other
securities) of the Company held by such Stockholders during the 180-day period
following the effective date of the Company's initial public offering or any
other registration statement of the Company in which such Stockholder has
included securities for registration, or during any shorter period agreeable to
the managing underwriter. Such agreement shall be in writing and in a form
reasonably satisfactory to the Company and such underwriter. The Company may
impose stop-transfer instructions with respect to the shares of Common Stock,
Series Preferred Stock, or any other securities of the Company subject to the
foregoing restriction until the end of such period.
-29-
<PAGE> 30
SECTION 10 GENERAL.
10.1. Amendments, Waivers and Consents.
(a) For the purposes of this Agreement and all agreements executed
pursuant hereto, no course of dealing between the Company and any Stockholder
and no delay on the part of any party hereto in exercising any rights hereunder
or thereunder shall operate as a waiver of the rights hereof and thereof. Except
as otherwise provided in Section 10.1(c) hereof, no provision hereof may be
waived otherwise than by a written instrument signed by the party so waiving
such covenant or other provision.
(b) Except as otherwise provided by the terms of this Agreement
(including Section 10(c) hereof), all and any amendments to and consents
required by this Agreement may be made, and compliance with any term, covenant,
condition or provision set forth herein may be omitted or waived (either
generally or in a particular instance and either retroactively or prospectively)
by the consent of the holders of a majority of the issued and outstanding shares
of Series Preferred Stock and Common Stock, voting together as a single class.
(c) No amendment, waiver or consent that adversely affects the Series
A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock,
the Series D Preferred Stock, or the Series E Preferred Stock, or affects any
rights specifically granted to the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, or
the Series E Preferred Stock shall be approved without the approval of the
holders of a majority of the issued and outstanding Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, or
Series E Preferred Stock, respectively, each voting separately as a class;
provided, however, that any amendment, waiver or consent that adversely affects
one Series Preferred Stockholder, or affects any rights specifically granted to
such Series Preferred Stockholder, in a manner different than all other Series
Preferred Stockholders holding the same series of Series Preferred Stock,
including, but not limited to, the right to designate certain directors set
forth in Sections 5.1 and 5.2 hereof, shall not be approved without such Series
Preferred Stockholder's consent.
(d) No amendment to Articles 7, 8 or 9 hereof that would, relative to
the rights of any other class of Stock, adversely affect any rights granted to
the Founder under this Agreement shall be approved without the Founder's
consent.
(e) Except as otherwise expressly provided by the terms of this
Agreement, any amendment or waiver effected in accordance with this Section 10.1
shall be binding upon:
(i) the Company;
(ii) each holder of the shares Series Preferred Stock at the time
outstanding and each future holder of the shares of Series Preferred Stock;
(iii) the Founder and any transferee of the shares of Common
Stock owned by the Founder as of the date hereof; and
(iv) Jalkut and any transferee of the Shares of Common Stock
owned by Jalkut as of the date hereof.
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<PAGE> 31
10.2. Legend on Securities.
The Company and the Stockholders acknowledge and agree that the following
legend shall be typed on each certificate evidencing any of the shares of
capital stock of the Company issued hereunder held at any time by the
Stockholders.
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE ACT), OR ANY STATE SECURITIES OR BLUE
SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE
ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE
EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY
LAWS. THESE SECURITIES ARE ALSO SUBJECT TO THE PROVISIONS OF A STOCKHOLDERS'
AGREEMENT DATED AS OF ___________, 1999, INCLUDING CERTAIN RESTRICTIONS ON
TRANSFER, INDEMNITY PROVISIONS AND VOTING PROVISIONS SET FORTH THEREIN. A
COMPLETE AND CORRECT COPY OF THIS AGREEMENT IS AVAILABLE FOR INSPECTION AT THE
PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST AND
WITHOUT CHARGE."
The Company shall be obligated to reissue promptly at the request of any Holder
thereof unlegended certificates if the Holder thereof shall have obtained an
opinion of counsel at such Holder's expense reasonably acceptable to the Company
to the effect that the securities proposed to be disposed of may lawfully be so
disposed of without registration, qualification, or legend, whether pursuant to
Rule 144(k), an effective registration statement, or otherwise.
10.3. Governing Law.
This Agreement shall be deemed to be a contract made under, and shall be
construed in accordance with, the laws of the State of Delaware, without giving
effect to conflict of laws principles thereof.
10.4. Section Headings and Gender.
The descriptive headings in this Agreement have been inserted for
convenience only and shall not be deemed to limit or otherwise affect the
construction of any provision thereof or hereof. The use in this Agreement of
the masculine pronoun in reference to a party hereto shall be deemed to include
the feminine or neuter as the context may require.
10.5. Counterparts.
This Agreement may be executed simultaneously in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original; but such counterparts shall together constitute but one and the
same document.
-31-
<PAGE> 32
10.6. Notices and Demands.
Any notice or demand which is required or provided to be given under this
Agreement shall be deemed to have been sufficiently given and received for all
purposes when delivered by hand, telecopy, telex or other method of facsimile,
or five business days after being sent by certified or registered mail, postage
and charges prepaid, return receipt requested, or two business days after being
sent by overnight delivery providing receipt of delivery to the following
addresses: If to the Company, at 1015 31st Street, N.W., Washington, D.C. 20007,
or at any other address designated by the Company to the Stockholders in
writing; if to a Stockholder, at his or its mailing address as shown on Exhibit
A hereto, or at any other address designated by such Stockholder to the Company
and the Stockholders in writing.
10.7. Severability.
Whenever possible, each provision of this Agreement shall be interpreted in
such a manner as to be effective and valid under applicable law, but if any
provision of this Agreement shall be deemed prohibited or invalid under such
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, and such prohibition or invalidity shall not
invalidate the remainder of such provision or the other provisions of this
Agreement.
10.8. Integration.
This Agreement, including the exhibits, documents and instruments referred
to herein or therein, constitutes the entire agreement and supersedes all other
prior agreements and understandings, both written and oral, among the parties
with respect to the subject mater hereof.
10.9. Review with Counsel.
Each party to this Agreement hereby confirms and acknowledges for the
benefit of each and all of the other parties hereto that he has obtained the
advice of counsel with respect to its execution, and that he has entered into
this Agreement of his own free will and not under compulsion or duress.
10.10. Waiver of Jury Trial.
EACH PARTY HERETO HEREBY WAIVES ANY RIGHT WHICH IT MAY OTHERWISE HAVE AT
LAW OR IN EQUITY TO A TRIAL BY JURY IN CONNECTION WITH ANY SUIT OR PROCEEDING AT
LAW OR IN EQUITY BROUGHT BY ANY PARTY HERETO AGAINST ANOTHER WAIVING PARTY OR
WHICH OTHERWISE RELATES TO THIS AGREEMENT.
10.11.Subsequent Series D or E Preferred Stockholders. To the extent that
the Company issues in accordance with the terms hereof any Series D Preferred
Stock or Series E Preferred Stock subsequent to the date hereof, each purchaser
thereof (i) shall be required to become a party to this Agreement, with all of
the benefits, rights and obligations of a Stockholder hereunder by executing a
written agreement between such purchaser and the Company, which agreement shall
not require the execution of the then current Stockholders hereunder, and (ii)
shall make the representations in Section 3, provided that, with respect to
Section 3.3(a), such purchaser shall make the representation of no present
intention or plan as of the date thereof, formally or informally, to transfer or
dispose of any of the purchased shares to any person who is not a member of the
controlling group of
-32-
<PAGE> 33
shareholders for purposes of IRC Section 351. The Company shall provide each
Stockholder notice of any parties added to this Agreement pursuant to the terms
hereof.
10.12. Transferees. Except as specifically set forth in this Agreement, any
transferee of Founder Securities or Series Preferred Stock shall be bound by and
subject to the restrictions and agreements and entitled to the benefits and
rights set forth in Sections 2, 4, 5, 6, 7, 8, 9 and 10 of this Agreement as if
such transferee was a Founder or Series Preferred Stockholder as defined herein.
The relevant Holder or Holders, as the case may be, shall notify the Company at
the time of such transfer. All certificates representing shares held by such
transferees shall bear a legend to such effect. Any transfers of shares subject
to this Agreement shall be effected in compliance with all applicable
requirements of the Federal Communications Commission (the "FCC") and federal
telecommunications law, including any relevant limitations on foreign ownership
of FCC licenses.
-33-
<PAGE> 34
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
PATHNET TELECOMMUNICATIONS, INC.
By:
---------------------------------
Name:
Title:
STOCKHOLDERS
SPECTRUM EQUITY INVESTORS, L.P.
By:
---------------------------------
Name:
Title:
SPECTRUM EQUITY INVESTORS II, L.P.
By:
---------------------------------
Name:
Title:
-------------------------------------
Shawn J. Colo
-------------------------------------
Benjamin M. Coughlin
-------------------------------------
Michael J. Kenneally
-34-
<PAGE> 35
-------------------------------------
Matthew N. Mochary
-------------------------------------
Robert A. Nicholson
-------------------------------------
Fred Wang
NEW ENTERPRISE ASSOCIATES VI, LIMITED
PARTNERSHIP
By:
---------------------------------
Name:
Title:
ONSET ENTERPRISE ASSOCIATES II, L.P.
By:
---------------------------------
Name:
Title:
ONSET ENTERPRISES ASSOCIATES III, L.P.
By:
---------------------------------
Name:
Title:
-35-
<PAGE> 36
MONTAUK PARTNERS, L.P.
By:
---------------------------------
Name:
Title:
PAUL CAPITAL PARTNERS V, L.P.
By:
---------------------------------
Name:
Title:
PAUL CAPITAL PARTNERS V (DOMESTIC ANNEX
FUND), L.P.
By:
---------------------------------
Name:
Title:
PAUL CAPITAL PARTNERS V INTERNATIONAL, L.P.
By:
---------------------------------
Name:
Title:
-36-
<PAGE> 37
PAUL CAPITAL PARTNERS VI, L.P.
By:
---------------------------------
Name:
Title:
PCP ASSOCIATES, L.P.
By:
---------------------------------
Name:
Title:
-------------------------------------
Thomas Domencich
-------------------------------------
Dennis R. Patrick
TORONTO DOMINION CAPITAL (U.S.A.), INC.
By:
---------------------------------
Name:
Title:
GROTECH PARTNERS IV, L.P.
By:
---------------------------------
Name:
Title:
-37-
<PAGE> 38
UTECH CLIMATE CHALLENGE FUND, L.P.
By:
---------------------------------
Name:
Title:
UTILITY COMPETITIVE ADVANTAGE FUND
By:
---------------------------------
Name:
Title:
FBR TECHNOLOGY VENTURE PARTNERS, L.P.
By:
---------------------------------
Name:
Title:
THE BURLINGTON NORTHERN AND SANTA FE
RAILWAY COMPANY
By:
---------------------------------
Name:
Title:
COLONIAL PIPELINE COMPANY
By:
---------------------------------
Name:
Title:
-38-
<PAGE> 39
CSX TRANSPORTATION, INC.
By:
---------------------------------
Name:
Title:
-------------------------------------
David Schaeffer
-39-
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 1
PATHNET TELECOMMUNICATIONS, INC. 1995 STOCK OPTION PLAN
AMENDMENT NO. 1 dated as of November 2, 1999 to the Pathnet
Telecommunications, Inc. 1995 Stock Option Plan (the "Amendment"). The effective
date of the Amendment ("Effective Date") shall be the Closing Date in Section 6A
of the Contribution Agreement by and among Pathnet Telecommunications, Inc.,
Pathnet, Inc. and the Burlington Northern and Santa Fe Railway Company, provided
that all of the contingencies in such Section 6A are satisfied.
W I T N E S S E T H:
WHEREAS, the Board of Directors of Pathnet Telecommunications, Inc.
("Company") has heretofore resolved to adopt the Pathnet Telecommunications,
Inc. 1995 Stock Option Plan ("Plan") on the Effective Date; and
WHEREAS, the Board of Directors of Company desires to amend the Plan in
certain respects on the Effective Date, all as set forth more fully below:
SECTION 1. Definitions; References. Unless otherwise specifically
defined herein, each capitalized term used herein without definition shall have
the meaning assigned to such term in the Plan. Each reference to "hereof,"
"hereunder," "herein," and "hereby" and each other similar reference and each
reference to the "Plan" contained in the Plan shall from and after the date
hereof refer to the Plan as amended hereby.
SECTION 2. Amendment to statement of purpose. The first sentence of the
first paragraph of the Plan is hereby amended, in relevant part, as follows:
"The purpose of this Pathnet Telecommunications, Inc. 1995 Stock Option
Plan ("Plan") is to encourage and enable employees of Pathnet
Telecommunications, Inc. (the "Company") and of any subsidiary"
SECTION 3. Clarification of Section 1 of the Plan. As of the Effective
Date, Common Stock as defined in the first sentence of Section 1 shall mean
stock of Pathnet Telecommunications, Inc. for all options granted under the
Plan, including those granted prior to the Effective Date.
SECTION 4. Amendment to Section 3 of the Plan. Section 3 of the Plan
shall be amended and restated in its entirety as follows.
"3. Administration.
(a) The Plan shall be administered by the Board of Directors
of the Company (the "Board"). The Board may, however, designate from its
members, a committee to administer the Plan ("Committee") where the
Committee is
<PAGE> 2
composed of not less than two directors, each of whom is expected, but
not required, to be a "Non-Employee Director" (within the meaning of
Rule 16b-3 of the Securities Exchange Act of 1934 ("Rule 16b-3") and an
"outside director" (within the meaning of Code section 162(m)) to the
extent Rule 16b-3 and Code section 162(m), respectively, are at such
time applicable to the Company and the Plan. References in the Plan to
the Board shall be deemed to include the Committee.
(b) Subject to the terms of the Plan and applicable law, and
in addition to other express powers and authorizations conferred on the
Board by the Plan, the Board shall have full power and authority to: (i)
determine the employees and other persons to be granted Options
("Optionees"); (ii) determine the type or types of Options to be granted
to an Optionee; (iii) determine the number of shares subject to each
Option; (iv) determine the terms and conditions, including the vesting
schedule and form, of each Option; (v) determine whether, to what
extent, and under what circumstances Options may be exercised, canceled
or forfeited; (vi) interpret, administer, reconcile any inconsistency,
correct any default and/or supply any omission in the Plan and any
instrument or agreement relating to, or Option granted under, the Plan;
(vii) establish, amend, suspend, or waive such rules and regulations and
appoint such agents as it shall deem appropriate for the proper
administration of the Plan; and (viii) make any other determination and
take any other action that the Board deems necessary or desirable for
the administration of the Plan.
(c) Unless otherwise expressly provided in the Plan, all
designations, determinations, interpretations, and other decisions under
or with respect to the Plan or any Option shall be within the sole
discretion of the Board, may be made at any time, and shall be final,
conclusive, and binding upon all persons, including the Company, any
affiliate, any Optionee, any holder or beneficiary of any Option, and
any shareholder.
(d) The mere fact that a Board member shall fail to qualify
as a "Non-Employee Director" or "outside director" within the meaning of
Rule 16b-3 and Code section 162(m), respectively, shall not invalidate
any Option granted by the Board where such award is otherwise validly
made under the Plan.
(e) No member of the Board shall be liable for any action or
determination made in good faith with respect to the Plan or any Option
hereunder.
SECTION 5. Amendment to Section 1 of the Plan. Section 1 of the Plan is
hereby amended by replacing the reference to "four hundred thirty-nine thousand
and twenty-four (439,024)" that appears in the first sentence of such Section,
and inserting in lieu thereof the number "495,126."
<PAGE> 3
SECTION 6. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, this Amendment is hereby executed and adopted as of
the date first written above.
PATHNET TELECOMMUNICATIONS, INC.
By: /s/ RICHARD A. JALKUT
-----------------------------
Name: Richard A. Jalkut
Title: President and CEO
<PAGE> 4
THE PATHNET, INC.
1995 STOCK OPTION PLAN
The purpose of this Plan is to encourage and enable employees of
PathNet, Inc. (the "Company") and of any subsidiary corporation of which 50% or
more of the outstanding voting stock is owned by the Company (the "Subsidiary")
to acquire an interest in the Company through the granting of stock options, as
herein provided (the "Options"). By encouraging such individuals to acquire or
increase their ownership of its stock, the Company seeks to attract and retain
the services of persons of exceptional competence and to furnish an added
incentive for them to increase their efforts on behalf of the Company. The
Options that may be granted hereunder include both incentive stock options
("Incentive Stock Options") as provided under the Internal Revenue Code of 1986,
as amended (the "Code"), and Options that are not qualified under the Code
("Non-Qualified Options").
1. Shares of Stock Subject to the Plan
The stock that may be issued and sold pursuant to Options granted under
the Plan shall not exceed, in the aggregate, four hundred thirty-nine thousand
and twenty-four (439,024) shares of the common stock, $.01 par value, of the
Company (the "Common Stock"), which may be (i) either authorized but unissued
shares or treasury shares or (ii) shares previously reserved for issue upon
exercise of Options under the Plan, which Options have expired or been
terminated; provided, however, that the number of shares subject to the Plan
shall be subject to adjustment as provided in Section 8.
2. Eligibility
Incentive Stock Options may be granted to persons who are employees of
the Company or a Subsidiary and eligible to receive an Incentive Stock Option
under the Code. In addition, Non-Qualified Options may be granted under the Plan
to non-employee directors of the Company, to consultants to the Company and to
such other persons as the Board may select from time to time.
3. Administration
The Board of Directors of the Company (the "Board") acting through its
Compensation Committee, including a member designated by the holders of the
Series A Convertible Preferred Stock, shall determine the employees and other
persons to be granted Options ("Optionees") and, in each case, the number of
Options, the number of shares subject to each Option, the vesting schedule for
each Option and the form of each Option. The Board shall also determine,
interpret and construe any provision of the Plan and any Option and shall effect
the grant of Options under the Plan. The Board may appoint from its members a
committee of two or more persons who may exercise the powers of the Board in
granting Options and taking any other action under the Plan. Any
<PAGE> 5
of the foregoing actions taken by the Board or the committee appointed by the
Board shall be final and conclusive and shall be binding on each Optionee.
4. Price
The purchase price of shares that may be purchased under each Incentive
Stock Option shall be at least equal to the fair market value (determined as of
the date of grant the Option) per share or, in the case of a stockholder owning
(or deemed to own under Section 424(d) of the Code) more than ten percent of the
total combined voting power of all classes of stock of the Company, as
determined under the Code (a "greater-than ten percent stockholder"), 110% of
such fair market value.
5. Nature of Option and Certain Limitations on Amount of Grant
The aggregate fair market value (determined as of the date of grant of
the Option) of the shares of Common Stock as to which any Incentive Stock Option
granted under the Plan shall first become exercisable (i.e., shall "vest") in
any calendar year shall not exceed $100,000. To the extent that the shares of
Common Stock as to which any Option granted under the Plan shall vest in any
calendar year shall have a fair market value (determined as of the date of the
grant of the Option) in excess of $100,000, or the extent that the Board shall
so specify upon the grant of any Option under the Plan, such Option shall be a
Non-Qualified Option with respect to such excess or specified shares of Common
Stock.
6. Period of Option and Certain Limitations on Right to Exercise
Each Option shall be exercisable at such time or times as the Board
shall from time to time determine but, with respect to an Incentive Stock
Option, in no event after the expiration of ten years (five years in the case of
a greater-than ten percent stockholder) from the date such Option is granted.
The delivery of certificates representing shares under any Option will be
contingent upon receipt by the Company from the Optionee (or a purchaser acting
in his stead in accordance with the provisions of the Option) of the full
purchase price for such shares and the fulfillment of any other requirements
contained in the Option or applicable provisions of law. No Optionee or person
entitled to exercise the Option shall be, or shall be deemed to be, a holder of
any shares subject to the Option for any purpose unless and until certificates
for such shares are issued to such Optionee under the terms of the Plan.
7. Non-transferability of Option
Options granted under the Plan shall not be transferable by the
Optionee, other than by will or the laws of descent and distribution, and are
exercisable during the Optionee's lifetime only by the Optionee.
<PAGE> 6
8. Dilution or Other Adjustments
If the Company effects a subdivision or consolidation of shares or other
capital readjustment, the payment of a stock dividend, or other increase or
reduction of the number of shares of the Common Stock outstanding, without
receiving compensation therefore in money, services or property, then (i) the
number, class, and per share price of shares of stock subject to outstanding
Options hereunder shall be appropriately adjusted in such a manner as a entitle
an Optionee to receive upon exercise of an Option, for the same aggregate cash
consideration, the same total number and class of shares the optionee would have
received as a result of the event requiring the adjustment had the Optionee
exercised the Option in full immediately prior to such event; and (ii) the
number and class of shares then reserved for issuance under the Plan shall be
adjusted by substituting for the total number of shares of Common Stock then
reserved that number and class of shares of stock that would have been received
by the owner of an equal number of outstanding shares of Common Stock as the
result of the event requiring the adjustment.
9. Tax Withholding
Each Optionee shall, no later than the date as of which the value of an
Option or of any Common Stock or other amount received thereunder first becomes
includable in the gross income of the participant for Federal income tax
purposes, pay to the Company, or make arrangements satisfactory to the Board
regarding payment of, any Federal, State, or local taxes of any kind required by
law to be withheld with respect to such income. The Company shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the Optionee. An Optionee may elect to have such tax
withholding obligation satisfied, in whole or in part, by (i) authorizing the
Company to withhold from shares of Common Stock to be issued pursuant to any
Option a number of shares with an aggregate fair market value that would satisfy
the withholding amount due, or (ii) transferring to the Company shares of Common
Stock owned by the Optionee with an aggregate fair market value that would
satisfy the withholding amount due.
10. Written Agreement
Each Option granted hereunder shall be embodied in a written Option
agreement, which shall be subject to the terms and conditions prescribed above
and shall be signed by the President or any Vice President of the Company for
and in the name of and on behalf of the Company. Such an Option agreement may
contain such other provisions as the Board in its discretion shall deem
advisable.
11. Amendment of the Plan
The Board of Directors may discontinue the Plan or amend the Plan at any
time, and from time to time, subject to any required regulatory approval and the
limitation that,
<PAGE> 7
except as provided in Section 8 hereof, no amendment shall be effective unless
approved by the stockholders of the Company in accordance with applicable law
and regulations at an annual or special meeting held within twelve months before
or after the date of adoption of such amendment, where such amendment will:
(a) increase the number of shares of Common Stock as to which
options may be granted under the Plan;
(b) change in substance Section 2 hereof relating to eligibility to
participate in the Plan; or
(c) otherwise materially increase the benefits accruing to
participants under the Plan.
Except as provided in Section 8 hereof, rights and obligations under any
option granted before any amendment of the Plan shall not be altered or impaired
by such amendment, except with the consent of the Optionee. Such action shall be
binding on all Options theretofore granted hereunder, except as otherwise
provided in the written agreement with respect to a particular Option.
12. Expiration and Termination of the Plan
Options may be granted under the Plan at any time, or from time to time,
prior to August 28, 2005. The Plan may be abandoned or terminated at any time by
the Board, except with respect to any Options then outstanding under the Plan.
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 1
PATHNET TELECOMMUNICATIONS, INC. 1997 STOCK INCENTIVE PLAN
AMENDMENT NO. 1 dated as of November 2, 1999 to the Pathnet
Telecommunications, Inc. 1997 Stock Incentive Plan (the "Amendment"). The
effective date of the Amendment ("Effective Date") shall be the Closing Date in
Section 6A of the Contribution Agreement by and among Pathnet
Telecommunications, Inc., Pathnet, Inc. and the Burlington Northern and Santa Fe
Railway Company, provided that all of the contingencies in such Section 6A are
satisfied.
W I T N E S S E T H:
WHEREAS, the Board of Directors of Pathnet Telecommunications, Inc.
("Company") has heretofore resolved to adopt the Pathnet Telecommunications,
Inc. 1997 Stock Incentive Plan ("Plan") on the Effective Date; and
WHEREAS, the Board of Directors of Company desires to amend the Plan in
certain respects on the Effective Date, all as set forth more fully below:
SECTION 1. Definitions; References. Unless otherwise specifically
defined herein, each capitalized term used herein without definition shall have
the meaning assigned to such term in the Plan. Each reference to "hereof,"
"hereunder," "herein," and "hereby" and each other similar reference and each
reference to the "Plan" contained in the Plan shall from and after the date
hereof refer to the Plan as amended hereby.
SECTION 2. Amendment to Section 1 of the Plan. The first sentence of
Section 1 of the Plan is hereby amended, in relevant part, as follows:
"The purposes of this Pathnet Telecommunications, Inc. 1997 Stock
Incentive Plan are to promote the interests of Pathnet
Telecommunications, Inc. and its stockholders by"
SECTION 3. Amendment to Section 2 of the Plan. Section 2 of the Plan is
hereby amended as follows:
(a) By deleting the definitions of "Permitted Holders," "Investment and
Stockholders' Agreement," "Investors," and "Investor Directors" in
their entirety;
(b) By replacing the following definitions in their entirety:
"Company" shall mean Pathnet Telecommunications, Inc., together
with any successor thereto.
<PAGE> 2
"Plan" shall mean this Pathnet Telecommunications, Inc. 1997 Stock
Incentive Plan.
(c) By adding the following definition:
"Stockholders' Agreement" shall mean the Pathnet
Telecommunications, Inc. Stockholders' Agreement by and among
Pathnet Telecommunications, Inc, and certain stockholders of
Pathnet Telecommunications, Inc., as the same may be amended from
time to time.
(d) By inserting the word "than" after "composed of not less" in the
definition of "Committee."
SECTION 4. Amendment to Section 4 of the Plan. Section 4 of the Plan is
hereby amended by replacing the reference to "1,153,667" that appears in the
first sentence of paragraph (a) of such Section (pursuant to the amendment dated
March 24, 1998), and inserting in lieu thereof the number "5,004,874." Section 4
of the Plan is further amended by replacing the references to "400,000" that
appear in the first sentence of paragraph (a) of such Section and inserting in
lieu thereof the number "1,160,000."
SECTION 5. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, this Amendment is hereby executed and adopted as of
the date first written above.
PATHNET TELECOMMUNICATIONS, INC.
By: /s/ RICHARD A. JALKUT
-----------------------------
Name: Richard A. Jalkut
Title: President and CEO
<PAGE> 3
PATHNET, INC.
1997 STOCK INCENTIVE PLAN
SECTION 1. Purpose. The purposes of this PathNet, Inc. 1997 Stock
Incentive Plan are to promote the interests of PathNet, Inc. and its
stockholders by (i) attracting and retaining exceptional officers and other
employees, consultants and directors of the Company and its Subsidiaries, as
defined below; (ii) motivating such individuals by means of performance-related
incentives to achieve performance goals; and (iii) enabling such individuals to
participate in the long-term growth and financial success of the Company.
SECTION 2. Definitions. As used in the Plan, the following terms shall
have the meanings set forth below:
"Affiliate" shall mean (i) any entity that, directly or
indirectly, is controlled by, or controls or is under common control
with, the Company and (ii) any entity in which the Company has a
significant equity interest, in either case as determined by the
Committee.
"Award" shall mean any Option, Stock Appreciation Right,
Restricted Stock Award, Restricted Stock Unit Award, Performance Award,
Other Stock-Based Award or Performance Compensation Award.
"Award Agreement" shall mean any written agreement, contract,
or other instrument or document evidencing any Award, which may, but
need not, be executed or acknowledged by a Participant.
"Board" shall mean the Board of Directors of the Company.
"Change of Control" shall mean the occurrence of any of the
following: (i) the sale, lease, transfer, conveyance or other
disposition, in one or a series of related transactions, of all or
substantially all of the assets of the Company to any "person" or
"group" (as such terms are used in Sections 13(d)(3) and 14(d)(2) of
the Exchange Act) other than the Permitted Holders, (ii) any person or
group, other than the Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of
all shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total voting power of
the voting stock of the Company, including by way of merger,
consolidation or otherwise or (iii) during any period of two
consecutive years, individuals who at the beginning of such period
constituted the Board (together with any new directors whose election
by such Board or whose nomination for
<PAGE> 4
election by the shareholders of the Company was approved by a vote of a
majority of the directors of the Company, then still in office, who
were either directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board, then in office.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
"Committee" shall mean either (i) the Board or (ii) a
committee of the Board designated by the Board to administer the Plan
and composed of not less two directors, each of whom is expected, but
not required, to be a "Non-Employee Director" (within the meaning of
Rule 16b-3) and an "outside director" (within the meaning of Code
section 162(m)) to the extent Rule 16b-3 and Code section 162(m),
respectively, are at such time applicable to the Company and the Plan.
If at any time such a committee has not been so designated, the Board
shall constitute the Committee.
"Company" shall mean PathNet, Inc., together with any
successor thereto.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Fair Market Value" shall mean, (A) with respect to any
property other than Shares, the fair market value of such property
determined by such methods or procedures as shall be established from
time to time by the Committee and (B) with respect to the Shares, as of
any date, (i) the mean between the high and low sales prices of the
Shares as reported on the composite tape for securities traded on the
New York Stock Exchange for such date (or if not then trading on the
New York Stock Exchange, the mean between the high and low sales price
of the Shares on the stock exchange or over-the-counter market on which
the Shares are principally trading on such date), or if, there were no
sales on such date, on the closest preceding date on which there were
sales of Shares or (ii) in the event there shall be no public market
for the Shares on such date, the fair market value of the Shares as
determined in good faith by the Committee.
"Fully Diluted Shares" shall mean, as of any date, the number
of Shares outstanding as of such date (including any shares of
Restricted Stock) plus the aggregate number of Shares issuable upon the
exercise of all outstanding Options, and other options, warrants and
rights to acquire Shares (whether or not then exercisable) and the
aggregate number of Shares issuable upon the conversion of all
outstanding securities that are convertible into Shares.
"Incentive Stock Option" shall mean a right to purchase Shares
from the Company that is granted under Section 6 of the Plan and that
is intended to meet the requirements of Section 422 of the Code or any
successor provision thereto.
<PAGE> 5
"Investment and Stockholders' Agreement" shall mean the
PathNet, Inc. Investment and Stockholders' Agreement dated as of
December 23, 1996, as the same may be amended from time to time.
"Investors" shall mean the "Investors" as defined in the
Investment and Stockholders' Agreement.
"Investor Directors" shall mean those members of the Board who
constitute Investor Directors as defined in the Investment and
Stockholders' Agreement.
"Negative Discretion" shall mean the discretion authorized by
the Plan to be applied by the Committee to eliminate or reduce the size
of a Performance Compensation Award; provided that the exercise of such
discretion would not cause the Performance Compensation Award to fail
to qualify as Performance-based compensation under section 162(m) of
the Code. By way of example and not by way of limitation, in no event
shall any discretionary authority granted to the Committee by the Plan
including, but not limited to, Negative Discretion, be used to (a)
grant or provide payment in respect of Performance Compensation Awards
for a Performance Period if the Performance Goals for such Performance
Period have not been attained; or (b) increase a Performance
Compensation Award above the maximum amount payable under Sections 4(a)
or 11(d)(vi) of the Plan. Notwithstanding anything herein to the
contrary, in no event shall Negative Discretion be exercised by the
Committee with respect to any Option or Stock Appreciation Right (other
than an Option or Stock Appreciation Right that is intended to be a
Performance Compensation Award under Section 11 of the Plan).
"Non-Qualified Stock Option" shall mean a right to purchase
Shares from the Company that is granted under Section 6 of the Plan and
that is not intended to be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a
Non-Qualified Stock Option.
"Other Stock-Based Award" shall mean any right granted under
Section 10 of the Plan.
"Participant" shall mean any officer or other employee,
consultant or director of the Company or its Subsidiaries eligible for
an Award under Section 5 and selected by the Committee to receive an
Award under the Plan.
"Performance Award" shall mean any right granted under Section
9 of the Plan.
<PAGE> 6
"Performance Compensation Award" shall mean any Award
designated by the Committee as a Performance Compensation Award
pursuant to Section 11 of the Plan.
"Performance Criteria" shall mean the criterion or criteria
that the Committee shall select for purposes of establishing the
Performance Goal(s) for a Performance Period with respect to any
Performance Compensation Award under the Plan. The Performance Criteria
that will be used to establish the Performance Goal(s) shall be based
on the attainment of specific levels of performance of the Company (or
Subsidiary, Affiliate, division or operational unit of the Company) and
shall be limited to the following: Return on net assets, return on
shareholders equity, return on assets, return on capital, shareholder
returns, profit margin, earnings per Share, net earnings, operating
earnings, Shares price per Share and sales or market share. To the
extent required under section 162(m) of the Code, the Committee shall,
within the first 90 days of a Performance Period (or, if longer, within
the maximum period allowed under section 162(m) of the Code), define in
an objective fashion the manner of calculating the Performance Criteria
it selects to use for such Performance Period.
"Performance Formula" shall mean, for a Performance Period,
the one or more objective formulas applied against the relevant
Performance Goal to determine, with regard to the Performance
Compensation Award of a particular Participant, whether all, some
portion but less than all, or none of the Performance Compensation
Award has been earned for the Performance Period.
"Performance Goals" shall mean, for a Performance Period, the
one or more goals established by the Committee for the Performance
Period based upon the Performance Criteria. The Committee is authorized
at any time during the first 90 days of a Performance Period, or at any
time thereafter (but only to the extent the exercise of such authority
after the first 90 days of a Performance Period would not cause the
Performance Compensation Awards granted to any Participant for the
Performance Period to fail to qualify as Performance-based compensation
under section 162(m) of the Code), in its sole and absolute discretion,
to adjust or modify the calculation of a Performance Goal for such
Performance Period to the extent permitted under section 162(m) of the
Code in order to prevent the dilution or enlargement of the rights of
Participants, (a) in the event of, or in anticipation of, any unusual
or extraordinary corporate item, transaction, event or development
affecting the Company; or (b) in recognition of, or in anticipation of,
any other unusual or nonrecurring events affecting the Company, or the
financial statements of the Company, or in response to, or in
anticipation of, changes in applicable laws, regulations, accounting
principles, or business conditions.
"Performance Period" shall mean the one or more periods of
time of at least one year in duration, as the Committee may select,
over which the attainment of one or more Performance Goals will be
measured for the purpose of
<PAGE> 7
determining a Participants right to and the payment of a Performance
Compensation Award.
"Permitted Holders" shall mean, as of the date of
determination, any and all of (i) any of the Investors or their
respective affiliates and (ii) any of David Schaeffer, his spouse, his
siblings and their spouses, and descendants of any of them (whether
natural or adopted) (collectively, the "Schaeffer Group"), (iii) any of
Richard A. Jalkut, his spouse, his siblings and their spouses, and
descendants of any of them (whether natural or adopted) (collectively,
the "Jalkut Group") and (iv) any trust established and maintained
primarily for the benefit of any member of the Schaeffer Group or the
Jalkut Group and any entity controlled by any member of the Schaeffer
Group or the Jalkut Group.
"Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization,
government or political subdivision thereof or other entity.
"Plan" shall mean this PathNet, Inc. 1997 Stock Incentive
Plan.
"Qualified Public Offering" shall mean the first firm
commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended,
covering the offer and sale of Shares to the public in which (i) the
proceeds received by the Company, net of underwriting discounts and
commissions, equal or exceed $20,000,000 and (ii) immediately prior to
the consummation of which, the Company is valued (without regard to any
proceeds to be received by the Company in connection with such public
offering) at greater than $50,000,000.
"Restricted Stock" shall mean any Share granted under Section
8 of the Plan.
"Restricted Stock Unit" shall mean any unit granted under
Section 8 of the Plan.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated and
interpreted by the SEC under the Exchange Act, or any successor rule or
regulation thereto as in effect from time to time.
"SEC" shall mean the Securities and Exchange Commission or any
successor thereto and shall include the Staff thereof.
"Shares" shall mean the shares of common stock of the Company,
$.01 par value, or such other securities of the Company (i) into which
such shares of common stock shall be changed by reason of a
recapitalization, merger, consolidation, split-up, combination,
exchange of shares or other similar
<PAGE> 8
transaction or (ii) as may be determined by the Committee pursuant to
Section 4(b).
"Stock Appreciation Right" shall mean any right granted under
Section 7 of the Plan.
"Subsidiary" shall mean (i) any entity that, directly or
indirectly, is controlled by the Company and (ii) any entity in which
the Company has a significant equity interest, in either case as
determined by the Committee
"Substitute Awards" shall have the meaning specified in
Section 4(c).
SECTION 3. Administration.
(a) The Plan shall be administered by the Committee. Subject
to the terms of the Plan and applicable law, and in addition to other
express powers and authorizations conferred on the Committee by the
Plan, the Committee shall have full power and authority to: (i)
designate Participants; (ii) determine the type or types of Awards to
be granted to a Participant and designate those Awards which shall
constitute Performance Compensation Awards; (iii) determine the number
of Shares to be covered by, or with respect to which payments, rights,
or other matters are to be calculated in connection with, Awards; (iv)
determine the terms and conditions of any Award; (v) determine whether,
to what extent, and under what circumstances Awards may be settled or
exercised in cash, Shares, other securities, other Awards or other
property, or canceled, forfeited, or suspended and the method or
methods by which Awards may be settled, exercised, canceled, forfeited,
or suspended; (vi) determine whether, to what extent, and under what
circumstances cash, Shares, other securities, other Awards, other
property, and other amounts payable with respect to an Award (subject
to section 162(m) of the Code with respect to Performance Compensation
Awards) shall be deferred either automatically or at the election of
the holder thereof or of the Committee; (vii) interpret, administer
reconcile any inconsistency, correct any default and/or supply any
omission in the Plan and any instrument or agreement relating to, or
Award made under, the Plan; (viii) establish, amend, suspend, or waive
such rules and regulations and appoint such agents as it shall deem
appropriate for the proper administration of the Plan; (ix) establish
and administer Performance Goals and certify whether, and to what
extent, they have been attained; and (x) make any other determination
and take any other action that the Committee deems necessary or
desirable for the administration of the Plan.
(b) Unless otherwise expressly provided in the Plan, all
designations, determinations, interpretations, and other decisions
under or with respect to the Plan or any Award shall be within the sole
discretion of the Committee, may be made at any time and shall be
final, conclusive, and binding upon all Persons, including the Company,
any Affiliate, any Participant, any holder or beneficiary of any Award,
and any shareholder.
<PAGE> 9
(c) The mere fact that a Committee member shall fail to
qualify as a "Non-Employee Director" or "outside director" within the
meaning of Rule 16b-3 and Code section 162(m), respectively, shall not
invalidate any award made by the Committee which award is otherwise
validly made under the Plan.
(d) No member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any
Award hereunder.
(e) With respect to any Performance Compensation Award granted
under the Plan, the Plan shall be interpreted and construed in
accordance with section 162(m) of the Code.
(f) Notwithstanding the foregoing, the Committee may delegate
to one or more officers of the Company the authority to grant awards to
Participants who are not officers or directors of the Company subject
to Section 16 of the Exchange Act or "covered employees" within the
meaning of Code section 162(m).
SECTION 4. Shares Available for Awards.
(a) Shares Available. Subject to adjustment as provided in
Section 4(b), the aggregate number of Shares with respect to which
Awards may be granted under the Plan shall be 579,264; the maximum
number of Shares with respect to which Options and Stock Appreciation
Rights may be granted to any Participant in any fiscal year shall be
400,000 and the maximum number of Shares which may be paid to a
Participant in the Plan in connection with the settlement of any
Award(s) designated as Performance Compensation Awards in respect of a
single Performance Period shall be 400,000 or, in the event such
Performance Compensation Award is paid in cash, the equivalent cash
value thereof. If, after the effective date of the Plan, any Shares
covered by an Award granted under the Plan, or to which such an Award
relates, are forfeited, or if an Award has expired, terminated or been
canceled for any reason whatsoever (other than by reason of exercise,
or other settlement for consideration), then the Shares covered by such
Award shall again be, or shall become, Shares with respect to which
Awards may be granted hereunder.
(b) Adjustments. Notwithstanding any provisions of the Plan to
the contrary, in the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares,
other securities, or other property), recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up,
spin-off, combination, repurchase, or exchange of Shares or other
securities of the Company, issuance of warrants or other rights to
purchase Shares or other securities of the Company, or other similar
corporate transaction or event affects the Shares such that an
adjustment is determined by
<PAGE> 10
the Committee in its discretion to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Committee shall, in such
manner as it may deem equitable, adjust any or all of (i) the number of
Shares or other securities of the Company (or number and kind of other
securities or property) with respect to which Awards may be granted,
(ii) the number of Shares or other securities of the Company (or number
and kind of other securities or property) subject to outstanding
Awards, and (iii) the grant or exercise price with respect to any Award
or, if deemed appropriate, make provision for a cash payment to the
holder of an outstanding Award in consideration for the cancellation of
such Award, which, in the case of Options and Stock Appreciation Rights
shall equal the excess, if any, of the Fair Market Value of the Shares
subject to such Options or Stock Appreciation Rights over the aggregate
exercise price or grant price of such Options or Stock Appreciation
Rights.
(c) Substitute Awards. Awards may, in the discretion of the
Committee, be made under the Plan in assumption of, or in substitution
for, outstanding awards previously granted by the Company or its
Affiliates under any other plan, agreement or arrangement or by a
company acquired by the Company or with which the Company combines
("Substitute Awards"). The number of Shares underlying any Substitute
Awards shall be counted against the aggregate number of Shares
available for Awards under the Plan.
(d) Sources of Shares Deliverable Under Awards. Any Shares
delivered pursuant to an Award may consist, in whole or in part, of
authorized and unissued Shares or of treasury Shares.
SECTION 5. Eligibility. Any officer or other employee, consultant or
director to the Company or any of its Subsidiaries (including any prospective
officer, employee, consultant or director) shall be eligible to be designated a
Participant.
SECTION 6. Stock Options.
(a) Grant. Subject to the provisions of the Plan, the
Committee shall have sole and complete authority to determine the
Participants to whom Options shall be granted, the number of Shares to
be covered by each Option, the exercise price therefor and the
conditions and limitations applicable to the exercise of the Option.
The Committee shall have the authority to grant Incentive Stock
Options, or to grant Non-Qualified Stock Options, or to grant both
types of Options. In the case of Incentive Stock Options, the terms and
conditions of such grants shall be subject to and comply with such
rules as may be prescribed by Section 422 of the Code, as from time to
time amended, and any regulations implementing such statute. All
Options when granted under the Plan are intended to be Non-Qualified
Stock Options, unless the applicable Award Agreement expressly states
that the Option is intended to be an Incentive Stock Option. If an
Option is intended to be an Incentive Stock Option, and if for any
reason such Option (or
<PAGE> 11
any portion thereof) shall not qualify as an Incentive Stock Option,
then, to the extent of such nonqualification, such Option (or portion
thereof) shall be regarded as a Non-Qualified Stock Option
appropriately granted under the Plan; provided that such Option (or
portion thereof) otherwise complies with the Plan's requirements
relating to Non-Qualified Stock Options.
(b) Exercise Price. The Committee shall establish the exercise
price at the time each Option is granted, which exercise price shall be
set forth in the applicable Award Agreement.
(c) Exercise. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Committee may, in its
sole discretion, specify in the applicable Award Agreement or
thereafter. The Committee may impose such conditions with respect to
the exercise of Options, including without limitation, any relating to
the application of federal or state securities laws, as it may deem
necessary or advisable. Options with an exercise price equal to or
greater than the Fair Market Value per Share as of the date of grant
are intended to qualify as "performance-based compensation" under
section 162(m) of the Code to the extent section 162(m) of the Code is
applicable to the Company and the Plan. In the sole discretion of the
Committee, Options may be granted with an exercise price that is less
than the Fair Market Value per Share and such Options may, but need
not, be intended to qualify as performance-based compensation in
accordance with Section 11 hereof.
(d) Payment.
(i) No Shares shall be delivered pursuant to any exercise of
an Option until payment in full of the aggregate exercise price
therefor is received by the Company. Unless otherwise provided in an
Award Agreement, such payment may be made in cash, or its equivalent,
or (x) by exchanging Shares owned by the optionee (which are not the
subject of any pledge or other security interest and which have been
owned by such optionee for at least 6 months), (y) if there shall be a
public market for the Shares, subject to such rules as may be
established by the Committee, through delivery of irrevocable
instructions to a broker to sell the Shares otherwise deliverable upon
the exercise of the Option and to deliver promptly to the Company an
amount equal to the aggregate exercise price, or (z) with the consent
of the Committee in its sole discretion, by the promissory note and
agreement of a Participant providing for the payment with interest of
the unpaid balance accruing at a rate not less than needed to avoid the
imputation of income under Code section 7872 and upon such terms and
conditions (including the security, if any therefor) as the Committee
may determine, or by a combination of the foregoing, provided that the
combined value of all cash and cash equivalents and the Fair Market
Value of any such Shares so tendered to the Company as of the date of
such tender is at least equal to such aggregate exercise price.
<PAGE> 12
(ii) Wherever in this Plan or any Award Agreement a
Participant is permitted to pay the exercise price of an Option or
taxes relating to the exercise of an Option by delivering Shares, the
Participant may, subject to procedures satisfactory to the Committee,
satisfy such delivery requirement by presenting proof of beneficial
ownership of such Shares, in which case the Company shall treat the
Option as exercised without further payment and shall withhold such
number of Shares from the Shares acquired by the exercise of the
Option.
SECTION 7. Stock Appreciation Rights.
(a) Grant. Subject to the provisions of the Plan, the
Committee shall have sole and complete authority to determine the
Participants to whom Stock Appreciation Rights shall be granted, the
number of Shares to be covered by each Stock Appreciation Right Award,
the grant price thereof and the conditions and limitations applicable
to the exercise thereof. Stock Appreciation Rights with a grant price
equal to or greater than the Fair Market Value per Share as of the date
of grant are intended to qualify as "performance-based compensation"
under section 162(m) of the Code to the extent section 162(m) of the
Code is applicable to the Company and the Plan. In the sole discretion
of the Committee, Stock Appreciation Rights may be granted with an
exercise price that is less than the Fair Market Value per Share and
such Stock Appreciation Rights may, but need not, be intended to
qualify as performance-based compensation in accordance with Section 11
hereof. Stock Appreciation Rights may be granted in tandem with another
Award, in addition to another Award, or freestanding and unrelated to
another Award. Stock Appreciation Rights granted in tandem with or in
addition to an Award may be granted either at the same time as the
Award or at a later time.
(b) Exercise and Payment. A Stock Appreciation Right shall
entitle the Participant to receive an amount equal to the excess of the
Fair Market Value of a Share on the date of exercise of the Stock
Appreciation Right over the grant price thereof. The Committee shall
determine whether a Stock Appreciation Right shall be settled in cash,
Shares or a combination of cash and Shares.
(c) Other Terms and Conditions. Subject to the terms of the
Plan and any applicable Award Agreement, the Committee shall determine,
at or after the grant of a Stock Appreciation Right, the term, methods
of exercise, methods and form of settlement, and any other terms and
conditions of any Stock Appreciation Right. The Committee may impose
such conditions or restrictions on the exercise of any Stock
Appreciation Right as it shall deem appropriate.
SECTION 8. Restricted Stock and Restricted Stock Units.
(a) Grant. Subject to the provisions of the Plan, the
Committee shall have sole and complete authority to determine the
Participants to whom Shares of Restricted Stock and Restricted Stock
Units shall be granted, the number of
<PAGE> 13
Shares of Restricted Stock and/or the number of Restricted Stock Units
to be granted to each Participant, the duration of the period during
which, and the conditions, if any, under which, the Restricted Stock
and Restricted Stock Units may be forfeited to the Company, and the
other terms and conditions of such Awards.
(b) Transfer Restrictions. Shares of Restricted Stock and
Restricted Stock Units may not be sold, assigned, transferred, pledged
or otherwise encumbered, except, in the case of Restricted Stock, as
provided in the Plan or the applicable Award Agreements. Certificates
issued in respect of Shares of Restricted Stock shall be registered in
the name of the Participant and deposited by such Participant, together
with a stock power endorsed in blank, with the Company. Upon the lapse
of the restrictions applicable to such Shares of Restricted Stock, the
Company shall deliver such certificates to the Participant or the
Participant's legal representative.
(c) Payment. Each Restricted Stock Unit shall have a value
equal to the Fair Market Value of a Share. Restricted Stock Units shall
be paid in cash, Shares, other securities or other property, as
determined in the sole discretion of the Committee, upon the lapse of
the restrictions applicable thereto, or otherwise in accordance with
the applicable Award Agreement. Dividends paid on any Shares of
Restricted Stock may be paid directly to the Participant, withheld by
the Company subject to vesting of the Restricted Shares pursuant to the
terms of the applicable Award Agreement, or may be reinvested in
additional Shares of Restricted Stock or in additional Restricted Stock
Units, as determined by the Committee in its sole discretion.
SECTION 9. Performance Awards.
(a) Grant. The Committee shall have sole and complete
authority to determine the Participants who shall receive a
"Performance Award", which shall consist of a right which is (i)
denominated in cash or Shares, (ii) valued, as determined by the
Committee, in accordance with the achievement of such performance goals
during such performance periods as the Committee shall establish, and
(iii) payable at such time and in such form as the Committee shall
determine.
(b) Terms and Conditions. Subject to the terms of the Plan and
any applicable Award Agreement, the Committee shall determine the
performance goals to be achieved during any performance period, the
length of any performance period, the amount of any Performance Award
and the amount and kind of any payment or transfer to be made pursuant
to any Performance Award.
(c) Payment of Performance Awards. Performance Awards may be
paid in a lump sum or in installments following the close of the
performance
<PAGE> 14
period or, in accordance with procedures established by the Committee,
on a deferred basis.
SECTION 10. Other Stock-Based Awards.
(a) General. The Committee shall have authority to grant to
Participants an "Other Stock-Based Award", which shall consist of any
right which is (i) not an Award described in Sections 6 through 9 above
and (ii) an Award of Shares or an Award denominated or payable in,
valued in whole or in part by reference to, or otherwise based on or
related to, Shares (including, without limitation, securities
convertible into Shares), as deemed by the Committee to be consistent
with the purposes of the Plan. Subject to the terms of the Plan and any
applicable Award Agreement, the Committee shall determine the terms and
conditions of any such Other Stock-Based Award, including the price, if
any, at which securities may be purchased pursuant to any Other
Stock-Based Award granted under this Plan.
(b) Dividend Equivalents. In the sole and complete discretion
of the Committee, an Award, whether made as an Other Stock-Based Award
under this Section 10 or as an Award granted pursuant to Sections 6
through 9 hereof, may provide the Participant with dividends or
dividend equivalents, payable in cash, Shares, other securities or
other property on a current or deferred basis.
SECTION 11. Performance Compensation Awards.
(a) General. The Committee shall have the authority, at the
time of grant of any Award described in Sections 6 through 10 (other
than Options and Stock Appreciation Rights granted with an exercise
price or grant price, as the case may be, equal to or greater than the
Fair Market Value per Share on the date of grant), to designate such
Award as a Performance Compensation Award in order to qualify such
Award as Performance-based compensation under section 162(m) of the
Code.
(b) Eligibility. The Committee will, in its sole discretion,
designate within the first 90 days of a Performance Period (or, if
longer, within the maximum period allowed under section 162(m) of the
Code) which Participants will be eligible to receive Performance
Compensation Awards in respect of such Performance Period. However,
designation of a Participant eligible to receive an Award hereunder for
a Performance Period shall not in any manner entitle the Participant to
receive payment in respect of any Performance Compensation Award for
such Performance Period. The determination as to whether or not such
Participant becomes entitled to payment in respect of any Performance
Compensation Award shall be decided solely in accordance with the
provisions of this Section 11. Moreover, designation of a Participant
eligible to receive an Award hereunder for a particular Performance
Period shall not require designation of such Participant eligible to
receive an Award hereunder in any subsequent
<PAGE> 15
Performance Period and designation of one person as a Participant
eligible to receive an Award hereunder shall not require designation of
any other person as a Participant eligible to receive an Award
hereunder in such period or in any other period.
(c) Discretion of Committee with Respect to Performance
Compensation Awards. With regard to a particular Performance Period,
the Committee shall have full discretion to select the length of such
Performance Period, the type(s) of Performance Compensation Awards to
be issued, the Performance Criteria that will be used to establish the
Performance Goal(s), the kind(s) and/or level(s) of the Performance
Goals(s) is(are) to apply to the Company and the Performance Formula.
Within the first 90 days of a Performance Period (or, if longer, within
the maximum period allowed under section 162(m) of the Code), the
Committee shall, with regard to the Performance Compensation Awards to
be issued for such Performance Period, exercise its discretion with
respect to each of the matters enumerated in the immediately preceding
sentence of this Section 11(c) and record the same in writing.
(d) Payment of Performance Compensation Awards
(i) Condition to Receipt of Payment. Unless otherwise provided
in the applicable Award Agreement, a Participant must be employed by
the Company on the last day of a Performance Period to be eligible for
payment in respect of a Performance Compensation Award for such
Performance Period.
(ii) Limitation. A Participant shall be eligible to receive
payment in respect of a Performance Compensation Award only to the
extent that: (1) the Performance Goals for such period are achieved;
and (2) the Performance Formula as applied against such Performance
Goals determines that all or some portion of such Participant's
Performance Award has been earned for the Performance Period.
(iii) Certification. Following the completion of a Performance
Period, the Committee shall meet to review and certify in writing
whether, and to what extent, the Performance Goals for the Performance
Period have been achieved and, if so, to calculate and certify in
writing that amount of the Performance Compensation Awards earned for
the period based upon the Performance Formula. The Committee shall then
determine the actual size of each Participant's Performance
Compensation Award for the Performance Period and, in so doing, may
apply Negative Discretion, if and when it deems appropriate.
(iv) Negative Discretion In determining the actual size of an
individual Performance Award for a Performance Period, the Committee
may reduce or eliminate the amount of the Performance Compensation
Award earned under the Performance Formula in the Performance Period
through the use of Negative Discretion if, in its sole judgement, such
reduction or elimination is appropriate.
<PAGE> 16
(v) Timing of Award Payments. The Awards granted for a
Performance Period shall be paid to Participants as soon as
administratively possible following completion of the certifications
required by this Section 11.
(vi) Maximum Award Payable. Notwithstanding any provision
contained in this Plan to the contrary, the maximum Performance
Compensation Award payable to any one Participant under the Plan for a
Performance Period is 400,000 Shares or, in the event the Performance
Compensation Award is paid in cash, the equivalent cash value thereof
on the last day of the Performance Period to which such Award relates.
Furthermore, any Performance Compensation Award that has been deferred
shall not (between the date as of which the Award is deferred and the
payment date) increase (i) with respect to Performance Compensation
Award that is payable in cash, by a measuring factor for each fiscal
year greater than a reasonable rate of interest set by the Committee or
(ii) with respect to a Performance Compensation Award that is payable
in Shares, by an amount greater than the appreciation of a Share from
the date such Award is deferred to the payment date.
SECTION 12. Amendment and Termination.
(a) Amendments to the Plan. The Board may amend, alter,
suspend, discontinue, or terminate the Plan or any portion thereof at
any time; provided that no such amendment, alteration, suspension,
discontinuation or termination shall be made without shareholder
approval if such approval is necessary to comply with any tax or
regulatory requirement applicable to the Plan and provided further that
any such amendment, alteration, suspension, discontinuance or
termination that would impair the rights of any Participant or any
holder or beneficiary of any Award theretofore granted shall not to
that extent be effective without the consent of the affected
Participant, holder or beneficiary.
(b) Amendments to Awards. The Committee may waive any
conditions or rights under, amend any terms of, or alter, suspend,
discontinue, cancel or terminate, any Award theretofore granted,
prospectively or retroactively; provided that any such waiver,
amendment, alteration, suspension, discontinuance, cancellation or
termination that would impair the rights of any Participant or any
holder or beneficiary of any Award theretofore granted shall not to
that extent be effective without the consent of the affected
Participant, holder or beneficiary.
(c) Adjustment of Awards Upon the Occurrence of Certain
Unusual or Nonrecurring Events. The Committee is hereby authorized to
make adjustments in the terms and conditions of, and the criteria
included in, Awards in recognition of unusual or nonrecurring events
(including, without limitation, the events described in Section 4(b)
hereof) affecting the Company, any Affiliate, or the financial
statements of the Company or any Affiliate, or of changes in applicable
<PAGE> 17
laws, regulations, or accounting principles, whenever the Committee
determines that such adjustments are appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan; provided that no such adjustment
shall be authorized to the extent that such authority or adjustment
would cause an Award designated by the Committee as a Performance
Compensation Award under Section 11 of the Plan to fail to qualify as
"performance-based compensation" under section 162(m) of the Code.
SECTION 13. Change of Control and Qualified Public Offering. In the
event of a Change of Control or a Qualified Public Offering after the date of
the adoption of this Plan, any outstanding Awards then held by Participants
which are unexercisable or otherwise unvested shall automatically be deemed
exercisable or otherwise vested, as the case may be, as of immediately prior to
such Change of Control or Qualified Public Offering.
SECTION 14. General Provisions.
(a) Nontransferability.
(i) Each Award, and each right under any Award, shall be
exercisable only by the Participant during the Participant's lifetime,
or, if permissible under applicable law, by the Participant's legal
guardian or representative.
(ii) No Award may be assigned, alienated, pledged, attached,
sold or otherwise transferred or encumbered by a Participant otherwise
than by will or by the laws of descent and distribution, and any such
purported assignment, alienation, pledge, attachment, sale, transfer or
encumbrance shall be void and unenforceable against the Company or any
Affiliate; provided that the designation of a beneficiary shall not
constitute an assignment, alienation, pledge, attachment, sale,
transfer or encumbrance.
(iii) Notwithstanding the foregoing, the Committee may in the
applicable Award Agreement evidencing an Option granted under the Plan
or at any time thereafter in an amendment to an Award Agreement provide
that Options granted hereunder which are not intended to qualify as
Incentive Options may be transferred by the Participant to whom such
Option was granted (the "Grantee") without consideration, subject to
such rules as the Committee may adopt to preserve the purposes of the
Plan, to:
(A) the Grantee's spouse, children or grandchildren
(including adopted and stepchildren and
grandchildren) (collectively, the "Immediate
Family");
(B) a trust solely for the benefit of the Grantee and
his or her Immediate Family; or
<PAGE> 18
(C) a partnership or limited liability company whose
only partners or shareholders are the Grantee and
his or her Immediate Family members;
(each transferee described in clauses (A), (B) and (C) above
is hereinafter referred to as a "Permitted Transferee");
provided that the Grantee gives the Committee advance written
notice describing the terms and conditions of the proposed
transfer and the Committee notifies the grantee in writing
that such a transfer would comply with the requirements of the
Plan and any applicable Award Agreement evidencing the Option.
The terms of any Option transferred in accordance with the
immediately preceding sentence shall apply to the Permitted
Transferee and any reference in the Plan or in an Award
Agreement to an optionee, Grantee or Participant shall be
deemed to refer to the Permitted Transferee, except that (a)
Permitted Transferees shall not be entitled to transfer any
Options, other than by will or the laws of descent and
distribution; (b) Permitted Transferees shall not be entitled
to exercise any transferred Options unless there shall be in
effect a registration statement on an appropriate form
covering the shares to be acquired pursuant to the exercise of
such Option if the Committee determines that such a
registration statement is necessary or appropriate, (c) the
Committee or the Company shall not be required to provide any
notice to a Permitted Transferee, whether or not such notice
is or would otherwise have been required to be given to the
Grantee under the Plan or otherwise and (d) the consequences
of termination of the Grantee's employment by, or services to,
the Company under the terms of the Plan and the applicable
Award Agreement shall continue to be applied with respect to
the Grantee, following which the Options shall be exercisable
by the Permitted Transferee only to the extent, and for the
periods, specified in the Plan and the applicable Award
Agreement.
(b) No Rights to Awards. No Participant or other Person shall
have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Participants, or holders or beneficiaries of
Awards. The terms and conditions of Awards and the Committee's
determinations and interpretations with respect thereto need not be the
same with respect to each Participant (whether or not such Participants
are similarly situated).
(c) Share Certificates. All certificates for Shares or other
securities of the Company or any Affiliate delivered under the Plan
pursuant to any Award or the exercise thereof shall be subject to such
stop transfer orders and other restrictions as the Committee may deem
advisable under the Plan or the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock
exchange upon which such Shares or other securities are then listed,
and any applicable Federal or state laws, and the Committee may cause a
legend or
<PAGE> 19
legends to be put on any such certificates to make appropriate
reference to such restrictions.
(d) Withholding.
(i) A Participant may be required to pay to the Company or any
Affiliate and the Company or any Affiliate shall have the right and is
hereby authorized to withhold from any Award, from any payment due or
transfer made under any Award or under the Plan or from any
compensation or other amount owing to a Participant the amount (in
cash, Shares, other securities, other Awards or other property) of any
applicable withholding taxes in respect of an Award, its exercise, or
any payment or transfer under an Award or under the Plan and to take
such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such taxes. The Committee
may provide for additional cash payments to holders of Awards to defray
or offset any tax arising from the grant, vesting, exercise or payments
of any Award.
(ii) Without limiting the generality of clause (i) above, a
Participant may satisfy, in whole or in part, the foregoing withholding
liability by delivery of Shares owned by the Participant (which are not
subject to any pledge or other security interest and which have been
owned by the Participant for at least 6 months) with a Fair Market
Value equal to such withholding liability or by having the Company
withhold from the number of Shares otherwise issuable pursuant to the
exercise of the option a number of Shares with a Fair Market Value
equal to such withholding liability.
(iii) Notwithstanding any provision of this Plan to the
contrary, in connection with the transfer of an Option to a Permitted
Transferee pursuant to Section 14(a) of the Plan, the Grantee shall
remain liable for any withholding taxes required to be withheld upon
the exercise of such Option by the Permitted Transferee.
(e) Award Agreements. Each Award hereunder shall be evidenced
by an Award Agreement which shall be delivered to the Participant and
shall specify the terms and conditions of the Award and any rules
applicable thereto, including but not limited to the effect on such
Award of the death, disability or termination of employment or service
of a Participant and the effect, if any, of such other events as may be
determined by the Committee.
(f) No Limit on Other Compensation Arrangements. Nothing
contained in the Plan shall prevent the Company or any Affiliate from
adopting or continuing in effect other compensation arrangements, which
may, but need not, provide for the grant of options, restricted stock,
Shares and other types of Awards provided for hereunder (subject to
shareholder approval if such approval is required), and such
arrangements may be either generally applicable or applicable only in
specific cases.
<PAGE> 20
(g) No Right to Employment. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the
employ of, or in any consulting relationship to, the Company or any
Affiliate. Further, the Company or an Affiliate may at any time dismiss
a Participant from employment or discontinue any consulting
relationship, free from any liability or any claim under the Plan,
unless otherwise expressly provided in the Plan or in any Award
Agreement.
(h) No Rights as Stockholder. Subject to the provisions of the
applicable Award, no Participant or holder or beneficiary of any Award
shall have any rights as a stockholder with respect to any Shares to be
distributed under the Plan until he or she has become the holder of
such Shares. Notwithstanding the foregoing, in connection with each
grant of Restricted Stock hereunder, the applicable Award shall specify
if and to what extent the Participant shall not be entitled to the
rights of a stockholder in respect of such Restricted Stock.
(i) Governing Law. The validity, construction, and effect of
the Plan and any rules and regulations relating to the Plan and any
Award Agreement shall be determined in accordance with the laws of the
State of Delaware.
(j) Severability. If any provision of the Plan or any Award is
or becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan
or any Award under any law deemed applicable by the Committee, such
provision shall be construed or deemed amended to conform the
applicable laws, or if it cannot be construed or deemed amended
without, in the determination of the Committee, materially altering the
intent of the Plan or the Award, such provision shall be stricken as to
such jurisdiction, Person or Award and the remainder of the Plan and
any such Award shall remain in full force and effect.
(k) Other Laws. The Committee may refuse to issue or transfer
any Shares or other consideration under an Award if, acting in its sole
discretion, it determines that the issuance or transfer of such Shares
or such other consideration might violate any applicable law or
regulation or entitle the Company to recover the same under Section
16(b) of the Exchange Act, and any payment tendered to the Company by a
Participant, other holder or beneficiary in connection with the
exercise of such Award shall be promptly refunded to the relevant
Participant, holder or beneficiary. Without limiting the generality of
the foregoing, no Award granted hereunder shall be construed as an
offer to sell securities of the Company, and no such offer shall be
outstanding, unless and until the Committee in its sole discretion has
determined that any such offer, if made, would be in compliance with
all applicable requirements of the U.S. federal securities laws.
(l) No Trust or Fund Created. Neither the Plan nor any Award
shall create or be construed to create a trust or separate fund of any
kind or a fiduciary
<PAGE> 21
relationship between the Company or any Affiliate and a Participant or
any other Person. To the extent that any Person acquires a right to
receive payments from the Company or any Affiliate pursuant to an
Award, such right shall be no greater than the right of any unsecured
general creditor of the Company or any Affiliate.
(m) No Fractional Shares. No fractional Shares shall be issued
or delivered pursuant to the Plan or any Award, and the Committee shall
determine whether cash, other securities, or other property shall be
paid or transferred in lieu of any fractional Shares or whether such
fractional Shares or any rights thereto shall be canceled, terminated,
or otherwise eliminated.
(n) Headings. Headings are given to the Sections and
subsections of the Plan solely as a convenience to facilitate
reference. Such headings shall not be deemed in any way material or
relevant to the construction or interpretation of the Plan or any
provision thereof.
SECTION 15. Certain Restrictions Prior to a Qualified Public Offering.
Notwithstanding any provision of the Plan or any Award Agreement to the
contrary, until the consummation of a Qualified Public Offering, any Shares
received by a Participant (or any permitted transferee under Section 14) in
connection with the grant, exercise, payment or other settlement in respect of
an Award ("Plan Shares") shall be subject to the following restrictions. The
restrictions set forth in this Section 15 shall lapse immediately upon the
occurrence of a Qualified Public Offering.
(a) Restrictions on Transfer.
(i) Transfer of Plan Shares Prior To A Change of Control.
Prior to the occurrence of a Change of Control, the Participants (and
any permitted transferees under Section 14) shall not sell, assign,
pledge or otherwise transfer or enter into any agreement to sell,
assign, pledge or transfer any interest in (a "Transfer") any Plan
Shares, other than (A) pursuant to applicable laws of descent and
distribution; (B) to the Company or the Permitted Holders or (C)
pursuant to Section 15(c); provided that the restrictions contained in
this Section 15 shall continue to be applicable to the Plan Shares
after any such permitted Transfer and the transferees of such Plan
Shares (other than the Company or the Permitted Holders or any
purchaser in a transaction described in Section 15(c)) must agree in
writing to be bound by the provisions of this Section 15 prior to any
such Transfer. Upon making any Transfer of Plan Shares pursuant to this
Section 15(a)(i), the transferor shall deliver a written notice (a
"Transfer Notice") to the Company. The Transfer Notice shall disclose
in reasonable detail the identity of the prospective transferee(s) and
the terms and conditions of the proposed transfer.
(ii) Transfer of Plan Shares After a Change of Control. At
least 30 days prior to making any Transfer of any Plan Shares after a
Change of Control, a Participant (and any permitted transferee under
Section 14) shall deliver a written
<PAGE> 22
notice (the "Sale Notice") to the Company disclosing in reasonable
detail the identity of the prospective transferee(s) and the terms and
conditions of the proposed Transfer. No Transfer may be consummated
prior to 60 days after the Sale Notice has been delivered to the
Company (the "Authorization Date").
(b) First Refusal Rights. The Company may elect to purchase
all or any portion of the Plan Shares to be transferred pursuant to
Section 15(a)(ii) at the same proportionate price for the Plan Shares
to be transferred as is specified in the Sale Notice by delivering a
written notice of such election to the Participant (or other
transferor) within 30 days after the receipt of the Sale Notice by the
Company. The Company shall have up to 30 days after delivery of such
notice to the Participant (or other transferor) to consummate the
purchase and sale of the Plan Shares. A Participant (or other
transferor) may, during the 60-day period immediately following the
Authorization Date, subject to the provisions of this Section 15,
transfer the Plan Shares specified in the Sale Notice at a price and on
terms no more favorable to the transferee(s) thereof than specified in
the Sale Notice; provided that the restrictions contained in this
Section 15 shall continue to be applicable to the Plan Shares after any
such transfer and the transferees of such Plan Shares must agree in
writing to be bound by the provisions of this Section 15 prior to any
such transfer. Any Plan Shares not transferred within such 60-day
period shall again be subject to the provisions of this Section 15(b)
upon subsequent transfer.
(c) Drag-Along Right. If at any time prior to a Qualified
Public Offering any of the Permitted Holders, singularly or in the
aggregate, proposes to sell 50% or more of the Fully Diluted Shares to
any person(s) or entity or entities other than a Permitted Holder, it
or they may, but shall not be obligated to, require the holders of the
Plan Shares to sell the same proportion and type of their Plan Shares
as such Permitted Holders in the aggregate are selling of their
securities by setting forth such requirement in a written notice to the
holders of the Plan Shares at least 10 days prior to such sale. In such
event, the holders of the Plan Shares shall vote for, consent to and
not raise any objections against such sale. The holders of the Plan
Shares shall take all necessary and reasonably desirable actions in
connection with the consummation of the sale, and shall be entitled to
participate in such sale on the same terms and conditions as other
holders of the Company's capital stock (including, without limitation,
such Permitted Holders) and to receive the same consideration with
respect to the Plan Shares as is received by other holders of the
Company's capital stock (including, without limitation, such Permitted
Holders). Without limiting the generality of the foregoing, if the sale
is structured as a sale of shares of the Company's capital stock, the
holders of the Plan Shares shall agree to sell to the purchaser or
purchasers of such capital stock all Plan Shares that such holder is
required to sell pursuant to the preceding sentence, on the same terms
and conditions as such Permitted Holder(s) is selling its or their
shares of the Company's capital stock.
<PAGE> 23
(d) Tag-Along Right.
(i) If at any time prior to a Qualified Public Offering any of
the Permitted Holders, singularly or in the aggregate (other than the
Company) holding 50% or more of the Fully Diluted Shares, proposes to
transfer (other than a pledge, collateral assignment or similar action)
any Shares to any person(s) or entity or entities other than a
Permitted Holder (a "Disposition"), such Permitted Holder shall, at
least ten (10) days prior to the consummation of such Disposition, give
notice (a "Disposition Notice") to the Participants who hold Plan
Shares describing the terms of the Disposition in reasonable detail and
stating that the Participants may elect to participate in such
Disposition on the same terms and conditions as the Permitted Holders
(including, without limitation, the price to be paid for the Shares);
provided that the provisions of this Section 15(d) shall not apply to
any transfers (x) pursuant to any registered public offering or (y) by
any Permitted Holder to any of the employees, directors of, or
consultants to, the Company or any of its Subsidiaries.
(ii) The election pursuant to clause (i) above shall be
exercised by written notice delivered to the Permitted Holders
effecting such Disposition within the time specified in the Disposition
Notice, which shall not be less than 10 business days after such
Disposition Notice is delivered. If a Participant delivers such notice
of the Participant's election to sell, the Participant shall be
obligated to transfer the Plan Shares specified in such notice upon the
terms specified in clause (i) above to the proposed transferee(s),
conditional upon the closing of the Disposition.
(iii) The maximum number of Plan Shares that a Participant may
sell to any transferee(s) pursuant to clause (i) above shall be the
number of Shares that is in the same proportion to the Participant's
total ownership of the Fully Diluted Shares as the number of Shares
being sold by the Permitted Holders, in the aggregate, (after giving
effect to any other co-sale, participation or similar rights to which
the Permitted Holders may be subject) is to such Permitted Holders'
total ownership of the Fully Diluted Shares.
SECTION 16. Term of the Plan.
(a) Effective Date. The Plan shall be effective as of the date
of its approval by the Board.
(b) Expiration Date. No Award shall be granted under the Plan
after July 31, 2007. Unless otherwise expressly provided in the Plan or
in an applicable Award Agreement, any Award granted hereunder may, and
the authority of the Board or the Committee to amend, alter, adjust,
suspend, discontinue, or terminate any such Award or to waive any
conditions or rights under any such Award shall, continue after July
31, 2007.
<PAGE> 24
AMENDMENT NO. 1 TO 1997 STOCK INCENTIVE PLAN
AMENDMENT NO. 1 dated as of March 24, 1998 to the Pathnet, Inc. 1997
Stock Incentive Plan (the "Amendment").
W I T N E S S E T H:
WHEREAS, the Board of Directors of Pathnet, Inc. ("Pathnet") has
heretofore adopted the Pathnet, Inc. 1997 Stock Inventive Plan (the "Plan"); and
WHEREAS, the Board of Directors of Pathnet desires to amend the Plan in
certain respects, all as set forth more fully below:
SECTION 1. Definition; References. Unless otherwise specifically
defined herein, each capitalized term used herein without definition shall have
the meaning assigned to such term in the Plan. Each reference to "hereof,"
"hereunder," "herein," and "hereby" and each other similar reference and each
reference to the "Plan" contained in the Plan shall from and after the date
hereof refer to the Plan as amended hereby.
SECTION 2. Amendment to Section 2 of the Plan. Section 2 of the Plan is
hereby amended by adding the following definitions thereto:
"Cause" shall mean any of (i) a Participant's plea of guilty
or nolo contendere to, or conviction for, the commission of a felony
offense by the Participant, (ii) a material breach by the Participant
of the fiduciary duty owed to the Company, (iii) a material breach by
the Participant of the provisions of the Company's Non-Disclosure,
Assignment of Inventions and Non-Competition Agreement or, if the
Participant is not a party to such Agreement, a material breach by the
Participant of any other obligations to the Company regarding
non-competition, confidentiality, non-solicitation or inventions to
which the Participant is otherwise bound and (iv) the Participant's
failure to substantially perform the Participant's material duties to
the Company; provided that any claim that "Cause" within the meaning of
clauses (ii), (iii) or (iv) above exists for the termination of a
Participant's employment may be asserted on behalf of the Company only
by a duly adopted resolution of the Board and only after thirty days
prior written notice to the Participant during which period the
Participant may cure the breach or neglect that is the basis of any
such claim, if curable (provided that no such cure period shall be
provided to the Participant if the Participant has previously taken the
same, or substantially similar, action or made the same, or
substantially similar, omissions which resulted in written notice by
the Company to the Participant of termination for Cause).
"Constructive Termination" shall mean a resignation by a
Participant following the occurrence of a Change of Control as a result
of (i) a reduction in the Participant's annual base salary as in effect
immediately prior to the Change of
<PAGE> 25
Control or a material reduction of any employee benefit or prerequisite
enjoyed by the Participant immediately prior to the Change of Control
(other than as a result of an across the board reduction applicable to
all other employees of the Company of the same or similar rank); (ii) a
material diminution in the Participant's title, duties or
responsibilities from those in effect immediately prior to such Change
of Control or (iii) the relocation following such Change of Control of
the Company's principal office, or the Participant's own office
location as assigned to the Participant by the Company, to a location
more than fifty miles from the office location prior to such Change of
Control; provided that no such action or event shall constitute grounds
for Constructive Termination unless the Company shall have failed to
cure such action or event within thirty days after the Company's
receipt of written notice from the Participant describing such action
or event.
SECTION 3. Amendment to Section 4 of the Plan. Section 4 of the Plan is
hereby amended by replacing the referencing to "579,264" that appears in the
first sentence of paragraph (a) of such Section, and inserting in lieu thereof
the number "1,153,667."
SECTION 4. Amendment to Section 13 of the Plan. Section 13 of the Plan
is hereby amended and restated in its entirety to read as follows:
SECTION 13. Change of Control. In the event of a Change of Control
after the date of the adoption of this Plan, and, if a Participant's employment
with the Company or its subsidiaries shall thereafter be terminated (a) by the
Company without Cause or (b) by the Participant due to a Constructive
Termination, then the portion, if any, of any outstanding Awards then held by
such Participant which are unexercisable or otherwise unvested and which would
otherwise have become exercisable or otherwise vested within one year after the
date of such Participant's termination of employment, shall automatically be
deemed exercisable or otherwise vested, as the case may be, as of immediately
prior to such Participant's termination of employment."
SECTION 5. Amendment to Section 15 and 16 of the Plan. Section 15 of
the Plan is hereby deleted in its entirety and Section 16 is hereby renumbered
as Section 15.
SECTION 6. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Delaware.
<PAGE> 1
Portions of this exhibit have been omitted and filed separately
with the Securities and Exchange Commission.
These portions are designated "[ * * * ]."
Exhibit 10.4
FIBER OPTIC ACCESS AGREEMENT
BETWEEN
PATHNET TELECOMMUNICATIONS, INC.
AND
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY
This fiber optic access agreement ("Agreement") is entered into as
of this ___ day of December, 1999 between Pathnet Telecommunications, Inc., a
Delaware corporation ("Pathnet") and The Burlington Northern and Santa Fe
Railway Company, a Delaware corporation ("BNSF").
WHEREAS, BNSF has certain ownership interests in certain of its rail
corridors covering the western United States, BNSF's rail network consisting of
over 30,000 route miles in 28 states and two Canadian provinces;
WHEREAS, Pathnet desires to obtain from BNSF the right to lease from
BNSF, on specified terms and conditions, strips of land constituting
approximately [ * * * ] route miles, in the aggregate, within any rail
corridor in BNSF's existing rail corridor network (or within the
Auburn-Yakima-Pasco, Washington rail corridor, or the Ortonville,
Minnesota-Terry, Montana rail corridor)(collectively, "Rail Corridors" and any
one individually, "Rail Corridor"), to the extent of BNSF's ownership rights, so
that Pathnet can construct, install, operate, maintain, replace, reconstruct,
remove and/or relocate (collectively, "Construct and Operate") a fiber optic
telecommunications transmission system and certain appurtenant equipment and
structures (collectively, "Fiber Optic Facilities");
WHEREAS, Pathnet intends to construct and operate a network of Fiber
Optic Facilities over many BNSF Rail Corridors, and to construct or acquire, and
then operate, a network of Fiber Optic Facilities over many corridors throughout
the eastern United States;
WHEREAS, Pathnet and BNSF have entered into a Contribution
Agreement, dated October ___, 1999, by which BNSF has agreed to contribute
certain property interests into Pathnet and to execute and deliver this
Agreement and, subject to the terms, conditions and obligations set forth in
this Agreement, perform the duties set forth herein; and
WHEREAS, BNSF is willing, on the terms and conditions set forth in
this Agreement, to enter into various specific leases with Pathnet, in the form
of the Lease attached hereto as Exhibit A, with respect to approximately
[ * * * ] route miles of Rail Corridors of BNSF's existing Rail Corridor
network, as specified by Pathnet and as shown on Exhibits B and C attached
hereto, each Lease to grant to Pathnet the right to Construct and Operate Fiber
Optic Facilities on a specific BNSF Rail Corridor, to the extent of BNSF's
ownership rights therein;
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NOW, THEREFORE, Pathnet and BNSF agree as follows:
1. Condition Precedent to Commencement of Pathnet's Rights.
Pathnet and BNSF have closed the transaction described and
governed by the Contribution Agreement, on the terms set forth in the
Contribution Agreement.
2. Right to Lease.
For a period of [* * * ] following the date of this Agreement,
on each rail corridor within BNSF's existing Rail Corridor network, subject to
the limitations of BNSF's ownership interest in each Rail Corridor, as set forth
in Section 11 hereof, and to the restrictions set forth in Section 3 hereof
concerning BNSF's overriding rail operations, safety concerns and property
marketing rights, Pathnet shall have the right to enter into a fiber optic lease
with BNSF on the terms set forth in the form of Fiber Optic Lease attached
hereto as Exhibit A and made a part hereof (hereinafter, "Lease"). (Where, with
respect to a particular Rail Corridor BNSF is subject to a limitation on its
ability to grant a Lease, but has a right to grant a fiber optic easement
instead, BNSF shall grant to Pathnet such a fiber optic easement on terms
otherwise identical to the Lease, and any such easement also shall be included
in references hereinafter to the term "Lease.") Pathnet acknowledges that,
subject only to certain restrictions set forth in Section 4 hereof, BNSF will
continue to convey to other parties, or may abandon, various Rail Corridors, or
portions thereof, throughout the term of this Agreement, and that such actions
will affect the Rail Corridor network subject to leasing to Pathnet at any
particular time. Each Lease shall permit Pathnet to Construct and Operate Fiber
Optic Facilities on the specific Rail Corridor premises to which each Lease
applies, subject to the procedures and terms of each Lease. Each Lease shall be
for a term of 35 years unless the Lease is terminated earlier in accordance with
the terms of each Lease.
3. Procedure to Obtain a Lease.
Pathnet may request a Lease in the form of Exhibit A, to the
extent of BNSF's ownership interest in the Rail Corridor, by providing to BNSF
prior written notice of its desire to enter into a Lease, which notice shall
specify the end points of the particular BNSF Rail Corridor where Pathnet
desires a Lease. BNSF shall grant such request, and BNSF and Pathnet shall
execute a Lease in the form of Exhibit A, as soon as practicable but no later
than thirty (30) days after the date BNSF receives such notice from Pathnet,
unless BNSF cannot allow a Lease in the Rail Corridor because either: (i) the
Construction and Operation of Fiber Optic Facilities under the Lease in BNSF's
judgment would materially interfere with, or create a safety hazard to BNSF with
respect to, BNSF's existing or then reasonably foreseeable future rail
operations on a segment of the Rail Corridor, as determined by a BNSF operating
or engineering Vice President or Assistant Vice President; or (ii) the
Construction and Operation of Fiber Optic Facilities under the Lease in BNSF's
judgment would materially interfere with BNSF's existing or then reasonably
foreseeable future plans to market or develop a particular parcel of land for
the benefit of a rail customer or as a real estate development (but not as a
fiber optic venture) on a
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segment of the Rail Corridor, as reasonably determined by a BNSF property
management Vice President or Assistant Vice President. Where BNSF cannot allow a
Lease in the Rail Corridor for one of the reasons just set forth, BNSF shall
cooperate with Pathnet in good faith to seek a solution that will enable Pathnet
to install its Fiber Optic Facilities on the requested portion of the Rail
Corridor and, if BNSF is unable to do so, to allow Pathnet to Construct and
Operate its Fiber Optic Facilities over as much of the Rail Corridor as
possible, consistent with the terms of (i) and (ii) above, and, if Pathnet so
desires, BNSF shall execute a Lease with Pathnet over those portions of the Rail
Corridor where the Lease would not violate the terms of (i) or (ii) above.
4. Restrictions on BNSF's Right to Grant Future Fiber Optic
Rights Along Certain Corridors.
Pathnet acknowledges that the rights to Construct and Operate
Fiber Optic Facilities to be granted to Pathnet in the Lease are nonexclusive,
except to the extent set forth in this Section 4, and that other parties have
rights under their existing agreements with, and/or conveyances from, BNSF to
Construct and Operate Fiber Optic Facilities on various BNSF rail corridors.
Subject to the existing rights of other parties under existing fiber optic
agreements, BNSF agrees as follows:
(a) Immediate Exclusivity Rights: Commencing on the date of
this Agreement, and continuing until December 31, 2004, for all of the Rail
Corridors set forth on Exhibit B attached hereto and made a part hereof,
constituting an aggregate of no more than approximately 4,052 miles ("Exclusive
Corridors"), BNSF shall not grant any rights to any other party to Construct and
Operate any Fiber Optic Facilities on any Exclusive Corridor, except where: (i)
such Fiber Optic Facilities only cross the Exclusive Corridor, and (ii) the
construction and operation of such Fiber Optic Facilities does not materially
disrupt Pathnet's ability to utilize the Fiber Optic Facilities covered by a
Lease. This exclusivity period shall terminate earlier on all routes where
Commencement of Construction (as defined herein) has not occurred, on either:
(x) the dates specified in Section 7 hereof if on such date Pathnet has not met
the applicable fiber optic network development milestone specified in Section 7
with respect to such date; or (y) on one of the dates specified below if:
(I) As of April 30, 2001, Pathnet has not completed
construction, which in this Section 4(a) shall mean
installation of a conduit and at least [* * *] fiber optic
fibers in the conduit, of at least 800 miles of Fiber Optic
Facilities along the Exclusive Corridors;
(II) As of [* * *], a Liquidity Event (as hereinafter
defined) has not occurred;
(III) As of April 30, 2002, Pathnet has not completed
construction of at least 1,600 miles of Fiber Optic Facilities
along the Exclusive Corridors;
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(IV) As of April 30, 2003, Pathnet has not
completed construction of at least 2,400 miles of
Fiber Optic Facilities along the Exclusive Corridors;
(V) As of April 30, 2004, Pathnet has not
completed construction of at least 3,200 miles of Fiber
Optic Facilities along the Exclusive Corridors; or
(VI) As of April 30, 2005, Pathnet has not
completed construction of at least 4,000 miles of Fiber
Optic Facilities along the Exclusive Corridors.
Termination of Pathnet's exclusivity rights on all routes
where Commencement of Construction has not then occurred will be the sole
consequence of Pathnet's failure to reach any milestone set forth in this
Section 4(a). In this Agreement, a "Liquidity Event" shall mean the earliest of:
(aa) a Qualified IPO, as defined in the Stockholders' Agreement, dated as of
October ___, 1999, among Pathnet, the current holders of Pathnet's Preferred
Stock, BNSF, CSX Railway Company and Colonial Pipeline Company; or (bb) the date
on which the common stock or any successor security of Pathnet either is listed
for trading on a national securities exchange registered under the Exchange Act
of 1934, as amended ("Exchange Act"), or is traded in an over-the- counter
market and quoted in an automated quotation system of the National Association
of Securities Dealers, Inc.; or (cc) there has been a transaction in which all
stockholders of Pathnet have received ownership interests which are listed for
trading on a national securities exchange registered under the Exchange Act, or
is traded in an over-the-counter market and quoted in an automated quotation
system of the National Association of Securities Dealers, Inc.
(b) Exclusive Right to Negotiate after Commencement of
Construction:
(1) Definitions. In this Agreement, the term "Commencement
of Construction" shall mean the date of award of the primary
construction contract for any segment of a Rail Corridor. In
this Agreement, the term "Restricted Corridors" shall mean
those Rail Corridors set forth on Exhibit C, which is made a
part hereof, the initial version of which is attached
hereto, which Exhibit C may be modified by Pathnet from time
to time by Pathnet delivering notice of such modification to
BNSF; provided that the aggregate route miles of the
Exclusive Corridors plus the Restricted Corridors during the
term of this Agreement shall not exceed approximately [* *
*] route miles. In the event that Pathnet revises Exhibit C
to include all or any portion of the [* * *] Rail Corridor,
BNSF, within 30 days following its receipt of notice of such
revision, shall acquire from its affiliate now owning
certain property rights in each Rail Corridor that
affiliate's rights in the Rail Corridor land (possibly
exclusive of a rail service easement in the case of the
[* * *]rail corridor).
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(2) Exclusive Right to Negotiate. Until Commencement of
Construction occurs on a Rail Corridor, Pathnet shall have
no exclusive right to negotiate and execute a fiber optic
agreement on such Rail Corridor with any third party.
Beginning on the date of Commencement of Construction, and
continuing for up to five years thereafter for each
Exclusive Corridor to the extent Pathnet no longer has
exclusive rights under 4(a) on such Rail Corridor, and for
up to three years thereafter for each Restricted Corridor,
but in no event beyond the termination of the Lease related
to such Exclusive Corridor or Restricted Corridor, Pathnet
shall have an exclusive right to negotiate and execute any
fiber optic agreement on such Rail Corridor, except for any
agreement related to Fiber Optic Facilities which only cross
the Restricted Corridor or Exclusive Corridor, where the
construction and operation of such Fiber Optic Facilities
does not materially disrupt Pathnet's ability to utilize the
Fiber Optic Facilities covered by a Lease; provided that
this exclusive right to negotiate and execute any fiber
optic agreement with respect to any particular party shall
continue for a period of [* * *] (and BNSF thereafter
may negotiate a fiber optic agreement with such party if
by the end of such [* * *] Pathnet does not have an
executed fiber optic agreement with such party). The periods
for exclusive rights to negotiate as specified in this
Section 4(b) shall terminate earlier, as to all Rail
Corridors and Rail Corridor segments on which Pathnet has
not yet reached the stage Commencement of Construction if
Pathnet either: (i) does not meet the applicable
development milestone specified in Section 7 hereof, (ii)
as of [* * *], a Liquidity Event has not occurred, or
(iii) has not met the schedule for constructing Fiber Optic
Facilities along Exclusive Corridors, as set forth in
Section 4(a) hereof . In addition, Pathnet's exclusive
right to negotiate and execute any fiber optic agreement
shall terminate on any Rail Corridor on the date that
Pathnet's Lease on such Rail Corridor is terminated
pursuant to the terms of such Lease. In addition, at any
time prior to the end of the period in which Pathnet has an
exclusive right to negotiate and execute any fiber optic
agreement on any Restricted Corridor, BNSF may not enter
into any fiber optic agreement with another party with
respect to such Restricted Corridor except where such
agreement requires such other party to reach Commencement
of Construction on such Restricted Corridor within one year
following the effective date of such agreement.
5. Limitation on Pathnet's Right to Lease.
If Pathnet enters into a Lease with BNSF, and such Lease
subsequently is terminated for any reason specified in such Lease, for a period
of three (3) years following the date of any such termination, Pathnet shall
have no right to enter into a Lease on any portion of the BNSF Rail Corridor
that was subject to such Lease.
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6. Contribution to Pathnet.
This Agreement is being contributed by BNSF to Pathnet
pursuant to the terms of the Contribution Agreement.
7. Fiber Optic Network Development Schedule.
Pathnet shall develop a Fiber Optic Facilities network
throughout the United States, utilizing BNSF's rail corridors and longitudinal
corridors of one or more other parties in the United States, in accordance with
the following schedule of fiber optic network development milestones:
(a) By June 30, 2001, Pathnet must have completed
construction of, or have acquired, Fiber Optic
Facilities over at least 3,000 Route Miles, in the
aggregate. As used in this Section, each "Route Mile"
shall consist of either one mile of at least [* * *],
or one mile of [* * *] plus [* * *]
(b) By June 30, 2002, Pathnet must have completed
construction of, or have acquired, Fiber Optic
Facilities over at least 6,000 Route Miles, in the
aggregate.
(c) By June 30, 2003, Pathnet must have completed
construction of, or have acquired, Fiber Optic
Facilities over at least 9,500 Route Miles, in the
aggregate.
(d) By June 30, 2004, Pathnet must have completed
construction of, or have acquired, Fiber Optic
Facilities over at least 12,000 Route Miles, in the
aggregate.
(e) By June 30, 2005, Pathnet must have completed
construction of, or have acquired, Fiber Optic
Facilities over at least 12,500 Route Miles, in the
aggregate.
Termination of Pathnet's exclusivity rights on all routes where Commencement of
Construction has not then occurred will be the sole consequence of Pathnet's
failure to reach any milestone set forth in this Section 7.
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8. Reporting Relative to Fiber Optic Network Development
Schedule.
Forty days before each deadline specified in Section 7 hereof,
Pathnet shall deliver to BNSF a report reasonably satisfactory to BNSF showing
Pathnet's progress, as of the date of the report, toward meeting each
appropriate level of development specified in Section 7, and its plans to meet
or exceed each such level by the appropriate deadline. Seven (7) days after each
deadline specified in Section 7, Pathnet shall deliver to BNSF a certified
report showing whether Pathnet has met or exceeded each appropriate level of
development specified in that Section. BNSF shall have the right to audit
Pathnet's records in order to verify the contents of each report required by
this Section 8.
9. Time is of the Essence; Post-Termination Liability.
Time is of the essence in performing this Agreement. No
termination of this Agreement shall release Pathnet from any liability or
obligation of Pathnet under the terms of this Agreement, resulting from events
happening prior to the date of termination.
10. Compliance with Laws.
In exercising any and all of its right under this Agreement,
Pathnet shall comply with all applicable laws, regulations, ordinances, rules,
decisions and orders of any court or governmental body with jurisdiction, and
shall have the sole responsibility for all costs associated with such
compliance. Pathnet, at its sole cost, shall secure and maintain in effect all
federal, state and local permits licenses and/or zoning approvals required to
Construct and Operate the Fiber Optic Facilities, and shall satisfy any and all
conditions that must be met in order to obtain any required permit, license or
zoning approval.
11. Limitations on BNSF's Ownership Rights.
Pathnet acknowledges that one or more other parties,
including, but not limited to, various native American nations, may have, or may
claim to have, ownership rights in certain segments of certain of BNSF's rail
corridors, and may claim that Pathnet also must obtain rights from it (or them)
in order to occupy, or access, the Premises, as defined in each Lease, and that,
in some cases, such claims may be valid. Pathnet acknowledges that BNSF's
ownership interest in many of its Rail Corridors is a determinable fee, a
railroad right of way or a rail service easement, which shall terminate when
BNSF either: (i) ceases to use those Rail Corridors for railroad purposes; or
(ii) uses such Rail Corridors for purposes found to be inconsistent with use of
the corridors for railroad purposes, and that in such circumstances, Pathnet's
right to Lease any such Rail Corridor, or its rights under any Lease of any such
Rail Corridor, may be subject to termination as of the date the circumstances
set forth in either (i) or (ii), above, first arise (unless Pathnet improves the
quality of title to the Lease property by obtaining a patent or deed from the
federal government, if appropriate, or acquiring additional property interests
from third parties). Pathnet also acknowledges that BNSF's ownership rights may
terminate for other reasons, such
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as termination of franchise rights, and that certain segments of BNSF's Rail
Corridors consist only of a trackage rights license to BNSF to enable BNSF to
provide rail service, or shared ownership with other railroads, and that BNSF
may not have rights to include those segments in any Lease to Pathnet. Pathnet
further acknowledges that Pathnet's rights to enter into a Lease on any BNSF
Rail Corridor, and its rights under any Lease of any BNSF Rail Corridor, are
subject and subordinate to all outstanding and/or future rights and encumbrances
on BNSF's Rail Corridors (including liens, security interests and mortgages),
and any and all easements, other leases, licenses, permits or agreements which
now or in the future relate to BNSF's Rail Corridors, except BNSF in the future
shall not place any encumbrance upon any BNSF Rail Corridor then subject to a
Lease to Pathnet, or enter into any easement, lease, license, permit or
agreement, which would materially disrupt Pathnet's ability to exercise its
rights under this Agreement or to utilize the Fiber Optic Facilities covered by
a Lease (and Pathnet acknowledges that its ability to exercise its rights under
this Agreement or to utilize such Fiber Optic Facilities would not be materially
disrupted if either: (x) Pathnet is relocated to another location within the
applicable BNSF Rail Corridor in accordance with the terms of Section 14 of the
applicable Lease, or could be located elsewhere in the Rail Corridor; or (y)
BNSF preserves fiber optic rights and makes those rights available to Pathnet at
no charge payable by Pathnet to the holder of the land interest where such
rights are located and changes following any conveyance by BNSF of its ownership
interest in such a parcel have not caused a significant physical limitation on
constructing Fiber Optic Facilities through such parcel (and Pathnet agrees that
any cost of enforcing such rights shall be the responsibility of Pathnet). BNSF
therefore conveys to Pathnet no more right, title or interest in any Rail
Corridor than BNSF holds in such Rail Corridor at the time of conveyance, and
Pathnet hereby releases BNSF from any and all liability, cost, loss, damage or
expense in connection with any claims that BNSF lacked sufficient legal title to
convey the rights described herein. Pathnet shall have the right, at its sole
cost and expense, to acquire or attempt to acquire from other parties such
rights in BNSF Rail Corridors that Pathnet deems necessary or appropriate.
12. Confidentiality.
The parties hereto shall keep confidential all terms of this
Agreement, except to the extent that disclosure thereof is required by law or
agreed by the parties in writing. In the event either party hereto is required
to disclose any terms of this agreement pursuant to applicable law, at least
three days prior to disclosing the same (or such shorter period permitted by
law), such party shall notify the other party hereto in writing and provide
copies of the terms that the party intends to disclose. The language of the
press release announcing this deal shall be mutually agreed upon between the
parties hereto.
13. No Assignment.
Neither this Agreement, nor any of the rights to lease that
are granted to Pathnet by the terms of this Agreement, shall be assigned by
Pathnet without BNSF's prior written consent, which may be granted or withheld
in BNSF's sole discretion. BNSF acknowledges that Pathnet, without consent of
BNSF may sublease to one or more parties the right to use other
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Fiber Optic Facilities under a Lease, may sell to one or more other parties a
partial ownership in such Fiber Optic Facilities, may sublease or assign this
Agreement or any Lease to a subsidiary, affiliate or parent company controlled
by, under common control with, or controlling, either indirectly or directly,
Pathnet, but only where, and to the extent, that such transaction does not
violate the terms of the Contribution Agreement, or, for financing purposes
only, Pathnet may assign this Agreement to Lucent Technologies, Inc. and/or
Nortel Networks, Inc., or an affiliate of either company, or to some other third
party following the written concurrence of BNSF which shall not be unreasonably
withheld or delayed, or may assign any Lease to a third party, provided that in
any such case Pathnet shall remain fully responsible to BNSF for compliance with
all terms of this Agreement and the Lease. (In the foregoing sentence the terms
"control", "controlled", and "controlling" shall mean ownership of more than 50
percent of the equity interest in a company.) Nothing herein shall prohibit
Pathnet: (i) from involving contractors, or strategic or co-development
partners, in Construction and Operation of the Fiber Optic Facilities, on such
terms as Pathnet may determine in its sole discretion, provided that all such
activities are conducted in accordance with the terms of this Lease, and that
Pathnet remains fully liable for all obligations hereunder; and (ii) from
granting liens or other security interests in the Fiber Optic Facilities or
Pathnet's rights under this Lease in connection with financing or investments
made available to Pathnet, which agreements may permit Pathnet's lenders to take
possession, sell, assign or otherwise transfer the Fiber Optic Facilities,
including the right to operate, or permit a third-party to operate, the Fiber
Optic Facilities, provided that any party taking possession of the Fiber Optic
Facilities shall be subject to all terms of the Lease, and that continued
operation of the Fiber Optic Facilities shall be subject to all terms of the
Lease.
14. Limitation on Damages for Breach of this Agreement.
Damages that may be recovered for breach of this Agreement
shall not include any indirect, consequential, special or punitive damages, or
lost profits, or the cost of Pathnet building Fiber Optic Facilities on any
alternative route.
15. Taxes and Other Charges.
(a) Pathnet shall pay, and shall indemnify BNSF against
the liability for, any and all taxes, levies,
excises, charges and assessments (including any
penalties and interest related thereto)
(collectively, "Taxes") attributable to the
execution, delivery, recording or filing of this
Agreement, including without limitation any ad
valorem taxes assessed against the properties of BNSF
to the extent such ad valorem taxes are attributable
to Pathnet's rights hereunder, but only to the extent
that the ad valorem taxes attributable to the value
of Pathnet's rights have increased due to assessments
levied after the date hereof.
(b) In the case of amounts described in Section 15(a) to
be paid by Pathnet, BNSF shall determine the amount
of such Taxes to be paid by Pathnet by reference to
information provided by the relevant taxing authority
that demonstrates or establishes the increase in such
Taxes after the date hereof. If the information
provided by the relevant taxing authority
demonstrates or establishes that Taxes are
attributable to fiber optic development value, but
the information does not demonstrate or establish the
amount of the Taxes that are so
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(c)
attributable, such amount shall be determined by
reference to a formula that is consistently applied
and that allocates any such Taxes among all of BNSF's
Rail Corridors (including similar agreements) subject
to such Taxes in a manner that reasonably reflects
both the basis upon which the Taxes are imposed and
the relative proportion of such Rail Corridors in
respect of which Pathnet has been granted rights
hereunder. The amount of Taxes attributable to fiber
optic development value shall be fairly allocated
between Pathnet and BNSF based upon the relative
value of Pathnet's rights and the rights of others to
whom BNSF has granted, or in the future may grant,
fiber optic rights with respect to the same property.
In all cases, BNSF promptly shall provide to Pathnet
information that establishes the manner in which any
such Taxes were allocated and the basis for
establishing that such amounts are attributable to
the execution of this Agreement. The parties shall
resolve any dispute regarding the liability for
payment of Taxes hereunder pursuant to the dispute
resolution and arbitration procedures set forth in
Section 21 of the Lease.
(d) Notwithstanding the foregoing, Pathnet shall not
be responsible for any Taxes for which it would
not be responsible pursuant to the provisions of
Section 24(d) or (e) of the form of Lease
attached hereto or for any Taxes on Rail
Corridors for periods in respect of which Pathnet
no longer has rights hereunder.
(e) BNSF agrees to reasonably cooperate with Pathnet
in the refund, rebate, reduction, abatement,
mitigation and contest of any Taxes for which
Pathnet is obligated to pay hereunder.
16. Notices.
Unless otherwise provided herein, all notices and other
communications required by or concerning this Agreement shall be in writing and
shall be deemed to have been duly given when delivered in person, or on the next
business day when sent by a nationally recognized overnight courier, or on the
second succeeding business day when sent by registered or certified United
States Mail (postage prepaid, return receipt requested), or, if postal claim
notice is given , on the date of its return marked "unclaimed" (provided,
however, that upon receipt of a returned notice marked "unclaimed", the sending
party hereto shall make reasonable effort to contact and notify the other party
hereto by telephone) and each respective party hereto at the following addresses
(or at such other address for a party hereto as shall be specified by like
notice):
(1) if to Pathnet:
Pathnet, Inc.
1015 31st Street., N.W.
Washington, DC 20007
Attn: General Counsel
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(2) if to BNSF:
Assistant Vice President, Telecommunications
The Burlington Northern and Santa Fe Railway Company
2600 Lou Menk Drive
Forth Worth, Texas 76131-2830
and to:
Vice President - Law
The Burlington Northern and Santa Fe Railway Company
2500 Lou Menk Drive, AOB-3
Fort Worth, Texas 76131-2830
18. Brokers and Agents.
BNSF and Pathnet represent and warrant to each other that
neither has employed any broker, agent or finder in connection with this
Agreement or the Purchase Agreement, and each indemnifies and agrees to hold
harmless the other from and against any commission or fee claimed by any broker,
agent or finder in connection with this transaction.
19. Force Majeure.
Except as may be elsewhere specifically provided in this
Agreement, any failure or delay in the performance by a party hereto of its
obligations hereunder shall not constitute a breach of this Agreement if such
failure or delay results from causes beyond that party's control, including but
not limited to acts of God, governmental action (whether in its sovereign or
contractual capacity), fire, flood, or other catastrophe, national emergency,
insurrection, riot, and war. The phrase "beyond that party's control" shall not
include any failure to reach agreement with a party with whom Pathnet is
negotiating pursuant to the exclusive right to negotiate provided in Section
4(b).
20. Severability.
If any provision of this Agreement or the application thereof,
shall be held invalid, illegal or unenforceable in whole or in part, the
remainder of this Agreement and the application thereof shall not be affected,
and shall be enforceable to the full extent permitted by law, and the portion
hereof found to be invalid shall be enforced to the fullest extent permitted by
law, and, if possible, shall be reformed to carry out as much as possible the
intent of the parties as expressed herein.
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21. Amendment.
This Agreement may be amended only by a written instrument
executed by both parties hereto. No failure to exercise and no delay in
exercising, on the part of a party hereto, any right, power or privilege
hereunder shall operate as a waiver of any other provision of this Agreement, or
as a waiver of that right, power or privilege either before, or after, the
period of waiver.
22. Entire Agreement.
This Agreement and all Exhibits attached hereto, constitutes
the entire agreement of the parties hereto with respect to the subject matters
hereof, and supersede any and all prior negotiations, understandings and
agreements, whether oral or written, with respect hereto.
23. Applicable Law.
This Agreement shall be interpreted and enforced in accordance
with the laws of the State of Texas. Venue for any legal action to interpret or
enforce this Agreement shall lie exclusively in the United States District Court
for the Northern District of Texas, or if jurisdiction cannot be obtained in
federal court, then venue shall be in a Texas state court in Tarrant County,
Texas.
24. Counterparts.
This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute but one and the same instrument.
IN WITNESS WHEREOF, authorized representatives of BNSF and Pathnet
have executed this Agreement as of the date first set forth herein.
THE BURLINGTON NORTHERN AND PATHNET TELECOMMUNICATIONS,
SANTA FE RAILWAY COMPANY INC.
By: By:
------------------------------ --------------------------
Name: Name:
------------------------ --------------------
Title: Title:
--------------------------- --------------------------
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EXHIBIT A
FORM OF LEASE
[SEE EXHIBIT 10.5]
-13-
<PAGE> 14
EXHIBIT B
EXCLUSIVE CORRIDORS
Approx.
Corridor Route
Description Miles
[* * *]
Total: [* * *]
-14-
<PAGE> 15
EXHIBIT C
RESTRICTED CORRIDORS
Approx.
Corridor Route
Description Miles
[* * *]
Total: [* * *]
- ------ -----
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<PAGE> 1
Exhibit 10.5
Portions of this exhibit have been omitted and filed separately
with the Securities and Exchange Commission.
Those portions are designated "[ * * * ]."
EXHIBIT B
FIBER OPTIC LEASE
THIS FIBER OPTIC LEASE ("Lease") is made as of this ____ day of
______________, 200__ between Pathnet Telecommunications, Inc., a Delaware
corporation ("Pathnet") and The Burlington Northern and Santa Fe Railway
Company, a Delaware corporation ("BNSF"). This Lease is being entered into
pursuant to the terms of that certain fiber optic access agreement between BNSF
and Pathnet dated November __, 1999 ("Fiber Optic Access Agreement"), which sets
forth the terms upon which BNSF granted to Pathnet the right to enter into fiber
optic leases, on the terms of this Lease, on specified rail corridors in the
BNSF rail transportation network and subject to all limitations on the ownership
interest of BNSF, to Construct and Operate Fiber Optic Facilities (as defined
below).
WHEREAS, BNSF has certain ownership interests in a rail corridor
consisting of ___ route miles between ___________________ and
______________________ ("Rail Corridor");
WHEREAS, Pathnet desires to lease from BNSF, on the terms and
conditions set forth herein, a portion of the Rail Corridor, in order for
Pathnet to construct, install, operate, maintain, replace, reconstruct, remove
and/or relocate (collectively, "Construct and Operate") a fiber optic
telecommunications transmission system and certain appurtenant equipment and
structures (collectively, "Fiber Optic Facilities"); and
WHEREAS, BNSF is willing, on the terms and conditions set forth in
this Lease, to lease a portion of the Rail Corridor to Pathnet, for the sole
purpose of allowing Pathnet, subject to all limitations on the ownership
interest of BNSF, to Construct and Operate Fiber Optic Facilities on the Rail
Corridor.
NOW THEREFORE, Pathnet and BNSF agree as follows:
1. Lease Rights. Pursuant to the terms of this Lease and the Fiber
Optic Access Agreement, Pathnet shall have the right to enter upon a portion of
the Rail Corridor, which portion generally shall be a three foot wide strip of
land, or such larger portion required to Construct and Operate the Fiber Optic
Facilities, as specified in the Final Construction Plans (as defined later
herein) but at each repeater station or other required Fiber Optic Facilities
structure occupying more land, the portion shall extend one foot beyond the
perimeter of the structure or equipment, or, where a perimeter fence is built
around the structure or equipment, one foot beyond the perimeter fence, the
specific portion of the Rail Corridor leased ("Premises") being identified in
Exhibit A attached hereto and made a part hereof. All structures may be fenced
by Pathnet, at its sole cost and expense, and may be multiple stories to the
extent approved by BNSF, provided that the height and other dimensions of any
such structure do not interfere with railroad operations or clearance, or create
a safety hazard. Any such structures may exceed 3,500
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square feet only: (i) subject to space availability; (ii) following prior
written approval of BNSF, not to be unreasonably withheld; and (iii) where such
structures are not buildings where people regularly report to work. Pathnet's
right to enter the Premises shall commence on the ___ day of ________________,
200__, and shall be for the sole purpose of allowing Pathnet, or any of its
permitted assignees, sublessees of capacity, agents, contractors, strategic or
co-development partners, customers or invitees, or any of their employees
(collectively, "Pathnet Parties") to Construct and Operate Fiber Optic
Facilities on the Premises, subject to BNSF's rights as set forth herein and all
contract and/or property rights of others in the Premises. Pathnet, and any of
the Pathnet Parties, also shall have the right to cross other property in which
BNSF has a sufficient ownership interest as required to access the Premises,
subject to BNSF's rights as set forth herein and all contract and/or property
rights of others in the Premises, so long as such access shall not cross any
active railroad track, or come within 25 feet of such track, without BNSF's
prior written consent, which will not be unreasonably withheld or delayed. Any
of the Pathnet Parties entering onto the Rail Corridor must first execute an
agreement with BNSF in the form of Exhibit "C-1" attached hereto and made a part
hereof, by which such party agrees to comply with BNSF's Contractor Requirements
set forth as Exhibit "C" attached hereto and made a part hereof (and Pathnet
acknowledges that any such Pathnet Party's execution of the Exhibit "C-1"
agreement shall not relieve Pathnet of its full responsibility hereunder for any
actions, omissions or the presence of such Pathnet Party on or near the Rail
Corridor). Pathnet may install as much fiber optic capacity (which term shall
include conduits, whether installed empty or with fiber) on the Premises as it
determines to be appropriate, and may add further fiber optic capacity during
the term of this Lease. Pathnet's rights under this Lease are granted without
covenant of title or quiet enjoyment and Pathnet acknowledges that one or more
other parties may have, or may claim to have, ownership rights in the Rail
Corridor, and may claim that Pathnet also must obtain rights from it (or them)
in order to occupy or access the Premises, and that, in some cases, such claims
may be valid. Pathnet acknowledges that segments of the Rail Corridor may
consist only of a trackage rights licensed to BNSF to enable BNSF to provide
rail service, or shared ownership with other railroads, and that BNSF may not
have rights to include these segments in any Lease to Pathnet. BNSF will use
reasonable efforts to make available to Pathnet all documents reasonably
requested by Pathnet that could be located in a reasonable search (and, at
BNSF's option, BNSF can require that Pathnet or Pathnet's agent conduct the
search, at Pathnet's cost), which documents concern BNSF's rights, and the
rights of others, which in BNSF's judgment affects the Premises and Pathnet's
rights under this Lease or which Pathnet may identify which reasonably relates
to its rights under this Lease. Pathnet acknowledges that BNSF shall not be
liable for any nondisclosure of any document other than nondisclosure resulting
from gross negligence or wilfull misconduct of BNSF. Pathnet shall keep
confidential all confidential and proprietary data contained in these documents
and shall not use it for any purposes other than as set forth herein. BNSF shall
have the right, without causing undue delay, to review documents prior to
permitting Pathnet or its agent to review those documents, and to redact
confidential and proprietary information contained therein. Where
confidentiality provisions apply to contracts requested by Pathnet under this
Section 1, BNSF shall describe for Pathnet the restrictions and interference
with Pathnet's rights that such contracts permit, and or the fiber optic
capacity that such contracts permit to be built in the Rail Corridor, to the
extent that BNSF determines that it can do so consistent with the terms of each
applicable confidentiality provision. If Pathnet determines that BNSF's
description in such
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circumstances is insufficient, Pathnet shall so inform BNSF and BNSF shall use
good faith efforts to obtain promptly from the other party to the contract at
issue a waiver of the confidentiality provision. Pathnet's rights are subject
and subordinate to all outstanding rights and encumbrances on the Rail Corridor
(including, but not limited to, BNSF's mortgages) which BNSF has placed, or in
the future will place, on the Rail Corridor, and any and all easements, other
leases, licenses, permits or agreements which now or in the future relate to the
Rail Corridor, except that BNSF in the future shall not place any encumbrance
upon the Premises, or enter into any easement, lease, license, permit or
agreement covering any portion of the Premises, which would materially disrupt
Pathnet's ability to utilize the Fiber Optic Facilities under this Lease (and
Pathnet acknowledges that its ability to utilize such Fiber Optic Facilities
would not be materially disrupted if Pathnet is relocated to another location
within the Rail Corridor in accordance with the terms of Section 14 hereof, or
BNSF makes available to Pathnet the fiber optic rights that BNSF has reserved at
no charge payable by Pathnet to the holder of the land interest where such
rights are located (and Pathnet agrees that any cost of enforcing such rights
shall be the responsibility of Pathnet). Pathnet accepts the condition of the
Premises "AS IS, WHERE IS" and "WITH ALL FAULTS". BNSF DISCLAIMS ANY AND ALL
WARRANTIES, EXPRESS OR IMPLIED, THAT ARE NOT SPECIFICALLY SET FORTH HEREIN IN
SECTION 22 HEREOF.
2. Limitations on Lease Rights. Pathnet's rights under this Lease
also shall be subject and subordinate to the prior and continuing rights: (i) of
BNSF (and/or any other party with rights from BNSF) to use and maintain all or
any portion of its Rail Corridor in operating, maintaining, reconstructing or
relocating railroad tracks, signals, communications, electric lines or any other
improvements, equipment or facilities related to providing rail service
(collectively, "Rail Facilities"); (ii) of BNSF to use, and to allow others to
use, all and any portion of the Rail Corridor for any purpose (subject to the
terms of Section 4 of the Fiber Optic Access Agreement), which would not
materially disrupt Pathnet's ability to utilize the Fiber Optic Facilities under
this Lease; (iii) of BNSF to market and/or develop all or any portion of the
Rail Corridor or other BNSF property to rail transportation customers,
utilities, municipalities and other third parties except as restricted by
Section 4 of the Fiber Optic Access Agreement; and (iv) of BNSF to convey to any
party all or any portion of the Rail Corridor, any improvements owned by BNSF on
its Rail Corridor, and any air rights above, or subsurface rights below, the
surface of the Rail Corridor, except that any such conveyance by BNSF after the
date of this Lease shall be subject to this Lease, to the extent permitted by
applicable laws and agreements entered into prior to the date of this Lease. The
provisions of this paragraph shall be subject to the provisions of the Fiber
Optic Access Agreement.
3. Railroad Control. BNSF (and/or any other party with rights from
BNSF) shall have full control at all times over the operation of its railroad
and all Rail Facilities in the Rail Corridor. Pathnet's rights under this Lease
do not authorize Pathnet, or any of the Pathnet Parties, to interfere in any way
with any aspect of BNSF's (and/or such other party's) rail operations, or with
any Rail Facilities, on or near the Rail Corridor, or BNSF's (and/or such other
party) ability to maintain, reconstruct or relocate any Rail Facilities on or
near the Rail Corridor. Pathnet understands that various activities of BNSF, or
parties with rights through BNSF, could have the potential of interrupting
service provided by Pathnet's Fiber Optic Facilities. BNSF
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<PAGE> 4
understands that uninterrupted service via Pathnet's Fiber Optic Facilities is
of critical importance to Pathnet. Where BNSF knows about future activities
which, in BNSF's opinion, would have a reasonable potential of interrupting
service via Pathnet's Fiber Optic Facilities or otherwise materially interfering
with the Construction and Operation of the Fiber Optic Facilities, BNSF shall
provide notice thereof to Pathnet as far in advance as is practical under the
circumstances, and shall cooperate with Pathnet to attempt to avoid any such
service interruption. Any failure by BNSF to provide such notice or cooperation
shall not subject BNSF to any liability, costs, expenses, damages, losses or
claims to Pathnet or any of the Pathnet Parties, except where the failure is due
to the gross negligence or willful misconduct of BNSF.
4. Fiber Optics Rights are Nonexclusive. The fiber optics rights
granted to Pathnet are nonexclusive, except to the extent set forth in Section 4
of the Fiber Optic Access Agreement.
5. Term of Lease. The term of this Lease shall be for 35 years
years from the date set forth in Section 1, except this Lease shall be
terminated earlier, if any of the following circumstances occur, on the specific
date related to those circumstances, as follows:
(a) If Pathnet fails to deliver Proposed Construction Plans
(as defined herein) within one hundred twenty (120) days
after the date of this Lease, or such longer period as
may be reasonably necessary to cure such failure,
provided that Pathnet already has begun to cure such
failure, and continues diligently to cure until
completion;
(b) If Pathnet fails to reach Commencement of Construction
(which is defined herein as the date of award of the
primary construction contract for the segment of the
Rail Corridor covered by the Proposed Construction
Plans), within either: (i) sixty (60) days from the date
that the Proposed Construction Plans become Final
Construction Plans for that segment of the Rail
Corridor, or such longer period as may be reasonably
necessary to cure such failure, provided that Pathnet
already has begun to cure such failure, and continues
diligently to cure until completion; or (ii) thirty (30)
days from a later date agreed to in writing by BNSF;
(c) Upon Pathnet's submission of the Proposed Construction
Plans, Pathnet also will submit to BNSF a construction
schedule ("Construction Schedule") for BNSF's approval,
such approval not to be unreasonably withheld. Pathnet
acknowledges that BNSF desires that construction be
completed as promptly as possible and will take this
into account in preparing the Construction Schedule. The
Construction Schedule shall contemplate completion of
construction of Fiber Optic Facilities on the segment of
the Rail Corridor covered by the Proposed Construction
Plans as promptly after BNSF's final approval of the
Proposed Construction Plans as is commercially feasible,
taking into account issues of weather and season, and
time to complete title due diligence or respond as
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<PAGE> 5
reasonably required to any title problems that likely
would materially affect Pathnet's ability to Construct
and Operate the Fiber Optic Facilities, and to acquire
any necessary construction and operating permits. Upon
approval of the Proposed Construction Plans and
Construction Schedule, Pathnet will construct the Fiber
Optic Facilities in accordance with the Construction
Schedule and otherwise with all promptness and due
diligence, it being understood that modifications in the
Construction Schedule may be required due to issues
arising during construction. If at any time BNSF
believes that Pathnet has failed to construct the Fiber
Optic Facilities as promptly as commercially feasibly,
subject to Pathnet's right to suspend construction as
provided in this Subsection, BNSF may provide Pathnet
with written notice of this fact. If Pathnet does not
cure such failure within thirty (30) days after
receiving such written notice, then upon written notice
to Pathnet, BNSF may terminate the Lease, effective
immediately. Notwithstanding the foregoing, Pathnet may
suspend construction for up to two (2) years, upon
receiving BNSF's written approval, not to be
unreasonably withheld, if market considerations or
financial issues warrant such a suspension. During any
such suspension, Pathnet's exclusive right to negotiate
fiber optic agreements with respect to the Rail
Corridor, as set forth in Section 4(b)(2) of the Fiber
Optic Access Agreement, also shall be suspended.
(d) [* * *]
(e) If BNSF has required that Pathnet suspend construction
activities on the Premises for Pathnet's failure to
comply with any BNSF safety requirements, or on account
of Pathnet's interference with BNSF's rail operations or
maintenance activities, and within twenty four (24)
hours after written notice requiring suspension, Pathnet
has not suspended such activities.
6. Effect of Termination of Lease. Immediately upon termination of
this Lease, or if Pathnet abandons any Fiber Optic Facilities under this Lease
for a period of three years (which term shall mean the failure either to have in
use or to dedicate commercially reasonable marketing efforts to sell conduit,
dark fibers or capacity on the Premises), Pathnet shall relinquish to BNSF
possession of the Premises, provided that, for one hundred eighty (180) days
following such date Pathnet shall have the obligation to, and may continue to
enter the Premises for, the sole purposes of: (i) removing all above ground
Fiber Optic Facilities, (ii) removing below ground fiber Optic Facilities as
desired by Pathnet or to the extent reasonably requested by BNSF, and (iii)
restoring the Premises substantially to their condition on the date of this
Lease, reasonable wear and tear and casualty excepted, or as approved by BNSF.
Failure by Pathnet to
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comply with the foregoing sentence by one hundred eighty (180) days following
the date of termination shall entitle BNSF to treat all remaining Fiber Optic
Facilities as abandoned, and as the property of BNSF.
7. BNSF's Right to Suspend Pathnet Construction and Operating
Activities. In the event that Pathnet or a Pathnet Party fails to comply with
BNSF safety or operational regulations, or interferes or is reasonably likely to
interfere with BNSF rail operations, BNSF may require that Pathnet immediately
suspend all construction and/or operating activities on the Rail Corridor. In
such event, BNSF shall make a good faith effort to make available by
teleconference to discuss with Pathnet, within four (4) hours after suspension,
an individual with sufficient authority to resolve the issue, who shall be
prepared to discuss the reason(s) for such suspension and to attempt to resolve
the issue. If the parties are unable to resolve the issue in such discussion,
then BNSF and Pathnet will escalate the issue to the next higher level of
management, and shall attempt to meet, at a mutually agreeable location, or,
failing that, will have a telephonic meeting, within twenty four (24) hours of
the work suspension, with the goal of resolving the issue at that meeting. The
parties will negotiate in good faith to resolve the issue, and to prevent the
occurrence of similar situations in the future.
[* * *]
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(f) [* * *] BNSF shall have the right to purchase capacity
on any portion of Pathnet's network on terms no less favorable than
Pathnet is then offering for sales of like capacity and product over
like distances in like markets.
9. Construction and Operation of Fiber Optic Facilities.
(a) (1) BNSF shall make available for inspection and
copying by Pathnet, at Pathnet's sole cost: (i) maps of BNSF's
Rail Corridor, and lists and/or center diagrams indicating the
approximate location and nature of all bridges and
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locations of all tunnels, overpasses and other significant
railroad structures located on the Rail Corridor; (ii)
available engineering documents in BNSF's possession
(including profiles, lengths, internal diameter, etc.), that
relate to bridges, overpasses or tunnels on the Rail Corridor,
which Pathnet reasonably requests in connection with its
activities to Construct and Operate the Fiber Optic
Facilities; and (iii) maps, agreements (redacted to remove
confidential business terms) or other documents showing the
identity, location, rights and nature of other known users or
owners of portions of the Rail Corridor whose use, rights or
ownership Pathnet and BNSF reasonably determine would cause
title, possession or operational problems or cost to Pathnet
(including, without limitation, reversion rights of underlying
fee owners and, exclusivity rights of third parties); and (iv)
other such documentation or information reasonably requested
by Pathnet to assist Pathnet in its activities to Construct
and Operate the Fiber Optic Facilities and which, in the
opinion of BNSF, relates to or impacts upon the development of
Fiber Optic Facilities; all to the extent that (i) through
(iv) are readily and available from the records of BNSF or its
outside contractors charged with retaining such records, can
be located by BNSF in a reasonable search, and are not
confidential and proprietary to BNSF or third parties, and if
they are made available to Pathnet without determining what is
confidential or proprietary to BNSF, Pathnet shall keep such
information confidential and proprietary and shall not use it
for any purpose other than as set forth herein. The
availability of all such maps or documents shall not be
considered a guarantee or warranty that such maps or documents
are accurate or complete. The absence of markers, monuments or
maps indicating the present of subterranean facilities,
whether belonging to BNSF or otherwise, shall not constitute a
warranty or representation by BNSF that none exist. Pathnet
accepts this Lease with full cognizance of the potential
presence of the various claims, restrictions and physical
conditions described herein, acknowledging that Pathnet's
costs to Construct and Operate the Fiber Optic Facilities may
increase by reason thereof. Any failure by BNSF to provide
such documents shall not subject BNSF to any liability, costs,
expenses, damages, losses, or claims to Pathnet or any of the
Pathnet Parties, except to the extent of failures due to gross
negligence or willful misconduct.
(2) Pathnet recognizes that any BNSF documents supplied
by BNSF were not prepared for use as real estate title maps.
BNSF does not represent or suggest that the property lines and
Rail Corridor boundary lines shown on such documents are
accurate or that any other information contained on such
documents is correct.
(b) Prior to commencing construction of the Fiber Optic
Facilities, Pathnet, at its sole cost and risk, shall submit
to BNSF four sets of prints showing in detail the proposed
initial construction of all Fiber Optic Facilities on the
Premises, including every proposed element, item of equipment
and improvement included therein that Pathnet plans to locate
on the Premises, which prints shall be referenced herein as
"Proposed Construction Plans". Where Fiber Optic Facilities
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extend over a route longer than 150 miles, Pathnet shall
submit Proposed Construction Plans to BNSF for each 150 mile
segment, as and when they are ready, and shall use its best
efforts to avoid any single submission of such Proposed
Construction Plans for a segment longer than 150 miles.
(c) (1) BNSF shall review the Proposed Construction
Plans, and may disapprove them, or propose changes, but any
disapproval or proposed change must be made in writing and
delivered to Pathnet within thirty (30) days of the date BNSF
receives such plans. Pathnet acknowledges that if BNSF does
not disapprove the Proposed Construction Plans, or propose any
changes to them, this does not constitute a determination by
BNSF that there are no design defects in such plans or that
Fiber Optic Facilities built in accordance with such plans
could be built or operated safely. If BNSF disapproves the
Proposed Construction Plans because it determines that
construction and/or maintenance of the Fiber Optic Facilities
likely would interfere with BNSF's rail operations or create a
safety hazard and that the Fiber Optic Facilities cannot be
located within BNSF's Rail Corridor for a specified distance,
and Pathnet then determines that the cost of locating its
Fiber Optic Facilities off of BNSF's Rail Corridors would be
significantly higher for Pathnet and so notifies BNSF, then
BNSF shall make reasonable efforts to work with Pathnet to
determine if there is a way to locate the Fiber Optic
Facilities somewhere on BNSF's Rail Corridor without
interfering with BNSF's rail operations or creating a safety
hazard. If BNSF disapproves all or any part of the Proposed
Construction Plans, BNSF, at the time of such disapproval,
shall provide to Pathnet a written explanation of the reasons
for disapproval and suggested cures, if any. Pathnet then
shall submit revised Proposed Construction Plans, which shall
be subject to the same review procedures just described. Once
the thirty (30) day period described above has expired and
BNSF has not disapproved the Proposed Plans (or the revised
Proposed Plans, if applicable), the same shall be the "Final
Construction Plans" which term shall also include any
subsequent modifications to the Plans as provided herein.
Pathnet shall not commence construction of the Fiber Optic
Facilities along any portion of the Rail Corridor in each
instance until it has received written notice from BNSF that
BNSF does not disapprove the Final Construction Plans.
(2) If at any time Pathnet desires to amend the Proposed
Construction Plans or the Final Construction Plans, Pathnet
must submit four sets of prints showing such amendment to BNSF
in the same manner described for submission of the Proposed
Construction Plans. If such amendment is not modified or
disapproved by BNSF in the manner specified for modification
or disapproval of Proposed Construction Plans, the Final
Construction Plans will be deemed as of such time to
incorporate such amendment
(d) In constructing the Fiber Optic Facilities, and with
respect to all entries onto the Rail Corridor by Pathnet and
the Pathnet Parties to Construct and
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Operate the Fiber Optic Facilities, or for any other purpose,
Pathnet shall coordinate with BNSF, with the understanding
that BNSF's presence and activities on the Rail Corridor for
any purpose, except as limited by the Fiber Optic Access
Agreement, shall have priority over Pathnet's activities under
this Lease.
(e) The Construction Schedule shall be used by Pathnet
and BNSF to coordinate personnel, activities and train
movements. Pathnet shall amend the Construction Schedule, as
required, to reflect any and all schedule changes and shall
furnish promptly to BNSF any amended Construction Schedule.
BNSF may rely on the Construction Schedule to schedule flagmen
and other BNSF personnel whose duties require them to
accompany personnel constructing the Fiber Optic Facilities.
(f) If, at any time it appears to BNSF that BNSF's
tracks may be "Fouled" (defined in this Lease to mean the
presence of equipment and/or personnel of Pathnet or any of
the Pathnet Parties on a railroad track or within twenty-five
(25) feet of the centerline of any railroad track) in
connection with the exercise of Pathnet's rights under this
Lease, BNSF personnel may be provided, at BNSF's option, to
accompany Pathnet and/or any of the Pathnet Parties who may
Foul BNSF's tracks. Pathnet shall bear the entire cost
associated with such BNSF personnel, regardless of whether
such personnel are actually utilized in a particular case, and
Pathnet agrees promptly to pay all invoices for such personnel
that are submitted to it by BNSF. The failure of BNSF to
furnish such personnel shall not relieve Pathnet, or any of
the Pathnet Parties, of any obligations or liabilities it or
they otherwise have assumed hereunder.
(g) Pathnet, and all Pathnet Parties, who are or will be
involved in any activities or presence permitted under this
Lease on or near the Rail Corridor, shall comply with all
applicable BNSF safety rules and regulations, as set forth in
Exhibits "C" and "C-1" attached hereto. BNSF shall pay for any
such materials or safety training personnel (but Pathnet shall
pay any BNSF safety contractor's cost, including the cost of
any instructors); Pathnet shall pay salaries, any travel
expenses or other costs for Pathnet, and any and all such
Pathnet Parties, to receive such safety training.
(h) As promptly as possible, but in no event later than
six months after each segment of the Fiber Optic Facilities is
installed, Pathnet shall furnish to BNSF "As Built" Fiber
Optic Facilities drawings.
(i) During and in furtherance of completion of Initial
Construction, Pathnet and the Pathnet Parties, subject to
BNSF's prior written approval, may use, as required, and at no
additional charge, available portions of the Rail Corridor, as
identified by local BNSF personnel, for the purpose of
allowing Pathnet, or any of the Pathnet Parties, to erect, at
its sole cost and risk, temporary
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structures and fences to protect Pathnet's material or
equipment necessary for the construction of the Fiber Optic
Facilities, including staging of construction activities and
storage of materials, provided that such structures and
fences: (i) shall not interfere with, or disrupt in any way,
other than in a manner approved in advance by BNSF, any
operations conducted by BNSF, or any activities of third
parties, on the Rail Corridor; and (ii) to the extent
reasonably feasible, shall be as shown and described in the
Final Construction Plans. Pathnet shall restore any land used
for such structures and fences substantially to its previous
condition before Initial Construction is complete, reasonable
wear and tear and casualty excepted, and shall remove all such
structures, fences, equipment and material placed thereon by
Pathnet, or any of the Pathnet Parties, before Initial
Construction is complete. In the event Pathnet does not comply
with the foregoing sentence, BNSF, following reasonable
advance notice to Pathnet, may take the actions specified in
that sentence, and Pathnet shall reimburse to BNSF all cost
incurred by BNSF in taking such actions.
(j) Subject to BNSF's approval and execution by the
applicable utility company of a BNSF standard form right of
entry permit, Pathnet may bring electrical power and other
utilities to the Fiber Optic Facilities. Pathnet shall make
its own arrangements, at its sole cost and risk, to obtain all
electrical power and other utilities or services necessary to
Construct and Operate the Fiber Optic Facilities, and Pathnet
shall indemnify, defend and hold BNSF harmless against any
liability to any utility or service company arising out of
utilities or services ordered or used by or on behalf of
Pathnet, except to the extent caused by the gross negligence
or willful misconduct of BNSF or its agents or contractors, or
any of their employees. Utilities and services needed by
Pathnet at each junction or repeater site shall be as shown
and described in the Final Construction Plans and shall be
part of Fiber Optic Facilities for purposes of this Lease. If
the location of such utilities or services serving the Fiber
Optic Facilities must be changed because of its interference
to BNSF railroad purposes or industrial development related to
railroad purposes, BNSF shall notify Pathnet and Pathnet
promptly shall relocate the affected Fiber Optic Facilities,
at Pathnet's sole cost, in a manner satisfactory to BNSF.
Power sources installed by Pathnet shall be part of the
Initial Construction.
(k) Pathnet, at its sole cost and risk, shall furnish
all materials, supervision, labor, parts, components,
equipment and structures necessary to Construct and Operate
the Fiber Optic Facilities, or any part thereof, in accordance
with this Lease. Any and all work by Pathnet and/or a Pathnet
Party under the authority of this Lease shall be done in a
good and workmanlike manner, in conformity with the Final
Construction Plans, and shall comply with all applicable
engineering, safety, and other statutes, laws, ordinance,
regulations, rules, codes, orders or specifications of any
public body or authority having jurisdiction over the Fiber
Optic Facilities or BNSF's rail operations, including,
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but not limited to, the Federal Communications Commission and
the Federal Railroad Administration.
(l) All installations by Pathnet and/or a Pathnet Party
under the authority of this Lease must meet or exceed
applicable specifications of the public authority of the state
in which the installation is located and must be in compliance
with all existing federal, state or local laws, ordinances,
and regulations. In no case shall any part of the Fiber Optic
Facilities be located in a manner that will interfere with the
presence or activities of BNSF, or any third parties acting
within their rights on the Rail Corridor as they exist on the
date of this Lease. The manner of, and the equipment and
devices to be used for, any installation, relocation or
removal of the Fiber Optic Facilities, shall be reviewed in
advance by BNSF, as set forth herein.
(m) Fiber Optic Facilities may be installed by Pathnet,
at its sole cost and risk, on bridges or other water crossings
on the Rail Corridor by attachment to BNSF's fixed or movable
bridges or crossing structures, as available, as agreed by
BNSF and Pathnet, as shown in the Final Construction Plans.
(n) Installation of Fiber Optic Facilities under public
roadways shall be at Pathnet's sole cost and risk, at a
location and depth as agreed to by BNSF, as shown on the Final
Construction Plans.
(o) Installation of Fiber Optic Facilities crossing over
or under other existing facilities in the Rail Corridor shall
be located and installed, at Pathnet's sole cost and risk, in
accordance with conditions set forth in this Section 9, and
applicable requirements of the owner of each such facility.
If, in the course of any activity that Pathnet is authorized
to undertake under the terms of this Lease, any changes in any
pipelines, sewers, conduits, fences, power, signal or
communication lines or other utility, facility or Railroad
Facilities is necessary (either temporary or permanent), such
change shall require prior review by BNSF, and a letter from
BNSF indicating that it does not disapprove such change, and
all other necessary approvals from third parties. Pathnet
shall indemnify, defend and hold BNSF harmless against all
claims from any third party relating to any such activity.
(p) All cranes, lifts, drilling equipment, or other
machinery that is to be operated in the vicinity of any Rail
Facilities, electric transmission lines or other facilities in
connection with Initial Construction or any other activity
that Pathnet is authorized to undertake under the terms of
this Lease, shall be electrically grounded in a manner
reviewed by, and not disapproved by, BNSF. Pathnet
acknowledges that if BNSF does not disapprove such plans this
does not constitute a determination by BNSF that such plans or
activities are safe. All personnel of Pathnet and any of the
Pathnet Parties that are operating such cranes, lifts,
drilling equipment, or other machinery shall have appropriate
and sufficient
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experience in operating of the machinery being used, and
Pathnet shall be prepared to certify the extent of this
experience upon request by BNSF.
(q) If Pathnet, or any of the Pathnet Parties, acting
under the authority granted by this Lease, discovers any
scientific or historic artifacts, Pathnet immediately shall
notify BNSF of such discovery and shall protect such artifacts
until they are identified and removed by the appropriate
authorities.
(r) BNSF shall have the right to verify by inspection,
at the sole cost of Pathnet, that the location of the work and
the materials constituting the Initial Construction, or used
operation of the Fiber Optic Facilities, are in compliance
with the Final Construction Plans. BNSF shall give Pathnet
reasonable notice of such inspections, and Pathnet, at its
option, may designate a representative to accompany BNSF's
representative on such inspections. If, following an
inspection, BNSF reasonably determines that Pathnet is
conducting activities that do not comply with the approved
Final Construction Plans, the parties hereto shall meet
promptly to discuss the situation and determine a remedy
satisfactory to BNSF. If BNSF is not satisfied with the remedy
selected at such meeting, and its subsequent implementation,
Pathnet's rights to Construct and Operate Fiber Optic
Facilities shall be suspended entirely until the parties have
settled on a remedy that is satisfactory to BNSF. The
provisions of Section 7 shall apply to any suspension of work
pursuant to this Section.
(s) BNSF's expenses for any work performed for or at the
expense of Pathnet pursuant to the terms of this Lease shall
be paid by Pathnet promptly upon Pathnet's receipt of each
itemized bill therefor. Expenses so billed by BNSF shall be
only those attributable to the work performed and shall
include, without limitation, cost of labor (whether performed
by BNSF or a contractor of BNSF) and supervision, necessary
travel or transportation expenses, lodging, meals, equipment
rental, materials, and any freight and handling charges on
materials used, plus standard additives A list of standard
additives then in effect will be provided to Pathnet with any
billing containing such activities.
(t) Pathnet, at its sole cost and risk: (i) shall secure
and maintain in effect all federal, state, and local permits,
licenses, platting, subdivisions, and/or zoning approvals or
any other land use requirement that is required to Construct
and Operate the Fiber Optic Facilities, including, without
limitation, crossing, zoning, building, health, environmental,
and communication permits and licenses, and Pathnet, at its
sole cost and risk, shall satisfy any and all conditions
required to obtain, maintain and comply with any required
permit, license or zoning approval or any other land use
requirement; and (ii) shall indemnify, defend and hold
harmless BNSF from and against payment of the cost therefor,
and against any fines or penalties that may be levied for
failure to procure, maintain or to comply with any such
permits, licenses and/or zoning, or any other land use
requirement as well as any remedial costs incurred by BNSF in
curing any such
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failure. BNSF shall cooperate with Pathnet in securing and
maintaining any such permits or licenses, and Pathnet shall
reimburse any reasonable out-of-pocket costs of BNSF in
providing such cooperation..
(u) Any environmental impact statements required by any
governmental agency in connection with any activity of Pathnet
to Construct and Operate the Fiber Optic Facilities shall be
prepared by Pathnet at Pathnet's sole cost and risk, and
Pathnet, at its sole cost and risk, shall comply with any
conditions required by any applicable government authority in
connection with, or following from, any environmental impact
statement.
(v) BNSF shall cooperate with Pathnet, as requested by
Pathnet, at no out-of-pocket cost to BNSF, in Pathnet's
efforts to obtain and maintain any permits, licenses or
approvals of government agencies or authorities, or any
approvals of any necessary third parties, for the use of any
structures or facilities (including streets, roads or utility
poles) along portions of the Rail Corridor. The provisions of
this paragraph will not be deemed to require BNSF to expend
significant internal resources.
10. Entry Notice.
(a) During progress of the Initial Construction, Pathnet
shall give BNSF at least five days' written notice before
initial entry by Pathnet, or any of the Pathnet Parties, upon
any portion of the Rail Corridor.
(b) After completion of Initial Construction, any entry
by Pathnet or any Pathnet Party onto the Rail Corridor that
does not constitute Routine Maintenance and Operation (defined
later herein) of the Fiber Optic Facilities, or is not related
to an Emergency (defined later herein) shall require: (i)
advance written notice from Pathnet to BNSF not less than ten
days prior to such planned entry, such notice to specify the
purpose of the entry; (ii) if entry involves any new
construction, reconstruction, or removal of Fiber Optic
Facilities, four (4) sets of prints showing in detail such
proposed new construction, reconstruction, or removal; and
(iii) approval by BNSF, which approval shall not be
unreasonably withheld or delayed, taking in account the nature
of the proposed entry. As used herein, "Routine Maintenance
and Operation" shall mean maintenance and operation by Pathnet
and/or a Pathnet Party of the Fiber Optic Facilities that does
not require any: (i) excavation of soil that could alter or
disturb, or threaten the support of, or ability to use, any
Rail Facility; (ii) use of heavy machinery within 50 feet of
any railroad track; or (iii) an activity or presence which
results in a Fouled railroad track. As used herein,
"Emergency" shall mean that service on the Fiber Optic
Facilities has been interrupted or significantly disrupted or
such interruption is reasonably likely, or that there is a
material adverse threat to the integrity of Pathnet's fiber
optic network, in circumstances that make it
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impractical for Pathnet or any Pathnet Party to give BNSF
normal advance written notice of entry onto BNSF's Rail
Corridor.
(c) During Routine Maintenance and Operation, Pathnet
and/or any Pathnet Party may enter the Rail Corridor without
notice to BNSF, for the sole purpose of Routine Maintenance
and Operation; provided, however, that: (i) if any entry for
such purpose is likely to result in a Fouled railroad track,
Pathnet shall give BNSF written notice of the places where and
the manner in which entry is required not less than two (2)
days, and not more than seven (7) days, prior to such entry;
and (ii) without BNSF's prior consent, which shall not be
unreasonably withheld, neither Pathnet nor any Pathnet Party
shall enter the Rail Corridor at any place where BNSF
previously has disapproved entry.
(d) In the event of an Emergency, Pathnet and/or any
Pathnet Party may enter the Rail Corridor without notice to
BNSF, for the sole purpose of dealing with the Emergency;
provided, however, that: (i) if any entry for such purpose is
likely to result in a Fouled railroad track, Pathnet shall
obtain verbal or written approval from BNSF prior to such
entry, promptly followed by written confirmation of such
approval, which may be provided within 24 hours after Pathnet
has addressed the Emergency; (ii) if any entry for such
purpose is likely to require the excavation of soil that could
alter or disturb, or threaten the support of or ability to
use, any Rail Facility, or would involve the use of heavy
machinery within 50 feet of any railroad track, Pathnet shall
give BNSF verbal or telephonic notice of the places where, and
the manner in which, entry is required prior to such entry,
promptly followed by written confirmation which shall be
obtained within 24 hours after Pathnet has addressed the
Emergency. and (iii) without BNSF's prior consent, which shall
not be unreasonably withheld, neither Pathnet nor any Pathnet
Party shall enter the Rail Corridor at any place where BNSF
previously has disapproved entry. Both parties acknowledge
that an Emergency involving a derailment or other similar
situation could cause significant damage to both parties, and
that both parties will need to respond promptly and
effectively to the situation. Subject to (i), (ii) and (iii)
above, in the event of an Emergency involving a derailment or
other similar situation, BNSF agrees that it will not prohibit
Pathnet from responding to the situation as appropriate to
repair or protect the Fiber Optic Facilities, provided that
Pathnet does not interfere with BNSF's rail operations or
related activities. The parties will cooperate with one
another to enable each party to take appropriate response
action as promptly and effectively as possible.
11. Maintenance of Premises and Fiber Optic Facilities. BNSF shall
not be responsible for maintenance of any Fiber Optic Facilities, or for
clearing or removal of trees, shrubs, plants, ice, snow or debris from the
Premises. Pathnet shall be responsible to remove from the Rail Corridor any
debris resulting from any of the activities of Pathnet or any of the Pathnet
Parties acting under the authority of this Lease.
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12. Track Support: Materials Storage.
(a) During any work by Pathnet or any of the Pathnet Parties
pursuant to this Lease, Pathnet shall ensure that all tracks,
supporting structures and roadbed of BNSF is supported in such
manner as is necessary for the safe operation of BNSF without any
slower speed or other train operating restrictions and, upon
completion of such work, Pathnet shall ensure that all such tracks,
supporting structures, and the roadbed are returned to their
pre-existing condition, all at Pathnet's sole cost.
(b) Except as expressly set forth in the Final Construction
Plans, Pathnet shall not store or temporarily place any goods,
materials, or equipment on the Rail Corridor: (i) near a highway or
private grade crossing in such a manner as to interfere with the
sight distance of anyone approaching such crossing; (ii) within
fifteen feet of the end of any tie in any railroad track; or (iii)
within such greater distance as required by an applicable government
authority. Notwithstanding any other provision in this Lease,
Pathnet shall not store or temporarily place fuel or any Hazardous
Substance (as defined later herein) on the Rail Corridor, other than
as may be approved in writing in advance by BNSF. If Pathnet
knowingly discovers any Hazardous Substances on the Premises,
Pathnet will promptly notify BNSF, suspend or relocate activities
that would disturb the Hazardous Substance, and permit BNSF to take
appropriate actions. BNSF will respond promptly to any such
situation.
13. Facility Location Signs. Pathnet, at its sole cost and risk,
shall furnish, erect, and thereafter maintain signs showing the location of all
underground Fiber Optic Facilities. The size, form, color, text, location, and
spacing of such signs shall be subject to advance review by BNSF, and such signs
shall be in conformance with standard industry practices and shall be considered
part of the Fiber Optic Facilities.
14. Relocations.
(a) If BNSF determines that the location of any of the Fiber
Optic Facilities must be changed due to either: (i) relocation or
placement of any Rail Facilities; (ii) rail operating improvements
for BNSF (or for any other party offering rail service in the Rail
Corridor via rights granted or conveyed by BNSF); (iii) locating or
modifying a rail customer's facilities, buildings or other
improvements along BNSF's rail route, or locating or modifying any
facilities, buildings or other improvements for railroad purposes or
industrial development related to railroad purposes; or (iv) any
reason beyond the control of BNSF, BNSF shall notify Pathnet of such
plans and shall use reasonable efforts to secure an alternative
location for the Fiber Optic Facilities within the Rail Corridor, in
light of BNSF's business assets, plans and activities and the rights
of third parties in the Rail Corridor, or to provide Pathnet with an
opportunity to protect its Fiber Optic Facilities if Pathnet may do
so without interference with the situation requiring relocation;
provided however, BNSF shall not be obligated to spend any money, or
incur any
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liabilities, to secure such an alternative location. If such
alternative location is found on the Rail Corridor, Pathnet shall
move the affected Fiber Optic Facilities to such alternative
location, at Pathnet's sole cost and risk, as soon as practicable.
If a location for Fiber Optic Facilities cannot be found on the Rail
Corridor, Pathnet shall move the affected Fiber Optic Facilities off
of the Rail Corridor as soon as practicable, at Pathnet's sole cost
and risk.
(b) In the event BNSF desires that Pathnet also move certain
Rail Facilities (excluding tracks and track structures)
simultaneously with moving its Fiber Optic Facilities, BNSF shall so
notify Pathnet in writing, and Pathnet shall move such Rail
Facilities and shall invoice BNSF for the reasonable, actual
incremental costs, including reasonable overhead costs, that are
incurred by Pathnet in moving such Rail Facilities.
(c) If BNSF desires to relocate any of the Fiber Optic
Facilities in order to accommodate a third party (other than as set
forth in Section 14(a)), BNSF shall so notify Pathnet, and Pathnet
promptly thereafter shall submit to BNSF a reasonable, detailed,
itemized estimate, including reasonable contingencies ("Estimate")
of its anticipated reasonable actual costs to relocate such Fiber
Optic Facilities (including reasonable overhead costs not to exceed
ten percent (10%) of actual costs). Upon receiving from BNSF fifty
percent of the amount of the Estimate, Pathnet shall proceed, as
expeditiously as feasible under the circumstances, to relocate those
Fiber Optic Facilities at a cost not to exceed one hundred ten
percent (110%) of the Estimate. Upon completion of such relocation,
and submission to BNSF of invoices documenting all costs thereof,
BNSF promptly shall pay the balance of such costs to Pathnet.
(d) Pathnet acknowledges that BNSF's ownership rights in all
or certain portions of the Rail Corridor may terminate, or revert,
if BNSF ceases to use the Rail Corridor for rail transportation
purposes, or, in some cases if BNSF uses the Rail Corridor for a
purpose inconsistent with rail transportation purposes, or for other
reasons, such as termination of franchise rights, and that if this
occurs, Pathnet might be required either to relocate its Fiber Optic
Facilities or acquire from the appropriate party the right to
continue to use the Fiber Optic Facilities. BNSF shall have no
obligation not to abandon rail service over all or any portion of
the Rail Corridor, no obligation not to use the Rail Corridor for a
purpose inconsistent with rail transportation purposes, and no
obligation to extend the term of BNSF's franchise rights or
ownership rights in the Rail Corridor.
15. Condemnation. In the event that any portion of the Premises
becomes the subject of condemnation proceedings, BNSF shall make reasonable
efforts to notify Pathnet promptly. Pathnet's interest in the personal property,
improvements, and facilities comprising the Fiber Optic Facilities shall be
valued separately from BNSF's ownership interest in the Fiber Optic Facilities
and the Premises, and BNSF and Pathnet shall seek to have any condemnation
award, or sale in lieu of condemnation, apportioned between Pathnet and BNSF
based on the relative value of their specific ownership interests in the Fiber
Optic Facilities and the Premises.
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16. Conveyance of Rail Corridor. In the event BNSF conveys all or
any portion of the Rail Corridor, in circumstances not covered by Section 14 or
Section 15 of this Lease, such conveyance shall be subject to any existing
rights of Pathnet under this Lease and the Fiber Optic Access Agreement, to the
extent permitted by applicable laws and agreements entered into prior to the
date of this Lease.
17. Compliance with Laws. Pathnet, in exercising any and all
rights under this Lease, shall comply with all applicable laws, regulations,
ordinance, rules, decisions and orders ("Laws") applicable to Pathnet and/or the
Fiber Optic Facilities, or resulting from the exercise of Pathnet's rights, and
shall have the sole responsibility for all costs and risks associated with such
compliance. Pathnet shall indemnify, defend and hold harmless BNSF against any
claims, damages, costs, fines or penalties arising in any way from Pathnet's
breach of this Section 17.
18. Liability: Indemnification. PATHNET HEREBY RELEASES BNSF FROM,
AND AGREES TO INDEMNIFY, DEFEND, PROTECT, AND HOLD BNSF HARMLESS AGAINST, ANY
AND ALL CLAIMS, SUITS, JUDGMENTS, LIABILITIES AND EXPENSES (INCLUDING, BUT NOT
LIMITED TO, REASONABLE ATTORNEYS' FEES) ARISING OUT OF OR RELATED TO:
(1) ANY LOSS OF AND/OR DAMAGE TO THE REAL OR PERSONAL PROPERTY OF
BNSF, PATHNET OR THIRD PARTIES AND ANY LOSS AND/OR DAMAGE ON ACCOUNT OF INJURY
TO, OR DEATH OF, ANYONE, CAUSED BY OR GROWING OUT OF PATHNET'S, OR ANY PATHNET
PARTY'S PRESENCE OR ACTIVITIES ON OR NEAR THE RAIL CORRIDOR, REGARDLESS OF ANY
NEGLIGENCE OF BNSF OR ANY PARTY THEN PERFORMING AS A CONTRACTOR OR AGENT OF
BNSF, EXCEPT TO THE EXTENT (AND ONLY TO THE EXTENT) THAT SUCH LOSS OR DAMAGE IS
PROXIMATELY CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF BNSF OR SUCH
CONTRACTOR OR AGENT OF BNSF;
(2) (i) [* * *] SERVICE INTERRUPTION, CESSATION, OR
UNRELIABILITY OF THE FIBER OPTIC FACILITIES CAUSED BY ANY PERSON, REGARDLESS OF
ANY NEGLIGENCE OF BNSF OR ANY PARTY THEN PERFORMING AS A CONTRACTOR OR AGENT OF
BNSF, EXCEPT TO THE EXTENT (AND ONLY TO THE EXTENT) THAT SUCH SERVICE
INTERRUPTION, CESSATION OR UNRELIABILITY WAS CAUSED BY THE GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT OF BNSF OR SUCH CONTRACTOR OR AGENT OF BNSF, OR (ii)
[* * *] LIBEL, SLANDER, INFRINGEMENT OR COPYRIGHT, OR UNAUTHORIZED USE OF ANY
TRADEMARK, TRADE NAME, OR SERVICE MARK, ARISING OUT OF THE MATERIAL, DATA,
INFORMATION OR OTHER CONTENT TRANSMITTED OR RECEIVED OVER THE FIBER OPTIC
FACILITIES, IN EACH CASE REGARDLESS OF WHETHER SUCH CLAIMS, SUITS, JUDGMENTS, OR
LIABILITIES ARISE FROM NEGLIGENCE, ACTIONS, OR INACTION OF BNSF, OR ANY PARTY
USING THE RAIL CORRIDOR WITH PERMISSION OF BNSF; AND
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(3) ANY BREACH OF THE TERMS OF THIS LEASE BY PATHNET OR ANY OF THE
PATHNET PARTIES.
WITHOUT LIMITATION OF ANY OF THE FOREGOING, PATHNET HEREBY AGREES TO
INDEMNIFY, DEFEND, PROTECT AND HOLD BNSF HARMLESS FROM AND AGAINST ANY AND ALL
LOSS, DAMAGE, COST AND EXPENSE SUSTAINED, SUFFERED, OR INCURRED BY BNSF AS A
RESULT OF THE EXISTENCE OF ANY HAZARDOUS SUBSTANCE WITHIN THE RAIL CORRIDOR TO
THE EXTENT CAUSED BY, CONTRIBUTED TO, EXPOSED BY OR AGGRAVATED BY PATHNET OR ANY
PATHNET PARTY. HAZARDOUS SUBSTANCE AS USED HEREIN SHALL MEAN MATERIAL OR
CONTAMINATION IN VIOLATION OF ANY APPLICABLE ENVIRONMENTAL LAW, ORDER, DECISION
OR REGULATION.
19. Insurance.
(a) Pathnet, prior to entering onto the Rail Corridor shall
procure the following insurance, covering all of the work and
services to be performed hereunder by Pathnet, which shall remain in
effect for so long as such party has any personnel, property or
facilities on, or having a right to be on, the Rail Corridor, at
their sole cost:
(1) Workers' Compensation and Employers Liability
Insurance in an amount of at least [* * *], covering the
entire liability of Pathnet, as determined by the compensation
laws of the State in which the work is performed, but if
optional under State law the insurance must cover all
employees anyway, or the federal workmen's compensation laws
as applicable. THE CERTIFICATE MUST CONTAIN A SPECIFIC WAIVER
OF THE INSURANCE COMPANY'S SUBROGATION RIGHTS AGAINST THE
BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY.
(2) Commercial General Liability insurance and
umbrella liability insurance covering liability, including but
not limited to Public Liability, Personal Injury, Property
Damage, and Contractual Liability with combined coverage of at
least [* * *] per occurrence and a general aggregate of at
least [* * *]. Where explosion, collapse, or underground
hazards are involved, the X, C and U exclusions must be
removed from the policy;
(3) Automobile Liability insurance, including bodily
injury and property damage, with coverage of at least
[* * *] combined single limit or the equivalent covering
any and all vehicles owned, used or hired by Pathnet;
(4) All Risk Property Damage insurance covering all
of the property of Pathnet on a replacement cost basis
including property in their care, custody or control and first
party pollution clean up. The first party pollution clean up
shall include, at a minimum, debris removal and cost of clean
up on a named perils
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basis. Such insurance shall contain a waiver of subrogation in
favor The Burlington Northern and Santa Fe Railway Company.
(5) Pollution Liability coverage in an amount of not
less than [* * *] per occurrence and in the aggregate and
shall include coverage for: (a) bodily injury, sickness,
disease, mental anguish or shock sustained by any person,
including death; (b) property damage including physical injury
to or destruction of tangible property including the resulting
loss of use thereof, clean up costs, and the loss of use of
tangible property that has not been physically injured or
destroyed; and (c) defense including loss adjustment costs,
charges and expenses incurred in the investigation adjustment
or defense of claims for such compensatory damages.
(6) If Pathnet requires disposal of any hazardous or
non-hazardous materials off of their property, Pathnet shall
utilize only a fully licensed and qualified disposal company.
(7) Railroad Protective Liability insurance naming The
Burlington Northern and Santa Fe Railway Company as the Named
Insured with coverage of at least [* * *] per occurrence
and [* * *] in the aggregate. [* * *]
All insurance shall be placed with insurance companies licensed to
do business in the States in which the work is to be performed, and
with a Best's Insurance Guide Rating of A- and Class VII, or better.
If any work is to be performed within 50 feet of railroad property,
then the insurance must provide for coverage of incidents occurring
within fifty (50) feet of railroad property, and any provision to
the contrary (including any limitation regarding the definition of
an insured contract) in the insurance policy must be specifically
deleted.
To the extent obtainable, with respect to any incident on or along
the Rail Corridor, in all cases except for Workers' Compensation,
the certificate must specifically state that "THE BURLINGTON
NORTHERN AND SANTA FE RAILWAY COMPANY IS AN ADDITIONAL INSURED." The
Additional Insured endorsement shall, at a minimum, include coverage
for the general supervision performed by BNSF.
Any coverage afforded BNSF, the Certificate Holder, as an Additional
Insured shall apply as primary and not excess to any insurance
issued in the name of BNSF.
(b) Before commencing any work hereunder, Pathnet shall
furnish to BNSF, Certificate of Insurance on the form prescribed by
BNSF, evidencing the issuance to Pathnet of the policies of
insurance providing the types of insurance and limits of liability
prescribed above, and amending the cancellation clause to certify
that BNSF shall be
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given not less than 30 days' written notice prior to any material
change, substitution or cancellation prior to normal expiration
dates. Cancellation or expiration of any of said policies of
insurance shall not preclude BNSF from recovery thereunder for any
liability arising under this Agreement.
If any coverage is purchased on a "claims made" basis, Pathnet
hereby agrees to maintain coverage in force for a minimum of three
years after expiration, cancellation or termination of this
contract. Pathnet shall provide evidence annually of such coverage
as required hereunder.
(c) Pathnet Parties shall procure and maintain insurance as
outlined in Exhibit C-1.
(d) It is mutually understood and agreed that the purchase of
insurance as herein provided shall not in any way limit the
liability of the Pathnet or Pathnet Parties to BNSF, as herein set
forth.
20. Liens.
(a) In the event that any BNSF property becomes subject to any
mechanics' or materialmen's lien, or other construction or
supplier's lien or encumbrance chargeable to or through Pathnet or
any of the Pathnet Parties as a result of a failure to pay. Pathnet
promptly, and in any event within ten days, shall cause such lien or
encumbrance to be discharged or released of record (by payment,
posting of bond, court deposit or other means), without cost to
BNSF, and shall indemnify and hold harmless BNSF against all costs
(including reasonable attorneys' fees) incurred in connection with
such lien or encumbrance. If any such lien or encumbrance is not so
discharged and released, BNSF may pay or secure the release or
discharge thereof, at the expense of Pathnet, after first giving
five days' advance notice of its intention to do so. Pathnet
acknowledges that: (i) all or portions of the Rail Corridor are
subject to the liens of one or more of BNSF's various mortgages;(ii)
BNSF from time to time may place other liens or mortgages on the
Rail Corridor and (iii) the discharge or release of record of the
current or future liens and mortgages from the Rail Corridor is not
required by this Section, provided however, that any such future
liens or mortgages shall be subject to Pathnet's rights under this
Lease.
(b) Nothing herein shall preclude either Pathnet or BNSF from
contesting of any lien or other encumbrance.
21. Liaison, Dispute Resolution and Arbitration.
(a) Not later than thirty days after the date of this Lease,
BNSF and Pathnet each shall send a letter to the other, pursuant to
Section 28 hereof, designating individuals as points of contact at
the following levels: corporate officer for overall decision-making,
corporate officer for dispute resolution; contact person for
day-to-day corporate contact and liaison; contact person for
engineering and project management; contact person for
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field construction; contact person for daily operations and
maintenance; and contact person for disaster operations on a
twenty-four (24) hour basis. The same individual may be designated
for one or more of the foregoing positions, and either BNSF or
Pathnet may change the name of any designated officer or contact
person at any time by so informing the other in writing.
(b) It is the intent of the parties hereto that any dispute
which may arise between them be resolved as quickly and as
informally as possible. When quick and informal resolution of any
dispute is not possible, the issues in dispute shall be referred to
the two corporate officers designated for dispute resolution
pursuant to this Section 21, who shall make a reasonable attempt to
settle the dispute.
(c) The parties hereto agree to waive any rights that either
may have to a remedy in a court of law or in a court of equity
arising out of this Lease, and to submit any dispute arising under
the Lease, and not settled pursuant to Section 21(b) hereof, to
binding arbitration in accordance with this Section 21.
Notwithstanding the foregoing, either party shall have the right to
pursue preliminary equitable relief in connection with this Lease,
or to pursue appropriate legal or equitable remedies in support of a
decision rendered in arbitration.
(d) The parties hereto agree that one of the remedies
available to the arbitrator(s) for any substantial breach of this
Agreement shall be specific performance, and that an award of
specific performance by an arbitrator or arbitrators may be enforced
in a court of law or equity.
(e) Any arbitration under this Agreement shall be conducted in
accordance with the Commercial Rules of the American Arbitration
Association and shall be conducted by an arbitrator, and said
arbitration shall be conducted by a panel of three (3) arbitrators,
one to be selected by BNSF, one to be selected by Pathnet, and one
to be selected by the two designated arbitrators. Discovery shall be
conducted in accordance with the Federal Rules of Civil Procedure
(f) All costs, fees and expense charged by the arbitrator(s)
and other neutral third parties retained by mutual agreement of
Pathnet and BNSF in any arbitration conducted pursuant to this
Section 21 shall be shared equally by Pathnet and BNSF, unless
apportioned otherwise by the arbitrators.
22. Representations and Warranties.
(a) By executing this Lease, BNSF represents and warrants the
following facts:
(1) BNSF has the full right and authority to enter
into and perform this Lease, and by entering into and
performing this Lease, BNSF is not in violation of its charter
or by-laws, or any Laws or agreement by which it is bound or
to which it is subject; it being understood, however, that
this warranty does not
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<PAGE> 25
constitute a warranty, express or implied, that BNSF has
sufficient rights in the Rail Corridor to permit Pathnet to
Construct and Operate the Fiber Optic Facilities; and
(2) The execution, delivery and performance of this
Lease by BNSF has been duly authorized by all requisite
corporate action, that the signatory for BNSF hereto is
authorized to sign this Lease and bind BNSF to its terms.
(b) By executing this Lease, Pathnet represents and
warrants:
(1) Pathnet has the full right and authority to enter
into and perform this Lease and by entering into and
performing this Lease, Pathnet is not in violation of its
charter or by-laws, or any Laws or agreement by which it is
bound or to which it is bound or to which it is subject;
(2) The execution, delivery and performance of this
Lease by Pathnet has been duly authorized by all requisite
corporate action, that the signatory for Pathnet hereto is
authorized to sign this Lease and bind Pathnet to its terms;
and
(3) Pathnet has the financial capability to fulfill
all of its obligations under this Lease.
23. Limitation on Damages for Breach of this Lease. Damages that
may be recovered for breach of this Lease shall not include any indirect,
consequential, special or punitive damages, or lost profits, or the cost of
Pathnet building Fiber Optic Facilities at a different location than it
originally planned.
24. Recordings, Taxes and Other Charges.
(a) Except as provided in this Section 24, Pathnet shall pay:
(i) all transfer taxes, documentary stamps, recording costs or fees,
or any similar expense in connection with this Lease and/or the
recording or filing of a Memorandum of Lease for this Lease (which
memorandum shall be in a form mutually agreeable between the parties
and the recording of a Memorandum of Lease shall occur only by
mutual agreement by the parties); and (ii) any and all taxes
(including but not limited to transfer, sales, use, and property
taxes), levies, excises, assessments and charges (collectively,
"Taxes"), including any penalties and/or interest thereon, levied or
assessed with respect to the Fiber Optic Facilities or Pathnet's
leasehold interest. Pathnet shall indemnify, defend and hold BNSF
harmless against the payment of any Taxes referenced in this Section
24(a).
(b) BNSF may pay any Taxes, plus any penalty and/or interest
thereon, imposed upon BNSF for which Pathnet is obligated pursuant
to this Lease, if Pathnet
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<PAGE> 26
does not pay such Taxes when due, and Pathnet shall promptly
reimburse BNSF for any such payment it makes.
(c) In the case of amounts described in Section 24(a)(ii),
where Taxes with respect to Fiber Optic Facilities or Pathnet's
leasehold interest are not separately assessed, BNSF shall determine
the amount of Taxes attributable to the Fiber Optic Facilities and
Pathnet's leasehold interest by reference to information provided by
the relevant taxing authority that demonstrates or establishes that
such Taxes are attributable to the Fiber Optic Facilities or
Pathnet's leasehold interest. If the information provided by the
relevant taxing authority demonstrates or establishes that Taxes are
attributable to the fiber optic value of a Rail Corridor in respect
of which Pathnet has been granted rights hereunder, but does not
demonstrate or establish the value attributable to the Fiber Optic
Facilities or Pathnet's leasehold interest, the amount so
attributable shall be determined by reference to a formula. Such
formula shall be consistently applied, shall reasonably allocate any
Taxes among all of BNSF's rail corridors and fiber optic values with
a further allocation of the Taxes attributable to the fiber optic
value between the Fiber Optic Facilities, Pathnet's leasehold
interest and fiber optic value attributable to fiber optic rights
granted by BNSF to others. In all cases, BNSF promptly shall provide
to Pathnet information that establishes the manner in which any such
Taxes were allocated and the basis for establishing that such
amounts are attributable to the Fiber Optic Facilities or Pathnet's
leasehold interest. The parties shall resolve any dispute regarding
the liability of Taxes hereunder pursuant to the dispute resolution
and arbitration procedures set forth in Section 21 of this Lease.
(d) Notwithstanding anything to the contrary contained in this
Lease, BNSF shall pay [* * *] and (ii) property, franchise or
similar taxes that are attributable to a Rail Corridor that are not
attributable to the existence or use of the Fiber Optic Facilities
or Pathnet's leasehold interest. BNSF shall indemnify, defend and
hold Pathnet harmless against the payment of any Taxes referenced in
this Section 24(d). Pathnet may pay any Taxes imposed on Pathnet for
which BNSF is obligated to indemnify Pathnet pursuant to this
Section 24(d), if BNSF does not pay such amounts when due and BNSF
shall promptly reimburse Pathnet for any such payment it makes. The
provision of Section 24(c) shall apply to amounts claimed by
Pathnet, mutatis mutandis.
(e) Neither BNSF nor Pathnet will be responsible for the
income or corporate franchise tax of the other.
(f) Both BNSF and Pathnet agree to reasonably cooperate with
each other in the refund, rebate, reduction, abatement, mitigation
or contest of any Taxes for which either is obligated to pay
hereunder.
25. Independent Contractor Status; No Joint Venture. BNSF reserves
no control whatsoever over the employment, discharge or compensation of
Pathnet's employees or contractors. It is the intention of the parties hereto
that Pathnet shall be and remain an independent contractor, and nothing in this
Lease shall be construed as inconsistent with
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<PAGE> 27
Pathnet's independent contractor status or creating or implying any partnership
or joint venture between Pathnet and BNSF.
26. Confidentiality.
(a) The terms of this Lease shall be confidential.
Either party hereto may designate as confidential certain materials,
maps, documents and other information exchanged in fulfilling the
terms and intent of this Lease. In addition, in connection with the
provision of material and/or services to BNSF by Pathnet, or to
BNSF, BNSF and/or Pathnet may discover or otherwise come into
contact with specifications, drawings, computer programs, and/or
technical or business information which BNSF or Pathnet has clearly
identified as confidential. All construction plans, drawings and
specifications, including, without limitation, all proposed
Construction Drawings, Final Construction drawings and as-built
plans and all information about the location of the Fiber Optic
Facilities, will constitute confidential information.
(b) Unless confidential information was previously known
free of any obligation to keep it confidential, or has been or is
subsequently made public, it shall be handled in confidence by BNSF
and Pathnet and shall be disclosed only upon a need to know basis,
such terms and conditions as may be mutually agreed upon in writing
by the parties hereto, or as required by law. BNSF and Pathnet shall
advise those employees, agents, and contractors who may have contact
with such information, of the obligation to keep such information
confidential, and will use their best efforts to avoid unauthorized
disclosure of such information. Notwithstanding the foregoing,
either party may disclose confidential information to the extent
required by applicable law or regulations, provided that the
disclosing party has notified the other party of the disclosing
party's obligation to disclose, and provided that the non-disclosing
party has had an opportunity to contest such disclosure.
(c) In the event of an actual or threatened disclosure
of such information by either party hereto which might cause
irreparable harm to the other party hereto, it is agreed that
monetary remedies available at law may be inadequate and, therefore,
the aggrieved or threatened party hereto shall be entitled to
receive injunctive relief as an equitable remedy.
(d) Notwithstanding anything else herein, the
obligations of the parties hereto under this Section 26 shall
survive termination of this Lease for a period of three years.
27. Assignment.
(a) This Lease shall be binding upon and inure to the
benefit of the parties hereto and their respective permitted
successors or assignees. Pathnet shall not assign any of the rights
granted to Pathnet under this Lease, without the prior written
consent of BNSF, which may be withheld or conditioned in BNSF's sole
27
<PAGE> 28
discretion. Any assignment made in violation of this Section 27
shall be null and void, shall confer no rights upon any party as
against BNSF, and shall give BNSF the right to terminate this Lease
effective immediately, or take any other lesser action with respect
thereto. The above requirement for consent shall not apply to (i)
any disposition of all or substantially all of Pathnet's stock or
assets; (ii) any corporate merger, consolidation or reorganization,
whether voluntary or involuntary, involving Pathnet; or (iii) a
sublease or assignment of the Lease (in whole or in part) by Pathnet
to a subsidiary, affiliate, or parent company, controlled, under
common control with, or controlling, either indirectly or directly,
Pathnet, but only where, and to the extent, such transaction does
not violate the terms of the Contribution Agreement; provided that
no assignment not consented to by BNSF shall relieve Pathnet of any
of its obligations or liabilities under this Lease. Nothing herein
shall prohibit Pathnet (i) from involving contractors, or strategic
or co-development partners in Construction and Operation of the
Fiber Optic Facilities, on such terms as Pathnet may determine in
its sole discretion, provided all such activities are conducted in
accordance with the terms of this Lease, and that Pathnet remains
fully liable for all obligations hereunder; and (ii) from granting
liens or other security interests in the Fiber Optic Facilities or
Pathnet's rights under this Lease in connection with financing or
investments made available to Pathnet.
(b) Upon request by Pathnet, BNSF shall execute
reasonable documentation to be provided by Pathnet acknowledging the
rights of Pathnet's lender(s) ("Lender") to obtain ownership of the
Fiber Optic Facilities if this Lease is still in effect and Pathnet
is in material default under the terms of Pathnet's loan to Lender,
provided, however, that in such case Lender shall become an assignee
to this Lease and shall become subject to all rights and obligations
of Pathnet under the terms of this Lease (and Pathnet also shall
remain subject to all obligations of Pathnet under this Lease). In
order to obtain the rights specified in this Lease, Lender must
execute an amendment to this Lease agreeing to be bound by the
terms, conditions and obligations contained in this Lease. The
execution of such an amendment by Lender shall not relieve Pathnet
from any obligations or liabilities contained in this Lease.
Further, before Lender or any other assignee or transferee of
Pathnet's interest in this Agreement may obtain any of Pathnet's
rights hereunder, such Lender, assignee, or transferee must cure any
and all outstanding defaults by Pathnet hereunder. In addition to
the rights granted to Pathnet hereunder, Pathnet's Lender shall have
the additional right to take possession, sell, assign or otherwise
transfer the Fiber Optic Facilities, including the right to operate,
or permit a third-party to operate, the Fiber Optic Facilities,
provided such operation shall be subject to all terms and conditions
of this Lease.
28. Notices. Unless otherwise provided herein, all notices and
other communications required by or concerning this Lease shall be in writing
and shall be deemed to have been duly given when delivered in person or on the
next business day when sent by a nationally recognized overnight courier, or on
the second succeeding business day when sent by registered or certified
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<PAGE> 29
United States Mail (postage prepaid, return receipt requested), or, if postal
claim notice is given, on the date of its return marked "unclaimed" (provided,
however, that upon receipt of a returned notice marked "unclaimed", the sending
party hereto shall make reasonable effort to contact and notify the other party
hereto by telephone) and each respective party hereto at the following addresses
(or at such other address for a party hereto as shall be specified by like
notice):
(1) if to Pathnet:
Pathnet, Inc.
1015 31st St., N.W.
Washington, DC 20007
Attn: General Counsel
and to:
Pathnet, Inc.
1661 Gateway Boulevard
Richardson, TX 75080
Attn: Senior Vice President, Engineering
(2) if to BNSF:
Assistant Vice President, Telecommunications
The Burlington Northern and Santa Fe Railway Company
2600 Lou Menk Drive
Forth Worth, Texas 76131
and to:
Vice President -Law
The Burlington Northern and Santa Fe Railway Company
2500 Lou Menk Drive, AOB-3
Fort Worth, Texas 76131-2830
29. Brokers and Agents. BNSF and Pathnet represent and warrant to
each other than neither has employed any broker, agent or finder in connection
with this Lease, and each indemnifies and agrees to hold harmless the other from
and against any commission or fee claimed by any broker, agent or finder in
connection with this transaction.
30. Force Majeure. Except as may be elsewhere specifically
provided in this Lease, any failure or delay in the performance by a party
hereto of its obligations hereunder, including, without limitation, Pathnet's
obligations pursuant to Section 5 hereof, shall not be a breach of this Lease if
such failure or delay results from causes beyond that party's control, including
but not limited to acts of God, governmental action or inaction (whether in its
sovereign or contractual capacity), fire, flood, or other catastrophe, national
emergency, insurrection, riot, and
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<PAGE> 30
war. The phrase "beyond that party's control" shall not include any failure to
reach agreement with a party with whom Pathnet is negotiating pursuant to the
exclusive right to negotiate provided in Section 4(b) of the Fiber Optic Access
Agreement.
31. Costs. Except as specifically provided in this Lease, each
party hereto shall be responsible for its own costs (including legal fees)
incurred in connection with the preparation, execution and performance of this
Lease.
32. Severability. If any provision of this Lease or the
application thereof, shall be held invalid, illegal or unenforceable in whole or
in part, the remainder of this Lease and the application thereof shall not be
affected, and shall be enforceable to the fullest extent permitted by law, and
the portion hereof found to be invalid shall be enforced to the fullest extend
permitted by law, and, if possible, shall be reformed to carry out as much as
possible the intent of the parties as expressed herein.
33. Amendment, Waiver. This Lease may be amended only by a written
instrument executed by both parties hereto. No failure to exercise and no delay
in exercising, on the part of a party hereto, any right, power or privilege
hereunder shall operate as a waiver of any other provision of this Lease, or as
a waiver of that right, power or privilege either before, or after, the period
of waiver.
34. Entire Agreement. This Lease and all Exhibits attached hereto,
together with the Fiber Optic Access Agreement and the Contribution Agreement
between the parties hereto dated as of __________ __, 1999, constitute the
entire agreement of the parties hereto with respect to the subject matters
hereof, and supersede any and all prior negotiations, understandings and
agreements, whether oral or written, with respect hereto.
35. Interpretation; Construction.
(a) Section headings contained in this Lease are solely for
purpose of reference and shall not be construed with the substance
of the Section they caption or in any way affect the meaning or
interpretation of this Lease.
(b) Wherever used in this Lease: (i) any pronoun or pronouns
shall be deemed to include both the plural and the singular and to
cover all genders, and (ii) "or" is used in the inclusive sense, in
all cases where such meanings would be appropriate.
36. Legal Forum. This Lease shall be interpreted, construed and
enforced in accordance with the laws of the State of Texas.
37. Counterparts. This Lease may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
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<PAGE> 31
IN WITNESS WHEREOF, authorized representatives of BNSF and Pathnet have executed
this Lease as of the date first set forth herein.
PATHNET TELECOMMUNICATIONS, INC. THE BURLINGTON NORTHERN AND
SANTA FE RAILWAY COMPANY
By: By:
----------------------------- ---------------------------
Name: Name:
----------------------------- ---------------------------
Title: Title:
----------------------------- ---------------------------
31
<PAGE> 32
EXHIBIT A
[to be agreed to by the parties]
<PAGE> 33
EXHIBIT B
Map of BNSF Railway Network
[to be agreed to by the parties]
<PAGE> 34
EXHIBIT C
Additional Construction Specifications
--------------------------------------
[to be agreed to by the parties]
<PAGE> 1
Exhibit 10.7
Portions of this exhibit have been
omitted and filed separately with
the Securities and Exchange Commission.
These positions are designated
"[ * * * ]."
MASTER RIGHT-OF-WAY LEASE AGREEMENT
BETWEEN
COLONIAL PIPELINE COMPANY,
A DELAWARE CORPORATION
AND
PATHNET TELECOMMUNICATIONS, INC.,
A DELAWARE CORPORATION
DATED: _________________, 1999
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<PAGE> 2
MASTER RIGHT-OF-WAY LEASE AGREEMENT
THIS MASTER RIGHT-OF-WAY LEASE AGREEMENT (the "Agreement"), made and
entered into as of this ____ day of _________________, 1999, by and between
COLONIAL PIPELINE COMPANY, a Delaware corporation ("Colonial") and PATHNET
TELECOMMUNICATIONS, INC., a Delaware corporation ("PTI").
W I T N E S S E T H:
WHEREAS, Colonial transports refined liquid petroleum products in
interstate commerce as a common carrier and maintains a system of pipelines and
related facilities across fourteen states and the District of Columbia for such
purposes (the "Colonial System");
WHEREAS, the Colonial System consists of (a) pipelines (collectively,
the "Colonial Pipeline") located on certain interests in land (e.g.,
rights-of-way, easements, licenses, permits, leases, etc. [collectively, the
"Colonial Rights-of-Way"]), and (b) injection stations, booster stations, tank
farms, delivery locations and terminals (collectively, the "Related Facilities")
located on certain other tracts of land owned in fee or leased by Colonial, all
of which Colonial Rights-of-Way and Related Facilities are located approximately
as shown on that certain system map of the Colonial System, attached hereto as
Exhibit A and made a part hereof (the "Colonial System Map");
WHEREAS, PTI desires the right to use designated portions of the currently
existing Colonial System for the purpose of installing and operating
communications facilities, including, but not limited to, fiber optic conduits,
regeneration stations and related machinery and equipment for the operation of a
telecommunications network;
WHEREAS, Colonial desires to lease to PTI designated portions of the
Colonial Rights-of-Way and Related Facilities to use for the aforesaid purposes,
subject to applicable title restrictions and encumbrances, and upon the terms
and conditions hereinafter set forth; and
WHEREAS, Colonial and PTI desire to enter into this Agreement in order to
set forth the terms and conditions of the foregoing.
NOW, THEREFORE, for and in consideration of the premises hereof, the
covenants contained herein, the sum of Ten and No/100 Dollars ($10.00) and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Colonial and PTI hereby agree as follows:
<PAGE> 3
ARTICLE I
AGREEMENT TO LEASE
1.1 Leasehold Interests.
(a) Subject to all of the terms and conditions of this Agreement, and
that certain Fiber Optic Access and Purchase Agreement entered into by Colonial
and PTI contemporaneously herewith (the "Fiber Optic Access and Purchase
Agreement"), Colonial agrees to lease to PTI the right to use portions of the
currently existing Colonial Rights-of-Way and Related Facilities for the uses
and purposes described herein (each such portion leased to PTI pursuant to the
terms hereof being a "Leasehold Interest"). The Leasehold Interests to be
granted hereby include the non-exclusive use of a strip of land five (5) feet on
either side of the centerline of the telecommunication conduits and
appurtenances to be installed hereunder within the designated Colonial
Rights-of-Way, or such larger area as may be reasonably necessary for the
construction and operation of the "Telecommunications Network" (as defined in
Section 1.5 hereof), as approved by Colonial in accordance with Article III
hereof; provided that, if necessary along a particular "Segment" (as hereinafter
defined), PTI may request that Colonial attempt to acquire additional
right-of-way at PTI's expense, to be included as part of the Colonial
Rights-of-Way for the purposes hereof.
(b) In the event that Colonial expands the Colonial System beyond its
current boundaries as of the date hereof, and should PTI desire to utilize such
expansion, then Colonial and PTI will negotiate in good faith to extend the
Leasehold Interests to be granted hereunder to include the additional Colonial
Rights-of-Way applicable to such extensions of the Colonial System and to
determine the compensation to be received by Colonial therefor.
(c) PTI's rights in the Colonial Rights-of-Way and Related Facilities
hereunder consist solely of Leasehold Interests subject to the terms of this
Agreement and PTI does not acquire hereby any other or additional rights in or
to any portion of the Colonial Rights-of-Way or any Related Facilities. PTI
further acknowledges that Colonial hereby reserves such access and other rights
as are necessary to enable Colonial to reasonably commercialize the "Colonial
Conduit" (as defined in the Fiber Optic Access and Purchase Agreement),
including, without limitation, full rights of access with respect to any portion
of the Colonial Rights-of-Way otherwise leased to PTI in order to allow Colonial
(or its assignee(s) or licensee(s) to maintain, operate, repair, replace and
upgrade the Colonial Conduit as necessary or appropriate.
1.2 Permits; Segment Leases.
(a) From time to time, PTI shall designate, by written notice to
Colonial (each, a "Designation Notice"), specified segments of the Colonial
System with respect to which PTI desires to acquire Leasehold Interests. Each
such Designation Notice shall identify or describe, as applicable: (i) a segment
or segments of the Colonial Rights-of-Way within the Colonial System (the
"Segment(s)"), using Colonial's location number references as beginning points
and ending points, and shall describe the approximate distance of the applicable
Segment(s); (ii) one or more of the Related Facilities along the Colonial
System; (iii) the types of
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<PAGE> 4
facilities PTI intends to install (i.e., regeneration facilities ("Regen
Facilities"), junctions, terminals, etc.); and (iv) the number of conduits PTI
plans to install within the Segment(s).
(b) Subject to Section 3.3 below, within thirty (30) days after
receipt of a Designation Notice, Colonial shall prepare, execute and deliver to
PTI a segment lease for the applicable Segment or Related Facility in
substantially the form set forth on Exhibit B attached hereto and made a part
hereof (each, a "Segment Lease"). Upon the execution by Colonial of a Segment
Lease, Colonial also shall notify PTI of the exact number of Conduits that
Colonial determines, in its reasonable discretion, may be installed along the
applicable Segment in question without material interference with the use,
operation and maintenance of the Colonial Pipeline in the applicable portion of
the Colonial Rights-of-Way and/or without compromising the safety of the
Colonial Pipeline. If Colonial does not own the applicable Segment or Related
Facility in fee, each such Segment Lease shall have attached as an exhibit
thereto a description of the applicable leases, easements, licenses or other
similar agreements (together with all amendments or modifications thereto),
pursuant to which Colonial has the right to use such portion of the Colonial
Rights-of-Way or Related Facility. Colonial also shall provide or otherwise make
available to PTI such documents, agreements and information pertaining to the
Colonial System, the Colonial Rights-of-Way and or Related Facilities as PTI may
reasonably request. Upon execution and delivery of a completed Segment Lease by
Colonial and PTI, the terms of such Segment Lease will be incorporated into this
Agreement and become subject to its terms and conditions, subject, however, to
modification in accordance with the terms of applicable "Permits" (as described
in Subsection 1.2(c) below issued hereunder). A Segment Lease shall signify
Colonial's authority for PTI to proceed with the modification of such existing
leases, easements, licenses and other agreements to which Colonial is a party in
order to obtain the rights (the "Perfection Rights") for PTI to install, operate
and maintain the Telecommunications Network and the Colonial Conduit through the
designated Segments of the Colonial Rights-of-Way (collectively, the "Perfection
Process"). Each such Segment Lease shall confirm, however, that PTI shall not
have the right to commence any "PTI Work" (as defined in Section 3.2 hereof)
until compliance by PTI with the applicable provisions of Sections 3.1 and 3.2
hereof.
(c) PTI shall notify Colonial in writing upon completion of the
Perfection Process with respect to a particular Segment or Related Facility,
such Perfection Process to be performed in accordance with the terms of Section
3.1 below. After completion of the pre-installation determinations described in
Subsections 3.1(b)-(d) hereof, Colonial shall prepare, execute and deliver to
PTI a Permit for the applicable Segment Lease, in substantially the form set
forth on Exhibit C attached hereto and made a part hereof (each, a "Permit").
PTI's right to use the Leasehold Interests described herein for the installation
and operation of the "Telecommunications Network" (as described in Section 1.5
hereof) shall become effective with respect to a particular Segment and/or a
particular Related Facility only upon the execution and delivery of the
applicable Permit for such Segment or Related Facility; provided, however, that
PTI may request that a Segment Lease be divided into sub-segments for "mini
construction spreads" (hereinafter defined as "Sub-Segment(s)") of no less than
fifteen (15) miles in length. In such event, PTI shall establish the applicable
Sub-Segment by delivering to Colonial a modification to a previously delivered
Designation Notice (a "Revised Designation Notice").
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<PAGE> 5
Receipt of same by Colonial shall authorize Colonial, upon completion of the
Perfection Process with respect to such Sub-Segment, to deliver to PTI a
"Sub-Segment Lease" for the applicable Sub-Segment that conforms to the Revised
Designation Notice.
(d) The books and records of Colonial shall be prima facie evidence
of the location and legal description of any applicable portion of the Colonial
Rights-of-Way or Related Facility in any dispute between Colonial and PTI
relating to this Agreement.
1.3 Term. The initial term of this Agreement shall be for a period of
thirty (30) years from and after the date hereof (the "Initial Term"). Provided
that PTI is not in default hereunder, PTI shall have the right to renew the
Initial Term for one (1) ten (10) year period (the "Renewal Term"), by giving
written notice to Colonial of the exercise of such right not later than twelve
(12) months prior to the expiration of the Initial Term and by paying to
Colonial, upon the termination of the Initial Term, the renewal payment
described in Article II hereof. PTI's use of its rights hereunder during the
Renewal Term shall be on the same terms and conditions as provided in this
Agreement. Whenever the word "Term" is used in this Agreement, it shall be
deemed to mean the Initial Term together with, if applicable, the Renewal Term.
1.4 Reversion to Colonial.
(a) In the event that, as of the fifth (5th) anniversary of the date
of this Agreement (the "Reversion Date"), PTI has not installed its
Telecommunications Network with respect to at least [ * * * ] miles of Colonial
Rights-of-Way throughout the Colonial System, then PTI shall have the right to
issue a Designation Notice, within ten (10) days after said Reversion Date,
designating additional Segments of the Colonial Rights-of-Way (and Related
Facilities) which, when added to the Segments for which Permits previously have
been granted to PTI, will equal [ * * * ] miles or less. In such event, upon the
execution and delivery of appropriate Segment Leases for such additional
designated portions of the Colonial Rights-of-Way and Related Facilities, then
PTI shall have the right to use such Segments and Related Facilities in
accordance with the terms of this Agreement.
(b) All other portions of the Colonial Rights-of-Way or Related
Facilities (i) in which PTI has not then installed its Telecommunications
Network; and (ii) that are not then the subject of Designation Notices as
described in Subsection 1.4(a) above will revert to Colonial as of the thirtieth
(30th) day after the Reversion Date. If any such reversion occurs, (aa) PTI will
have no further rights with respect to such portions of the Colonial
Rights-of-Way or Related Facilities (collectively, the "Undeployed Segments and
Stations") and (bb) the Undeployed Segments and Stations will no longer be
subject to the terms and conditions of this Agreement or the Fiber Optic Access
and Purchase Agreement. Additionally, at the end of the second (2nd) year after
the Reversion Date, any Segment of the Colonial Rights-of-Way or Related
Facilities that is the subject of Designation Notices as described in Subsection
1.4(a) above will be released from the exclusivity restrictions set forth in
Section 3 of the Fiber Optic Access and Purchase Agreement from and after such
date unless (x) PTI has then installed its Telecommunications Network within
such Segment, or (y) PTI is then proceeding with such installation process in
good faith and with diligent efforts. Upon the release of any such
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<PAGE> 6
Segments or Related Facilities from said exclusivity restrictions as described
in the immediately preceding sentence, PTI shall continue to have the right to
install its Telecommunications Network within the applicable Segments and/or at
such Related Facilities; provided that PTI's rights under this Agreement with
respect to such Segments or Related Facilities then shall be subject to the
rights of other parties, if any, claiming by, through or under Colonial;
provided, however, that although Colonial acknowledges that it shall not grant
"exclusive rights" to any such other parties, PTI acknowledges that there are
space limitations within the Colonial Rights-of-Way and that any granting by
Colonial of rights to other parties for the last remaining available space
within a Segment or portion thereof shall not constitute the granting of
"exclusive rights" for the purposes hereof.
1.5 Use. PTI acknowledges and agrees that the property to be leased to PTI
hereunder may be used only for the purpose of installing, constructing, using,
operating, maintaining, repairing and replacing a fiber optic telecommunications
network consisting of not more than ten (10) telecommunications conduits (the
"Conduit(s)") within a given Segment (together with appurtenant and necessarily
related Regen Facilities and other telecommunications machinery and equipment
(collectively, the "Telecommunications Network")), the exact number and location
of Conduits to be located within a given Segment to be determined in accordance
with the terms and conditions of Subsection 1.2(b) and Article III hereof.
ARTICLE II
CONSIDERATION; RENEWAL PAYMENT; OTHER FEES AND EXPENSES
2.1 Consideration. The parties hereto acknowledge that, pursuant to that
certain Contribution Agreement, by and between Colonial and PTI, dated as of
October ___, 1999, Colonial and PTI have agreed that, in consideration of
Colonial's permission to allow PTI to use designated portions of the Colonial
Rights-of-Way as described herein for the Initial Term, Colonial has received,
simultaneously with the execution of this Agreement __________________ (_____)
shares of Series D convertible preferred stock of PTI (collectively, the "PTI
Stock").
2.2 Renewal Payment.
(a) In the event that PTI exercises its right to extend the Term of
this Agreement for the Renewal Term, PTI shall pay to Colonial, on or before the
expiration of the Initial Term, a renewal payment equal to the then-current
"fair market value" of the Leasehold Interests to be granted herein (the
"Renewal Payment").
(b) Within the thirty (30) day period commencing upon Colonial's
receipt of PTI's written notice of renewal as described in Section 1.3 above,
Colonial and PTI shall negotiate in good faith in order to determine a mutually
satisfactory amount for the Renewal Payment. If Colonial and PTI fail to agree
upon the amount of such Renewal Payment within such thirty (30) day period, then
the renewal payment will be determined by the following third party independent
appraisal procedure:
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(i) The parties shall attempt to agree upon a single appraiser;
however, if the parties are unable to agree upon an appraiser within
fifteen (15) days after the expiration of the thirty (30) day negotiation
period described in the first sentence of this Subsection 2.2(b), then each
party shall appoint an appraiser within five (5) days after the expiration
of the initial fifteen (15) day period. Upon the appointment of the two (2)
appraisers, said appraisers, within five (5) Business Days after the
appointment of the second appraiser, and before exchanging views as to the
question at issue, shall appoint in writing a third appraiser and give
written notice of such appointment to the parties. If any appraiser shall
not be appointed or agreed upon within the time herein provided, then
either of the parties may apply to the United States District Court for the
Northern District of Georgia for such appointment. The appraisers shall
have thirty (30) days from the date of the appointment of the last
appraiser to provide a determination under this Section 2.2.
(ii) Any appraiser appointed hereunder shall be a member of the
MAI and shall have no less than five (5) years experience in the appraisal
of comparable assets or rights.
(iii) In the event any appraiser appointed as aforesaid
thereafter shall die or become unable or unwilling to act, such appraiser's
successor shall be appointed in the same manner provided in this Section
2.2 for the appointment of the appraiser so dying or becoming unable or
unwilling to act.
(iv) The question to be determined by the appraisers shall be:
"What is the then fair market value of the renewal of the rights leased
under the Segment Leases?"
(v) For the purposes of this Section 2.2, the term "fair market
value" shall mean the highest price for cash that the rights leased under
the Segment Leases would bring in a competitive and open market under all
conditions requisite to a fair transaction with the lessor and lessee each
acting prudently and knowledgeably, and subtracting therefrom the costs and
expenses of such a transaction, including, without limitation, commissions
and legal fees and assuming further that (aa) such price is not affected by
undue stimulus; (bb) lessor and lessee are typically motivated; (cc) both
parties are well-informed or well-advised and are each acting in what it
considers its own best interest; (dd) a reasonable time is allowed for
exposure on the open market; (ee) payment is made in cash or its
equivalent; and (ff) to the extent applicable, that the Telecommunications
Facilities to be installed and operated on the Colonial Rights-of-Way in
connection with such renewal already have been installed.
(vi) As applicable, the determination of (aa) the single
agreed-upon appraiser, or (bb) the concurring determination of any two of
the three appraisers shall be binding upon Colonial and PTI; provided that,
in the event no two of the appraisers shall render a concurring
determination, then the average of the two appraised values that are
closest in amount shall be binding upon Colonial and PTI.
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(vii) The fees and expenses of the appraiser(s) shall be divided
equally between the two parties to the transaction.
(viii) Wherever the determination of "fair market value" of the
rights licensed hereunder is at issue, the procedure established in this
Section 2.2 shall be binding upon Colonial and PTI and shall be a condition
precedent to the filing of any action at law or in equity by any party
hereto.
(c) PTI will not be entitled to any return or refund of all or any
portion of either the PTI Stock or any Renewal Payment in the event of any
termination of this Agreement "for cause" by Colonial or in the event that
PTI elects not to use or is prohibited from using any portion of the
Colonial Rights-of-Way or Related Facilities for the purposes described
herein, including, without limitation, any portions of the Colonial
Rights-of-Way that become Undeployed Segments and Stations pursuant to
Section 1.4 hereof.
2.3 Expenses.
(a) Except to the extent that Colonial is obligated for same pursuant
to the "Services Agreement" described in Section 3.3 hereof, PTI will be solely
responsible for all costs and expenses of any nature whatsoever in connection
with:
(i) all aspects of the Perfection Process (including, without
limitation, any payments to the fee owners, ground lessors or lessees of
applicable land (collectively, the "Landowners") or to contractors,
right-of-way agents and other brokers, agents, consultants or other third
parties (collectively, "Right-of-Way Agents") for the purposes of assisting
in such Perfection Process (all of the foregoing being collectively
referred to as the "Perfection Expenses");
(ii) the construction, installation, use, operation, maintenance,
repair, replacement and/or removal of the Telecommunications Network or any
portion thereof in accordance with the requirements of Articles III, IV and
IX hereof; and
(iii) any construction, grading or other work of any nature
whatsoever required by any state, county, municipal and/or tribal
governments, and/or the appropriate agencies, offices, departments, boards,
bureaus, authorities or commissions thereof with jurisdiction over the
matter in question (collectively, the "Governmental Authorities") in order
to allow the use of applicable portions of the Colonial Rights-of-Way
and/or Related Facilities for the deployment of the Telecommunications
Network;
(b) PTI acknowledges that, as of the date hereof, Colonial has not
completed the Perfection Process with respect to the Colonial Rights-of-Way, but
has substantially completed the Perfection Process with respect to certain
segments of the Colonial Rights-of-Way described on Exhibit D attached hereto
and made a part hereof (collectively, the "Currently Perfected Segments"). Upon
the issuance of a Designation Notice by PTI with respect to a Currently
Perfected Segment, PTI will reimburse Colonial for all actual and reasonable
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Perfection Expenses for such Currently Perfected Segments, such reimbursement to
be made within thirty (30) days of receipt of an invoice from Colonial, and to
be calculated in accordance with the methods and procedures described in the
Services Agreement.
2.4 Payments. All rentals, license fees, Renewal Payments, expenses and
other payments or reimbursements to be paid by PTI to Colonial hereunder shall
be payable in lawful money of the United States of America. All payments shall
be made by PTI to Colonial without notice or demand, deduction or offset at the
address provided in Section 17.1 hereof.
2.5 Default Interest. In the event that any payment or reimbursement is
not paid within ten (10) days after written notice of such nonpayment is given
pursuant to Section 12.1 hereof, then interest shall accrue on such unpaid
payment or reimbursement at the "Default Rate" described in Section 17.12 hereof
from the date such payment or reimbursement was due until finally paid.
ARTICLE III
INSTALLATION OF TELECOMMUNICATIONS NETWORK
3.1 Perfection; Pre-Installation Determinations.
(a) The parties hereto agree that PTI shall be obligated to complete
the Perfection Process for the right to install the Telecommunications Network
and the Colonial Conduit within any discrete portion of a Segment before
commencing any "PTI Work" (as defined in Section 3.2 hereof) within such
portion, unless PTI receives Colonial's express written permission not to do so,
which permission will be based, among other matters, upon PTI's agreement to
indemnify Colonial for any liabilities described in Subsection 11.1(c) hereof.
PTI will use good faith efforts to obtain Perfection Rights in a manner that
provides authority generally to install and operate telecommunications
facilities along the Colonial Rights-of-Way, such good faith efforts to be as
follows: Prior to and during the Perfection Process, Colonial and PTI will work
together to create and modify Perfection Process methodologies that balance (i)
Colonial's interest in maximizing "broad form" perfection and (ii) PTI's
interest in controlling perfection costs and minimizing delays. If it is
determined that there is an incremental cost difference between (aa) broad form
perfection and (bb) the minimum Perfection Rights that are necessary in order to
install PTI's Telecommunications Network and the Colonial Conduit along the
applicable property, then Colonial shall have the option of paying such
difference.
(b) Within thirty (30) days after PTI's designation of a Segment or
Related Facility pursuant to Section 1.2 hereof, Colonial, at its own cost and
expense, (along with any other potential contractor that PTI may consider for
such work) shall prepare a proposal for completion of the Perfection Process,
route engineering that may be necessary prior to the installation of the
Telecommunications Network ("Route Engineering Work") and the performance of
construction management services in connection with installation of the
Telecommunications Network ("Construction Management Work"; the Perfection
Process, Route Engineering Work and Construction Management Work sometimes
collectively referred to as "Perfection and Construction Management Work").
Colonial acknowledges that PTI shall
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have no obligation to select Colonial for the performance of such Perfection and
Construction Management Work; provided, however, that in the event Colonial is
not selected to perform such Perfection and Construction Management Work,
Colonial nevertheless shall have the right to approve the contractor that will
perform such Perfection and Construction Management Work (the "Perfection and
Construction Management Contractor") in accordance with the provisions of
Subsection 3.2(f) hereof. Colonial also shall have the right to review,
supervise and approve, jointly with PTI, the performance of all such Perfection
and Construction Management Work and to receive periodic progress reports from
the Perfection and Construction Management Contractor (if not Colonial) during
the course of performance of the Perfection and Construction Management Work.
(c) PTI shall notify Colonial in writing upon completion of the
Perfection Process as to a Segment of the Colonial Rights-of-Way or a discrete
portion of such Segment. Within thirty (30) days after receipt of such notice,
Colonial shall notify PTI in writing (the "Colonial Engineering Notice") of:
(i) the exact location in which PTI may install the Conduits
within such Segment of the Colonial Rights-of-Way or the applicable portion
thereof (such location to be, whenever possible, running along a centerline
located not less than five (5) feet from an outer right-of-way boundary of
the Segment in question, but no closer than ten (10) feet from the closest
pipeline within the Segment in question); and
(ii) any special conditions regarding any construction,
installation, use or operation that must be conducted within such Segment
or the applicable portion thereof or Related Facility and not otherwise
generally described herein (including, without limitation, the timing
deadlines for the completion of the applicable work on any given
Landowner's property) that are necessary, in Colonial's reasonable
determination, to prevent or limit material interference with the use,
operation and maintenance of Colonial's Pipeline in the applicable portion
of the Colonial Rights-of-Way, to prevent any compromising of the safety of
the Colonial Pipeline and/or, in the case of construction schedules, to
maintain good relations with Landowners on the Colonial Rights-of-Way.
Colonial will attempt to develop general guidelines for such determinations to
the extent reasonably feasible in order to provide PTI with appropriate
flexibility so long as development is consistent with such guidelines. If PTI's
concerns cannot be resolved without re-routing or obtaining additional
Perfection Rights, the cost of same shall be borne by PTI.
(d) If PTI objects to any of the determinations made by Colonial pursuant
to Subsection 3.1(c) above or to the determination of the exact number of
Conduits to be allowed, as described in the second sentence of Subsection 1.2(b)
above, then, upon PTI's written request to Colonial within fifteen (15) days
after receipt of the Colonial Engineering Notice (or other notice provided
pursuant to Subsection 1.2(b), as applicable), representatives of each party's
appropriate departments will meet to discuss the concerns of both parties and
possible resolutions. If the parties are not able to resolve the dispute within
ten (10) days after the first
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meeting, then either party may elect to escalate the issue to the senior vice
president level and/or any comparable executive-level officer of each party for
good faith discussions to resolve the matter. It is the intent of such
discussions to find a resolution that protects the safety and integrity of the
Colonial System, while minimizing to the extent reasonably possible the harm to
PTI that may result from a limitation on the permitted number of Conduits to be
developed or other restrictions imposed by Colonial. If, after such discussions,
the parties are unable to reach agreement, then the decision of Colonial's
applicable executive-level officer shall be final as to the matter in question.
(e) As referenced in Subsection 1.2(b), Permits shall be prepared and
executed upon completion of the Perfection Process and the other
pre-installation determinations described in Subsections 3.1(b)-(d) above. Among
other matters, said Permits shall have the effect of modifying the applicable
Segment Leases by limiting the areas leased to PTI within the Colonial
Rights-of-Way to the areas specifically described in the Permits.
(f) In circumstances in which PTI elects not to install its
facilities within a portion of the Colonial Rights-of-Way and instead installs
its facilities on land that is adjacent to or within five (5) miles of such
portion (the "Rerouted Portion"), PTI agrees (i) to comply with the Perfection
Process and other requirements of this Section 3.1 with respect to all parcels
of land which are within the Rerouted Portion and which are not owned by, or
subject to leases, easements or other right-of-way grants in favor of, utilities
or government authorities (including, without limitation, railroad, power
companies, pipeline companies, and federal, state or local governments or
agencies) and (ii) to provide contemporaneous written notice to Colonial of such
reroute, identifying the Rerouted Portion in reasonable detail.
3.2 Requirements for Installation of the Telecommunications Network and
the PTI Work. All work to be performed by or on behalf of PTI in connection with
the development, construction, installation, operation, maintenance and repair
of PTI's Telecommunications Network within any applicable Segments of Colonial
Rights-of-Way or at any Related Facility (collectively, "PTI Work") shall be
subject in all events to the following terms and conditions, the satisfaction of
which shall be at the sole cost and expense of PTI:
(a) The plans and specifications for all PTI Work and any
modifications thereto must be approved in advance by Colonial and no PTI
Work may commence until receipt of such approval, which approval will not
be unreasonably withheld. PTI shall deliver to Colonial, for its approval,
complete detailed engineering and design plans and specifications for the
performance of the PTI Work on the applicable Segment or at the applicable
Related Facility, including, without limitation, all construction methods
and staging areas to be used in connection with the same. Colonial shall
approve, or propose modifications, within thirty (30) days of its receipt
of such plans and specifications or revised plans and specifications, as
applicable. In the event of any dispute between Colonial and PTI regarding
such approval, the matter shall be referred to the Head Engineer of each of
PTI and Colonial for resolution.
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(b) All PTI Work shall be performed in a good and workmanlike manner,
free and clear of all mechanics' and materialmen's liens and encumbrances
related thereto and in accordance with all applicable present and future
statutes, regulations, rules, ordinances, codes, licenses, permits, orders,
concessions, franchises and similar items of or from all applicable
Governmental Authorities with jurisdiction over the applicable portions of
the Colonial Rights-of-Way and/or the Related Facilities and the use and
operation thereof (including, without limitation, any rules or regulations
issued by the Department of Transportation or the Occupational Safety and
Health Administration, and all applicable judicial, administrative and
regulatory decrees, judgments and orders relating thereto (collectively,
"Applicable Laws").
(c) All PTI Work shall be performed in accordance with the general
construction requirements and specifications for work within the Colonial
Rights-of-Way or at the applicable Related Facility attached hereto as
Exhibit E and made a part hereof (the "Colonial Construction Standards").
(d) All PTI Work with respect to the initial development,
construction and installation of any portion of the Telecommunications
Network within any applicable Segments of Colonial Rights-of-Way or at any
Related Facilities must be performed in accordance with all general or
special conditions or requirements noted on the applicable Permits.
(e) All PTI Work shall be performed in accordance with all standards
or requirements, whether now or hereafter in force, issued by (i) any
insurer or insurance carrier, board of fire underwriters or any other
company, bureau, organization or entity performing the same or similar
functions applicable to the Telecommunications Network, the Colonial
Pipeline and/or the Related Facilities (collectively, the "Insurance
Requirements"); and (ii) the American Society of Mechanical Engineers, the
American Petroleum Institute, the National Electrical Safety Code, and the
National Association of Corrosion Engineers (collectively, the "Trade
Standards").
(f) All contractors, materialmen, mechanics and any other parties who
may perform work in, on or about the Colonial Rights-of-Way or at the
applicable Related Facilities for the benefit of the Telecommunications
Network pursuant to agreements with PTI (collectively, "Telecommunications
Network Contractors") (i) must be approved in advance by Colonial; (ii)
must submit for review and approval by Colonial satisfactory evidence of
contractor's liability and worker's compensation insurance; and (iii) must
acknowledge receipt and review of the Colonial Construction Standards and
the potential liability arising out of any breach of the integrity of the
adjacent Colonial Pipeline. Colonial and PTI will establish a list of
pre-approved contractors and suppliers, and a mechanism to provide for
approval by Colonial of parties performing work on the Colonial
Rights-of-Way or at the applicable Related Facility in a manner that does
not materially delay or interfere with work to be performed on the Colonial
Rights-of-Way or at the applicable Related Facility.
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(g) During all phases of the construction and installation of any
portion of the Telecommunications Network within any applicable Segments of
Colonial Rights-of-Way or at the applicable Related Facility, Colonial
shall assign one or more inspectors to work with each PTI construction crew
in order to provide construction inspection services with respect to such
PTI Work. PTI shall reimburse Colonial for the costs of such inspections
within thirty (30) days of receipt of an invoice from Colonial, such
reimbursement payment to be calculated in accordance with the methods and
procedures described in the Services Agreement. In connection with such
inspections, PTI will make available to Colonial and its inspectors, upon
Colonial's reasonable request, the PTI personnel and all Telecommunications
Network contractors and other agents working for or on behalf of PTI in the
performance of the PTI Work.
(h) All PTI Work must be done in such a manner as will not interfere
with in any way whatsoever the use, maintenance, operation, repair and
replacement of the adjacent Colonial Pipeline.
(i) PTI shall provide monthly engineering progress reports and weekly
construction progress reports advising Colonial of the status and progress
of all PTI Work and any issues of concern arising therefrom.
(j) PTI shall perform a complete locations survey of the applicable
Segment or Related Facility in question, including the staking and marking
of the existing Colonial Pipeline and the route of the Telecommunications
Network and any applicable Regen Facilities that are a part hereof) in
accordance with the Colonial Construction Standards and standard
telecommunications industry practices.
(k) PTI shall prepare field alignment maps showing the route along
the Segment in question as well as the property ownership, terrain
description, materials and other pertinent information.
(l) PTI shall prepare railroad, highway, waterway or wetlands
crossing permit drawings sufficient for approval by the applicable
Governmental Authorities or railroads and obtain any and all other permits
necessary for such crossings.
(m) All PTI Work shall be performed at such a standard of care that
equals the Colonial Construction Standards or that which is normal and
customary in the telecommunications industry, whichever standard is higher.
(n) In the event that PTI fails to comply with Colonial safety or
operational regulations, and such failure interferes or is likely to
interfere with Colonial's operations, Colonial may require that PTI
immediately suspend all affected operations on the applicable Segment.
Promptly after such suspension, and if such suspension materially and
adversely affects PTI's Telecommunications network, within two (2) hours
after such suspension, Colonial and PTI each will make available by
telephone a representative of upper management, as designated on the
escalation list agreed to by the parties, to discuss
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prompt resolution of the situation. If the parties are unable to resolve
the issue by telephone, then Colonial and PTI will escalate the issue to
the next higher individual on the escalation list for a face to face
meeting at a mutually agreeable location within twenty-four (24) hours of
the suspension. The parties thereafter will negotiate in good faith to
resolve the issue and prevent the occurrence of similar situations in the
future.
3.3 Services Agreement with Colonial. Notwithstanding the other provisions
of this Article III or of Subsection 1.2(b) or Section 4.1 below, the parties
hereto acknowledge that Colonial shall not be obligated to execute and deliver
to PTI any Segment Lease hereunder prior to the execution by Colonial and PTI of
that certain Master Services Agreement (the "Services Agreement"). Such Services
Agreement shall set forth, among other matters, the designation by Colonial of
specified employees to work within PTI's organization, Perfection Process
methodologies, the scope of work for Colonial's performance, if any, of any
Perfection and Construction Management Work and inspections with respect to the
Colonial Rights-of-Way and Related Facilities (or portions thereof) to be
deployed by PTI hereunder and the compensation to be paid to Colonial for such
services; however, PTI shall continue to have sole responsibility for all PTI
Work hereunder for any applicable Segment to the extent that Colonial has not
expressly assumed such responsibility within such Segment pursuant to the terms
of the Services Agreement.
3.4 Completion of PTI Work. Upon the completion of any PTI Work within a
designated Segment or Related Facility, PTI shall do the following:
(a) Perform an as-built survey of the Segment or Related Facility in
question and cause any applicable system maps and drawings of Colonial for
such particular Segment or Related Facility to be revised and updated as
appropriate so that each of PTI and Colonial have at least one full set of
revised and updated maps and drawings.
(b) Deliver to Colonial complete technical specifications for the
Telecommunications Network, including all Regen Facilities and any other
machinery or equipment placed within the Colonial Rights-of-Way or at a
Related Facility, as the case may be.
(c) Deliver to Colonial equipment manuals for the proper use,
operation, maintenance and repair of any portion of the Telecommunications
Network, including all Regen Facilities and any other machinery or
equipment that is to be or may be maintained by Colonial.
(d) Deliver to Colonial a certificate from PTI's general
contractor(s), certifying that all PTI Work within the applicable Segment
or Related Facility has been completed in accordance with the plans and
specifications previously approved by Colonial, that all such PTI Work has
been paid for, that all Telecommunications Network Contractors have been
paid and that no party has any lien rights or claims of lien with respect
to any portion of the completed PTI Work for such Segment or Related
Facility.
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(e) Obtain any certificates, permits, licenses or approvals required
to be obtained by any applicable Governmental Authorities under any
Applicable Laws or Trade Standards upon completion of the PTI Work in
question including, without limitation, such of the foregoing as may be
required for the operation of the Telecommunications Network.
3.5 Unauthorized Work. In the event that PTI performs any PTI Work along
any portion of the Colonial Rights-of-Way or at a Related Facility without
obtaining Colonial's approval therefor or completing the Perfection Process with
respect to the applicable Segment, or if Colonial determines that any such PTI
Work or portion thereof is prohibited by applicable Governmental Authorities or
Applicable Laws, then Colonial may require PTI to remove the PTI Work (including
any Conduits, Regen Facilities or other improvements installed therein)
immediately and to restore the subject property to its original condition, wear
and tear and casualty excepted, provided that Colonial will not require such
removal for so long as PTI is in good faith contesting or otherwise attempting
to resolve such prohibitions. In the event that PTI fails to do so, then
Colonial may perform such removal and restoration at PTI's sole cost and
expense, without any liability to Colonial.
ARTICLE IV
OPERATION, MAINTENANCE AND REPAIR
4.1 PTI Operation, Maintenance and Repair. Upon completion of any
applicable portion of the Telecommunications Network, and during the Term hereof
PTI shall be responsible, at its sole expense, for all costs and expenses of the
operation of the Telecommunications Network (except only as expressly described
in the Fiber Optic Access and Purchase Agreement), and all ordinary and
extraordinary maintenance and repair (including, without limitation, the
performance of continual monitoring and routine or special inspections) of all
aspects of the Telecommunications Network (including, without limitation, any
fibers, conduits, Regen Facilities or junctions, line amplifiers and other
equipment and machinery that are a part thereof) (collectively, the "PTI
Operation and Maintenance Services"), all pursuant to and in accordance with the
provisions of Section 3.2 and in compliance with the plans and specifications
for the Telecommunications Network approved by Colonial as provided in Section
3.2. PTI shall have no responsibility for, or authorization to perform
maintenance or repairs on any portion of the Colonial Pipeline or any other
Colonial equipment or machinery located along the Colonial Rights-of-Way or at
the Related Facilities.
4.2 Warranties. In the event any maintenance or repairs to the
Telecommunications Network are required as a result of any breach of any
warranty made by any of PTI's manufacturers, contractors or vendors, PTI shall
pursue any remedies it may have against such manufacturers, contractors or
vendors, and PTI shall reimburse Colonial for any expenses that Colonial has
incurred as a result of any such breach of warranty.
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4.3 Subcontractors. PTI may subcontract its obligations under this Article
IV; however, in any such event, PTI shall require the subcontractors to meet
operations, maintenance and repair standards for the Telecommunications Network
that are at least as high as those standards set forth in Section 3.2 of this
Agreement. The use of any such subcontractor shall not relieve PTI of any of its
obligations hereunder.
4.4 Colonial Inspections . In addition to the matters described in the
Services Agreement, after installation of the Telecommunications Network within
any Segment, Colonial shall have the right, but not the obligation, to inspect
all or any portion of the PTI Work, including, without limitation, the
Telecommunications Network, as Colonial may deem appropriate, such additional
inspections to be performed at Colonial's expense. Notwithstanding the
foregoing, in the event that Colonial considers special, non-periodic
inspections of the PTI Work to be reasonably necessary because of perceived
interference with or threats to the use and operation of the adjacent Colonial
Pipeline and/or the safety and integrity of such Colonial Pipeline, PTI will pay
Colonial for the cost of such special inspections in accordance with the
provisions of the Services Agreement.
ARTICLE V
PIPELINE MAINTENANCE AND REPAIR
5.1 Pipeline Maintenance and Repair. Colonial will perform, at its sole
expense, all emergency, routine and necessary maintenance, replacements and
repair on the Colonial Pipeline and other Colonial equipment located along the
Colonial Rights-of-Way and at the Related Facilities, excluding, however, any
portion of the Telecommunications Network located at any Related Facility.
ARTICLE VI
INSURANCE
6.1 Acquisition of Insurance Policies. During the entire Term, Colonial
and PTI shall procure and maintain the insurance described in this Article VI
(or its then available equivalent). Policy limits shall be reviewed annually and
may be adjusted if prudent, considering levels of inflation, risk of loss,
premium expenses and other relevant factors.
6.2 Types of Required Insurance for PTI. PTI shall procure and maintain
the following:
(a) commercial general public liability insurance covering loss or
damage resulting from accidents or occurrences on, about or arising out of
or in connection with the Telecommunications Network (or the attempted
installation thereof) and/or the Segments that may be leased to PTI
hereunder, with personal injury, death and property damage combined single
limit liability of not less than [ * * * ] for each accident or
occurrence and in the aggregate. Coverage under
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such policies shall be broad form and shall include, but shall not be
limited to, operations, contractual, owner's and contractor's protective,
products and completed operations, environmental pollution, and the use of
all owned, non-owned and hired vehicles;
(b) umbrella liability insurance in an amount not less than
[ * * * ];
(c) "all risk" or "special" physical damage insurance covering all
risks of physical loss or damage to all portions of the Telecommunications
Network installed by or on behalf of PTI, with liability limits of not less
than one hundred percent (100%) of the then full replacement cost of all
such property;
(d) contractor's liability and builder's risk insurance during
performance of all PTI Work and during any subsequent maintenance, repair,
modification, or replacement thereof;
(e) worker's compensation and employer's liability insurance as
required by Applicable Laws; and
(f) such other insurance in amounts from time to time reasonably
required by Colonial against other insurable risks if, at the time, such
coverage is available at commercially reasonable rates and is commonly
obtained with respect to similar improvements or systems.
6.3 Types of Required Insurance for Colonial. Colonial shall procure and
maintain the following:
(a) commercial general public liability insurance covering loss or
damage resulting from accidents or occurrences on or about or arising out
of or in connection with the Colonial Pipeline and/or the portions of the
Colonial Rights-of-Way not leased to PTI hereunder with personal injury,
death and property damage combined single limit liability of not less than
[ * * * ] for each occurrence and in the aggregate. Coverage under
such policies shall be broad form and shall include, but shall not be
limited to, operations, contractual, owner's and contractor's protective,
products and completed operations, environmental pollution, and the use of
all owned, non-owned and hired vehicles;
(b) umbrella liability insurance in an amount not less than
[ * * * ]; and
(c) worker's compensation and employer's liability insurance as
required by Applicable Laws.
6.4 Terms of Insurance. The policies required under Sections 6.2 and 6.3
shall name Colonial or PTI, as applicable, as additional insured(s). Each party
shall provide to the other
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party certificates of insurance and copies of policies obtained by the insuring
party hereunder promptly upon the request of the other party. All policies of
insurance obtained by a party pursuant to Sections 6.2 or 6.3, as applicable,
also:
(a) shall be written by responsible insurance companies reasonably
acceptable to the other party having a Best's rating of "A-VIII" or better;
(b) shall be written as primary policies with respect to losses
arising out of the acts or omissions of the named insured not contributing
with and not in excess of any coverage that the other party may carry;
(c) shall contain an endorsement providing that the amount of
coverage will not be reduced with respect to any party except after thirty
(30) days' prior written notice from the insurance company to the other
party and such coverage may not be cancelled with respect to any party
(including, without limitation, for non-payment of premium) except after
thirty (30) days' prior written notice from the insurance company to the
other party;
(d) shall contain, if obtainable, a statement that the insurance
shall not be invalidated should any insured waive in writing prior to a
loss any or all right of recovery against any party for loss accruing to
the property described in the insurance policy; and
(e) shall contain, if obtainable, a provision that no act or omission
of the party procuring such insurance shall affect or limit the obligation
of the insurance carrier to pay the amount of any loss sustained.
6.5 Failure to Maintain Insurance. If either party at any time during the
Term fails to procure or maintain any insurance required hereunder or to pay the
premiums therefor, the other party shall have the right to procure the same on
behalf of the defaulting party and to pay any and all premiums thereon. In such
event, any amounts paid by such other party in connection with the acquisition
of such insurance shall be immediately due and payable by the defaulting party
and interest on the amount so paid shall accrue at the Default Rate.
6.6 Blanket Policies; Self-Insurance.
(a) Any insurance required to be carried pursuant to this Article VI
may be carried under a "blanket" policy or policies covering other liabilities
and locations of Colonial or PTI, as applicable; provided, however, that such
policy or policies: (i) shall apply to the property required to be insured by
this Article VI and in an amount not less than the amount of insurance required
to be carried by Colonial or PTI with respect thereto; and (ii) shall provide
that no payment of insurance proceeds under any such policy with respect to any
location other than the Telecommunications Network (with respect to PTI) or
other than the Colonial Rights-of-Way and/or Related Facilities (with respect to
Colonial), shall reduce the amount of insurance available with respect to the
Telecommunications Network or to the Colonial Rights-of-Way
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and/or Related Facilities, as applicable, to an amount below the limits of
liability required to be maintained herein.
(b) The insurance requirements described in this Article VI may be
satisfied with respect to the initial [ * * * ] of liability by any plan
of self-insurance from time to time maintained by Colonial or PTI on condition
that: (i) the party so self-insuring has and maintains an aggregate net worth of
[ * * * ] or more; and (ii) any party so self-insuring shall furnish to
the other party, upon request, evidence of the adequacy of its net worth. The
annual report of such party that is audited by an independent certified public
accountant shall be sufficient evidence of its net worth. If either Colonial or
PTI elects to self-insure pursuant to the provisions set forth herein, or
thereafter elects to terminate such self-insurance program, it shall give at
least ten (10) days' prior written notice thereof to the other party.
ARTICLE VII
INTENTIONALLY OMITTED
ARTICLE VIII
CONDEMNATION
8.1 Material Taking. If (a) all or any portion of a Segment (or a Related
Facility, as applicable) shall be acquired for any public or quasi-public use
through taking by condemnation, eminent domain or any similar proceeding, or
purchase in lieu thereof (each, a "Taking"); and (b) PTI and Colonial reasonably
determine, as applicable, that (i) the Segment or portion thereof cannot, at
reasonable cost, continue to be operated for both the existing Pipeline and the
operation of the Telecommunications Network, or (ii) the Related Facility or
portion thereof cannot, at reasonable cost, continue to be operated for both the
existing Colonial Related Facility and the operation of PTI's Regen Facilities
thereon (in either such case, a "Material Taking"), then any Permits or Segment
Leases applicable to the portion of the Colonial Rights-of-Way or Related
Facility so taken shall cease and terminate as of the date the condemning
authority takes title or possession, whichever first occurs and only to the
extent that such Permits or Segment Leases apply to the property so taken.
8.2 Continuation of Agreement. If there is a Taking that is not a Material
Taking and this Agreement is not partially terminated as provided in Section
8.1, this Agreement shall remain in full force and effect and any award(s)
received thereby shall be apportioned pursuant to Section 8.3 hereof.
8.3 Apportionment of Award(s) .
(a) If there is a Taking, whether a Material Taking or otherwise,
Colonial and PTI shall be entitled to receive and retain such separate awards
and portions of lump sum awards as may be allocated to their respective
interests in any condemnation proceedings, or as may be otherwise agreed, taking
into consideration the nature of the respective interests of Colonial and PTI in
the subject property, as subject to this Agreement.
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(b) If the condemning authority does not make separate awards and the
parties are unable to agree as to amounts that are to be allocated to the
respective interests of Colonial and PTI, the award shall be allocated as
follows: (i) first, if the Taking is not a Material Taking and Colonial and/or
PTI elect(s) to restore the property and improvements so taken, then to such
party(ies) in the amount(s) equal to the costs and expenses incurred by Colonial
and/or PTI in performing any such restoration; (ii) second, to Colonial and PTI
in proportional amounts reflecting the respective unamortized cost of any
portion of the Colonial Pipeline, Related Facilities and/or Telecommunications
Network so taken; and (iii) the balance, if any, shall be distributed in
proportion to the amounts of the award allocated to Colonial and PTI pursuant to
clause (ii) above.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PTI
9.1 PTI's Representations, Warranties and Covenants. PTI represents,
warrants and covenants that:
(a) PTI is a corporation existing and in good standing under the laws
of the State of Delaware,
(b) PTI has the power and authority to enter into this Agreement and
to consummate the transactions provided for herein. This Agreement and all of
the documents executed and delivered by PTI constitute the legal, valid, binding
and enforceable obligations of PTI and there are no claims or defenses, personal
or otherwise, or offsets whatsoever to the enforceability or validity of this
Agreement.
(c) The execution, delivery and performance by PTI of its obligations
under this Agreement will not conflict with or result in a breach of any
Applicable Law by which PTI is bound or by any of the provisions of any contract
to which PTI is a party or by which PTI is bound, or PTI's articles of
incorporation or by-laws. There is no action, suit, proceeding or investigation
pending or, to PTI's knowledge, threatened, before any agency, court or other
Governmental Authority that relates to PTI, this Agreement or the installation
of the Telecommunications Network contemplated herein that would materially
interfere with PTI's ability to perform its rights and obligations hereunder.
(d) PTI has not made a general assignment for the benefit of
creditors, filed any voluntary petition of bankruptcy or suffered the filing of
an involuntary petition by its creditors, suffered the appointment of a receiver
to take possession of substantially all of its assets, suffered the attachment
or other judicial seizure of substantially all of its assets, admitted its
inability to pay its debts as they come due, or made an offer of settlement,
extension or compromise to its creditors generally.
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(e) PTI warrants and covenants that the installation, use and
operation of the Telecommunications Network (and any related maintenance, repair
or replacement thereof) shall comply with all Applicable Laws.
(f) PTI shall obtain (and cause to remain effective for the Term of
this Agreement) all rights, licenses, authorizations, permits, consents and
other agreements or approvals required by Governmental Authorities
(collectively, the "Required Permits") necessary for the installation, use and
operation of the Telecommunications Network (including, without limitation, all
Conduits, Regen Facilities, cables, fibers or other physical plant facilities or
machinery or equipment related thereto). Colonial shall have the right to review
and approve all documents evidencing or reflecting the Required Permits.
(g) PTI will comply with all requirements, conditions and
stipulations set forth in any of the Required Permits and in any easements,
licenses or other agreements evidencing the rights of Colonial in and to the
Colonial Rights-of-Way that have been disclosed to PTI.
(h) PTI shall notify promptly Colonial of any matters pertaining to
any damage or threatened damage to or loss of any portion of the
Telecommunications Network, the Colonial Pipeline or any Related Facilities of
which it becomes aware.
(i) PTI shall respect Colonial's right to use the Colonial Pipeline
and the Related Facilities. PTI shall not use the Telecommunications Network in
a manner that interferes in any way with or adversely affects the Colonial
Pipeline or any Related Facility, and PTI shall take all reasonable precautions
against, and shall assume liability for, subject to the terms herein, any damage
to the Colonial Pipeline or any Related Facility caused by PTI or any of PTI's
employees, officers, directors, contractors, agents, licensees and/or
concessionaires, as applicable (collectively, the "PTI Parties").
(j) PTI agrees to cooperate with and support Colonial in connection
with the compliance with any government requirements issued by any Governmental
Authority applicable to the Telecommunications Network.
(k) PTI shall pay when due all charges for public or private utility
services to or for any portion of the Telecommunications Network during the
Term, including, without limitation, all charges for electricity, water, sewer,
storm water drainage, gas, telephone and/or garbage collection.
(l) PTI shall pay when due the following, as they arise during the
Term (collectively, the "Impositions"): (i) all real property taxes,
assessments, fees or payments in lieu thereof due with respect to the
Telecommunications Network, or any portion thereof, or any personal property or
intangibles located in or used in connection with the Telecommunications
Network; (ii) any and all sales, use, income, gross receipts or other taxes
assessed on the basis of revenues received or accrued by PTI arising out of its
use of the Telecommunications Network; and (iii) all other taxes, assessments,
excises, levies, license fees, permit fees, franchise fees,
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inspection fees and similar charges assessed, levied, or imposed on any
occupancy, use or possession of the Telecommunications Network, including those
based upon the physical location of the Telecommunications Network and/or the
construction thereof in, on or along any public road, highways, waterways or
rights-of-way, or any part thereof. Notwithstanding the foregoing, PTI shall
have no responsibility for (x) any tax based in whole or in part on Colonial's
income from this Agreement or the Fiber Optic Access and Purchase Agreement; (y)
any taxes that are the responsibility of Colonial pursuant to Subsection 7(g) of
the Fiber Optic Access and Purchase Agreement; or (z) any other real property
taxes or assessments with respect to the Colonial Rights-of-Way other than those
set out in clause (i) of this Subsection 9.1(l) above. PTI shall have the right
to make a claim, and Colonial shall cooperate reasonably with PTI, for refund,
rebate, reduction or abatement of any such Impositions.
ARTICLE X
REPRESENTATIONS, WARRANTIES AND COVENANTS OF COLONIAL
10.1 Colonial's Representations, Warranties and Covenants. Colonial
represents, warrants and covenants that:
(a) Colonial is a corporation existing and in good standing under the
laws of the State of Delaware,
(b) Colonial has the power and authority to enter into this Agreement
and to consummate the transactions provided for herein. This Agreement and all
of the documents executed and delivered by Colonial constitute the legal, valid,
binding and enforceable obligations of Colonial and there are no claims or
defenses, personal or otherwise, or offsets whatsoever to the enforceability or
validity of this Agreement.
(c) The execution, delivery and performance by Colonial of its
obligations under this Agreement will not conflict with or result in a breach of
any Applicable Law by which Colonial is bound or by any of the provisions of any
contract to which Colonial is a party or by which Colonial is bound, or
Colonial's articles of incorporation or by-laws. There is no action, suit,
proceeding or investigation pending or, to Colonial's knowledge, threatened,
before any agency, court or other Governmental Authority that relates to
Colonial, this Agreement, the Colonial Pipeline or any Related Facility.
(d) Colonial has not made a general assignment for the benefit of
creditors, filed any voluntary petition of bankruptcy or suffered the filing of
an involuntary petition by its creditors, suffered the appointment of a receiver
to take possession of substantially all of its assets, suffered the attachment
or other judicial seizure of substantially all of its assets, admitted its
inability to pay its debts as they come due, or made an offer of settlement,
extension or compromise to its creditors generally.
(e) Colonial shall promptly notify PTI of any matters pertaining to
any damage or threatened damage to or loss of any part of the Telecommunications
Network of which Colonial becomes aware.
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(f) Colonial shall respect PTI's right to use the Telecommunications
Network. Colonial shall take all reasonable precautions against, and shall
assume liability for, subject to the terms herein, any damage to the
Telecommunications Network caused by Colonial or any of Colonial's employees,
officers, directors, contractors, agents, licensees and/or concessionaires, as
applicable (collectively, the "Colonial Parties").
(g) Colonial agrees to cooperate with and support PTI in connection
with the compliance with any government requirements issued by any Governmental
Authority and applicable to the Telecommunications Network.
(h) Except as expressly stated in Subsections 10.1(a)-(g) above,
Colonial makes no warranty to PTI or any other person or entity, whether
express, implied or statutory, as to the description, quality, merchantability,
completeness or fitness for any purpose of the Colonial Rights-of-Way
(including, without limitation, for the purposes for which PTI may use the
Colonial Rights-of-Way hereunder), or as to any other matter, all of which
warranties are hereby excluded and disclaimed.
ARTICLE XI
INDEMNIFICATION; LIMITATION OF LIABILITY
11.1 Indemnification by PTI. PTI hereby indemnifies and holds harmless
Colonial, the Colonial Parties and Colonial's affiliates and shareholders and
their respective employees, officers, directors, contractors, agents, licensees
and concessionaires (collectively, the "Colonial Indemnified Parties") from and
against any liability, loss, damage, claim or cause of action of any kind or
nature (including damage to property and injury to or death of persons) whether
actual or alleged, or payments to any person in compromise of settlement
thereof, whether or not liability has been shown or can be known, and any costs
or expenses in connection therewith (including, without limitation, reasonable
court costs, costs of litigation and attorneys' fees and expenses incurred in
enforcing same) arising out of or in connection with PTI's use of the leasehold
rights granted herein (but only to the extent such claims do not arise from the
negligence, gross negligence or willful misconduct of a Colonial Indemnified
Party), including, without limitation:
(a) third party claims, or any death or personal injury to, or loss
or damage to any property of, a Colonial Indemnified Party, to the extent
any of the foregoing is caused in whole or in part by the presence of the
Telecommunications Network on any portion of the Colonial Rights-of-Way or
at any Related Facility or the performance of any PTI Work or PTI Operation
and Maintenance Services by PTI or any PTI Parties on or along the Colonial
Rights-of-Way or at any Related Facility;
(b) penalties, fines or forfeitures imposed by any Governmental
Authority arising out of any failure or refusal by any PTI Party to comply
with Applicable Laws applicable to the installation, operation, use,
maintenance or repair of the
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Telecommunications Network (including, without limitation, any inadvertent
effect the same may have on the Colonial Pipeline or any Related Facility);
and
(c) any other liability arising out of or resulting from the acts or
omissions, negligent or otherwise, of any PTI Party or in connection with a
breach by PTI of any of its obligations under this Agreement, including,
without limitation, liabilities arising out of PTI's failure to obtain
easement, license, lease or other Perfection Rights from any Landowner so
as to allow PTI to install, operate and maintain the Telecommunications
Network through designated Segments of the Colonial Rights-of-Way, it being
acknowledged, however, that nothing in this Subsection 11.1(c) shall limit
or restrict in any manner the obligations and restrictions contained in
Subsection 3.1(a) hereof.
11.2 Indemnification by Colonial. Colonial hereby indemnifies and holds
harmless PTI, the PTI Parties and PTI's affiliates and shareholders and their
respective employees, officers, directors, contractors, agents, licensees and
concessionaires (collectively, the "PTI Indemnified Parties") from and against
any liability, loss, damage, claim or cause of action of any kind or nature
(including damage to property and injury to or death of persons) whether actual
or alleged, or payments to any person in compromise of settlement thereof,
whether or not liability has been shown or can be known, and any costs or
expenses in connection therewith (including, without limitation, reasonable
court costs, costs of litigation and attorneys' fees and expenses incurred in
enforcing same) arising out of or in connection with Colonial's operation of the
Colonial Pipeline and the Related Facilities (but only to the extent such claims
do not arise from the negligence, gross negligence or willful misconduct of a
PTI Indemnified Party, including, without limitation:
(a) third party claims, or any death or personal injury to, or loss
or damage to any property of, a PTI Indemnified Party, to the extent any of
the foregoing is caused in whole or in part by the presence of the Colonial
Pipeline or the Related Facilities;
(b) penalties, fines or forfeitures imposed by any Governmental
Authority arising out of any failure or refusal by any PTI Party to comply
with Applicable Laws applicable to the installation, operation, use,
maintenance or repair of the Colonial Pipeline or any Related Facility
(including, without limitation, any inadvertent effect the same may have on
the Telecommunications Network; and
(c) any other liability arising out of or resulting from the acts or
omissions, negligent or otherwise, of any Colonial Party or in connection
with a breach by Colonial of any of its obligations under this Agreement.
11.3 Limitation of Liability. In no event will Colonial be liable to PTI
for any interruption of or interference with the Telecommunications Network
arising out of any cause whatsoever, except to the extent caused by Colonial's
gross negligence or willful misconduct.
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11.4 No Consequential or Special Damages. Neither party hereto will be
liable to the other for any incidental, punitive, indirect, consequential or
special damages suffered by the other, including lost profits, lost savings or
loss of use.
11.5 Legal Proceedings. If any action, suit or proceeding is brought
against a party to which any indemnity is described in Sections 11.1 or 11.2,
the indemnifying party, upon the request of the indemnified party, and at the
indemnifying party's expense, shall resist and defend such action, suit or
proceeding, or cause the same to be resisted and defended by counsel designated
by the indemnifying party and approved by the indemnified party. The obligations
of the indemnifying party under this Section 11.5 relating to any matter subject
to indemnification under this Agreement that occurs, arises, or accrues during
the Term shall survive the expiration or earlier termination of this Agreement.
The indemnified party, at its sole expense, also shall be entitled to appear,
defend or otherwise take part in the matter involved, at its election, by
separate counsel of its own choosing. The indemnifying party will not settle any
claim without the prior written approval of the indemnified party, which
approval shall not be unreasonably withheld or delayed. The indemnified party
will be entitled to settle any claim on terms it deems appropriate. The parties
will treat any settlement of any claim and the terms of the settlement as
confidential information.
ARTICLE XII
DEFAULT
12.1 Event of Default by PTI. Subject to the other provisions of this
Article XII, the occurrence of any of the following shall constitute an "Event
of Default" by PTI hereunder:
(a) Failure by PTI to make any payment owed to Colonial hereunder
within ten (10) days after written notice thereof is given to PTI by
Colonial;
(b) Failure by PTI to maintain any of the insurance coverage required
hereunder, or to pay any of the premiums to be paid with respect thereto,
and such failure continues for a period of fifteen (15) days after written
notice thereof is given to PTI by Colonial;
(c) PTI breaches or fails to perform, comply with or observe any
other term, covenant, warranty, condition, agreement or undertaking
contained in or arising under this Agreement other than those referred to
in Subsections 12.1(a) and (b) above, and such occurrence or failure
continues for a period of thirty (30) days after written notice thereof is
given by Colonial to PTI; provided, however, that if such default is a
non-monetary default and is not susceptible of being cured within said
thirty (30) day period, then no Event of Default shall occur hereunder if
PTI commences commercially reasonable efforts to cure such default within
such thirty (30) day period and diligently pursues the same to completion
within a reasonable time thereafter, not to exceed a total of one hundred
fifty (150) days;
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(d) The subjection of any right or interest of PTI under this
Agreement to attachment, execution or other levy, or to seizure under legal
process, if not released within sixty (60) days;
(e) PTI shall make an assignment for the benefit of creditors, file a
petition in bankruptcy, petition or apply to any tribunal for the
appointment of a custodian, receiver or any trustee for it or a substantial
part of its assets, or commence any proceedings under any bankruptcy,
reorganization, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or hereafter in
effect; or if there shall have been filed against PTI any such petition or
application, or any such proceeding shall have been commenced against it,
in which an order for relief is entered or which remains undismissed for a
period of ninety (90) days of more; or PTI, by any act or omission,
indicates its consent to, approval of or acquiescence in any such petition,
application or proceeding or order for relief or the appointment of a
custodian, receiver or any trustee for it or any substantial part of any of
its properties, or suffers any such custodianship, receivership or
trusteeship to continue undischarged for a period of ninety (90) days or
more; or
(f) PTI generally is unable to pay its debts as such debts become
due.
12.2 Effect of Arbitration. Notwithstanding the provisions of Section 12.1
hereof, if the Event of Default or the asserted default giving rise to same is
subject to arbitration pursuant hereto, and the existence of such Event of
Default or asserted default is being contested by the party assertedly in
default, then, if and so long as such party is cooperating and acting in good
faith to complete the arbitration proceeding with respect thereto as
expeditiously as possible, the time for curing such asserted default shall
commence upon the rendering of the arbitration decision with respect thereto, or
other resolution thereof, whichever occurs first.
12.3 Remedies of Colonial.
(a) In addition to all of the rights and remedies available to
Colonial by law or equity (other than termination of this Agreement which shall
be available as a remedy for an Event of Default only as provided in this
Section 12.3), at any time after the occurrence of any Event of Default on the
part of PTI:
(i) in the event that such Event of Default is a recurring
and/or flagrant breach of this Agreement and materially and adversely
affects the safety or operation of the Colonial Pipeline, Colonial shall
have the right to terminate this Agreement immediately upon written notice
to PTI; and
(ii) in the event that such Event of Default is not of the type
and nature described in clause (i) of this Subsection 12.3(a), but
constitutes a material breach of a material covenant of PTI under this
Agreement, Colonial shall have the right, upon written notice to PTI, to
suspend immediately all then pending and future installation, construction
and/or deployment of the Telecommunications Network on or about any
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Segment or applicable portion thereof with respect to which the Event of
Default has occurred until such time as the applicable Event of Default is
cured or PTI demonstrates to Colonial's reasonable satisfaction that PTI
has taken such steps and/or implemented such procedures so that the
particular Event of Default in question will not recur.
(b) In the event of any failure on the part of PTI to pay any
sum of money, or to do any act or to satisfy any of the obligations or covenants
that it is required to pay, do or perform under the provisions of this
Agreement, Colonial, at its option, after notice to PTI, may pay any or all of
such sums, or perform any or all of such acts, obligations or covenants or incur
any other expense whatsoever in order to remedy such failure on the part of PTI.
In such event, PTI shall reimburse Colonial for all costs and expenses of any
nature whatsoever incurred by Colonial in connection therewith, together with
interest at the Default Rate provided in Section 17.12 hereof, such interest to
be calculated from and after the date payment is made by Colonial or the expense
is incurred.
12.4 Effect of Termination. At the expiration of the Term or any earlier
termination of this Agreement, whether pursuant to this Article XII or
otherwise, all rights and privileges of PTI and all duties and obligations of
Colonial hereunder shall terminate. Within one hundred eighty (180) days
thereafter, PTI shall remove all above-ground facilities of the
Telecommunications Network and only such underground facilities that Colonial
reasonably requests be removed so as to avoid future interference with Colonial
pipeline operations; provided, however, that PTI may remove fiber optic cables
from within any Conduits (but not the actual Conduits) if such removal of fiber
optic cables may be performed without the use of heavy machinery in and about
the Colonial Rights-of-Way and without the need to dig or excavate within any
portion of the Colonial Rights-of-Way. Any facilities not removed within the
foregoing time period shall become the sole property of Colonial, free and clear
of any and all claims of PTI, without the payment of compensation or
consideration of any kind to PTI. Immediately upon such termination of the
Agreement, and without further notice to any other party, Colonial shall have
the right to assert, perfect, establish or confirm all rights reverting to
Colonial by reason of such termination by any means permitted by law. Subject
only to the rights and obligations of PTI to remove certain facilities as
described in the second sentence of this Section 12,4, and the continuing rights
of any bona fide third party purchasers or assignees who have complied with the
provisions of Subsections 15.1(c) or (d) hereof, as applicable, such rights
shall include, without limitation, the right to take possession of the property
leased to PTI hereunder, together with all improvements thereto, fixtures
therein and any other alterations or improvements that may have been made to the
property leased hereunder (including, without limitation, the Telecommunications
Network), with or without process of law, and to remove, at the option of
Colonial, any such items from the property licensed to PTI hereby, thereby
wholly terminating any right, title, interest or claim of or through PTI as to
such property. If Colonial exercises any such rights, it shall not incur any
liability to PTI for any damage caused or sustained by reason of such entry or
removal, except for damage resulting from Colonial's gross negligence or willful
misconduct in effecting such removal.
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12.5 Event of Default by Colonial.
(a) Subject to the other provisions of this Article XII, it shall be
an Event of Default by Colonial hereunder if Colonial shall be in breach of, or
Colonial shall fail to perform, comply with or observe any term, covenant,
warranty, condition, agreement or undertaking contained in or arising under this
Agreement and such failure continues for a period of thirty (30) days after
written notice thereof is given by PTI to Colonial; provided, however, if such
default is a non-monetary default and is not susceptible of being cured within
thirty (30) days, no Event of Default shall have occurred hereunder by Colonial
if it commences commercially reasonable efforts to cure such default within such
thirty (30) day period and diligently pursues the same to completion within a
reasonable time thereafter, not to exceed a total of one hundred fifty (150)
days.
(b) At any time after the occurrence of an Event of Default on the
part of Colonial, PTI may exercise any and all rights or remedies available to
PTI at law or in equity, subject only to any limitations expressly set forth in
this Agreement.
12.6 No Waivers. No failure by any party hereto to insist upon the strict
performance of any provisions of this Agreement or to exercise any right, power
or remedy consequent to any breach thereof, and no waiver of any such breach,
during the continuance thereof, shall constitute a waiver of any such breach or
of any such provision or otherwise be deemed to affect or alter this Agreement.
In any such event, this Agreement shall continue in full force and effect, and
the rights of any party hereto with respect to any other then-existing breach or
subsequent breach shall remain unaffected thereby.
12.7 No Remedy Exclusive. Except as expressly provided in this Article 12,
no remedy herein conferred or reserved to Colonial or PTI is intended to be
exclusive of any other available remedy or remedies, but each and every such
remedy shall be cumulative, and shall be in addition to every other remedy given
under this Agreement or now or hereafter existing at law or in equity or by
statute. The exercise of any right or remedy should not be construed as an
election of remedies and shall not preclude the right to exercise any other
right or remedy. No delay or failure to exercise any right or power accruing
upon any default or Event of Default shall impair any such right or power or
shall be construed to be a waiver thereof, but any such right and power may be
exercised from time to time and as often as may be deemed expedient. In order to
entitle Colonial or PTI to exercise any remedy reserved to Colonial or PTI in
this Article XII, it shall not be necessary to give any notice, other than such
notice as is herein expressly required by this Agreement.
12.8 Force Majeure. Neither party shall be in default under this Agreement
with respect to any delay in such party's performance, and all time periods
shall be deemed suspended, to the extent resulting from any of the following
conditions: act of God, fire, flood, material shortage or unavailability, lack
of transportation, compliance with Applicable Laws, war or civil disorder, or
any other cause beyond the reasonable control of such party, provided that the
party claiming relief under this Section 12.8 shall notify the other party
promptly in writing of the existence of the event upon which such relief is
claimed and further as to the cessation or
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termination of said event. The party claiming relief under this Section 12.8
shall exercise reasonable efforts to minimize the time for any such delay.
12.9 No Personal Liability. Each action or claim against any party arising
under or relating to this Agreement shall be made only against such party as a
corporation, and any liability relating thereto shall be enforceable only
against the corporate assets of such party. No party shall seek to pierce the
corporate veil or otherwise seek to impose any liability relating to, or arising
from, this Agreement against any shareholder, employee, officer or director of
the other party. Each of such persons is an intended beneficiary of the mutual
promises set forth in this Article XII and shall be entitled to enforce the
obligations of this Article XII.
ARTICLE XIII
VOLUNTARY REMOVAL OF TELECOMMUNICATIONS NETWORK
13.1 Removal of Telecommunications Network by PTI. Provided that an Event
of Default by PTI is not continuing to be in effect at such time, PTI may remove
any portion of the Telecommunications Network from any Segment (except for the
Colonial Conduit and any Regen Facility or other Related Facility that PTI has
made available for use by Colonial in connection with the Colonial Conduit, all
of which must remain in place and intact in all events) (it being acknowledged
herein that PTI has no obligation hereunder to provide any such Regen Facility
or Related Facility for Colonial's use), provided that as to underground
facilities, PTI will provide Colonial with written notice of its intention so to
remove, given (a) at least thirty (30) days prior to the date of such removal,
and (b) not less than one (1) year prior to the expiration of the Term. Such
notice also will state whether PTI intends to replace the underground portion of
the Telecommunications Network so removed. Upon the occurrence of an Event of
Default, PTI's rights of removal hereunder shall be suspended until such time as
such Event of Default has been cured.
ARTICLE XIV
ARBITRATION
14.1 Arbitration. In the event any dispute or disagreement arising between
Colonial and PTI in connection with this Agreement or the Fiber Optic Access and
Purchase Agreement is not settled to the mutual satisfaction of Colonial and PTI
within thirty (30) days from the date that either party informs the other in
writing that such dispute or disagreement exists, then either party may demand
arbitration by notifying the other party in writing (a "Notice of Arbitration")
in accordance with the notice provisions of Section 17.1. The Notice of
Arbitration shall describe the reasons for such demand, the amount involved, if
any, and the particular remedy sought.
14.2 Selection of Arbitrators. The parties shall attempt to agree upon a
single arbitrator; however, if the parties are unable to agree upon a single
arbitrator within fifteen (15) days after the Notice of Arbitration, then each
party shall select an arbitrator within five (5) Business Days of the expiration
of the initial fifteen (15) day period. Upon the appointment of the two
arbitrators, and before exchanging views as to the question at issue, said two
arbitrators
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so selected shall appoint in writing a third arbitrator within ten (10) days of
the selection of both of the first two arbitrators and shall give written notice
of such appointment to the parties. If the two arbitrators fail to appoint a
third arbitrator in a timely manner, then either party may apply to the United
States District Court for the Northern District of Georgia for the appointment
of such third arbitrator.
14.3 Qualified Arbitrator. Any arbitrator selected in accordance with
Section 14.2 shall be a natural person not employed by either of the parties or
any parent or affiliated partnership, corporation or other enterprise thereof
and shall be knowledgeable and experienced in the matters sought to be
arbitrated. In the event that the matter to be arbitrated deals with
construction or engineering issues, the arbitrator so appointed shall be
experienced and knowledgeable in the construction and engineering industry as it
relates to the nature of the structure to which such arbitration applies. In the
event any arbitrator selected as aforesaid thereafter shall die or become unable
or unwilling to act, such arbitrator's successor shall be selected in the same
manner provided in Section 14.2.
14.4 Arbitration Hearing; Discovery; Venue. The arbitration hearing shall
commence within thirty (30) calendar days of appointment of the single or third
arbitrator, as applicable, as described in Section 14.2. There shall be no
dispositive motion practice (such as motions for summary judgment or to dismiss
or the like) except as may be permitted by the arbitrators. All arbitration
shall be conducted in accordance with the rules of the American Arbitration
Association, except that discovery shall be permitted in accordance with the
Federal Rules of Civil Procedure. Venue of any arbitration hearing pursuant to
this Article XIV shall be in the metropolitan Atlanta, Georgia area. Each party
shall bear the cost of preparing and executing its own case.
14.5 Decision. The arbitrators' decision shall be made in no event later
than thirty (30) calendar days after the conclusion of the arbitration hearing
described in Section 14.4. The award shall be final and binding upon the parties
and shall include written findings of law and fact, and judgment may be entered
thereon by either party in any court having competent jurisdiction thereof. The
arbitrators may award specific performance of this Agreement. The arbitrators
may also require remedial measures as part of any award. The cost of the
arbitration, including the fees and expenses of the arbitrator(s), shall be
shared equally by the parties hereto unless the award otherwise provides.
14.6 Non-Binding in Certain Events. Notwithstanding any provision to the
contrary in this Article XIV, the obligation herein to arbitrate shall not be
binding upon any party with respect to requests for preliminary injunctions,
temporary restraining orders or other procedures in a court of competent
jurisdiction to obtain interim relief when deemed necessary by such court to
preserve the status quo or to prevent irreparable injury pending resolution by
arbitration of the actual dispute.
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ARTICLE XV
ASSIGNMENT
15.1 Assignment by PTI.
(a) Except as expressly provided in this Section 15.1 below, PTI
shall not assign or otherwise transfer this Agreement or its rights, covenants,
liabilities or obligations hereunder, in whole or in part, to any other party
without the prior written consent of Colonial. Nothing herein shall prohibit PTI
from involving strategic or co-development partners or customers in connection
with its performance hereunder, on such terms as PTI may determine in its sole
discretion, provided (i) all such activities are conducted in accordance with
the terms of this Agreement; (ii) PTI shall not be released from, and shall
remain fully liable to Colonial for all of its covenants, liabilities and
obligations hereunder and the acts or omissions of all parties claiming by,
through or under PTI; (iii) PTI remains the sole point of contact with Colonial;
and (iv) all activities of parties claiming by, through or under PTI on Colonial
Rights-of-Way are conducted under PTI's supervision.
(b) PTI shall have the right, without Colonial's consent, to assign
or otherwise transfer this Agreement (i) to any entity that, indirectly or
directly, is controlled by, controls or is under common control with PTI, or to
any entity into which PTI may be merged or consolidated or which purchases all
or substantially all of the assets of PTI; or (ii) as collateral in connection
with any financings by any lender; provided, however, that (x) any such
assignment or transfer described in this Subsection 15.1(b) shall be subject and
subordinate in all respects to this Agreement and to Colonial's rights as the
owner of the Colonial Rights-of-Way; (y) any such assignee or transferee
described in clause (i) above shall continue to perform PTI's obligations to
Colonial under the terms and conditions of this Agreement; and (z) any lender
described in clause (ii) above shall have the right to assume all (but not part)
of PTI's rights and obligations under this Agreement. In the event of any
permitted partial assignment of any rights hereunder or in any portion of the
Telecommunications Network, PTI shall remain the sole point of contact with
Colonial.
15.2 Assignment by Colonial. Colonial shall have the right to assign,
license or otherwise transfer this Agreement and/or its rights or obligations
hereunder as it pertains to a particular Segment (or discrete portion thereof)
of the Colonial Rights-of-Way, in connection with a sale or other transfer of
Colonial's rights within such Segment (or discrete portion thereof), to any
third party; provided, however, that any such assignment or transfer shall be
made subject to the terms and conditions of this Agreement and any such assignee
or transferee shall continue to perform Colonial's obligations to PTI under the
terms and conditions of this Agreement. Colonial also shall have the right,
without PTI's consent, to assign or otherwise transfer this Agreement and/or its
rights or obligations hereunder: (i) to any entity that, indirectly or directly,
is controlled by, controls or is under common control with Colonial, or to any
entity into which Colonial may be merged or consolidated or which purchases all
or substantially all of the assets of Colonial; or (ii) as collateral in
connection with any financings by any lender.
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15.3 Binding Upon Successors and Assigns. This Agreement and each of the
parties' respective rights and obligations under this Agreement, shall be
binding upon and shall inure to the benefit of the parties hereto and each of
their respective permitted successors and assigns.
ARTICLE XVI
CONFIDENTIALITY
16.1 Confidentiality. If either party provides confidential information to
the other in writing and it is identified as such, the receiving party shall
protect the confidential information from disclosure to third parties with the
same degree of care accorded its own confidential and proprietary information.
Neither party shall be required to hold confidential any information that (a)
becomes publicly available other than through the recipient; (b) is required to
be disclosed by a Governmental Authority or Applicable Law; provided, however,
that the information disclosed is limited to the existence and general nature of
the relationship between the parties, including, as required, the scope,
approximate revenues, purposes and expectations related to such relationship and
a description of any disputes relating thereto; (c) is independently developed
by the disclosing party; or (d) becomes available to the disclosing party
without restriction from a third party. These obligations shall survive any
expiration or termination of this Agreement.
ARTICLE XVII
MISCELLANEOUS
17.1 Notices. All notices, demands, requests, or other writings delivered
pursuant to this Agreement shall be in writing and may be given personally or
may be delivered by depositing the same in the United States mail, certified,
registered or equivalent, return receipt requested, postage prepaid, properly
addressed, and sent to the following addresses:
If to Colonial: Colonial Pipeline Company
945 E. Paces Ferry Rd., N.E.
Atlanta, GA 30326-0855
Attention: General Counsel
Fax: 404-841-2315
with a copy to: Arnall Golden & Gregory, LLP
1201 West Peachtree Street, Suite 2800
Atlanta, Georgia 30309-2450
Attention: Donald I. Hackney, Jr., Esquire
Fax: 404-873-8639
If to PTI: Pathnet Telecommunications, Inc.
1661 Gateway Boulevard
Richardson, Texas 75080
Attention: Senior Vice President, Engineering
Fax: 972-231-9728
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with a copy to: Pathnet Telecommunications, Inc.
1015 31st St., N.W.
Washington, D.C. 20007
Attention: General Counsel
Fax: 202-625-7369
or to such other address as either party may from time to time designate by
written notice to the other party. Notices given by mail as aforesaid shall be
deemed received and effective as of the first Business Day following such
dispatch; provided, however, that if any such notice or other communication also
shall be sent by telecopy or fax machine, such notice shall be deemed given at
the time and on the date of machine transmittal if the sending party receives a
written send verification on its machines and forwards a copy thereof with its
mailed or courier delivered notice or communication.
17.2 No Partnership. Nothing contained herein or in any instrument relating
hereto shall be construed as creating a partnership or joint venture between
Colonial and PTI or between Colonial and any other party, or cause Colonial to
be responsible in any way for the debts or obligations of PTI or any other
party.
17.3 Time of the Essence. Time is hereby expressly declared to be of the
essence of this Agreement and of each and every term, covenant, agreement,
condition and provision hereof.
17.4 Entire Agreement. Except for the Services Agreement and the Fiber
Optic Access and Purchase Agreement, this Agreement constitutes the entire and
final agreement and understanding between the parties with respect to the
subject matter hereof and supersedes all prior agreements relating to the
subject matter hereof, which are of no further force or effect. The Exhibits
referred to herein are integral parts hereof and are hereby made a part of this
Agreement.
17.5 Captions. The captions of this Agreement and the table of contents
preceding this Agreement are for convenience and reference only, and are not a
part of this Agreement, and in no way amplify, define, limit or describe the
scope or intent of this Agreement, nor in any way affect this Agreement.
17.6 Meaning of Terms. Words of any gender in this Agreement shall be held
to include any other gender and words in the singular number shall be held to
include the plural when the sense requires.
17.7 Agreement Construed as a Whole. The language throughout this Agreement
shall be construed as a whole according to its fair meaning and neither strictly
for nor against Colonial or PTI.
17.8 Severability. If any provision of this Agreement or the application
thereof to any person or circumstances shall to any extent be invalid or
unenforceable, the remainder of this Agreement, or the application of such
provision to persons or circumstances other than those as to
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which it is invalid or unenforceable, shall not be affected thereby, and each
provision of this Agreement shall be valid and shall be enforced to the fullest
extent permitted by law.
17.9 Survival. Each provision of this Agreement that may require the
payment of money by, to or on behalf of Colonial or PTI or third parties after
the expiration of the Term hereof or its earlier termination shall survive such
expiration or earlier termination.
17.10 Amendment. This Agreement may be modified or amended only in writing,
signed by a duly authorized officer of both Colonial and PTI.
17.11 Attorneys' Fees. In any proceeding or controversy associated with or
arising out of this Agreement or a claimed or actual breach thereof, or in any
proceeding to recover the possession of the property leased hereunder, the
prevailing party shall be entitled to recover from the other party as a part of
the prevailing party's costs, reasonable attorney's fees, the amount of which
may be fixed by the court and may be made a part of any judgment rendered. For
the purposes of this Agreement, the term "reasonable attorneys' fees" shall mean
legal fees actually incurred by a party at the normal and customary hourly rates
of attorneys experienced in the area of law in dispute and shall not be based
upon a percentage of any amount of any judgment, notwithstanding any statutory
or other presumption to the contrary.
17.12 Interest. Except as otherwise specifically provided herein, any
amounts due from one party to the other pursuant to the terms of this Agreement,
including amounts to be reimbursed one to the other, shall bear interest from
the due date or the date the right to reimbursement accrues at (a) the rate
published or publicly announced most recently prior to such date as the lowest
rate charged by [_____________________], or its successor, for commercial,
short-term unsecured loans, plus (b) two percent (2%) (such sum being referred
to herein as the "Default Rate"); provided, however, that such Default Rate
shall not exceed, in any event, the highest rate of interest which may be
charged under Applicable Law without the creation of liability for penalties or
rights of offset or creation of defenses. For purposes of interest calculations
unless otherwise provided herein, the due date of any amount or the date from
which a right to reimbursement accrues shall be deemed to be the date from which
interest accrues.
17.13 Governing Law. This Agreement shall be construed according to and
governed by the laws of the State of Georgia.
17.14 Business Days. For the purposes of this Agreement, a "Business Day"
shall mean a day on which banks are required to open for the conduct of banking
business at their principal offices under the laws of the State of Georgia. If
this Agreement provides for the performance of any obligation or the expiration
of any time period on or no later than a day that is not a Business Day, then
the applicable day of performance or expiration of the time period shall be
extended until the next succeeding Business Day.
17.15. Reference Date of Agreement. For reference purposes, the date of
this Agreement shall be the date on the first page hereof, irrespective of the
date Colonial or PTI actually executes this Agreement.
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17.16 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original, and all such counterparts
together shall constitute one and the same agreement.
17.17 Exhibits. The Exhibits to this Agreement are:
EXHIBIT DESCRIPTION
------- -----------
Exhibit A System Map
Exhibit B Form of Segment Lease
Exhibit C Form of Right-of-Way Permit
Exhibit D Currently Perfected Segments
Exhibit E General Colonial Construction Standards
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IN WITNESS WHEREOF, Colonial and PTI have executed this Agreement as of the
day and year first above written.
COLONIAL:
COLONIAL PIPELINE COMPANY,
a Delaware corporation
By:
----------------------------------
Name:
----------------------------
Its:
----------------------------
[CORPORATE SEAL]
PTI:
PATHNET TELECOMMUNICATIONS, INC.,
a Delaware corporation
By:
----------------------------------
Name:
----------------------------
Its:
----------------------------
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<PAGE> 37
EXHIBIT A
SYSTEM MAP
(Map of Colonial System)
[to be agreed to by the parties]
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<PAGE> 38
EXHIBIT B
FORM OF SEGMENT LEASE
- --------------------------------------------------------------------------------
SEGMENT LEASE
THIS SEGMENT LEASE (the "Segment Lease"), made this ____ day of
____________, ____, between COLONIAL PIPELINE COMPANY ("Lessor") and PATHNET
TELECOMMUNICATIONS, INC. ("Lessee").
W I T N E S S E T H:
WHEREAS, Lessor and Lessee heretofore have entered into that certain
Master Right-of-Way Lease Agreement (the "Master Lease Agreement"), dated as of
______________, 1999;
WHEREAS, pursuant to the Master Lease Agreement, Lessee has executed
and delivered to Lessor a "Designation Notice", conforming in form and
substance to the requirements of said Master Lease Agreement;
WHEREAS, said Designation Notice describes a "Segment" of the
"Colonial Rights-of-Way", which Segment is more particularly described on
Exhibit A attached hereto and incorporated herein; and
WHEREAS, Lessor and Lessee desire to enter into this Segment Lease
Agreement, in accordance with the terms of the Master Lease Agreement, in order
to evidence the leasing of the Segment to Lessee, subject to all of the terms
and conditions hereof and in the Master Lease Agreement.
NOW, THEREFORE, for and in consideration of the covenants contained
herein, the sum of Ten and No/100 Dollars ($10.00), and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Lessor and Lessee hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined herein
shall have the same meaning as ascribed to such terms in the Master Lease
Agreement.
2. Subject to Section 4 hereof, Lessor hereby leases to Lessee the
Segment on the terms and conditions contained herein and in the Master Lease
Agreement.
3. The term of this Segment Lease shall commence on the date hereof
and, if not otherwise terminated in accordance herewith or in accordance with
the Master Lease Agreement, shall terminate at the expiration of the "Term".
<PAGE> 39
4. The parties hereto acknowledge that, after completion of the
"Perfection Process" with respect to the Segment, Lessor shall execute and
deliver to Lessee a "Permit" for the Segment, in substantially the form set
forth on Exhibit C to the Master Lease Agreement. Notwithstanding any other
provision herein to the contrary, the parties hereto further acknowledge and
agree that, upon the issuance of such Permit with respect to the Segment
described herein, this Segment Lease shall terminate automatically, without the
requirement of any additional action or documentation on the part of either
party, with respect to all portions of the Segment for which Lessee is not
granted specific rights to use under the terms of the applicable Permit.
5. The Master Lease Agreement shall govern and control the use of the
Segment and, upon the issuance of the Permit, the applicable portion of the
Segment described therein. Lessor and Lessee shall comply with all obligations
contained in the Master Lease Agreement that apply to the Segment or the
applicable portion thereof and Lessor and Lessee shall have all rights and
remedies contained in the Master Lease Agreement with respect thereto. Without
limiting in any way the foregoing, Lessee shall not have the right to commence
any "PTI Work" until compliance by Lessee with the applicable provisions of
Sections 3.1 and 3.2 of the Master Lease Agreement.
6. In the event of any inconsistency between any of the terms hereof
and any of the terms of the Master Lease Agreement, the applicable terms of the
Master Lease Agreement shall govern and control.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
this ___ day of _______________, _______________.
LESSOR:
COLONIAL PIPELINE COMPANY
By: __________________________________
Its: __________________________________
[CORPORATE SEAL]
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LESSEE:
PATHNET TELECOMMUNICATIONS, INC.
By: __________________________________
Its: __________________________________
[CORPORATE SEAL]
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<PAGE> 41
EXHIBIT A TO FORM OF SEGMENT LEASE
Description of Segment
[to be agreed to by the Parties]
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<PAGE> 42
EXHIBIT C
FORM OF RIGHT-OF-WAY PERMIT
LEGAL DESCRIPTION OF RIGHT-OF-WAY
Colonial right-of-way of ________________ (INSERT ACCURATE LEGAL DESCRIPTION)
referenced in Segment Lease dated __________ (the "Segment Lease"). Beginning
approximately at Colonial Location No. ___________ and ending approximately at
Colonial Location No. ___________ for a total distance of approximately ______
miles and as further described on attached as-built survey drawings provided by
PTI.
SPECIAL CONDITIONS ON USE OF RIGHT-OF-WAY
Notwithstanding the terms of the Segment Lease, PTI shall have the right to use
only such portions of the Segment that are the subject of the Segment Lease as
are specifically described hereinbelow. PTI telecommunication lines, cables,
conduits and other similar equipment and facilities shall be installed in
conformity with the plans mutually approved by the parties prior to
construction. In general, the specifications anticipate a minimum separation
of ten feet (10') between the telecommunications lines and the nearest Colonial
pipeline. Where the existing right-of-way provides more than fifteen feet
(15') between the Colonial right-of-way boundary and the nearest Colonial
pipeline, the telecommunication lines shall be built five feet (5') from the
edge of the Colonial right-of-way. Said routing is preliminarily depicted as
shown on attached construction drawings and as-built survey drawings provided
by PTI. It is understood that PTI will need as workspace a strip of land
approximately ____ feet (____') in width in which to perform construction work
and that, upon completion of such work, PTI will restore the right-of-way in
accordance with the agreements between Colonial and the Landowners and in
accordance with the Colonial post-construction grassing specifications, but
under no circumstances shall restoration result in the condition of the subject
land being less favorable to the underlying Landowner than the condition
existing prior to such work. Depth of installation, which shall be at least
thirty-six inches (36"), and the determination as to the side of the Colonial
right-of-way on which installation shall occur must be addressed and PTI must
give advance notice to Colonial of the time and place of any construction.
Colonial shall have the right to observe and inspect all construction within
any Colonial right-of-way. All construction work shall be completed within
_________ (____) days of the date hereof and shall be performed lien free and
upon completion of construction PTI shall deliver a final affidavit and lien
waivers from all contractors, subcontractors and other persons performing work
or supplying material or equipment.
<PAGE> 43
ACKNOWLEDGMENT
Colonial and PTI acknowledge that they intend for this Permit to be
incorporated into the Master Right-of-Way Lease Agreement between the parties
dated ____________, 1999 and that this Permit hereby modifies the aforesaid
Segment Lease by limiting the description of the right-of-way leased thereby to
the specific property described herein. The effective date of this Permit is
the last date on which this Permit was signed by either party, as indicated
below.
COLONIAL PIPELINE COMPANY, PATHNET TELECOMMUNICATIONS,
a Delaware corporation INC., a Delaware corporation
By: By:
------------------------- -------------------------
Its: Its:
------------------------ ------------------------
Date: Date:
----------------------- -----------------------
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EXHIBIT D
CURRENTLY PERFECTED SEGMENTS
Listed below are the segments of the Colonial Rights-of-Way that have been
perfected [* * *] by Colonial for telecommunications purposes as of the date of
this Agreement:
[* * *]
- ---------------
[* * *]
<PAGE> 45
EXHIBIT E
GENERAL COLONIAL CONSTRUCTION STANDARDS
A. GENERAL DESCRIPTION OF PROJECT - PROTECTION OF UNDERGROUND PIPELINES
FROM FIBER OPTICS INSTALLATION
This project consists of the protection of underground petroleum pipelines from
a third party's installation of fiber optics cables and related facilities
within the pipeline right of way. These specifications govern all such
installations regardless of their location, rural or urban, regardless of the
width of the right of way, the depth or size of the pipelines, or the size of
the proposed fiber optic conduits.
These specifications are designed to be made a part of any agreement between
Colonial and the fiber optic party encroaching on the pipeline right of way,
its construction contractor and any entity contracted to perform utility
location or inspection services for the benefit of either party (collectively,
the "Company").
B. THE PARTIES ARE CAUTIONED AS FOLLOWS
B.1. The underground pipeline which is the subject of the protective
measures described herein is a carrier of a hazardous and highly volatile
liquid under high pressure. Damage to the pipeline must be avoided in all
circumstances and at any cost. Personal injury and loss of life are not
unlikely if fiber optic construction equipment comes in contact with the
pipeline. Serious damage to property and the environment in the magnitude of
the highest order are a certainty if a leak results from damage to the
pipeline. Damage to the pipelines from such third party installation might
result in an immediate rupture or are likely to weaken the pipeline to the
extent that a leak is inevitable. In either event the resulting damage to the
property and the environment is usually catastrophic.
B.2. The Company, its contractors, agents and subcontractors shall
indemnify, defend and hold Colonial harmless for all injury to all persons or
property, loss and damage resulting from a leak caused directly or indirectly
from installation of the fiber optic facilities contemplated hereunder, and any
direct or indirect consequences therefrom, whether such injury to the pipeline
was caused by negligence, recklessness, or willful misconduct or by a failure
to protect the pipeline as described in these specifications.
B.3. The herein obligations of the Company shall continue for so long
as a pipeline remains within the right of way easement, and shall not be
extinguished upon the sale, assignment or removal of the fiber optic
facilities, and such obligations shall be binding upon up the successors and
assigns of the Company
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<PAGE> 46
C. PRE-CONSTRUCTION REQUIREMENTS
C.1. Subsequent to Colonial providing data regarding its easements,
title, pipeline location and survey, the Company shall coordinate with
Colonial's Right of Way and Engineering departments throughout its title
confirmation, route survey and rights acquisition activities.
C.2. Upon completion of work in C.1, the Company shall prepare
alignment sheets, ownership and construction line lists, and work plans
necessary to prosecute the work described below.
C.3. Among other things, the line lists shall include landowner names,
tenants, special construction provisions, and Colonial shall preview all
instrument forms used to perfect the rights required to install the fiber optic
facilities.
C.4. Among other things, the alignment sheets shall include: the width
of Colonial's easement, the location of Colonial's pipelines, the proposed
location of the Company's facilities and the proposed construction work space
limits and distances of separation of same with pipelines and easement
boundaries.
C.5. Among other things, the work plans shall include a detailed list
of construction procedures, contractors and equipment. Colonial shall be given
the opportunity to preview the Company's proposed construction contracts,
provide comments and recommendations, whereupon the Company shall cooperate
with Colonial to remove all items denoted as "in conflict" with the safety of
Colonial's pipelines, as determined in Colonial's sole and absolute discretion.
Colonial shall inspect and approve all final installations, specifications and
route maps prior to commencing fiber optic installation within its right of way
easements.
C.7. Prior to commencement of construction activities, the Company
shall provide Colonial with a list of all successful bidders contracted to
perform any and all work in prosecution of its construction, as well as the
names of employees and personnel in supervisory positions assigned to such
activity.
C.8. Upon approval of the specifications, Colonial shall furnish a
copy of its detailed encroachment requirements for all phases of fiber optic
line co-location within Colonial's easements. These requirements shall include
but not be limited to: ditching; placement of backfill, replacement of
backfill; tamping and compaction; rock excavation; blasting; road, railroad or
water crossings by trenching, boring, jacking and/or directional drilling; soil
erosion and sedimentation control; equipment traffic paralleling and crossing
the pipeline(s), including requirements for earthen padding, when and how much
is needed; notification; inter-Company communication and landowner relations. A
guided boring head shall be used when boring, jacking or directional drilling
is performed.
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<PAGE> 47
C.9. Colonial and the Company shall compare operating and maintenance
manuals, and revisions shall be made to include the presence of each other's
facilities and what measures shall be taken to protect the other's facilities,
including emergency response procedures and notification instructions.
C.10. All inspectors used to ensure that the installation is performed
to Colonial's standards as expressed herein shall be chosen and trained by
Colonial. Colonial shall provide the Company with a list of its inspection
personnel, and the Company shall submit any objections or suggestions about the
deployment of such personnel and their roles as described below.
D. COMPANY EQUIPMENT EMPLOYED TO INSTALL THE FIBER OPTIC FACILITIES
D.1. The Company shall list and describe all equipment and machinery
which shall be used to construct and install the fiber optic facilities.
D.2. Colonial shall be given the opportunity to review the impact of
the proposed equipment and machinery and amend these specifications to account
for any equipment not anticipated at the time of this Agreement.
D.3. The Company shall make its best efforts to comply with any
Colonial suggestions regarding the use of said equipment and suggested safety
procedures, and cooperate with Colonial to resolve any conflicts ensuing
therefrom.
E. LANDOWNER RELATIONS
E.1. The Company shall include the following landowner relations
activities in prosecution of its construction activities:
(a) Provide personnel to conduct courtesy notifications
to landowners of impending construction activities;
(b) Make arrangements to protect and contain livestock
and other landowner animals and pets;
(c) Take down fences and replace same, repairing any
damage resulting therefrom;
(d) Conduct post construction cleanup activities,
including the reseeding of the construction work
space area with ground cover and erosion control
devices;
(e) Settlement of all off right of way damages, and the
payment of all construction damages not paid in
advance of construction.
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F. SURVEYS AND MAPPING
F.1. The Company shall provide as-built survey personnel during
construction to document actual placement of all underground and above-ground
facilities.
F.2. Alignment sheets of the proposed routing shall be updated monthly
during construction and distributed to designated Colonial offices.
G. APPROVAL OF INSPECTOR
G.1. No fiber optic installation will be allowed to commence in any
Colonial right of way easement without the presence of a Colonial inspector and
such inspector's approval to proceed. Daily work permits shall be obtained from
Colonial for all crews performing excavation or installation within the
easement.
G.2. The inspector is charged with the responsibility of protecting
the pipelines, and any construction activity observed in violation of this
Agreement shall be communicated to the offending equipment operator or other
person acting in violation of this Agreement, whereupon the person performing
the offending activity shall immediately refrain from such activity.
G.3. Failure to refrain from the activity in violation of the terms of
this Agreement shall result in an immediate shut down of such activity until
the Company provides adequate reassurances that corrections have been made to
avoid further occurrence of said activity.
G.4. Failure to observe a shut down order by an inspector shall result
in a breach of this Agreement and subject the Company to the penalties
described in this Agreement under Article ____.
H. LOCATING AND FLAGGING THE FACILITIES, AND MARKING THE CONSTRUCTION
LIMITS
No fiber optic installation will be allowed to commence in any Colonial right
of way easement without the marking of the centerlines of all of Colonial's
existing pipelines and appurtenances, as well as the flagging of the route of
the fiber optics lines and the limits of the construction work space.
H.1. Locating the pipelines shall be accomplished by utilizing a
Metrotech model 810 inductive type finders or equivalent, in the conductive
mode, supported by metal rods probing at the placement of every stake, and then
confirming the location by finding the top of the pipe with a probe rod.
Probing shall only be performed by Colonial personnel, unless approved and
inspected by Colonial's inspector.
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H.2. Flagging stakes on the centerline of the nearest pipeline shall
be made of three-foot (3') wood lathing with red ribbon flagging and shall be
placed at intervals not exceeding fifty feet (50') separation and at all
pipeline P.I. all fence crossing, road and railroad right of way limits and at
all waterway high water marks, along with spray painting of the ground where
the stake enters the earth's surface. Pipeline centerline stakes and fiber
optic line stakes shall be labeled with station numbers at foreign line
crossings, property lines, and the limits of all crossing easements and flagged
with a contrasting color from interval stakes. If pipeline station numbers do
not correspond with Colonial alignment sheets, the route surveyor shall notify
Colonial's inspector and make note of discrepancies on a set of Colonial
alignment sheets designated for changes in surface observations. The pipeline
right of way shall be clear cut or mowed to allow visibility of staking.
Replacement of all stakes is mandatory should they disappear prior to fiber
optic installation.
H.3. The boundary of the work space closest to the pipelines shall be
staked with optic yellow, continuous police-type ribbon draped from stake to
stake, each stake exceeding three feet (3') above ground.
H.4. The centerline of the fiber optic lines shall be staked at
intervals not exceeding fifty feet (50') separation and shall be marked with
optic orange flagging.
H.5. All pipelines must be located to ensure that the pipeline closest
to the proposed installation is identified, however, the Company is required to
flag only the closest pipeline.
I. CONSTRUCTION AND SAFETY
I.1. Placement - All linear fiber optic lines shall be installed near
the outer limits of Colonial's easements, and under no circumstances will
Colonial approve the installation of linear fiber optic lines within ten feet
(10') of the centerline of any of its pipelines.
I.2. If the existing width of Colonial's easement is insufficient to
provide a 10-foot separation, then an easement modification or an new easement
must be acquired.
I.3. Copies of any easement modification or new easements shall be
provided to Colonial prior to commencing installation of the fiber optic lines.
I.4. Machinery and equipment shall only be allowed to cross or travel
across Colonial's pipelines within designated crossing lanes that have been
built up with extra earth padding and/or other protection as approved by
Colonial's inspector. No other work shall be permitted on top of or above
Colonial's pipelines without a written work variance authorization executed by
Colonial's chief engineer, and accompanied by a written description of the work
to be performed.
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I.5. No longitudinal vehicle and equipment traffic over Colonial's
pipelines will be permitted.
I.6. Colonial does not require the installation of fiber optic lines
be at a certain depth, provided, however, that where a crossover is necessary
(a crossover meaning the need to move the fiber optic lines from one side of
Colonial's easement to the other) the fiber optic lines shall be encased in
steel the entire distance of the crossover, and they shall always cross below
Colonial's lines at a minimum clearance of 24 inches. When crossing any
Colonial pipeline, the pipeline crossing location shall be excavated to the
extent that the crossing can be observed without obstruction, and all
excavation within five feet (5') of the outer wall of a pipeline shall be
performed by hand tools, unless authorized by the Colonial inspector. All
crossovers shall be made as near as practical to the perpendicular (90
degrees). The number of crossovers shall be held to an absolute minimum.
I.7. Any surface altering equipment necessary for the installation of
the communication facilities will only be permitted subsequent to the approval
of individual site plans. All installations within Colonial facility property
shall be permitted subsequent to locating all underground pipeline facilities
by Metrotech pipe finders, probing and hand digging to visually spot the
facilities. Any clearing and grading within the easement area shall only be
performed in the presence of a Colonial inspector.
I.8. The installation of cables, conduits, fibers, equipment,
appurtenances and all other facilities, whether above or below ground, shall be
located no less than ten feet (10') from the centerline of any Colonial
pipeline in its right of way, which shall be extended to a minimum distance of
no less than twenty feet (20') at all road and water crossings or in any other
circumstance where installation requires boring or drilling or where soil
conditions dictate.
I.9. No installation shall proceed without the presence of a Colonial
inspector on site and in a position to observe the installation activity.
I.10. No installation shall proceed without the presence of staking
and flagging as described in Section H above.
J. POST-CONSTRUCTION DELIVERABLES
J.1. Within six months of completion of the installation contemplated
herein the Company shall provide Colonial:
(a) "as built" alignment sheets and survey, indicating the
location of fiber optic installations, the depth of the fiber optic facilities
were buried, the distances to the nearest Colonial pipelines, Colonial
stationing and reference to Colonial's alignment sheets; and
(b) updated title information and line lists.
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Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission. These portions are designated "[ * * * ]".
Exhibit 10.8
FIBER OPTIC ACCESS AND PURCHASE AGREEMENT
This FIBER OPTIC ACCESS AND PURCHASE AGREEMENT ("Agreement") is entered
into as of this ___ day of ______________, 1999 between PATHNET
TELECOMMUNICATIONS, INC., a Delaware corporation ("PTI") and COLONIAL PIPELINE
COMPANY, a Delaware and Virginia corporation ("Colonial").
WHEREAS, Colonial and PTI have entered into that certain Contribution
Agreement dated _______________, 1999 (the "Contribution Agreement"), pursuant
to which, among other things, Colonial has agreed to contribute certain assets
to PTI and PTI has agreed to issue certain shares of stock to Colonial, as more
particularly described therein;
WHEREAS, contemporaneous herewith, Colonial and PTI have entered into the
Lease pursuant to which, subject to the terms and conditions of such Lease and
this Agreement, Colonial has leased to PTI specified portions of the Colonial
Rights-of-Way to be designated, from time to time, in order to permit PTI to
construct, install, operate, maintain, replace, reconstruct, remove and/or
relocate (collectively, "Construct or Operate") a Telecommunications Network (as
hereinafter defined);
WHEREAS, Colonial and PTI have entered into the Lease on the condition that
PTI and Colonial agree to certain additional terms regarding PTI's
Telecommunications Network as described herein; and
WHEREAS, Colonial also desires to purchase from PTI, and PTI also desires
to sell to Colonial, a Conduit within PTI's Telecommunications Network, on the
terms and conditions described herein.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and promises of the parties and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
1. Definitions.
For purposes of this Agreement, the following terms shall have the meanings
set forth below:
(a) "Affiliate" shall mean an entity that, directly or indirectly, is
controlled, under common control with, or controls another entity, or
the successor to an entity by merger or purchase of all or
substantially all of such entity's stock or assets.
(b) "Colonial Conduit" shall be defined as provided in Section 7 hereof.
(c) "Colonial Rights-of-Way" shall have the meaning ascribed to such term
in the Lease.
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(d) "Colonial System" shall have the meaning ascribed to such term in the
Lease.
(e) "Conduits" shall have the meaning ascribed to such term in the Lease.
(f) "Designated Affiliate" shall mean the entities named in Exhibit B,
attached hereto and incorporated by reference herein.
(g) "Disposition" in reference to the Colonial Conduit or to any
telecommunications capacity shall mean the sale, assignment, barter,
swap, lease, license, sub-license, making available to, or other
transfer or grant of rights therein or in respect thereof, and the
terms "Dispose" and "Disposed" shall be interpreted accordingly.
(h) "Landowner" shall have the meaning ascribed to such term in the Lease.
(i) "Lease" shall mean that certain Master Right-of-Way Lease Agreement
entered into by Colonial and PTI in substantially the form attached as
Exhibit A hereto.
(j) "Lease Date" shall mean the date on which the Lease is executed and
becomes binding and effective on the parties thereto.
(k) "Restriction Release Date" shall mean the earlier of the date (i)
which is five (5) years following the Lease Date; or (ii) on which
PTI makes an assignment for the benefit of creditors, files a
voluntary petition in bankruptcy, or an involuntary petition in
bankruptcy is filed against PTI (unless such petition is dismissed or
stayed within ninety (90) days).
(l) "Segment" shall have the meaning ascribed to such term in the Lease.
(m) "Telecommunications Network" shall mean a network or other
communications system capable of transmitting voice, data, images or
other information over strands of optical fiber, copper wire, radio
waves, or other transmission media.
2. Right to Lease. Upon the closing of the transaction contemplated by
the Contribution Agreement, PTI and Colonial shall enter into the Lease and all
other documentation reasonably necessary to more fully effectuate the terms
thereof.
3. Limited Exclusivity. Except with respect to the Colonial Conduit
(which can be commercialized or used in accordance with the provisions of
Section 7 below) and as otherwise contemplated hereunder and in the Lease, for a
period of ten (10) years following the Lease Date:
(a) Colonial shall not, directly or indirectly, lease to, license to,
make available to, or otherwise permit the use of by any other party,
including, without limitation, any Affiliates of Colonial, any portion of
the Colonial Rights-of-Way for the Construction or Operation of a
Telecommunications Network; and
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<PAGE> 3
(b) Colonial shall not, directly or indirectly, use or permit the use
of any portion of the Colonial Rights-of-Way for the Construction or
Operation of a Telecommunications Network.
The foregoing restrictions shall not apply to any portion of the Colonial
Rights-of-Way that reverts to Colonial pursuant to Section 1.4 of the Lease.
4. Provision of Telecommunications Capacity to Colonial. Subject to
availability, as determined by PTI from time to time in its reasonable
discretion and taking into account the reasonably anticipated level of traffic
on PTI's Telecommunications Network, Colonial shall have the right to purchase
telecommunications capacity on PTI's Telecommunications Network at the best
price and terms that such capacity has been or is being offered by PTI to its
preferred customers. The foregoing telecommunications capacity may not be used
in any manner that competes with PTI or its Affiliates, including, without
limitation, used for any purpose other than for the internal communications
purposes of Colonial and its Affiliates, and may not be Disposed of or used in
connection with any other Telecommunications Network or any other
telecommunications venture or business.
5. Compensation for Similar Transactions. If, at any time from the date
of this Agreement until [ * * * ], PTI and/or one of its affiliates or
successors shall enter into an agreement or other contractual relationship with
any Designated Affiliate pursuant to which PTI and/or one of its Affiliates or
successors shall have the right or license to use, lease or occupy all or
portions of the right-of-way of one or more of the Designated Affiliates for
development of a Telecommunications Network, PTI shall pay to Colonial a fee
equal to [ * * * ] per mile of right-of-way which is covered by each such
agreement or relationship. The payment of such fee shall be made within ten (10)
business days of the execution of such agreement or other contractual
relationship.
6. [INTENTIONALLY DELETED]
7. Purchase and Sale of Colonial Conduit.
(a) In addition to the transactions contemplated by the Contribution
Agreement, but simultaneously with the closing of such transactions, Colonial
shall pay to PTI the sum of Four Million Dollars ($4,000,000.00). In
consideration thereof, PTI agrees that along: (i) any Segment of the Colonial
Rights-of-Way in which PTI installs Conduits and in which Colonial's engineers
have determined that PTI can install eight (8) or more Conduits within such
Segment or applicable portion thereof; (ii) any Segment of the Colonial
Rights-of-Way in which PTI notifies Colonial that it desires to commercialize
and deploy less than [ * * * ]; and (iii) any other rights-of-way acquired by
PTI along the market corridor of the Colonial System that are necessary as
substitutions for or supplements to portions of the Colonial Rights-of-Way in
which PTI installs Conduits, PTI will
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<PAGE> 4
convey one such Conduit installed by PTI within any such Segment or substituted
area to Colonial for the exclusive use, ownership or control by Colonial, its
successors and assigns (as applicable, the "Colonial Conduit"); provided,
however, that Colonial shall be entitled to only [ * * * ] of Colonial Conduit
in the aggregate.
(b) Colonial shall own and have full title to such Colonial Conduit
from and after the installation thereof within any such Segment or substituted
area, and PTI promptly thereafter shall execute such documents as shall be
reasonably required to evidence the title thereto vested in Colonial. PTI
covenants and agrees not to assign, mortgage, hypothecate, pledge, encumber,
permit a lien to be placed on, or otherwise transfer all or any portion of the
Colonial Conduit.
(c) Notwithstanding the foregoing Subsection 7(a), the parties hereto
agree and acknowledge that:
(i) (aa) in the event that [ * * * ] have determined that the
installation by PTI of at least [ * * * ] within a particular Segment or
applicable portion thereof is not commercially feasible because of [ * * *]
and (bb) if PTI desires to commercialize and deploy all of the available
Conduits permitted by Colonial within such Segment, then there will not be
a Colonial Conduit available for the exclusive use by Colonial within that
Segment or the applicable portion thereof; and
(ii) as of the fifth (5th) anniversary of the Lease Date, PTI may
not have installed its Telecommunications Network (and, thus, the Colonial
Conduit) within Segments aggregating at least 2,200 miles of the Colonial
System.
In either of the circumstances described in clauses (i) and (ii) above, the
parties will negotiate in good faith to make available to Colonial, at no
charge, a suitable alternative to such Colonial Conduit, which alternative may
include the right to use fiber within a conduit, the right to an undivided
percentage interest in a conduit, and/or the right to use fibers or conduit on
other portions of PTI's network, in each case such alternative having a fair
market value comparable to such of the Colonial Conduit as shall have not been
provided. Within (x) six (6) months (if during the first year of this
Agreement), or (y) two (2) months (if after the first year of this Agreement)
after Colonial has knowledge that there will not be a Colonial Conduit
available in a particular Segment or portion of the Colonial System, Colonial
may deliver written notice to PTI (the "Equivalency Request Notice"),
designating the nature and type of equivalency that Colonial requests to
receive from and after the Restriction Release Date. If Colonial and PTI have
not agreed on the nature and type of such equivalency within thirty (30) days
after PTI's receipt of the Equivalency Request Notice, then either party may
institute arbitration proceedings in accordance with Section 14 of the Lease.
(d) Until the Restriction Release Date:
(i) the Colonial Conduit may not be used in any manner that
competes or facilitates competition with PTI or its Affiliates;
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(ii) the Colonial Conduit may be used only for the internal
communications purposes of Colonial and its Affiliates; provided that,
although Colonial may be reimbursed by any such Affiliates for applicable
costs and expenses, Colonial may not earn a profit on such operations for
internal communications purposes; and
(iii) neither the Colonial Conduit, nor any optical fibers or
other communications media installed therein, nor any capacity on such
media, may be Disposed of or otherwise made available to third parties, or
(other than as set forth in item (ii) above) used in connection with any
Telecommunications Network or any other telecommunications venture or
business.
(e) From and after the Restriction Release Date, Colonial shall be
free to sell, assign, license or transfer the Colonial Conduit or any portion
thereof to any third party whatsoever, subject, however, to the provisions of
Section 8 below.
(f) Prior to the Restriction Release Date, PTI will maintain the
Colonial Conduit in the same manner as applies to PTI's maintenance activities
on the Colonial Rights-of-Way under the terms of the Lease so that such Colonial
Conduit is equal to or better in quality and capacity as the conduit in all
other portions of the PTI Telecommunications Network. After the Restriction
Release Date, PTI shall have no responsibility in connection with the
maintenance of the Colonial Conduit.
(g) From and after the date hereof, Colonial will be responsible for
all expenses (other than those described in Subsection 7(f) above) of operating
the Colonial Conduit for the purposes described Subsections 7(d)(ii) and 7(e)
above, as applicable. Furthermore, PTI shall not be responsible for any taxes
that are attributable to the existence and use of the Colonial Conduit by
Colonial; provided, however, that nothing herein shall be deemed to acknowledge
or imply that any taxes necessarily will be imposed upon or attributable to the
existence and use of the Colonial Conduit by Colonial.
8. Disposition of the Colonial Conduit.
(a) Subject to Subsection 8(d) below, PTI and its Affiliates shall
have a right of first refusal as to the Colonial Conduit as described in this
Subsection 8(a) (the "Right of First Refusal"). During the period beginning on
the Restriction Release Date and ending on the [ * * * ] anniversary of the
Lease Date, in the event that Colonial desires to Dispose of the Colonial
Conduit, in whole or in part, Colonial shall provide written notice to PTI
describing the terms of such Disposition, including the price of the
Disposition, the term of any lease or license, and the identity of the proposed
transferee (the "Notice of Terms"). Within sixty (60) days thereafter, PTI may
elect, upon written notice to Colonial, to accept the Disposition on the terms
described in Colonial's Notice of Terms. In the event that PTI so elects to
accept such Notice of Terms, Colonial shall Dispose of the Colonial Conduit to
PTI on the terms set forth in such Notice of Terms or on such other terms as
the parties may mutually agree. If PTI fails to make such election within such
sixty (60) day period, PTI shall be deemed to have declined the
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opportunity to exercise its Right-of-First Refusal as proposed by Colonial in
the Notice of Terms.
(b) In the event that PTI declines or is deemed to have declined the
opportunity to exercise its Right of First Refusal, Colonial shall be free to
Dispose of the Colonial Conduit to the transferee proposed in the Notice of
Terms on terms not materially different than the terms so described in the
Notice of Terms, provided that if Colonial and the transferee fail to consummate
the Disposition within ninety (90) days of the date PTI declines or is deemed
to have declined the Right of First Refusal, then PTI will again have a Right
of First Refusal as to the portion of the Colonial Conduit described in the
Notice of Terms.
(c) Provided Colonial complies with the foregoing provisions, the
consummation of any Disposition of a portion of the Colonial Conduit will
extinguish PTI's Right of First Refusal as to such portion, unless the
Disposition is for a period that terminates prior to the [ * * * ] of the Lease
Date, in which event, upon expiration of such Disposition, PTI will again have a
Right of First Refusal as to such portion on the terms set forth in Subsection
8(a) above.
(d) The foregoing Right of First Refusal shall apply only to the
extent that the Colonial Conduit or any applicable portion thereof [ * * * ].
9. Confidentiality. The parties hereto shall keep confidential all terms
of this Agreement, except to the extent that disclosure thereof is required by
law, agreed by the parties in writing. In the event either party hereto is
required to disclose any terms of this Agreement pursuant to applicable law, at
least three (3) days prior to disclosing the same (or such shorter period
permitted by law), such party shall notify the other party hereto in writing and
provide copies of the terms that the party intends to disclose. The language of
the press release announcing this transaction shall be mutually agreed upon
between the parties hereto. The parties acknowledge that the transaction
contemplated herein is part of a larger transaction in which certain other
parties are contemplating contribution of right of way to PTI in exchange for
equity interests in PTI and that disclosure of certain terms of this Agreement
to such parties may be necessary or appropriate in connection with the larger
transaction. PTI shall be permitted to make such disclosures, provided that PTI
limits such disclosures to the extent reasonably necessary to consummate the
larger transaction.
10. Assignment.
(a) Neither this Agreement, nor any of the rights granted to PTI by
the terms of this Agreement, shall be assigned by PTI without Colonial's prior
written consent, which shall not be unreasonably withheld, except that PTI may,
upon prior notice to Colonial, but without the necessity of obtaining Colonial's
prior consent, assign this Agreement to an Affiliate of PTI. Nothing herein
shall prohibit PTI from involving customers or strategic or co-development
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partners in development of the Telecommunications Systems within the Colonial
Rights-of-Way on such terms as PTI may determine in its sole discretion,
provided that: (i) all such activities are conducted in accordance with the
terms of this Agreement and the Lease, (ii) PTI shall not be released from, and
shall remain fully liable to Colonial for all of its covenants, liabilities and
obligations hereunder and under the Lease and for the acts or omissions of all
parties claiming by, through or under PTI within any Colonial Rights-of-Way;
(iii) PTI shall remain the sole point of contact with Colonial; and (iv) all
activities of parties claiming by, through or under PTI within any Colonial
Rights-of-Way are conducted under PTI's supervision.
(b) Colonial shall have the right to assign, license or otherwise
transfer this Agreement and/or its rights or obligations hereunder as it
pertains to a particular Segment (or discrete portion thereof) of the Colonial
Rights-of-Way in connection with a sale or other transfer of Colonial's rights
within such Segment (or discrete portion thereof) to any third party; provided,
however, that any such assignment or transfer shall be made subject to the terms
and conditions of this Agreement and any such assignee or transferee shall
continue to perform Colonial's obligations to PTI under the terms and conditions
of this Agreement. In addition to Colonial's rights under Subsection 7(c)
hereof, Colonial also shall have the right, without PTI's consent, to assign or
otherwise transfer this Agreement and/or its rights or obligations hereunder:
(i) to any entity that, indirectly or directly, is controlled by, controls or is
under common control with Colonial, or to any entity into which Colonial may be
merged or consolidated or which purchases all or substantially all of the assets
of Colonial; or (ii) as collateral in connection with any financings by any
lender.
11. Notices. All notices, demands, requests, or other writings delivered
pursuant to this Agreement shall be in writing and may be given personally or
may be delivered by depositing the same in the United States mail, certified,
registered or equivalent, return receipt requested, postage prepaid, properly
addressed, and sent to the following addresses:
If to Colonial: Colonial Pipeline Company
945 E. Paces Ferry Rd., N.E.
Atlanta, Georgia 30326-0855
Attention: General Counsel
Fax: 404-841-2315
with a copy to: Arnall Golden & Gregory, LLP
1201 West Peachtree Street, Suite 2800
Atlanta, Georgia 30309-2450
Attention: Donald I. Hackney, Jr., Esquire
Fax: 404-873-8639
If to PTI: Pathnet Telecommunications, Inc.
1661 Gateway Boulevard
Richardson, Texas 75080
Attention: Senior Vice President, Engineering
Fax: 972-231-9728
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with a copy to: Pathnet Telecommunications, Inc.
1015 31st St., N.W.
Washington, D.C. 20007
Attention: General Counsel
Fax: 202-625-7369
or to such other address as either party may from time to time designate by
written notice to the other party. Notices given by mail as aforesaid shall be
deemed received and effective as of the first Business Day following such
dispatch; provided, however, that if any such notice or other communication also
shall be sent by telecopy or fax machine, such notice shall be deemed given at
the time and on the date of machine transmittal if the sending party receives a
written send verification on its machines and forwards a copy thereof with its
mailed or courier delivered notice or communication.
12. Force Majeure. Any failure or delay in the performance by a party
hereto of its obligations hereunder shall not constitute a breach of this
Agreement, and each party's obligations to complete actions by specific
deadlines shall be delayed, to the extent attributable to causes beyond that
party's control, including, but not limited to, acts of God, governmental action
(whether in its sovereign or contractual capacity), fire, flood, or other
catastrophe, national emergency, insurrection, riot, and war.
13. Severability. If any provision of this Agreement or the application
thereof, shall be held invalid, illegal or unenforceable in whole or in part,
the remainder of this Agreement and the application thereof shall not be
affected, and shall be enforceable to the full extent permitted by law, and the
portion hereof found to be invalid shall be enforced to the fullest extent
permitted by law, and, if possible, shall be reformed to carry out as much as
possible the intent of the parties as expressed herein.
14. Amendment. This Agreement may be amended only by a written instrument
executed by both parties hereto. No failure to exercise and no delay in
exercising, on the part of a party hereto, any right, power or privilege
hereunder shall operate as a waiver of any other provision of this Agreement, or
as a waiver of that right, power or privilege either before, or after, the
period of waiver.
15. Entire Agreement. This Agreement and all Exhibits attached hereto,
constitute the entire agreement of the parties hereto with respect to the
subject matters hereof, and supersede any and all prior negotiations,
understandings and agreements, whether oral or written with respect hereto.
16. Applicable Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Georgia, without regard to the
conflicts of laws provisions thereof.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, authorized representatives of Colonial and PTI have
executed this Agreement as of the date first set forth herein.
COLONIAL PIPELINE COMPANY PATHNET TELECOMMUNICATIONS, INC.
By: By:
---------------------------- -----------------------------
Name: Name:
Title: Title:
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EXHIBIT A
FORM OF LEASE
(SEE EXHIBIT 10.7)
<PAGE> 11
EXHIBIT B
DESIGNATED AFFILIATES
1. Specified Companies.
Capline Pipeline Company
Chicap Pipeline
Cushing-Chicago Pipeline
Dixie Pipeline Company
Explorer Pipeline Company
Inland Corporation
Kaw Pipeline
Olympic Pipeline
West Shore Pipe Line (Including Badger)
West Texas Gulf Pipe Line
Wolverine Pipe Line
Yellowstone Pipe Line
2. Affiliates of Colonial's Owners.
All pipeline companies in which 75% or more of the outstanding voting equity
interests therein are held by one or more entities which are 100% owned,
directly or indirectly, by any one or more of: (i) the following current owners
of Colonial's outstanding common stock (the "Colonial Owners"); (ii) any entity
which is the 100% owner, directly or indirectly, of such Colonial Owners; or
(iii) any entity that is 100% owned, directly or indirectly, by any of the
entities included in clause (ii). For purposes of this paragraph, the Colonial
Owners shall consist of:
Atlantic Richfield Company (ARCO Pipeline)
Amoco Pipeline Holding Company (BP Amoco Pipeline)
CITGO Pipeline Investment Company
Conoco Pipe Line Company
Koch Petroleum Corporation
Marathon Oil Company (Marathon Ashland Pipe Line, LLC)
Mobil Pipe Line Company
Phillips Petroleum International Investment Company
Texaco Trading and Transporation Inc. (Equilon Pipeline Company, LLC)
Union Oil Company of California
<PAGE> 1
EXHIBIT 10.9
OPTION AGREEMENT
This Option Agreement is made as of _______________, 1999, by and
between Pathnet Telecommunications, Inc., a Delaware corporation (the
"Company"), and Colonial Pipeline Company, a Delaware and Virginia corporation
("Colonial").
W I T N E S S E T H:
WHEREAS, on November __, 1999, the parties hereto entered into that
certain Contribution Agreement (the "Contribution Agreement") pursuant to which
Colonial has agreed to contribute to the Company cash and certain property, on
the terms and conditions described therein; and
WHEREAS, in consideration for such contributions, the Company has agreed
to issue to Colonial certain shares of the Company's Series D Convertible
Preferred Stock, par value $0.01 per share ("Series D Preferred Stock") and
certain shares of the Company's Series E Convertible Preferred Stock, par value
$0.01 per share ("Series E Preferred Stock"); and
WHEREAS, pursuant to the Contribution Agreement, the Company has also
agreed to grant (a) an option to purchase additional shares of its Series E
Convertible Preferred Stock, to be exercised by Colonial (with the approval of
the Company if above the level specified herein) or to be assigned by Colonial
to certain Designated Entities (as defined below) and (b) an option to purchase
shares of its common stock (the "Common Stock") to Colonial if the Company
pursues an Initial Public Offering (as defined below), subject to the terms and
conditions set forth herein.
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:
1. Grant of Options.
(a) In consideration of $1,000,000 paid by Colonial by
electronic wire transfer to the Company upon execution of this Agreement, the
Company hereby grants to Colonial the right and option (the "Preferred Stock
Option") to purchase from the Company all or any part of an aggregate of
1,593,082 shares of Series E Preferred Stock, subject to, and in accordance
with, the terms and conditions set forth in this Agreement. Subject to the
provisions of Section 6, Colonial may assign the Preferred Stock Option in whole
or in part to one or more of the entities listed on Exhibit B attached hereto
and incorporated herein (the "Designated Entities" and, to the extent Colonial
so assigns a portion of the Preferred Stock Option to a Designated Entity, such
Designated Entity is sometimes referred to herein as a "Permitted Purchaser") by
providing written notice to the Company of the name and address of the assignee
and the number of shares subject to the Preferred Stock Option assigned to such
assignee (the "Assigned Option Shares"). To the extent the Preferred Stock
Option is exercised by Colonial for more than 455,166 shares of Series E
Preferred Stock, the exercise with respect to shares in excess of that amount
shall
<PAGE> 2
require the prior written consent of the Company, which may be withheld in the
Company's sole discretion. Any assignment to, or exercise by, a Designated
Entity shall not require the prior written consent of the Company. The grant may
be exercised in whole or in part, but in no event shall the aggregate number of
shares issued to Colonial and the Designated Entities pursuant to the exercise
of the Preferred Stock Option exceed such 1,593,082 shares of Series E Preferred
Stock (subject to adjustment as provided herein).
(b) For value received, the Company hereby grants Colonial
the right and option (the "Common Stock Option") to purchase from the Company up
to a whole number of shares of Common Stock equal to ten percent (10%) of the
total number of shares of Common Stock actually sold in the Company's Initial
Public Offering (excluding any shares issuable upon exercise of any
over-allotment option granted to the underwriters of the Initial Public
Offering), subject to, and in accordance with, the terms and conditions set
forth in this Agreement. As used herein, "Initial Public Offering" means the
closing of a firm commitment underwritten initial public offering for cash
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder from time to time, covering the offer and sale of the
Company's Common Stock to the public. Any shares of Common Stock acquired by
Colonial pursuant to this Section 1(b) shall be subject to the registration
rights granted to Colonial pursuant to the Stockholders Agreement of even date
herewith among the Company and certain of its stockholders (the "Stockholders
Agreement").
2. Term of Options.
(a) The Preferred Stock Option shall be exercisable, in
whole or in part, during the term commencing on the date hereof and ending at
5:00 p.m. on the date (the "Expiration Date") that is the earlier of (i) the
date that is the later to occur of (1) the 120th day after the Agreement Date
(as such term is defined in the Contribution Agreement), and (2) the 15th day
after the Initial Closing Date (as such term is defined in the Contribution
Agreement); or (ii) 15 days after the filing by the Company of a registration
statement under the Securities Act, for an Initial Public Offering; provided,
however, that on and after the date that is the later to occur of (A) the 90th
day after the Agreement Date, and (B) the 15th day after the Initial Closing
Date, the Preferred Stock Option shall be exercisable solely in connection with
the concurrent execution by and between the Company and such of the Permitted
Purchasers as shall seek to exercise such Preferred Stock Option of a mutually
acceptable agreement providing for the purchase, use, lease or other acquisition
by the Company of telecommunications network right-of-way rights from such
Permitted Purchasers, on such terms as the Company and such Permitted Purchaser
or Permitted Purchasers may agree.
(b) Colonial may exercise the Common Stock Option solely in
connection with the Company's Initial Public Offering.
3. Exercise Price.
(a) The price at which the Preferred Stock Option may be
exercised (the "Preferred Exercise Price") shall be $21.97 per share of Series E
Preferred Stock, as adjusted from time to time pursuant to Section 12 hereof.
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<PAGE> 3
(b) The price at which the Common Stock Option may be
exercised (the "Common Exercise Price") shall be ninety percent (90%) of the
initial price per share to the public of the Common Stock being offered in the
Company's Initial Public Offering, as reflected on the cover page of the final
prospectus filed with the Securities and Exchange Commission pursuant to Rule
424(b).
4. Exercise of Options.
(a) The purchase rights represented by the Preferred Stock
Option are exercisable solely by Colonial or, upon assignment, one or more
Permitted Purchasers at any time up to the Expiration Date for (i) all or a
portion of the shares of Series E Preferred Stock specified in Section 1(a), if
exercised by Colonial, or (ii) all or a portion of its respective Assigned
Option Shares, if exercised by a Permitted Purchaser; provided, however, that
the prior written consent of the Company, which consent may be withheld in the
Company's sole discretion, shall be required with respect to the exercise by
Colonial in its own name and on its own behalf of options with respect to more
than 455,166 Series E Preferred Shares. To exercise the Preferred Stock Option,
each Permitted Purchaser (or Colonial, as the case may be, with the prior
written consent of the Company in the Company's sole discretion) shall deliver
written notice thereof (the "Exercise Notice") to the Company in the form
attached hereto as Exhibit A duly completed and executed by such Permitted
Purchaser (or Colonial, as the case may be). Colonial or a Permitted Purchaser
that exercises its option as described in this Section 4(a) (and, with respect
to Colonial, receives the prior written consent of the Company) is sometimes
referred to as a "Purchaser."
(b) The purchase rights represented by the Common Stock
Option are exercisable by Colonial, in whole or in part (and Colonial may
specify in such exercise notice, in lieu of or in addition to a percentage of
shares, a maximum aggregate amount of its investment, from which its percentage
shall be derived), in connection with an Initial Public Offering, by written
notice by Colonial delivered to the Company not less than 10 days prior to the
filing of a registration statement by the Company in connection with an Initial
Public Offering setting forth any maximum aggregate investment amount as to
which Colonial is exercising its Common Stock Option, and, subject to any such
maximum, Colonial's desired number of shares in respect of which Colonial is
exercising its Common Stock Option. The Company shall notify Colonial in
writing at least 30 days prior to the filing of a registration statement for an
Initial Public Offering (and shall advise Colonial as promptly as practicable
of any delay in the expected date for filing).
5. Closing of the Purchase.
(a) The closing of any purchase of Series E Preferred Stock
pursuant to exercise of the Preferred Stock Option (the "Preferred Stock
Closing") shall be held at the offices of the Company on a date agreed to by the
Company and the Purchaser, but not later than thirty (30) days following
delivery of the Exercise Notice.
(b) The closing of any purchase of Common Stock pursuant to
exercise of the Common Stock Option (the "Common Stock
Closing") shall be held at the offices of the Company on
or as soon as reasonably practicable following the
closing date of the Initial Public Offering in respect
of which the option was so exercised.
(c) At the Preferred Stock Closing:
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<PAGE> 4
(i) The Company shall deliver to each Purchaser one or more
certificates representing the shares of Series E Preferred Stock to be purchased
by such Purchaser;
(ii) Each Purchaser shall deliver to the Company a signed
certificate, dated as of the date of the Closing as described in Section 7;
(iii) Each Purchaser and the Company shall execute and deliver
a written agreement, whereby the Purchaser shall agree to become a party to and
bound by the terms of the Stockholders Agreement and the Company shall grant to
such Purchaser the rights and benefits of a "Stockholder" as such term is
defined in the Stockholders Agreement; and
(iv) Payment of the purchase price for the Series E Preferred
Stock shall be made by wire transfer of immediately available funds to an
account designated by the Company in an amount equal to (A) the number of shares
of Series E Preferred Stock specified by the Purchaser in its Exercise Notice,
multiplied by (B) the Preferred Exercise Price.
(d) At the Common Stock Closing:
(i) The Company shall deliver to Colonial one or more
certificates representing the shares of Common Stock to be purchased pursuant to
exercise of the Common Stock Option; and
(ii) Payment of the purchase price for the Common Stock shall
be made by wire transfer of immediately available funds to an account designated
by the Company in an amount equal to (A) the number of shares of Common Stock
specified by Colonial in its notice delivered pursuant to Section 4(b),
multiplied by (B) the Common Exercise Price.
6. Transferability. Colonial shall not assign, hypothecate, donate,
encumber, transfer or otherwise dispose of any interest in the Series E
Preferred Stock or Common Stock of the Company, and shall not assign all or any
portion of the Preferred Stock Option, except in compliance with the provisions
herein, the Stockholders Agreement, and applicable securities laws. Without
limitation of the foregoing, Colonial shall not assign all or any portion of the
Preferred Stock Option except (i) to a Designated Entity that agrees in writing
to be bound by the terms of this Option Agreement in the same manner that
Colonial is bound (including, without limitation, this Section 6, but excluding
the restrictions upon Colonial's direct exercise of the Preferred Stock Option,
which apply only to Colonial and any successor entity thereto), and (ii) on the
condition that Colonial provides to the Company an opinion of counsel, in form
and substance to the reasonable satisfaction of the Company, to the effect that
such assignment and the issuance of any Series E Preferred Stock or Common Stock
upon exercise of the Preferred Stock Option by the assignee will not require
registration of such securities under the Securities Act of 1933 or any
applicable state securities law.
7. Representations and Warranties.
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<PAGE> 5
(a) At the Preferred Stock Closing, as a condition thereto,
each Purchaser shall deliver to the Company a certificate representing and
warranting the following in connection with the acquisition of Series E
Preferred Stock by such Purchaser pursuant to the exercise of the Preferred
Stock Option:
(i) The Purchaser is aware of the Company's business
affairs and financial condition and has acquired sufficient information from the
Company about the Company to reach an informed and knowledgeable decision to
acquire the Series E Preferred Stock. The Purchaser is purchasing the Series E
Preferred Stock for investment for its own account only and not as a nominee for
any party and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act (except as
contemplated by Section 10).
(ii) The Purchaser understands that Series E
Preferred Stock has not been registered under the Securities Act by reason of a
specific exemption therefrom, which exemption depends upon, among other things,
the bona fide nature of such Purchaser's investment intent as expressed herein.
(iii) The Purchaser further understands that the
Series E Preferred Stock must be held indefinitely unless it is subsequently
registered under the Securities Act or an exemption from such registration is
available. The Purchaser further acknowledges and understands that the Company
is under no obligation to register the Series E Preferred Stock except as set
forth in the Stockholders Agreement. The Purchaser understands that the
certificate evidencing the Series E Preferred Stock (and any Common Stock
received upon conversion thereof) will be imprinted with the following legend
which prohibits its transfer unless it is registered or such registration is not
required in the opinion of counsel for the Company.
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD
OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE
AGREEMENT COVERING THE PURCHASE OF THESE SECURITIES AND
RESTRICTING THEIR TRANSFER OR SALE MAY BE OBTAINED AT NO
COST BY WRITTEN REQUEST MADE TO THE SECRETARY OF THE
COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
COMPANY.
(b) The Company hereby represents and warrants to Colonial
and each Purchaser, as of the date hereof and as of the date of the Preferred
Stock Closing, as follows:
(i) The Company has all requisite corporate power
and authority to execute and deliver this Agreement, to issue and sell the
Series E Preferred Stock and to carry out the provisions of this Agreement.
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<PAGE> 6
(ii) All corporate action on the part of the Company,
its officers, directors and stockholders necessary for the authorization of this
Agreement, the performance of all obligations of the Company hereunder and
thereunder at the Preferred Stock Closing and the authorization, sale, issuance
and delivery of the Series E Preferred Stock has been taken or will be taken
prior to the Preferred Stock Closing. Upon its execution and delivery, this
Agreement will be a valid and binding obligation of the Company, enforceable in
accordance with its terms.
(iii) When issued in compliance with the provisions of
this Agreement, the Series E Preferred Stock will be validly issued, fully paid
and nonassessable, and will be free of any liens or encumbrances; provided,
however, that the Series E Preferred Stock may be subject to restrictions on
transfer under state and/or federal securities laws as set forth herein or as
otherwise required by such laws at the time a transfer is proposed.
(c) The Company hereby represents and warrants to Colonial,
as of the date hereof and as of the date of the Common Stock Closing, as
follows:
(i) The Company has all requisite corporate power
and authority to execute and deliver this Agreement, to issue and sell the
Common Stock and to carry out the provisions of this Agreement.
(ii) All corporate action on the part of the Company,
its officers, directors and stockholders necessary for the authorization of this
Agreement, the performance of all obligations of the Company hereunder and
thereunder at the Common Stock Closing and the authorization, sale, issuance and
delivery of the Common Stock has been taken or will be taken prior to the Common
Stock Closing. Upon its execution and delivery, this Agreement will be a valid
and binding obligation of the Company, enforceable in accordance with its terms.
(iii) When issued in compliance with the provisions of
this Agreement, the Common Stock will be validly issued, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided, however,
that the Common Stock may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein or as otherwise required by
such laws at the time a transfer is proposed.
8. Conditions to Obligations of the Company.
(a) The Company's obligation to issue and sell the Series E
Preferred Stock at the Preferred Stock Closing is subject to the satisfaction,
on or prior to such Preferred Stock Closing, of the following conditions:
(i) The representations and warranties in Section
7(a) shall be true and correct in all material respects at the date of the
Preferred Stock Closing.
(ii) The Purchaser shall have performed and complied
with all agreements and conditions required to be performed or complied with by
Purchaser under this Agreement on or before the Preferred Stock Closing.
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<PAGE> 7
(iii) As of the Preferred Stock Closing, the sale and
issuance of the Series E Preferred Stock shall be legally permitted by all laws
and regulations to which any Purchaser and the Company are subject.
(iv) The Purchaser shall have executed and delivered
the Stockholders Agreement as provided herein.
(b) The Company's obligation to issue and sell the Common
Stock at the Common Stock Closing is subject to the satisfaction, on or prior to
such Common Stock Closing, of the following conditions:
(i) Colonial shall have performed and complied with
all agreements and conditions required to be performed or complied with by
Colonial under this Agreement and the Contribution Agreement on or before the
Common Stock Closing.
(ii) As of the Common Stock Closing, the sale and
issuance of the Common Stock shall be legally permitted by all laws and
regulations to which Colonial and the Company are subject.
(iii) A registration statement relating to the Initial
Public Offering shall have become effective and no stop order suspending the
effectiveness thereof shall have been issued and no proceedings therefor shall
be pending or threatened by the Securities and Exchange Commission.
9. Rights of Stockholders. With respect to the Series E Preferred
Stock and Common Stock subject to option hereunder, neither Colonial nor any
Permitted Purchaser shall be entitled to vote or receive dividends or be deemed
the holder of such Series E Preferred Stock or Common Stock until the Preferred
Stock Option or Common Stock Option shall have been exercised as provided
herein. In addition, nothing contained herein be construed to confer upon
Colonial nor any Permitted Purchaser, by virtue of their ownership of the
Preferred Stock Option or Common Stock Option, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value, or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until the Preferred Stock Option or the Common Stock Option shall have
been exercised as provided herein.
10. Consulting Agreement. Notwithstanding anything contained herein
or in any certificate delivered hereunder or under the
Contribution Agreement or any of the documents, instruments or
agreements executed in connection with such Contribution
Agreement, the Company acknowledges that certain of the
Designated Entities have entered into, or may in the future
enter into, Consulting Agreements with Colonial pursuant to
which Colonial shall be entitled to receive from such Designated
Entities certain consideration, which may include shares of
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<PAGE> 8
the Company's Preferred Stock, upon the conditions specified in
the Consulting Agreements.
11. Reservation of Stock.
(a) The Company covenants that during the term the Preferred
Stock Option is exercisable, the Company will reserve from its
authorized and unissued Series E Preferred Stock a sufficient number of
shares to provide for the issuance of Series E Preferred Stock upon the
exercise of the Preferred Stock Option (and shares of its Common Stock
for issuance on conversion of such Series E Preferred Stock) and, from
time to time, will take all steps necessary to amend its Certificate of
Incorporation to provide sufficient reserves of shares of Series E
Preferred Stock issuable upon exercise of the Preferred Stock Option
(and shares of its Common Stock for issuance on conversion of such
Series E Preferred Stock). The Company further covenants that all shares
that may be issued upon the exercise of rights represented by the
Preferred Stock Option or the Common Stock Option and payment of the
Preferred Exercise Price or Common Exercise Price, all as set forth
herein, will be free from all taxes, liens and charges in respect of the
issue thereof (other than taxes in respect of any transfer occurring
contemporaneously or otherwise specified herein).
(b) The Company will use its best efforts to direct for sale
to Colonial in the Initial Public Offering as many shares as Colonial may
request, subject to any restrictions imposed by the National Association of
Securities Dealers and subject to the best advice of the underwriters of the
Initial Public Offering.
12. Dilution. In the event that prior to the delivery by the Company
of the shares of Series E Preferred Stock in respect of which the Preferred
Stock Option is granted, the outstanding shares of Series E Preferred Stock,
including any Common Stock into which the Series E Preferred Stock shall be
convertible, shall be changed in number or class or exchanged for a different
number or kind of shares of stock or other securities of the Company, whether by
reason of recapitalization, reclassification, reorganization, combination, stock
split or reverse stock split, or payment of a stock dividend or other similar
change in capitalization, the number and kind of shares of Series E Preferred
Stock subject to the Preferred Stock Option shall be adjusted in a manner set
forth in Section 5.3.4(e) and (f)(ii) of the Certificate of Incorporation so
that the Preferred Stock Option shall thereafter represent the right to acquire
such number and kind of securities as would have been issuable if the Preferred
Stock Option had been exercised immediately prior to such recapitalization,
reclassification, reorganization, combination, stock split or reverse stock
split, or payment of a stock dividend or other similar change in capitalization.
For purposes of the foregoing, the "Certificate of Incorporation" shall mean the
Certificate of Incorporation of the Company as amended and/or restated and
effective immediately prior to the change in terms of the Company's Series E
Preferred Stock.
13. Series D Preferred Stock. The Company and one or more Designated
Entities, may, but are not required to, hereafter enter into agreements for the
issuance of stock of the Company in exchange for a contribution of rights-of-way
rights from such Designated Entities. In the event that the Company and such
Designated Entities enter into such agreement, Colonial and the Company hereby
agree that, between the date of this Option Agreement and the
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<PAGE> 9
Expiration Date, unless the parties otherwise agree, (a) the type of stock
delivered to such Designated Entity shall be Series D Preferred Stock, (b) the
purchase price per share for such Series D Preferred Stock shall be $21.97, and
(c) the Company and the Designated Entity shall execute and deliver a written
agreement pursuant to which the Designated Entity shall become a party to and
bound by the terms of the Stockholders Agreement such that such Designated
Entity shall have the rights and benefits of a "Stockholder" as such is defined
in the Stockholders Agreement.
14. Miscellaneous.
(a) Transfer and Similar Taxes. All stock, stamp, transfer,
registration or similar taxes or duties, if any, resulting from the purchase of
Series E Preferred Stock or Common Stock pursuant to this Agreement shall be
paid by the Purchaser acquiring such shares.
(b) Authorized Signatories. The persons executing this
Agreement for and on behalf of Colonial and the Company each represent that they
have the requisite authority to bind the entities on whose behalf they are
signing.
(c) Successors and Assigns. Except as provided in Sections 1
and 6, this Agreement may not be assigned, delegated or otherwise transferred 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.
(d) 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.
(e) 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.
(f) 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. Except as
otherwise provided herein, capitalized terms used herein without definition
shall have the meanings ascribed to them in the Contribution Agreement.
(g) Governing Law. This Agreement shall be governed by the
laws of the State of Delaware, without giving effect to its principles or rules
of conflict of laws to the extent such principles or rules would require or
permit the application of the laws of another jurisdiction.
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<PAGE> 10
(h) Amendment. No change or addition shall be made to this
Agreement except by a written agreement executed by Colonial and the Company.
(i) 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, Georgia 30326-1125
Attn: General Counsel
Fax: 404-841-2315
With a copy to (which shall not constitute notice):
Arnall Golden & Gregory, LLP
2800 One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3450
Attn: Donald I. Hackney, Jr., Esq.
Fax: 404-873-8639
If to a Permitted Purchaser:
At the address provided by Colonial pursuant to Section 1(a) above
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 to (which shall not constitute notice):
Covington & Burling
1201 Pennsylvania Avenue., N.W.
P.O. Box 7566
Washington, D.C. 20044
Attn: Bruce S. Wilson, Esq.
Fax: 202-662-6291
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<PAGE> 11
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.
(j) Complete Agreement. This Agreement represents the entire
agreement between Colonial 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.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have executed this Option
Agreement on the date first written above.
PATHNET TELECOMMUNICATIONS, INC.
------------------------------------
By:
---------------------------------
Its:
--------------------------------
COLONIAL PIPELINE COMPANY
------------------------------------
By:
---------------------------------
Its:
--------------------------------
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<PAGE> 1
EXHIBIT 10.11
Positions of this exhibit have been
omitted and filed separately with
the Securities and Exchange Commission.
These positions are designated
"[ * * * ]."
THIS AGREEMENT IS DELIVERED WITH THE EXPRESS UNDERSTANDING THAT
CSX TRANSPORTATION, INC.'S LEGAL COUNSEL WILL HAVE THE RIGHT OF FINAL
REVIEW AND APPROVAL PRIOR TO EXECUTION.
FIBER OPTIC ACCESS AND
LICENSE AGREEMENT
dated as of ________, 1999
between
CSX TRANSPORTATION, INC.
A VIRGINIA CORPORATION, FOR ITSELF AND
AS OPERATOR FOR NEW YORK CENTRAL LINES LLC, A DELAWARE LIMITED LIABILITY
COMPANY AND A WHOLLY-OWNED SUBSIDIARY OF CONSOLIDATED RAIL CORPORATION, A
PENNSYLVANIA CORPORATION
and
PATHNET TELECOMMUNICATIONS, INC.,
a Delaware corporation
<PAGE> 2
FIBER OPTIC ACCESS AND LICENSE AGREEMENT
THIS FIBER OPTIC ACCESS AND LICENSE AGREEMENT (this "License Agreement")
is made as of ___________, 1999 ("Effective Date"), by and between CSX
TRANSPORTATION, INC., a Virginia corporation ("CSXT"), for itself and as
operator for New York Central Lines LLC, a Delaware limited liability company
("NYC Lines") and a wholly owned subsidiary of Consolidated Rail Corporation, a
Pennsylvania corporation (CSXT and NYC Lines, collectively, the "Railroad"),
whose mailing address is 500 Water Street, Jacksonville, Florida 32202, and
PATHNET TELECOMMUNICATIONS, INC., a Delaware corporation ("Pathnet"), whose
mailing address is 1015 31st Street, N.W., Washington, D.C. 20007.
R E C I T A L S:
A. Railroad is the owner or operator of a continuous right-of way (by fee,
easement, license, operating agreement, joint use agreement or other interest)
within certain real property upon which it operates an interstate rail
transportation system, as shown on Railroad's current System Map (hereinafter
referred to as the "Rail Corridor").
B. Pursuant to the Contribution Agreement and Stockholder Agreement being
executed in connection herewith, Pathnet desires to enter into an agreement with
Railroad to permit Pathnet to install, market, sell and/or maintain a Fiber
Optic Communication System, including Conduit (Innerduct), Cable, Optical Fibers
and related equipment and structures, along, in and on up to [ * * * ] miles of
Rail Corridor, along Segments of the Rail Corridor to be selected in accordance
herewith.
C. Pursuant to the Contribution Agreement and Stockholder Agreement being
executed in connection herewith, Railroad is willing to transfer certain
property interests to Pathnet in exchange for stock in Pathnet, provided that
Pathnet accepts a license to use the selected Segments of the Rail Corridor
subject to all of the terms and conditions of this License Agreements and the
Right of Way Operating Agreement being entered into by and between Railroad and
Pathnet concurrently herewith (hereinafter, the "Operating Agreement" and,
together with this License Agreement, the "Agreements"), which Agreements
provide, among other things, that (i) the license granted thereby shall be
subject to the existing rights and interests of other parties, including,
without limitation, [ * * * ] and [ * * * ], and (ii) Railroad makes no
representation or warranty with respect to its right, title or interest, if any,
in and to any portion of the Rail Corridor or its right to grant any type of
license or other right for any party, including Pathnet, to use or occupy the
same.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Railroad and Pathnet hereby agree as
follows:
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1. CERTAIN DEFINITIONS.
1.1 General Interpretive Principles. For purposes of this License Agreement,
except as otherwise expressly provided or unless the context otherwise requires,
(i) the terms defined in this Section have the meanings assigned to them in this
Section and include the plural as well as the singular, and the use of any
gender in this License Agreement shall be deemed to include the other gender;
(ii) the word "including" means "including, but not limited to," and (iii) the
article, section and paragraph headings in this License Agreement are for
convenience only and are not intended to describe, interpret, define or limit
the scope, extent, or intent of any of the provisions of this License Agreement.
1.2 Incorporation of Recitals. The Recitals set forth above are
incorporated herein by this reference.
1.3 Definitions. As used in this License Agreement, the following terms
shall have the following respective meanings (unless otherwise expressly
provided):
"Affiliate" shall mean any Person that, directly or indirectly, through
one or more intermediaries, controls or is controlled by, or is under common
control with, another Person. 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 conclusively presumed in
the case of the direct or indirect ownership of fifty percent (50%) or more of
the equity interests in an entity.
"Agreements" shall be as defined in Recital C.
"Broadform Telecommunications Rights" shall mean, exclusive of the Limited
Telecommunications Rights granted hereunder, the right of owners of and other
parties with interests in the land underlying the Rail Corridor to license
generally, for telecommunications purposes, any and all portions of Rail
Corridor.
"Build Supplement" shall have the meaning set forth in Section 2.6 below
"Cable" shall mean a single cable containing Optical Fiber, and any
support material and protective casing, capable of transmitting data or voice
communications in a Fiber Optic Communication System.
"Conduit (Innerduct)" shall mean a single duct or pipe, not exceeding two
inches (2") inside diameter (or similar cross sectional equivalent), except
where specifically required or approved by Railroad, suitable for housing a
Fiber Optic Cable.
"Construction Exclusivity" shall have the meaning set forth in Section 4.2
below.
"Construction Plans" shall mean the drawings, plans and specifications for
the construction and installation of Pathnet's System and Facilities, showing
the proposed location of all Pathnet's System and Facilities, in sufficient
detail, with distance shown from nearest track, with separate detailed drawings
of all junction, Repeater (Regen) Sites, bridge and tunnel occupancies, showing
depth of installation, details and methods
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of the proposed construction, with numbers and size of Conduit(s) (Innerduct(s))
to be placed, including Optical Fiber count and total mileage for each Segment.
Construction Plans shall clearly note Railroad Valuation Map references,
Railroad Survey Station and Milepost references for all beginning and ending
points and all alignment transition points. Each set of Construction Plans for
each Segment shall have an overview map showing all of the required information.
"Construction Schedule" shall have the meaning set forth in Section 2.6
below
"Contribution Agreement" shall mean that certain Contribution Agreement
dated as of _____________, 1999 by and between, among others, Railroad and
Pathnet.
"CSX Conduits" shall have the meaning set forth in Section 8.5 below.
"CSXT Corridor" shall mean, subject to Section 2.1 of this Agreement, all
of the Rail Corridor exclusive of the NYC Corridor, as described in Exhibit 2,
attached hereto and incorporated herein.
"Designated Rail Corridor" shall mean a Segment of the Rail Corridor
selected by Pathnet and approved by Railroad in accordance with the terms of the
Agreements.
"Designation Period" shall have the meaning set forth in Section 2.6
below.
"Exclusivity Period" shall have the meaning set forth in Section 4.2
below.
"Facilities", when applied to property of or installed by Pathnet, shall
mean Conduit (Innerduct), Cable, carrier pipes, Pathnet wires and poles, Optical
Fibers, junctions, Repeaters (Regens), Handholds, terminals, power sources,
fault alarm system(s), emergency equipment storage shelters, attachments, and
all other structures and articles of personal property connected with, necessary
for, appurtenant to, or useful to the installation, operation, maintenance,
repair, re-installation, replacement, relocation or removal of Pathnet's Fiber
Optic Communication System.
"Fiber Optic" or "Optical Fiber" shall mean a strand of optical waveguide
permitting the transmission of communications signals.
"Fiber Optic Communication System" or "System" shall mean the system
utilizing Optical Fiber as the medium for communications and transmission to be
installed by Pathnet in the Designated Rail Corridor, which may contain
Conduit(s) (Innerducts(s)), Cable(s) and Optical Fiber(s). Such terms shall
include all Conduit (Innerduct), Cable, Optical Fiber, Handholds, manholes,
marker tape, signs, coupler, structure attachment, pull rope, other necessary
ancillary hardware, and bridge, tunnel and trestle attachments, and shall also
include such communications technologies as may hereafter evolve from or
relating to Optical Fiber but which utilize Pathnet's Facilities and/or System
as initially installed or as thereafter modified pursuant to the Agreements.
"Handholds" shall include Cable loops, or boxes or vaults placed in or
above ground at junctions, Repeaters (Regens) or at areas of Cable splicing and
connection, for storage of slack Cable.
"Interest Notice" shall have the meaning set forth in Section 4.2 below.
"License" shall have the meaning set forth in Section 2.1 below.
"Limited Telecommunications Rights" shall mean Pathnet's right to
construct, install, operate, repair and maintain the Facilities and System as
more particularly described in, and subject to the terms and conditions of, the
Agreements, including, without limitation, those contained in Article 6 of the
License Agreement.
"Negotiation Exclusivity" shall have the meaning set forth in Section 4.2
below.
"NYC Corridor" shall mean that certain portion of the Rail Corridor
operated by CSXT pursuant to that certain Operating Agreement dated as of June
1, 1999 by and
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between NYC Lines, as owner, and CSXT, as operator, as described in Exhibit 2,
attached hereto and incorporated herein.
"Operating Agreement" shall have the meaning set forth in Recital C above.
"Optical Fiber" shall mean Fiber Optic.
"Person" shall mean any individual, association, partnership, limited
liability company, corporation, joint stock company, trust, joint venture,
unincorporated organization or governmental entity or any department, agency or
political subdivision thereof.
"[ * * * ] Obligations" shall mean that Railroad, in accordance with that
certain Agreement, dated as of [ * * * ], between Railroad and [ * * * ], now
known as [ * * * ], shall refer Pathnet's Route Plan on CSXT Corridor to
[ * * * ], in writing, and [ * * * ] shall have ten (10) business days from
receipt to confirm its intent to negotiate with Pathnet for the installation of
a proposed portion of the Pathnet System. If [ * * * ] declines to negotiate
with Pathnet or fails to advise Railroad of its intent to negotiate within ten
(10) business days following its receipt of notification, the terms of this
Agreement shall become operative as to the Build Supplement evidenced by the
Route Plan, except in those areas subject to the following exclusivity
provisions. In addition, [ * * * ] has exclusivity on those segments of CSXT
Corridor on which [ * * * ] has commenced installation of its fiber optic
communications system. Such exclusivity does not apply: (i) to any segment in
which all conduit or fiber optic capacity has been sold or utilized; and (ii)
to third party installations of ten (10) miles or less.
"Rail Corridor" shall have the meaning set forth in Recital A above.
"Railroad Duct" shall have the meaning set forth in Section 8.1 below.
"Repeater (Regen)" shall mean a device which regenerates, amplifies or
extends optical signals, used to send the light impulse through Optical Fiber,
and includes attendant equipment, facilities, power source, and technological
changes.
"Repeater (Regen) Sites" shall mean those permitted portions of the Rail
Corridor on which Repeaters (Regens) are located, and shall be limited to an
area of five hundred (500) square feet or less, and located beyond the
Restricted Working Area, unless otherwise specifically permitted in writing by
Railroad.
"Restricted Working Area" shall mean the area parallel to and located
thirty feet (30') (or the top of any ditch slope if that distance is greater
than thirty feet (30')) from the centerline of the outermost track (on each
side) in the Rail Corridor.
"Segment" shall mean either a longitudinal section of Rail Corridor or a
longitudinal section of Conduit (Innerduct) or Cable installed by Pathnet, as
applicable.
"Stockholder Agreement" shall mean that certain Stockholder Agreement
dated as of ____________, 1999 by and between, among others, Railroad and
Pathnet.
"Substitution Notice" shall have the meaning set forth in Section 4.2
below.
"System" shall mean Fiber Optic Communication System.
"System Map" shall mean Railroad's line map, published periodically,
designating the general location of the Railroad's operating lines.
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"Term" shall have the meaning set forth in Section 3.1 below.
"Title Deficient Areas" shall mean those portions of the Rail Corridor, if
any, for which Railroad holds title in less than fee simple absolute and for
which Railroad may not otherwise have the right to grant to Pathnet the license
for use and occupancy as contemplated by this License Agreement.
"Trackage Rights" shall mean the rights arising by agreement of one
railroad to use the tracks or right-of-way of another railroad for the carriage
of rail traffic; said agreement ordinarily imparting no ownership interest in
the burdening carrier relating to the tracks or rights-of-way of the burdened
carrier.
"[* * *] Obligations" shall mean that in CSXT Corridor occupied by a
fiber optic communications system installed by [* * *] (or any predecessor
entity) (collectively "[* * *]") or, in any CSXT Corridor over which [* * *]
has exercised its option to install its system within the preceding [* * *]
prior to the date of the applicable Build Supplement, Pathnet's System shall not
be installed in any length longer than [* * *] contiguous miles and no
closer than [* * *] from any existing [* * *] facility. For the purposes
of this limitation only, any two (2) Segments of Pathnet's Fiber Optic
Communications System of which the respective ends are less than [* * *] apart
shall be deemed a single Segment and the aggregate length of such two (2)
Segments (but not the length between the respective ends of such Segments) shall
be considered in determining contiguous mileage.
2. LICENSE
2.1 Grant of License. (a) Subject to the terms and conditions contained in
the Agreements, including, without limitation, Article 6 of this Agreement,
Railroad hereby grants to Pathnet a license of Limited Telecommunications
Rights, for the Term and upon the conditions, covenants and agreements set forth
in the Agreements, to select up to [* * *] miles of Rail Corridor (including
up to [* * *] miles of NYC Corridor) to be designated (as provided herein
and subject to Railroad's approval rights as set forth in the Agreements) as
Designated Rail Corridor and to use such Designated Rail Corridor for the
purpose of constructing, installing, operating, maintaining, repairing,
replacing and removing (and including rights of access subject to the
conditions, covenants and agreements set forth in the Agreements) a Fiber Optic
Communications Systems containing no more than eight (8) Conduits (Innerducts)
and an unlimited number of Optical Fibers therein, together with necessary
appurtenant equipment and structures (the "License"). Subject to Railroad's
prior consent, which may be withheld in Railroad's sole discretion, Pathnet may
install additional Conduits (Innerducts), if Railroad and Pathnet can reach
agreement on how to share in the revenue resulting from sales of such Conduits
(Innerducts) or the Optical Fiber contained therein.
(b) With respect to CSXT Corridor located within the State of
[* * *], Pathnet acknowledges the pendancy of certain class action litiga-
tion concerning the use of railroad rights of way by telecommunications
companies. During the pendancy of this or any related litigation, Pathnet shall
not have any right under this Agreement to install its System or Facilities upon
CSXT Corridor in the State of [* * *] without the prior written consent of
Railroad, which shall not be unreasonably withheld, provided however, that if
the court rules that telecommunications companies (such as Pathnet), cannot
install their systems and facilities on such rights of way, Pathnet shall have
the obligation, prior to the installation of any portion of its System or
Facilities on the CSXT Corridor in the State of [* * *], to acquire Broad-
form Telecommunications Rights sufficient in Railroad's reasonable discretion to
authorize such installation. Pathnet understands and agrees that any Broadform
Telecommunications Rights acquired by Pathnet are subject to the terms and
conditions of this License Agreement.
2.2 Acknowledgement of Condition of Title. Pathnet understands,
acknowledges and agrees that (a) portions of the Designated Rail Corridor may be
in Title Deficient Areas, and (b) Pathnet accepts the License in any Title
Deficient Areas
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subject to the terms and conditions of the Agreements. Subject to the
provisions of this Article 2, with respect to any Segment of the Designated Rail
Corridor in Title Deficient Areas, the License herein granted Pathnet shall
include the additional right in favor of Pathnet to procure all Broadform
Telecommunications Rights from third parties as Pathnet determines are necessary
to enable it to construct, install, operate, maintain, repair, replace and
remove Pathnet's Facilities and System in such Title Deficient Areas provided
that Pathnet shall not acquire exclusive Broadform Telecommunications Rights
(such that the underlying fee owner no longer has the right to grant such rights
to third parties) without the prior written consent of Railroad, which may be
withheld in Railroad's sole discretion. All provisions of the Agreements,
including, but not limited to, Pathnet's obligations for the payment or other
delivery of the consideration described in this License Agreement, shall apply
as between Railroad and Pathnet with respect to any Title Deficient Areas,
notwithstanding that Pathnet's right to occupy the Title Deficient Areas is or
may be derived, in whole or in part, from Broadform Telecommunications Rights
obtained by Pathnet from third parties. The License is made and given subject to
the [* * *] Obligations, the [* * *] Obligations and the rights and
interests of all other third parties, existing as of the Effective Date or the
date of any Build Supplement.
2.3 Operating Agreement. The parties acknowledge and agree that the
License shall be exercised in accordance with the terms and provisions of this
License Agreement and the Operating Agreement, the terms of which are
incorporated herein by this reference. In the event of any conflict between the
Operating Agreement and this License Agreement with respect to any rights or
obligations under this License Agreement, the terms of this License Agreement
shall control. Notwithstanding any contrary provision in the Agreements, the
parties agree that (i) any dispute relating to this License Agreement, except a
dispute arising under Section 8.5 hereof, shall not be subject to Article 25
(Liaison; Coordination and Dispute Resolution) of the Operating Agreement, it
being the specific intention of the parties to litigate any and all disputes
hereunder, without resort to arbitration or mediation, and (ii) the
indemnification provisions contained in this License Agreement shall not be
governed or affected by Article 17 (Liability; Indemnity) of the Operating
Agreement.
2.4 Transfer of Broadform Telecommunications Rights. In the event that
Pathnet obtains Broadform Telecommunications Rights with respect to any Title
Deficient Areas that provide use and occupancy rights in excess of the Limited
Telecommunications Rights granted by Railroad to Pathnet pursuant to the
Agreements, then Pathnet shall immediately offer, by way of assignment, to
convey such Broadform Telecommunications Rights to Railroad. Upon receipt of
Pathnet's offer of assignment, Railroad shall promptly determine, in its sole
and absolute discretion, to accept such assignment or reject the same. In the
event Railroad accepts such assignment, Railroad shall pay to Pathnet, [* * *]
of the actual direct out of pocket costs (exclusive of Pathnet's internal
overhead) incurred by Pathnet in connection with the acquisition of such rights
together with the actual direct costs including overhead of any Pathnet field
personnel to the extent dedicated to such acquisition.
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2.5 Sublicenses. Pathnet may sell, lease, license, or otherwise grant
rights in and to Optical Fibers, telecommunications capacity, Conduit
(Innerduct) or other portions of Pathnet's System on such terms as Pathnet may
determine in its sole discretion. Pathnet may also involve customers or
co-development or strategic partners in the installation of Pathnet's System on
Designated Rail Corridors on such terms as Pathnet determines, in its sole
discretion. Any such arrangements shall be expressly subject and subordinate to
the terms and conditions of the Agreements, Pathnet shall remain fully liable
for its obligations under the Agreements, Pathnet shall remain the sole point of
contact with Railroad in connection with such arrangements, and Pathnet shall be
responsible for and shall supervise any and all activities on or affecting the
Designated Rail Corridor. Pathnet shall have no right to sell, sublicense or
otherwise transfer the right to access any portion of the Designated Rail
Corridor to a third party without the prior written consent of Railroad, which
consent may be withheld in Railroad's sole discretion.
2.6 Selection and Development of Rail Corridor. Pursuant to one or more
supplements to this License Agreement, the form of which is attached hereto as
Exhibit 1 (each a "Build Supplement"), Pathnet shall, except as otherwise
provided herein, designate as Designated Rail Corridor for its System and
Facilities up to the maximum number of miles of Rail Corridor authorized
hereunder. Pathnet may designate such Designated Rail Corridor at any time
during the first [* * *] years after the Effective Date (the "Designation
Period"). Railroad shall approve each Build Supplement within thirty (30) days
of submission thereof unless such approval cannot be granted due to existing
contractual or other legal limitations, safety concerns, operational or
engineering conflicts or interference with existing or foreseeable future
development of the Rail Corridor for railroad purposes. Designation of the Rail
Corridor pursuant to an approved Build Supplement shall remove the designated
mileage from the mileage bank granted under this License Agreement. Together
with each Build Supplement, Pathnet shall also submit a proposed schedule of
construction (the "Construction Schedule") of its System and Facilities over the
Segment designated in the Build Supplement. Railroad shall have the right, to be
exercised in its reasonable discretion within thirty (30) days after submission,
to approve or reject any proposed Construction Schedule (giving the reasons for
any such rejection and leave for Pathnet to resubmit such Construction Schedule
within the Designation Period), provided that Pathnet shall commence physical
installation of Conduit (Innerduct) in the ground no sooner than sixty (60) days
after Railroad's approval of the Build Supplement and Construction Schedule, but
no later than three (3) years of Pathnet's submission of the applicable Build
Supplement, unless otherwise provided herein. If Pathnet fails to timely
commence such physical installation, Pathnet shall be prohibited from installing
any portion of its Facilities or System within such Segment and shall not be
entitled to any refund of the miles deducted (from the mileage bank granted
hereunder) as a result of such Build Supplement, provided that Pathnet may
submit a second Build Supplement and Construction Schedule for such Segment
during the Designation Period (which second submission shall be treated as an
initial submission hereunder).
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3. TERM
3.1 Term. Unless sooner terminated in accordance with the provisions of
the Agreements, the License, the Agreements and the rights granted under any
Build Supplement shall be for a term commencing as of the Effective Date and
ending thirty (30) years hence (the "Term").
4. EXCLUSIVITY
4.1 Exclusive Rights. Except as set forth below in this Article 4,
Pathnet's rights and interests under the License and with respect to the
Designated Rail Corridor (including those portions of the Designated Rail
Corridor for which Pathnet obtains Broadform Telecommunication Rights) shall be
non-exclusive.
4.2 NYC Corridor Development. For a period of three (3) years from the
Effective Date hereof (the "Exclusivity Period"), with respect to the Segments
of the NYC Corridor (up to a maximum of 2,000 miles) designated by Pathnet upon
execution of this License Agreement as set forth in Exhibit 6 hereof, Pathnet
shall have the exclusive right to place and operate its System and Facilities
within such Segment(s) (the "Construction Exclusivity"); provided, however, that
the foregoing exclusivity right will not apply to any Segment of less that
[* * *] unless either (i) the Segment connects two cities in which Pathnet
establishes a point of presence; or (ii) the Segment connects Pathnet's network
on property that is not within the NYC Corridor to a city on the NYC Corridor in
which Pathnet establishes a point of presence. [* * *] For the four (4)
years following the expiration of the Exclusivity Period (although the foregoing
exclusivity shall no longer apply), Railroad shall promptly notify (the
"Interest Notice") Pathnet in writing of any serious inquiries from third
parties who wish access to a Segment of the NYC Corridor which Pathnet and
Railroad have executed a Build Supplement for construction and installation of
Pathnet's System and/or Facilities. Within ten (10) days after its receipt of
the Interest Notice, Pathnet shall notify Railroad if it has a good faith
interest in pursuing negotiations with the interested third party. If Pathnet
fails to notify Railroad that it has an interest within such ten (10) day
period, then Pathnet shall be deemed to have conclusively waived its right to
negotiate with such third party. If Pathnet notifies Railroad that it is
interested in such negotiations within such ten (10) day period, Pathnet shall,
for a period of [* * *] after Pathnet's receipt of such Interest
Notice, have the exclusive right to negotiate with such third party with respect
to
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such third party's access, construction, installation and/or use of a fiber
optic communications system along such Segment (the foregoing rights,
collectively "Negotiation Exclusivity"). If Pathnet and such third party have
not executed a definitive agreement within such [* * *] period, Railroad
shall be free to negotiate and enter into an agreement with such third party for
the development of the referenced Segments of the NYC Corridor. Upon written
notice to Railroad (the "Substitution Notice"), Pathnet may substitute
additional Segments of NYC Corridor for Segments of NYC Corridor previously
designated in Exhibit 6, provided that (i) any such substitute NYC Corridor
shall be subject to the rights of third parties in such NYC Corridor as of the
date of the Substitution Notice; (ii) the aggregate mileage of Pathnet's
designation of NYC Corridor (after deducting the mileage of the originally
designated Segment(s) and adding the mileage of the substitute Segment(s)) does
not exceed [* * *] miles; (iii) the Construction Exclusivity which initially
attached to the originally designated Segment(s) shall no longer apply to such
Segment(s) after the Substitution Notice; (iv) no Construction Exclusivity shall
attach to the substitute Segment(s); and (v) with respect to such substitute
Segment(s), the Negotiation Exclusivity shall commence upon the date of
completion of such substitute Segment(s) and shall continue for a period of four
(4) years following the expiration of the Exclusivity Period (even though the
Construction Exclusivity shall not apply).
4.3 Third Party Non-Exclusive Grants. Except as provided in Section 4.2
above, Railroad may grant development rights for fiber optic and other
communication systems in the Rail Corridor (including the Designated Rail
Corridor) to any third party on a non-exclusive basis.
4.4 Third Party Exclusive Grants. Except as provided in Section 4.2 above,
Railroad may grant development rights for fiber optic and other communication
systems in the Rail Corridor (including the Designated Rail Corridor) to any
third party on an exclusive basis; provided, however, that Pathnet shall not be
subject to such exclusivity provisions.
4.5 Additional Restrictions. In addition to the foregoing restrictions,
Pathnet represents that (i) Pathnet will commence and diligently pursue to
completion the installation of its System and Facilities over five hundred (500)
miles of NYC Corridor in each of the first three (3) years after the Effective
Date hereof; and (ii) in all stages of its development of the NYC Corridor,
seventy five percent (75%) of the Designated Rail Corridor miles completed and
under development (in accordance with the applicable Construction Schedule(s))
will be in contiguous segments of at least two hundred (200) miles each. In the
event Pathnet breaches either of these representations, then as Railroad's sole
and exclusive remedy, Pathnet will automatically lose Construction Exclusivity
as to the entirety of the NYC Corridor except as to those Segments of NYC
Corridor which Pathnet has completed in accordance with this Section 4.5,
provided that Pathnet shall be entitled to Negotiation Exclusivity commencing on
the date of completion of any Segment(s) for which Construction Exclusivity was
lost hereunder and continuing for a period of four (4) years following the
expiration of the Exclusivity Period (even though the Construction Exclusivity
shall not apply).
5. EQUITY CONSIDERATION
5.1 Consideration. As consideration for the License, Railroad shall
receive an equity interest in Pathnet pursuant to the Contribution Agreement.
6. TITLE LIMITS.
6.1 General. Pathnet understands and acknowledges that Railroad occupies,
uses and possesses lands, rights-of-way and rail corridors under all forms and
qualities of ownership rights or facts, from fee simple absolute to bare
occupation. Accordingly, nothing in the Agreements shall act as or be deemed to
act as any warranty, guaranty or
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representation of the quality or quantity of Railroad's title in and to any
particular Segment occupied, used or enjoyed in any manner by Pathnet under any
rights created in the Agreements. It is expressly understood that Railroad does
not warrant title to any portion of the Rail Corridor, and Pathnet hereby
accepts the grants and privileges contained herein, subject to all lawful
outstanding existing liens, mortgages and superior rights or interests in and to
the Rail Corridor, and all leases, licenses and easements or other interests
previously granted to or reserved by others therein.
6.2 Limitations of License. The term "License" herein shall mean: (a) with
regard to any portion of Rail Corridor which is owned by Railroad in fee simple
absolute or in which the uses contemplated hereunder are otherwise statutorily
authorized or approved by the state in which such Rail Corridor is located,
merely a "license"; (b) with regard to any portion of Rail Corridor owned,
occupied, used or controlled by Railroad in less than fee simple absolute (e.g.,
fee simple determinable, fee simple conditional, lease or rail easement or other
occupancy right), where the applicable law permits such grants by Railroad to
Pathnet, merely "a right of occupancy" commensurate with the term and extent of
Railroad's ownership, occupancy, etc; and (c)with regard to any portion of Rail
Corridor for which Railroad does not possess the right to license the same to
third parties for telecommunications purposes, the Agreements shall not convey
any rights to Pathnet except that Railroad merely waives its exclusive rights to
occupy, use and/or control the Rail Corridor commensurate with the term and
extent of such Railroad rights.
6.3 Broadform Telecommunications Rights. Pathnet understands and agrees
that the rights conveyed hereunder may not be sufficient to permit installation
of its System and Facilities at all desired locations throughout the Designated
Rail Corridor. Accordingly, except as otherwise provided herein, Pathnet may, as
Pathnet reasonably deems necessary, obtain Broadform Telecommunication Rights in
accordance herewith before commencing construction on any Segment, provided,
however, that Pathnet understands and agrees that any such Broadform
Telecommunications Rights acquired by Pathnet within the Designated Rail
Corridor are subject to the terms and conditions of this License Agreement.
6.4 Waiver of Claims. Pathnet agrees it shall not have and hereby
completely and absolutely waives its right to any claim against Railroad for
damages or any other legal or equitable relief on account of any deficiencies in
title to the Designated Rail Corridor.
6.5 Indemnity. In addition to the indemnities contained in the Operating
Agreement, Pathnet shall indemnify, defend (at Pathnet's sole cost and expense,
with counsel selected and controlled by Railroad, if Railroad so requests) and
hold Railroad and its Affiliates, officers, directors, employees and agents
harmless from and against all claims or litigation for trespass, slander of
title, overburden of easement, or any other claims arising out of or based upon
(i) Pathnet's Conduit (Innerduct), Cable or Optical Fiber placement, or (ii) the
presence of Pathnet's Conduit (Innerduct), Cable or Optical
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Fiber or other Facilities in, on or along the Designated Rail Corridor, or (iii)
Pathnet's failure to obtain sufficient Broadform Telecommunications Rights, or
(iv) the presence of Pathnet's purchasers, sublicensees, customers,
co-development or strategic partners, agents, invitees, their respective
employees or any other third party acting for the benefit or at the direction of
Pathnet or any such third party, on the Designated Rail Corridor, or their
individual or collective use of Pathnet's Conduit (Innerduct), Cable or Optical
Fiber or other Facilities in, on or along the Designated Rail Corridor, or (v)
the title related claims of Pathnet's purchasers, sublicensees, customers,
co-development or strategic partners, agents, invitees, their respective
employees or any other third party acting for the benefit or at the direction of
Pathnet or any such third party, including all claims for damages, including,
but not limited to, civil, criminal, compensatory, consequential, direct,
indirect, treble, exemplary, special, punitive and all other damages or
penalties of any kind available at law or in equity.. This indemnity shall
survive the expiration or termination of the Agreements. The foregoing indemnity
shall not be deemed to apply to any of the foregoing claims, liabilities, costs
or expenses to the extent attributable to Railroad's own operations or to
Railroad's grant of rights of way for fiber optic, utility or other uses to any
parties other than Pathnet.
6.6 [* * *] Obligations and [* * *] Obligations. The License and
all other rights and interests granted pursuant to the Agreements and all of the
terms and provisions of the Agreements are made expressly subject to the [* * *]
Obligations and the [* * *] Obligations. The parties acknowledge that the
[* * *] Obligations and the [* * *] Obligations affect all or part of
the CSXT Corridor. The portions of the CSXT Corridor over which [* * *] and
[* * *] have installed conduit are depicted on Exhibit 5, attached hereto
and incorporated herein. Railroad shall promptly give written notice to Pathnet
of all future installations and/or designations of CSXT Corridor by Pathnet and
[* * *]. Nothing in this paragraph will be deemed to expand the [* * *]
or [* * *] Obligations beyond the scope of such obligations arising pursuant
to the agreements between Railroad and [* * *] and [* * *],
respectively.
7. THIRD PARTY JOINT FACILITIES AND TRACKAGE RIGHTS.
7.1 This Agreement does not pertain to any occupancies over or
structures upon rights-of-way owned jointly by Railroad with another Person
which is not an Affiliate of Railroad or upon any Rail Corridor on which
Railroad has only Trackage Rights. Railroad, however, agrees to reasonably
cooperate with and assist Pathnet in obtaining any approvals of third parties
necessary to permit Pathnet to use any such jointly owned rights-of-way, and
agrees not to block Pathnet's application to use any portion of the Rail
Corridor on which Railroad only has Trackage Rights; provided, however, that
Pathnet shall reimburse Railroad, upon demand, for any costs, including
reasonable attorneys' fees, incurred by Railroad in connection with such
cooperation. The portion of the Rail Corridor over which Railroad possesses only
Trackage Rights are depicted on the Railroad System Map which has been made
available to Pathnet.
8. CONDUIT (INNERDUCT); FIBER; AND CAPACITY.
12
<PAGE> 13
8.1 Railroad Ducts and Signal Cable. Pathnet, at its sole cost and
expense, shall install one (1) two-inch (2.0") SDR-11 or equivalent single duct
or pipe, of not less than one and nine-tenths inches (1.9") inside diameter for
Railroad (the "Railroad Duct"). The Railroad Duct shall be installed by Pathnet
along the entire length of Designated Rail Corridors in which Pathnet installs
the Pathnet System and where installation of such Railroad Duct in addition to
the Conduits (Innerducts) to be installed by Pathnet, is physically feasible,
with such installation to be concurrent with Pathnet's Conduit (Innerduct)
installation. The Railroad Duct shall become the sole property of Railroad upon
installation, and Railroad, its successors and/or assigns, shall have the
exclusive right of use of such Railroad Duct. To the extent assignable, Pathnet
shall assign to Railroad, without charge, any service and product warranties
relating to such Railroad Duct that it obtains from its manufacturer and/or
installation contractor(s). The Railroad Duct may be used only for Railroad's
internal communications needs, and neither the Railroad Duct, nor Optical Fiber
therein, nor telecommunications capacity thereon, may be sold, assigned, leased,
licensed, or otherwise made available to third-parties, or used in connection
with any telecommunications business, until the earlier of (a) five (5) years
after completion of construction of the relevant Segment containing the Railroad
Duct, (b) the sale, option to purchase, or use by Pathnet of all installed
Conduits (Innerducts) or Optical Fibers on such Segment other than those held in
reserve by Pathnet, or (c) ten (10) years from the Effective Date hereof.
[* * *]
8.3 Ability to Purchase Telecommunications Capacity. CSX shall also have
the right, subject to availability as determined by Pathnet in its reasonable
discretion, to purchase telecommunications capacity anywhere on Pathnet's entire
fiber optic communications system at prices at least as favorable as Pathnet is
then offering as its best rate to other unrelated parties for like amounts of
telecommunications capacity in like markets. The foregoing capacity may be used
only for Railroad's or any Railroad Affiliate's internal communications needs,
and may not be sold, assigned, leased, licensed, or otherwise
13
<PAGE> 14
made available to third-parties.
8.4 Last Available Build in Segment. If, in any Segment of Designated Rail
Corridor, Railroad determines that it is likely that Pathnet's construction
will, due to engineering or construction limitations, be the last Conduit
(Innerduct) placed or constructed within such Segment, Railroad may require
Pathnet to build additional Conduits (Innerducts) for Railroad's benefit. In
such event Railroad will pay a sum equal to the ratio of the additional
Conduit(s) (Innerduct(s)) installed in such Segment to the total number of
Conduits (Innerducts) installed therein, multiplied by the total actual direct
out of pocket costs (exclusive of Pathnet's internal overhead) of the entire
installation together with the actual costs (including overhead) of any Pathnet
field personnel to the extent dedicated to such installation. The foregoing
additional Conduits (Innerducts) will be subject to the same restrictions as
apply to the Railroad Duct.
8.5 Boston to Framingham Conduits (Innerducts). On the Effective Date
hereof, Pathnet shall submit a Build Supplement and Construction Schedule for
the development of the Segment of Rail Corridor between Boston and Framingham,
provided that, notwithstanding any provision hereof to the contrary, Pathnet
shall commence physical installation of Conduit (Innerduct) in such Segment
within [ * * * ] of the Effective Date hereof. In connection with such
installation, Pathnet shall also install, at Pathnet's sole cost and expense,
four (4) two inch (2") Conduits (Innerducts) for Railroad's exclusive use and/or
for sale by Railroad to third parties (the "CSX Conduits"). The CSX Conduits
shall be in lieu of the Railroad Duct to be installed along such Segment by
Pathnet in accordance with Section 8.1. In the event that Pathnet determines
that the Boston to Framingham Segment is not commercially practicable (taking
into consideration Pathnet's obligation to install the CSX Conduits), Pathnet
shall not be obligated to install such Segment, provided that, in recognition of
the value of the CSX Conduits to Railroad, which constituted a material aspect
of the bargain achieved through the Agreements, Pathnet and Railroad shall
negotiate, in good faith, for Pathnet to deliver equivalent value to Railroad
pursuant to a mutually agreed alternative. If the parties are unable to agree
upon such mutually agreed alternative, the dispute shall be subject to Article
25 (Liaison; Coordination and Dispute Resolution) of the Operating Agreement.
9. DISCLAIMER
9.1 Disclaimer Relating to Certain Information. Railroad does not warrant
the accuracy of those maps, descriptions and depictions attached hereto as
Exhibits 2, 3 and 5, nor does it warrant the accuracy of the Railroad Valuation
Maps or the Railroad System Map. Railroad states that such items were prepared
and are utilized in the ordinary course of Railroad's business. With respect to
Exhibit 5 only, Railroad's Assistant Vice President, T. R. Jackson, represents
that such Exhibit accurately depicts the current status of the occupancies of
[* * *] and [* * *] on CSXT Corridor, to the best of his knowledge.
IN WITNESS WHEREOF, the undersigned have executed this License Agreement
as of the Effective Date.
14
<PAGE> 15
CSX TRANSPORTATION, INC.,
a Virginia corporation, for itself and as Operator
for New York Central Lines, L.L.C.
By: ____________________________
Title: ___________________________
PATHNET TELECOMMUNICATIONS, INC.,
a Delaware corporation
By: _________________________
Title: ____________________________
15
<PAGE> 16
EXHIBIT 1
NYC BUILD SUPPLEMENT NO. -------
Utility Project Name:______________________________________________________
Segment:___________________________________________________________________
Railroad Project Name:_____________________________________________________
THIS BUILD SUPPLEMENT NO._______ ("Build Supplement") is made as of this
_______ day of ____________________, _______ (the "Effective Date"), between CSX
TRANSPORTATION, INC., a Virginia corporation, as Operator for New York Central
Lines LLC, a Delaware limited liability company and a wholly owned subsidiary of
Consolidated Rail Corporation, a Pennsylvania corporation ("Railroad"), and
PATHNET TELECOMMUNICATIONS, INC., a Delaware corporation ("Utility").
RECITALS:
A. Railroad and Utility have previously entered into those certain Fiber
Optic License and Access Agreement and Right of Way Operating
Agreement both dated as of _____ ____________________, as amended and
supplemented from time to time by the parties (collectively, the "Base
Agreement").
B. The Base Agreement grants certain rights to Utility, including the
right to install a Fiber Optic Communications System pursuant to one
or more Build Supplements over certain Segments of Designated Rail
Corridor as more fully defined therein.
C. Utility wishes to expand its current Fiber Optic Communications System
in accordance with the Base Agreement and this Build Supplement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for the sum of Ten and No/100 Dollars ($10.00) in hand
paid and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Railroad and Utility agree as follows:
1. The above Recitals are true and correct and are incorporated herein by
this reference.
2. Unless otherwise specifically defined in this Build Supplement, all
capitalized terms used herein shall have the same meanings defined in the Base
Agreement.
3. In addition to the rights and obligations set forth in the Base
Agreement and any previously executed Build Supplements, and in accordance
therewith and herewith, Utility is hereby granted a non-exclusive License to
install the following additional Segment(s) of its Fiber Optic Communications
System as shown on Exhibit(s) _______________, attached hereto and by this
reference made a part hereof and described as follows:
Segment: from: to:
City, State _______________ _______________,
County _______________ _______________,
Township _______________ _______________,
Valuation Map No. _______________ _______________,
Milepost _______________ _______________,
1
<PAGE> 17
Railroad Survey Station No. _______________ _______________,
Total distance: ___________________;
Aggregate Optical Fiber Count
(irrespective of number of Conduit/Innerduct or Cable) ___________________;
Number of Conduit/Innerduct ___________________;
Size of Conduit/Innerduct ___________________;
Number of Cable ___________________;
Size of Cable ___________________.
4. The non-exclusive license granted to Utility with respect to the
additional installation pursuant to this Build Supplement shall be for a term
concurrent with the Base Agreement.
5. The parties hereby ratify and affirm the Base Agreement, as
supplemented hereby, which shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Build Supplement as of
the Effective Date.
Witnesses: CSX TRANSPORTATION, INC.,
a Virginia corporation, as Operator for
New York Central Lines LLC,
a Delaware limited liability company
________________________________ By:_______________________________
Print Name:_______________________
________________________________ Print Title:______________________
Witnesses: PATHNET TELECOMMUNICATIONS, INC.,
a Delaware corporation
________________________________ By:_______________________________
Print Name:_______________________
________________________________ Print Title:______________________
2
<PAGE> 18
EXHIBIT 1
CSXT BUILD SUPPLEMENT NO. -------
Utility Project Name:______________________________________________________
Segment:___________________________________________________________________
Railroad Project Name:_____________________________________________________
THIS BUILD SUPPLEMENT NO._______ ("Build Supplement") is made as of this
day of _____ _______________, _______ (the "Effective Date"), between CSX
TRANSPORTATION, INC., a Virginia corporation ("Railroad"), and PATHNET
TELECOMMUNICATIONS, INC., a Delaware corporation ("Utility").
RECITALS:
A. Railroad and Utility have previously entered into those certain Fiber
Optic License and Access Agreement and Right of Way Operating
Agreement both dated as of _____ _______________, as amended and
supplemented from time to time by the parties (collectively, the "Base
Agreement").
B. The Base Agreement grants certain rights to Utility, including the
right to install a Fiber Optic Communications System pursuant to one
or more Build Supplements over certain Segments of Designated Rail
Corridor as more fully defined therein.
C. Utility wishes to expand its current Fiber Optic Communications System
in accordance with the Base Agreement and this Build Supplement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for the sum of Ten and No/100 Dollars ($10.00) in hand
paid and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Railroad and Utility agree as follows:
1. The above Recitals are true and correct and are incorporated herein by
this reference.
2. Unless otherwise specifically defined in this Build Supplement, all
capitalized terms used herein shall have the same meanings defined in the Base
Agreement.
3. In addition to the rights and obligations set forth in the Base
Agreement and any previously executed Build Supplements, and in accordance
therewith and herewith, Utility is hereby granted a non-exclusive License to
install the following additional Segment(s) of its Fiber Optic Communications
System as shown on Exhibit(s) _______________, attached hereto and by this
reference made a part hereof and described as follows:
Segment: from: to:
City, State _______________ _______________,
County _______________ _______________,
Township _______________ _______________,
Valuation Map No. _______________ _______________,
Milepost _______________ _______________,
Railroad Survey Station No. _______________ _______________,
Total distance: ___________________;
1
<PAGE> 19
Aggregate Optical Fiber Count
(irrespective of number of Conduit/Innerduct or Cable) ____________________;
Number of Conduit/Innerduct ____________________;
Size of Conduit/Innerduct ____________________;
Number of Cable ____________________;
Size of Cable ____________________.
4. The non-exclusive license granted to Utility with respect to the
additional installation pursuant to this Build Supplement shall be for a term
concurrent with the Base Agreement.
5. The parties hereby ratify and affirm the Base Agreement, as
supplemented hereby, which shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Build Supplement as of
the Effective Date.
Witnesses: CSX TRANSPORTATION, INC.,
a Virginia corporation
_______________________________ By:__________________________________
Print Name:__________________________
_______________________________ Print Title:_________________________
Witnesses: PATHNET TELECOMMUNICATIONS, INC.,
a Delaware corporation
_______________________________ By:__________________________________
Print Name:__________________________
_______________________________ Print Title:_________________________
2
<PAGE> 20
EXHIBIT 2
CSX System Map
--------------
(Map of CSX Railway System)
<PAGE> 21
Exhibit 3
Non-exclusivity around specific cities
--------------------------------------
[ * * * ]
<PAGE> 22
EXHIBIT 4
TIER CITIES
[* * *] [* * *]
[* * *]
<PAGE> 23
Exhibit 5
Map of [* * *] and [* * *] Builds
[* * *]
<PAGE> 24
Exhibit 6
Pathnet's Initial Designation of Conrail Build
[* * *]
<PAGE> 25
EXHIBIT 7
[ * * * ]
<PAGE> 1
EXHIBIT 10.12
Portions of this exhibit have been omitted and filed separately
with the Securities and Exchange Commission.
These portions are designated "[ * * * ]."
THIS AGREEMENT IS DELIVERED WITH THE EXPRESS UNDERSTANDING THAT
CSX TRANSPORTATION, INC.'S LEGAL COUNSEL WILL HAVE THE RIGHT OF FINAL REVIEW
AND APPROVAL PRIOR TO EXECUTION.
RIGHT OF WAY OPERATING AGREEMENT
dated as of , 1999
---
between
CSX TRANSPORTATION, INC.
A VIRGINIA CORPORATION, FOR ITSELF AND
AS OPERATOR FOR NEW YORK CENTRAL LINES LLC,
A DELAWARE LIMITED LIABILITY COMPANY
AND A WHOLLY-OWNED SUBSIDIARY OF CONSOLIDATED RAIL CORPORATION,
A PENNSYLVANIA CORPORATION
and
PATHNET TELECOMMUNICATIONS, INC.,
A Delaware corporation
1
<PAGE> 2
RIGHT OF WAY OPERATING AGREEMENT
THIS RIGHT OF WAY OPERATING AGREEMENT (this "Operating Agreement"),
is made as of ____________, 1999 (the "Effective Date"), by and between CSX
TRANSPORTATION, INC., a Virginia corporation ("CSXT"), for itself and as
Operator for New York Central Lines LLC, a Delaware limited liability company
("NYC Lines") and a wholly-owned subsidiary of Consolidated Rail Corporation, a
Pennsylvania corporation (CSXT and NYC Lines, collectively, "Railroad"), whose
mailing address is 500 Water Street, Jacksonville, Florida 32202, and PATHNET
TELECOMMUNICATIONS, INC., a Delaware corporation ("Pathnet"), whose mailing
address is 1015 31st Street, N.W., Washington, D.C. 20007.
R E C I T A L S
A. Railroad is the owner or operator of a continuous right-of way
(by fee, easement, license, operating agreement, joint use agreement or other
interest) within certain real property upon which it operates an interstate rail
transportation system, as shown on Railroad's current System Map (hereinafter
referred to as the "Rail Corridor").
B. Pursuant to the Contribution Agreement and Stockholder Agreement
being executed in connection herewith, Pathnet desires to enter into an
agreement with Railroad to permit Pathnet to install, market, sell and/or
maintain a Fiber Optic Communication System, including Conduit (Innerduct),
Cable, Optical Fibers and related equipment and structures, along, in and on up
to [ * * * ] miles of Rail Corridor, along Segments of the Rail Corridor to be
selected in accordance herewith.
C. Pursuant to the Contribution Agreement and Stockholder Agreement
being executed in connection herewith, Railroad is willing to transfer certain
property interests to Pathnet in exchange for stock in Pathnet, provided that
Pathnet accepts a license to use the selected Segments of the Rail Corridor
subject to all of the terms and conditions of this Operating Agreement and the
Fiber Optic Access and License Agreement being entered into by and between
Railroad and Pathnet concurrently herewith (hereinafter, the "License Agreement"
and, together with this Operating Agreement, the "Agreements"), which Agreements
provide, among other things, that (i) the license granted thereby shall be
subject to the existing rights and interests of other parties, including,
without limitation, [ * * * ] and [ * * * ], and (ii) Railroad makes no
representation or warranty with respect to its right, title or interest, if any,
in and to any portion of the Rail Corridor or its right to grant any type of
license or other right for any party, including Pathnet, to use or occupy the
same.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Railroad and Pathnet hereby agree as
follows:
1
<PAGE> 3
1. CERTAIN DEFINITIONS.
1.1 General Interpretive Principles. For purposes of this Operating
Agreement, except as otherwise expressly provided or unless the context
otherwise requires, (i) the terms defined in this Section have the meanings
assigned to them in this Section and include the plural as well as the singular,
and the use of any gender in this Operating Agreement shall be deemed to include
the other gender; (ii) the word "including" means "including, but not limited
to," and (iii) the article, section and paragraph headings in this Operating
Agreement are for convenience only and are not intended to describe, interpret,
define or limit the scope, extent, or intent of any of the provisions of this
Operating Agreement.
1.2 Incorporation of Recitals. The Recitals set forth above are
incorporated herein by this reference
1.3 Definitions. As used in this Operating Agreement, the following terms
shall have the following respective meanings (unless otherwise expressly
provided):
"Abandonment", when applied to a Rail Corridor, shall mean the application
to (and approval of) the necessary and applicable governmental body for
permission to cease all public rail transportation over any Segment of Rail
Corridor and the removal of all Railroad property, tracks and ties, excluding
permitted or required rail banking conveyances.
"Affiliate" shall mean any Person that, directly or indirectly, through
one or more intermediaries, controls or is controlled by, or is under common
control with, another Person. 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 conclusively presumed in
the case of the direct or indirect ownership of fifty percent (50%) or more of
the equity interests in an entity.
"Agreements" shall be as defined in Recital C.
"As-Built Drawing" shall comprise Pathnet's Construction Plans, revised to
reflect all changes made during actual construction, and shall show, without
limitation, the exact location of Pathnet's System and Facilities in relation to
the nearest track, and shall, upon submission to and approval by Railroad, be
attached hereto as Exhibit A-2.
"Broadform Telecommunications Rights" shall mean, exclusive of the Limited
Telecommunications Rights granted hereunder, the right of owners of and other
parties with interests in the land underlying the Rail Corridor to license
generally, for telecommunications purposes, any and all portions of Rail
Corridor.
"Cable" shall mean a single cable containing Optical Fiber, and any
support material and protective casing, capable of transmitting data or voice
communications in a Fiber Optic Communication System.
2
<PAGE> 4
"Conduit (Innerduct)" shall mean a single duct or pipe, not exceeding two
inches (2") inside diameter, except where specifically required or approved by
Railroad, suitable for housing a Fiber Optic Cable.
"Conduit Right-of-Way" shall mean that portion of the Designated Rail
Corridor on which Pathnet's Fiber Optic Communication System and Facilities
(other than microwave and transmission towers) are located.
"Construction Plans" shall mean the drawings, plans and specifications for
the construction and installation of Pathnet's System and Facilities, showing
the proposed location of all Pathnet's System and Facilities, in sufficient
detail, with distance shown from nearest track, with separate detailed drawings
of all junction, Repeater (Regen) Sites, bridge and tunnel occupancies, showing
depth of installation, details and methods of the proposed construction, with
numbers and size of Conduit(s) (Innerduct(s)) or bare Cable(s) to be placed,
including Optical Fiber count and total mileage for each Segment. Construction
Plans shall clearly note Railroad Valuation Map references, Railroad Survey
Station and Milepost references for all beginning and ending points and all
alignment transition points. Each set of Construction Plans for each Segment
shall have an overview map showing all of the required information.
"Contracted Railroad Personnel" shall mean, for purposes of the
establishment of liability between and among the contracting parties of this
Operating Agreement only, those employees of Railroad utilized in performing or
directly involved in the route designation, inspection, survey, design, plan,
installation, construction, maintenance or operation of Pathnet's Facilities or
System, upon request of Pathnet or as otherwise required or permitted by this
Operating Agreement; and the same shall be considered as sole agents or servants
of Pathnet when performing such activity.
"Contribution Agreement" shall mean that certain Contribution Agreement
dated as of ____________, 1999 by and between, among others, Railroad and
Pathnet.
"CSXT Corridor" shall mean, subject to Section 2.1 of the License
Agreement, all of the Rail Corridor exclusive of the NYC Corridor, as described
in Exhibit 2 attached to the License Agreement.
"CSXT" shall mean CSX Transportation, Inc., any of its predecessor
railroads, and any successor by merger, consolidation or reorganization.
"Default Rate" shall mean a rate of interest equal to the lesser of (a)
the Prime Rate plus five percent (5%) per annum, or (b) the highest non-usurious
rate permitted under applicable law.
"Designated Rail Corridor" shall mean a Segment of the Rail Corridor
selected by Pathnet and approved by Railroad in accordance with the terms of the
Agreements.
"Discontinuance," when related to bare Conduit (Innerduct) or dark Optical
Fiber within Pathnet's Fiber Optic Communication System or Segment thereof,
shall mean that Pathnet has ceased dedicating commercially reasonable efforts to
the sale and marketing of telecommunications products and services on the
applicable Segment for a period of six consecutive (6) months and when related
to lit Optical Fiber within Pathnet's Fiber Optic Communication System or
Segment thereof, shall mean, for a period of six (6) consecutive
3
<PAGE> 5
months, complete (a) disconnection from power source; (b) disconnection from
terminal; or (c) cessation of transmission of signal through such Segment or
System. Such term shall not include a temporary disconnection or cessation of
transmission during periods of maintenance or repair of the Fiber Optic
Communication System.
"Engineer" shall mean the Chief Engineer of CSXT, or the authorized
representative(s) thereof.
"Facilities", when applied to property of or installed by Pathnet, shall
mean Conduit (Innerduct), Cable, carrier pipes, Pathnet wires and poles, Optical
Fibers, junctions, Repeaters (Regens), Handholds, terminals, power sources,
fault alarm system(s), emergency equipment storage shelters, attachments, and
all other structures and articles of personal property connected with, necessary
for, appurtenant to, or useful to the installation, operation, maintenance,
repair, re-installation, replacement, relocation or removal of Pathnet's Fiber
Optic Communication System.
"Fiber Optic" or "Optical Fiber" shall mean a strand of optical waveguide
permitting the transmission of communications signals.
"Fiber Optic Communication System" or "System" shall mean the system
utilizing Optical Fiber as the medium for communications and transmission to be
installed by Pathnet in the Designated Rail Corridor, which may contain
Conduit(s) (Innerduct(s)), Cable(s) and Optical Fiber(s). Such terms shall
include all Conduit (Innerduct), Cable, Optical Fiber, Handholds, manholes,
marker tape, signs, couplers, structure attachment, pull rope, other necessary
ancillary hardware, and bridge, tunnel and trestle attachments, and shall also
include such communications technologies as may hereafter evolve from or
relating to Optical Fiber but which utilize Pathnet's Facilities and/or System
as initially installed or as thereafter modified pursuant to the Agreements.
"Fouling of Tracks" or "Fouled" shall mean the existence, movement or
placement of equipment and/or personnel on a railroad track or within twelve
feet (12') of the centerline of any track within the Rail Corridor.
"Handholds" shall include Cable loops, or boxes or vaults placed in or
above ground at junctions, Repeaters (Regens) or at areas of Cable splicing and
connection, for storage of slack Cable.
"License Agreement" shall have the meaning set forth in Recital C.
"Limited Telecommunications Rights" shall mean Pathnet's right to
construct, install, operate, repair and maintain Pathnet's Facilities and System
as more particularly described in, and subject to the terms and conditions of,
the Agreements, including, without limitation, those contained in Article 6 of
the License Agreement.
"NYC Corridor" shall mean that certain portion of the Rail Corridor
operated by CSXT pursuant to that certain Operating Agreement dated as of June
1, 1999 by and between New York Central Lines LLC, as owner, and CSXT, as
operator, as described in Exhibit 2 to the License Agreement.
"Optical Fiber" shall mean Fiber Optic.
4
<PAGE> 6
"Pathnet" shall mean Pathnet as defined in the introductory paragraph of
this Agreement, any successor by merger, consolidation or reorganization, and
its permitted assignees. For purposes of Pathnet's construction, maintenance,
repair, replacement or removal of Pathnet's System and/or Facilities, "Pathnet"
shall also mean Pathnet's employees, agents, servants, contractors and
subcontractors.
"Person" shall mean any individual, association, partnership, limited
liability company, corporation, joint stock company, trust, joint venture,
unincorporated organization or governmental entity or any department, agency or
political subdivision thereof.
"Prime Rate" shall mean the prime rate of U.S. money center commercial
banks as published in The Wall Street Journal from time to time.
"[ * * * ] Obligations" shall be as defined in the License Agreement.
"Railroad" shall mean Railroad as defined in the introductory paragraph of
this Agreement, any of its predecessor railroads (including Consolidated Rail
Corporation), any successor by merger, consolidation or reorganization, and its
permitted assignees. For the purposes of Article 17 (excluding the
indemnification obligation in Section 17.2 which shall be limited to Railroad as
defined in the introductory paragraph of this Agreement) and Article 18 only,
the term "Railroad" shall also include all Affiliates of CSXT, Affiliates of NYC
Lines and their respective officers, directors, employees and agents.
"Rail Corridor" shall have the meaning set forth in Recital A.
"Relocation", when related to alteration or removal of Railroad's track
from Rail Corridor, shall mean: (a) change in track grade or location in order
to avoid or eliminate curvature problems; (b) creation or deletion of double or
multiple tracks; or (c) installation of additional passing tracks, storage
sidings, spur or industrial lead tracks, and other track movement for operating
or shipping needs or plans of Railroad. The term, however, shall not include
Abandonment or complete removal of any particular tracks in conjunction with
termination or Abandonment of a service route, branch or main line.
"Repeater (Regen)" shall mean a device which regenerates, amplifies or
extends optical signals, used to send the light impulse through Optical Fiber,
and includes attendant equipment, facilities, power source, and technological
changes.
"Repeater (Regen) Sites" shall mean those permitted portions of the Rail
Corridor on which Repeaters (Regens) are located; and shall be limited to an
area of five hundred (500) square feet or less, and located beyond the
Restricted Working Area, unless otherwise specifically permitted in writing by
Railroad
"Restricted Working Area" shall mean the area parallel to and located
thirty feet (30') (or the top of any ditch slope if that distance is greater
than thirty feet (30')) from the centerline of the outermost track (on each
side) in the Rail Corridor.
5
<PAGE> 7
"Route Plan" shall mean the plan showing the route of placement of
Pathnet's Facilities and System in, on or over Segments of Railroad's Rail
Corridor, as prepared by Pathnet and approved in writing by Railroad, as shown
on Exhibit A-1 attached hereto.
"Segment" shall mean either a longitudinal section of Rail Corridor or a
longitudinal section of Conduit (Innerduct) or Cable installed by Pathnet, as
applicable.
"Stockholder Agreement" shall mean that certain Stockholder Agreement
dated as of ____________, 1999 by and between, among others, Railroad and
Pathnet.
"System" shall mean Fiber Optic Communication System.
"Title Deficient Areas" shall mean those portions of the Rail Corridor, if
any, for which Railroad holds title in less than fee simple absolute and for
which Railroad may not otherwise have the right to grant to Pathnet the license
for use and occupancy as contemplated by the License Agreement.
"Trackage Rights" shall mean the rights arising by agreement of one
railroad to use the tracks or right-of-way of another railroad for the carriage
of rail traffic; said agreement ordinarily imparting no ownership interest in
the burdening carrier relating to the tracks or rights-of-way of the burdened
carrier.
"Valuation Maps" shall mean Railroad's Rail Corridor maps, prepared by
Railroad originally in 1913-1919 under 49 U.S. Code Sections 19 and 19a (now
Sections 10781-10783) for the U.S. Surface Transportation Board, successor to
the Interstate Commerce Commission ("S.T.B"), and the S.T.B. regulations, as
updated from time to time.
"[ * * * ] Obligations" shall be as defined in the License Agreement.
2. GRANT OF LICENSE
2.1 Exercise of Rights Under License Agreement. Pursuant to the terms of
the License Agreement, Pathnet has been granted a license to select and utilize
up to [ * * * ] miles of Rail Corridor (including up to [ * * * ] miles of NYC
Corridor) for the installation and operation of its System and Facilities. The
rights and interests granted under the License Agreement shall be implemented in
accordance with the terms and provisions of this Operating Agreement. The term
of this Operating Agreement shall be concurrent with the term of the License
Agreement.
2.2 Construction of the Facilities. Construction of the System and
Facilities by Pathnet shall occur in accordance with the following:
(a) Access and Construction. All access and construction activities on
the property by Pathnet shall be conducted in strict accordance with the
requirements of this Operating Agreement and the Exhibits hereto. In the event
of any conflict between the terms of the Exhibits and the body of this Operating
Agreement, the provisions of the body of this Operating Agreement shall control.
(b) Right to Audit. Railroad shall have the right, during regular
business hours, upon reasonable notice to Pathnet, and at mutually agreeable
times, to conduct field examinations
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of Pathnet's Facilities and System in the presence of an authorized
representative of Pathnet and to examine and audit such books and records of
Pathnet as are appropriate and necessary, in Railroad's sole discretion, to
determine and verify (i) the number and size of Conduits (Innerducts) installed
by Pathnet in the Designated Rail Corridor pursuant to the Agreements, and (ii)
such other items related to Pathnet's compliance with the terms of the
Agreements, as reasonably determined by Railroad. This audit right shall survive
the expiration or other termination of the Agreements for a period of three (3)
years.
3. LIMITATION OF RIGHTS; RAILROAD'S USE RIGHTS.
3.1 Limitation of Rights. Pathnet, at Pathnet's sole risk, cost and
expense, shall furnish all materials, construct, maintain, use, change or remove
Pathnet's Facilities and System or any part thereof, in accordance with the
design, specifications and plans approved as provided in this Operating
Agreement, in a manner reasonably satisfactory to Railroad, all in a prudent and
workmanlike manner, in conformity with any applicable statutes, orders, rules,
regulations and specifications of any public body having jurisdiction thereof,
and so as not to interfere with or endanger, in the sole judgment of Railroad,
any property, traffic (freight or passenger), operations (direct or via Trackage
Rights), maintenance, employees or patrons of Railroad, or of others occupying
or using the property of Railroad for railroad operational purposes at each
location, including other lessees or licensees of Railroad. Railroad may
prohibit development on any Rail Corridor where development would unreasonably
interfere with Railroad's current or reasonably foreseeable future development
for railroad purposes. Pathnet shall be limited to a single build (one-time
placement) in a single trench on each Segment of the Designated Rail Corridor
unless Railroad approves an additional trench, which approval may be withheld in
its sole discretion.
3.2 Railroad's Use Rights. Subject to the terms and provisions of the
Agreements, the rights of Pathnet hereunder shall not limit nor preclude
Railroad's use of its Rail Corridor for other uses and purposes, including
placement and operation of Railroad's own tracks(s), signal and communication
systems (of whatever nature); nor shall this Agreement bar or limit placement
and operation of any other pipe, conduit, cable, optical fiber or wire line by
Railroad or its licensee(s), which does not unreasonably interfere with
Pathnet's Facilities or Fiber Optic Communication System.
4. PLANNING, INSTALLATION AND IMPLEMENTATION.
The procedures and conditions for planning, installation and
implementation of Pathnet's System and Facilities are defined in Exhibit B,
attached hereto.
5. PERMITS.
5.1 Permit Requirements. Pathnet, at its sole cost and expense, shall
secure and maintain in effect all federal, state and local approvals,
authorizations, permits and licenses required for the construction,
installation, operation, maintenance, repair, replacement and/or removal of
Pathnet's Facilities and System, including zoning, building, health,
environmental and communication service permits and licenses, and shall
indemnify Railroad against claims for payment therefor and against any claims
for fines or penalties that may be levied for failure to procure, or to comply
with, such approvals, authorizations, permits or licenses, and any remedial
costs to cure any violations thereof. Without limiting the foregoing, any
development or
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environmental impact statements required for the Facilities or System shall be
prepared by Pathnet, at Pathnet's sole risk, cost and expense, and all costs for
local zoning, construction and subdivision compliance, approval and permits,
shall be borne solely by Pathnet.
5.2 Railroad Cooperation. Railroad shall not hinder Pathnet's attempts to
secure, and shall cooperate with and assist Pathnet, at Pathnet's cost and
expense, in obtaining, any permits, licenses or approvals of governmental
agencies or authorities, or of any necessary third parties, for use of any
structures or facilities (including streets, roads or utility poles) along the
Designated Rail Corridor not solely owned by Railroad.
6. FOULING TRACK; SAFETY RULES.
6.1 Railroad Safety and Operating Rules. Pathnet employees, agents,
contractors and/or subcontractors seeking to enter or engage in Fouling of
Tracks or any portion of the Rail Corridor (including tunnels and bridges) shall
be trained in the safety and operating rules established by Railroad from time
to time (the "Railroad Safety and Operating Rules"), and shall at all times wear
required identification badges and safety equipment (shoes, hardhat, goggles,
etc.). Pathnet shall bear all travel, lodging, course materials and other
similar costs of its attendees at any program given or administered by Railroad
to train such persons, and Railroad shall bear the costs associated with any
instructors.
6.2 Contracted Railroad Personnel. Railroad shall provide Contracted
Railroad Personnel, as necessary, at Pathnet's sole risk, cost and expense as
provided herein, to accompany Pathnet's employees, agents, contractors or
subcontractors during their presence on the tracks and the Rail Corridor.
6.3 Restriction Right. Notwithstanding any contrary provision contained
herein, Railroad reserves the right, in its sole discretion, to exclude or bar
specifically-named individuals from entrance upon Railroad's tracks and/or Rail
Corridor for demonstrating actions dangerous to themselves or others, or for
refusing to comply with Railroad's safety and operating rules, regulations or
directions, or for any other specific cause deemed sufficient in Railroad's sole
discretion.
7. TRACK USE; CLEARANCES; CROSSINGS.
7.1 Restricted Working Area. No goods, materials, equipment or fuel shall
be placed or stored within the Restricted Working Area.
7.2 No Vehicles. Pathnet shall not use Railroad's tracks for maintenance
or the placement of its vehicles without the prior written approval of such use
by Railroad's Engineer, which approval may be withheld in his or her sole
discretion.
7.3 Pathnet Track Support. During any work of any character at any
location on its System, Pathnet, at its sole risk, cost and expense, shall
support the tracks and roadbed of Railroad to prevent any interference or danger
as necessary in the sole judgment of Railroad's Engineer. Upon the completion of
all work, Pathnet shall restore such tracks, roadbed and other property of
Railroad to the same functional and operational condition as approved by
Railroad's Engineer, which approval may be withheld in his or her sole
discretion.
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7.4 Railroad Track Support. Railroad may perform or contract to have
performed any or all the work of supporting tracks and roadbed and of restoring
the same, at the sole risk, cost and expense of Pathnet, if (a) Pathnet fails to
perform such work timely or satisfactorily, (b) such work is required by
Railroad's labor agreements in existence at the time, or (c) requested by
Pathnet (subject to availability of Railroad's personnel and equipment and
satisfactory security for payment of costs by Pathnet).
7.5 Crossing Specifications. Crossings of Railroad's track and Rail
Corridor necessitated by difficulties in Conduit (Innerduct) or Cable
construction (i.e., locations of manmade or natural structures, waterways,
streets, etc.) shall be coordinated with and approved in writing by Railroad's
Engineer, which approval may be withheld in his or her sole discretion, and
installation of such crossings shall be in accordance with the requirements set
forth in Exhibit I, all at Pathnet's sole risk, cost and expense.
8. FLAGGING; WATCHMEN.
8.1 General. Railroad shall have the right, in its sole discretion and at
any time during any period of construction, maintenance, repair, renewal,
alteration or removal of Pathnet's System or Facilities, to place watchers,
flaggers, inspectors or supervisors, for the protection of the operations of
Railroad (including freight and passenger service) or the property of Railroad
(including Amtrak) or others (including Pathnet) on the Rail Corridor or other
Railroad property, at the sole risk, cost and expense of Pathnet.
Notwithstanding any contrary provision contained herein, watchmen, flagmen,
inspectors or supervisors placed upon the Rail Corridor or other Railroad
property while working on Pathnet's System or Facilities under this Article 8
shall be deemed to be Contracted Railroad Personnel of Pathnet.
8.2 Scheduling. Pathnet recognizes that because of Railroad's labor and
employment agreements: (a) the furnishing of any watchers or flaggers needs to
be requested at least thirty (30) days prior to actual work date for short term
flagmen or forty-five (45) days prior to actual work date for long term flagmen,
or such watchers/flaggers may not be available; (b) once a watcher/flagger is
designated, he/she cannot be pulled from the job less than seven (7) days prior
to work date, or cost thereof may be incurred by Pathnet; (c) once assigned, for
any period of time, such watcher/flagger must be paid for at least an eight (8)
hour shift, regardless of lesser hours worked; and (d) if Pathnet's needs
overlap ordinary shift turns (or tricks), Pathnet may incur flagging costs for
both shifts/tricks.
9. FACILITY LOCATION SIGNS.
9.1 Pathnet, at its sole cost and expense, shall furnish, erect and
thereafter maintain, signs showing the location of all underground Facilities
and Pathnet's contact telephone number. Such signs shall be painted and placed
in conformity with the provisions of Exhibit D attached hereto, or as otherwise
mutually agreed upon in writing by Railroad and Pathnet.
10. MAINTENANCE OF RAIL CORRIDOR, FACILITIES.
10.1 Maintenance of Conduit Right-of-Way. Unless Railroad and Pathnet
otherwise agree in writing, Railroad shall not be responsible for maintenance of
Pathnet's Conduit Right-of-Way, or for clearing or removing of trees, shrubs,
plants, ice, snow or debris therefrom. If
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Railroad agrees, at Pathnet's request, to extend maintenance to cover Pathnet's
Conduit Right-of-Way, Railroad shall cut, mow and/or treat such Conduit
Right-of-Way maintenance only at the same time as Railroad performs its own
track or Rail Corridor maintenance. Railroad shall perform such extended
maintenance at Pathnet's sole risk, cost and expense and Railroad's employees
performing such maintenance shall be deemed to be Contracted Railroad Personnel
of Pathnet. Railroad shall be reimbursed for all costs incurred, including,
without limitation, any and all billable expenses, labor costs (Railroad or
contract), supplies, parts, materials, etc., directly associated with such
extended maintenance program.
10.2 Maintenance of Facilities. Pathnet shall maintain its Facilities, and
all ancillary structures within Conduit Rights-of-Way, at Pathnet's sole risk,
cost and expense.
11. RAILROAD APPROVALS; ADMISSIONS.
11.1 Any approval given or supervision exercised by Railroad hereunder, or
failure of Railroad to object to any work done, material used or method of
construction or maintenance of Pathnet's System or Facilities, shall not be
construed as an admission of responsibility by Railroad or as a waiver of any of
the obligations of Pathnet under this Operating Agreement.
12. RAILROAD EXPENSES; EMPLOYEE COSTS.
12.1 General. Railroad's costs and expenses for work performed for or at
the expense of Pathnet pursuant to this Agreement (including review and approval
of Pathnet plans and designs) shall be paid by Pathnet within thirty (30) days
of Pathnet's receipt of itemized bills therefor irrespective of any billing
disputes. Interest on unpaid billed amounts shall accrue monthly after the first
thirty (30) days at an annual rate equal to the Default Rate. Pathnet shall have
ninety (90) days from payment to notify Railroad, in writing, of any billing
disputes. Billing disputes that are not resolved within sixty (60) days of such
notice shall be resolved in accordance with the provisions of Article 25.
12.2 Invoice Format. Railroad bills for labor or supervision shall
include: Railroad's Project I.D. Number, Pathnet's Project I.D. Number,
Pathnet's Authorization for Fiber Optic Cable Work (substantially in the form of
Exhibit L attached hereto), and the dates, locations, party names, hourly or
salaried billing rates, number of hours, outside expenses and total charge.
12.3 Permitted Costs and Expenses. Documented costs and expenses directly
attributable to work performed for Pathnet shall include only: (a) labor costs,
plus payroll overhead and additives applicable to each Railroad employee's
salary or hourly rate as set forth in Exhibit J and as may be modified or
updated from time to time by Railroad; (b) for contracted labor or consultants,
reasonable market-based amounts as billed to and paid by Railroad; (c) necessary
and reasonable travel and transportation expenses; (d) the reasonable,
market-based total cost of materials used and equipment rentals, plus actual
cost of freight charges and handling; and (e) reasonable rental cost for any
Railroad equipment used by Railroad or Pathnet or their respective employees or
contractors. Costs and expenses for Railroad's own labor and personnel, and
non-contract administrative overhead, shall be limited to the sum of (i) then
current hourly rate plus, (ii) applicable overhead and additives (which shall
include, but not be limited to, vacation, holiday, health and welfare, insurance
and supervision) in accordance with the applicable rates set forth in the then
current EB-2 Schedule in effect at the time the expense is
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incurred, published by Railroad and amended from time to time. The current EB-2
Schedule applicable as of the Effective Date is attached hereto as Exhibit J.
Updated EB-2 Schedules will be available upon Pathnet's written request.
12.4 Consultant. Railroad shall have the right, in its sole discretion, to
place a consultant on any installation site in lieu of Railroad's own
supervisory personnel, at Pathnet's sole cost and expense (provided such
expenses are reasonable, market-based and consistent with the provisions of
Section 12.3 above), to monitor installation and compliance with approved
Construction Plans, to log progress, and to log the time spent by Railroad
employees (including Contracted Railroad Personnel) in accordance with the
Agreements (by name, date and purpose). Such consultant shall advise Railroad
and Pathnet of any deviation from approved Construction Plans requested by
Pathnet or any of Pathnet's contractors.
12.5 Records. Railroad shall keep accurate records of all costs and
expenses attributable to Pathnet pursuant to the Agreements, and Pathnet shall
have the right, at Pathnet's sole cost and expense, to examine and copy the
applicable records of Railroad to verify that such charges accurately reflect
the costs and expenses thereof.
13. LIENS AND ENCUMBRANCES.
13.1 Pathnet shall not permit any mortgage, pledge, security interest,
lien or encumbrance, including, without limitation, tax liens or encumbrances
and liens or encumbrances with respect to work performed or equipment furnished
in connection with the construction, installation, operation, repair,
maintenance, replacement or removal of the System or Facilities or any portion
of the Rail Corridor occupied by Pathnet (collectively, "Liens or
Encumbrances"), to be established or remain against the Rail Corridor or any
other property of Railroad. In the event that any Railroad property becomes
subject to any Lien or Encumbrance, Pathnet agrees to pay, discharge, bond off
or remove the same within thirty (30) days of Pathnet's receipt of notice that
such Lien or Encumbrance has been recorded, filed or docketed against such Rail
Corridor or other Railroad property; provided, however, that if Pathnet provides
a bond or other security acceptable to Railroad for the payment and removal of
such Lien or Encumbrance, Pathnet shall have the right to challenge, at its sole
expense, the validity and/or enforceability of any such Lien or Encumbrance.
Pathnet shall indemnify, defend and hold Railroad harmless against all damages,
costs (including reasonable attorneys' fees) and expenses, arising out of any
lien, the enforcement or removal thereof, or encumbrance caused by the same,
with respect to the Rail Corridor or any portion thereof or any other Railroad
property.
14. TAXES.
14.1 Transfer Taxes. Except as provided in Section 14.4 of this Operating
Agreement, Pathnet shall pay all transfer or recordation taxes, documentary
stamps, and any similar expenses in connection with the transfer or execution of
the License (as defined in the License Agreement), this Operating Agreement, the
Contribution Agreement, the System and/or the Facilities.
14.2 Sales and Use Taxes. Except as provided in Section 14.4 of this
Operating Agreement, if, pursuant to the Agreements or the Contribution
Agreement (i) the sale, acquisition, license, grant, transfer or disposition of
property or rights, or (ii) the payment
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of any fee or compensation or the payment to Railroad for services provided
thereunder, requires the payment of any sales or use tax (including any Canadian
GST or provincial sales tax) under any statute, regulation or rule, Pathnet
shall pay the same, plus any penalty or interest thereon, to Railroad when due
or if allowable, directly to such taxing authority, and shall indemnify and hold
Railroad harmless therefrom.
14.3 Property Taxes. Pathnet shall pay all annual and periodic ad valorem
and other taxes levied or assessed upon Pathnet's Facilities or the System, and
shall indemnify and hold Railroad harmless therefrom.
14.4 Taxes Payable by Railroad. Pathnet shall have no responsibility for
(i) any taxes (including but not limited to transfer, sales, use, income or
property taxes), assessments or other impositions attributable to Conduit
(Innerduct) or other telecommunications assets or services provided to Railroad
pursuant to Article 8 of the License Agreement; (ii) taxes based on Railroad's
income or corporate franchise; or (iii) property or franchise taxes that are
attributable to the Rail Corridor and not to Pathnet's Facilities or System.
Railroad shall reimburse Pathnet for any such taxes, assessments or impositions
within thirty (30) days after written request.
14.5 Mutual Cooperation. Each party shall cooperate with the other party,
at the first party's sole cost and expense, in the prosecution of any claim for
refund, rebate, reduction or abatement of any taxes which are the responsibility
of the first party under the Agreements or the Contribution Agreement, provided
that a reasonable basis exists for such refund, rebate, reduction or abatement.
The first party shall reimburse the second party for all reasonable out of
pocket expenses incurred in connection therewith. Notwithstanding any other
provision of this Section, the first party is not obligated to pay or reimburse
the second party for any tax for which the first party is liable under this
Section if the party first elects to prosecute a claim for reduction or
abatement of such taxes and prepayment thereof is not a condition to prosecuting
the claim. The first party shall pay or reimburse the second party for any such
taxes when the taxes finally are adjudged to be due and owing by the highest
administrative or judicial authority to which an appeal has been taken.
15. SITES FOR NON-CABLE FACILITIES.
15.1 Non-Cable Areas. Railroad, insofar as it has the right and can
reasonably do so, shall make available to Pathnet for Pathnet's sole use, areas
not to exceed five hundred (500) square feet within the Designated Rail Corridor
for use by Pathnet as Repeater (Regen) Sites, or power or auxiliary power
stations, or sites for construction facilities or temporary storage of materials
and fuel for power stations. Railroad shall have no duty to provide such sites
at a requested location if the width, nature or other uses or planned uses of
the Rail Corridor by Railroad at such location or if restrictions on Railroad's
title or interest in the property preclude such use by Pathnet.
15.2 Adjacent Land. If for any reason, Railroad is unable to provide such
site within the Designated Rail Corridor, and Railroad has available adjacent
land suitable for the location of such site, then Railroad shall furnish the use
of a reasonable portion of such adjacent land to Pathnet for such site at a fee
to be negotiated; provided, however, that such use will not interfere with
Railroad's current or reasonably foreseeable future use of such property. Such
adjacent land usage shall be documented by Railroad's standard form lease, the
form of which is attached hereto as Exhibit C.
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15.3 No Obligation as to Third Parties. Notwithstanding the provisions of
Sections 15.1 and 15.2, Railroad shall have no obligation to provide or make
available any portion of any adjacent land or allow the expansion of any
structure of Pathnet located thereon beyond five hundred (500) square feet or
such additional size initially improved by Pathnet with the approval of
Railroad, which approval may be withheld in its sole discretion, for use by
third party purchasers, sublicensees, transferees or permitted assignees. Any
such accommodation shall be at a fee to be negotiated, shall not interfere with
Railroad's current or future use of such property and shall be documented by
Railroad's standard form lease, the form of which is attached hereto as Exhibit
C. This Section 15.3 shall not apply to Pathnet's partners in development of the
Rail Corridor, and shall not restrict Pathnet's ability to make space in
Pathnet's existing Facilities available to third parties on such terms as
Pathnet determines in its sole discretion. Pathnet shall, except to the extent
caused by Railroad's gross negligence or willful misconduct, (i) assume
responsibility for any and all claims, liabilities, damages, costs (including
reasonable attorneys' fees) and expenses arising out of or based upon the acts
or omissions of any such third party in or around such non-cable facilities, the
Rail Corridor or other Railroad property, and (ii) indemnify, defend and hold
Railroad harmless from and against any and all losses and damages suffered by
such third party as a result of the presence of such third party or its
facilities or equipment in or around such non-cable facilities, the Rail
Corridor or other Railroad property.
15.4 Rent. Rents for any land(s) outside of the Designated Rail Corridor,
or for lands within the Designated Rail Corridor in excess of five hundred (500)
square feet or for uses other than those described in Section 15.1, shall be at
a fee to be negotiated.
15.5 Approval of Structure. The location and size of any buildings or
other structures to be placed by Pathnet or any third party within Railroad's
Rail Corridor or on Railroad's other property shall be as approved by Railroad's
Engineer, which approval may be withheld in his or her sole discretion, on plans
submitted in accordance herewith.
16. INDEPENDENT CONTRACTOR STATUS.
16.1 Except with respect to the Contracted Railroad Personnel, Railroad
reserves no control whatsoever over the employment, discharge, compensation of
or services rendered by Pathnet's employees, agents or contractors, and it is
the intention of the parties that Pathnet shall be and remain a licensee and
that nothing herein shall be construed as inconsistent with that status or as
creating or implying any partnership or joint venture relationship between
Pathnet and Railroad.
17. LIABILITY; INDEMNITY.
17.1 Pathnet's Release and Indemnification. Recognizing that Railroad has
owned and/or operated the Rail Corridor for many years prior to the Effective
Date and prior to entry thereupon by employees, agents, contractors or
representatives of Pathnet, and in addition to the indemnities otherwise
provided in the Agreements, Pathnet hereby assumes, releases and shall defend,
indemnify, protect and save Railroad harmless from and against the following:
(a) All claims, liabilities, losses, damages, causes of action,
costs, and expenses (including reasonable attorneys' fees and costs) arising
from: (1) damage to or destruction of Pathnet's Facilities or System except to
the extent attributable to [ * * * ] of
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Railroad, its employees or contractors and (2) [ * * * ], including any claim or
loss to any client, customer, patron or other purchaser, transferee, sublicensee
or permitted assignee of Pathnet's rights or services resulting from [ * * * ].
Railroad shall not under any circumstances be liable for interruption of or
damage to the installation, operation, maintenance or repair of Pathnet's
Facilities or System unless attributable to the [ * * * ] of Railroad, its
employees (including Contracted Railroad Personnel), agents, contractors, or
other parties performing services for Railroad. In no event shall Railroad be
liable for [ * * * ];
(b) All claims, liabilities, losses, damages, causes of action,
costs, and expenses (including reasonable attorneys' fees and costs) arising
from injury to or death of any persons on or about Pathnet's Facilities or
System, including, but not limited to, Pathnet's employees, agents, contractors,
subcontractors, invitees, or other such third parties, purchasers, transferees,
permitted assignees, licensees or sublicensees, resulting from the existence,
construction, maintenance, operation, use, repair, change, placement,
replacement, relocation and/or subsequent removal of Pathnet's Facilities or
System, or any part thereof, or the use of the Rail Corridor or other Railroad
Property, regardless of any approvals, reviews, controls or standards imposed by
Railroad or other actions of Railroad, unless such claims, losses, damages,
causes of action, costs, and expenses (including reasonable attorneys' fees and
costs) result from the [ * * * ];
(c) All claims, liabilities, losses, damages, causes of action, costs
and expenses (including reasonable attorneys' fees and costs) arising from any
breach of the Agreements by Pathnet, including, but not limited to, any failure
of Pathnet to support track and/or roadbed, as provided herein or any failure of
Pathnet to secure permits or other approvals as provided herein, regardless of
cause, [ * * * ];
(d) All claims, liabilities, losses, damages, causes of action,
costs, and expenses (including reasonable attorneys' fees and costs) arising
from any slide, soil disturbance or environmental damage or impairment resulting
from the existence, construction, installation, maintenance, operation, use,
repair, change, placement, relocation and/or subsequent removal of Pathnet's
Facilities or System, regardless of cause, [ * * * ];
(e) Any claim (regardless of merit), loss or damages awarded, whether
civil or criminal, under any [ * * * ], or under any [ * * * ] it being
understood and agreed that this indemnity shall not apply to any claims, loss or
damage arising out of any other agreement between the parties or the parties'
performance thereunder, including the contributions set forth in the
Contribution Agreement; in any such actions, Railroad shall have the right to
designate and/or employ independent counsel, if deemed necessary by Railroad, to
protect its interests, and the expense of such representation shall be paid or
reimbursed by Pathnet;
(f) Reserved.
(g) All claims, liabilities, losses, damages, causes of action,
costs, and expenses (including reasonable attorneys' fees and costs) arising
from any damage or injury to (including
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loss of use or service of or loss of revenue or profit from) any facilities,
cables, wires, pipes, casings, conduits, innerducts or ducts of any other party
or Conduit Right-of-Way operator or user, licensee, sublicensee, transferee,
purchaser or permitted assignee arising out of or related to any act or omission
of Pathnet or Pathnet's employees, agents, contractors, subcontractors,
licensees, sublicensees, customers, partners, [ * * * ] or others acting at the
direction of any of the foregoing, unless caused by the [ * * * ] of Railroad or
Contracted Railroad Personnel;
(h) All claims, liabilities, losses, damages, causes of action,
costs, and expenses (including reasonable attorneys' fees and costs) arising
from any act or omission of Pathnet or Pathnet's employees, agents, contractors,
subcontractors, licensees, sublicensees, customers, partners, [ * * * ] or
others acting at the direction of any of the foregoing [ * * * ].
17.2 Railroad's Indemnification. Railroad hereby assumes responsibility
for, and shall indemnify, defend and hold Pathnet harmless from, claims,
liabilities, losses, damages, causes of actions, costs, and expenses (including
reasonable attorneys' fees and costs) arising from:
(a) Death of or injury to any employee(s) of Railroad or Railroad's
Affiliates, other than Contracted Railroad Personnel;
(b) Destruction of or damages to any Railroad or Railroad Affiliate
facilities or equipment (moving or stationary) or property;
(c) Interruption to or cessation of freight rail service;
(d) The willful misconduct of Railroad's Affiliates or,
notwithstanding anything to the contrary contained herein, Contracted Railroad
Personnel.
UNLESS such claim, liability, loss, damage, cause of action, cost or expense is
caused by, arises from, or results in whole or in part from:
(i) [ * * * ] of Pathnet (including, but not limited to,
any improper or negligent plan and/or design, construction, installation,
maintenance, placement, operation, repair, relocation use or removal of
Pathnet's System or Facilities);
(ii) any breach of the Agreements by Pathnet;
(iii) any direct rescheduling, delay or diversion costs, as set
forth in Exhibit B; or
(iv) any matter which is the subject of Pathnet's release and
indemnification in Section 17.1.
17.3 Notice of Claims; Indemnification Procedures. Upon receipt of notice
by Railroad or Pathnet, as applicable, (the "Indemnitee"), of any loss, event,
happening or occurrence which would be the basis of a claim by the Indemnitee
under the provisions of this Article 17 (an "Indemnified Claim"), the Indemnitee
shall immediately provide written notice to the other party (the "Indemnitor")
of such Indemnified Claim. So long as the Indemnitor is not in default in the
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performance of its obligations under the Agreements, as between the Indemnitee
and the Indemnitor, the Indemnitor shall retain primary responsibility for the
conducting of any legal and/or administrative action or other proceeding
regarding any such Indemnified Claim (an "Indemnified Claim Proceeding") and the
defense (and any appropriate appeal) thereof. Legal counsel retained with
respect to any Indemnified Claim proceeding shall be selected by the Indemnitor,
but shall be subject to the reasonable prior approval of the Indemnitee. As
between the Indemnitee and the Indemnitor, all costs incurred with respect to
any Indemnified Claim Proceeding (including, but not limited to, reasonable
costs and attorneys' fees) shall be borne by the Indemnitor, and the
Indemnitor's indemnification obligations set forth in this Article 17 shall
extend to all such costs. Nothing contained herein shall in any way limit the
Indemnitee's right to participate and/or retain independent legal counsel, at
the Indemnitee's expense, with respect to any Indemnified Claim proceeding, but
the Indemnitee shall cooperate with the Indemnitor and coordinate Indemnitee's
participation and/or use of such independent counsel in a matter not
inconsistent with Indemnitor's positions and interests in such Indemnified Claim
Proceeding, to the extent reasonably possible and not adverse to the interests
of Indemnitee. Notwithstanding the foregoing, in the event Indemnitee
determines, in Indemnitee's reasonable opinion, that there is a conflict of
interest or other circumstance whereby such Indemnitor's retained legal counsel
cannot adequately represent Indemnitee's interests in any Indemnified Claim
Proceeding, Indemnitee shall have the right to retain independent legal counsel
and Indemnitor's indemnification obligations set forth in this Article 17 shall
extend to all costs incurred with respect to such separate representation. In
the event that an Indemnitor defends an Indemnitee pursuant to the terms hereof,
and the final adjudication determines that the Indemnitee bears some portion of
liability under the Indemnified Claim which is not subject to the Indemnitor's
indemnification obligations hereunder, the costs of such defense will be
apportioned between the Indemnitor and Indemnitee based upon such parties'
ultimate liability after giving effect to the indemnification provisions hereof.
Any settlement of an Indemnified Claim shall be subject to the written approval
of both the Indemnitee and the Indemnitor. Indemnification payment shall be made
within thirty (30) days of such approval.
17.4 Exceptions to Liability. Notwithstanding any contrary provision
contained herein, (a) Railroad shall not have any liability whatsoever for any
death of or injury to persons or damage to or loss of property arising from or
resulting in connection with any train derailment, and Pathnet hereby releases
Railroad and its Affiliates from any and all claims, liabilities, losses,
damages, causes of action, costs and expenses (including reasonable attorneys'
fees and costs) arising from or resulting in connection with any train
operation, accident or derailment, irrespective of the negligence, gross
negligence or willful misconduct of Railroad, and (b) Pathnet shall have no
liability relating to any Conduits (Innerducts) installed for [* * *] to
Railroad pursuant to the License Agreement; provided, however, that (x) any such
Conduits (Innerducts) shall be of equal or greater quality as Pathnet's own
Conduits (Innerducts), and (y) [ * * * ] which Railroad acknowledges [* *
*].
17.5 Survival. The provisions of this Article 17 shall survive the
expiration or earlier termination of the Agreements.
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18. INSURANCE.
18.1 Railroad Protective Liability Insurance. Before any period of
construction of any portion of the System or Facilities (including preliminary
surveys and inspections), Pathnet shall purchase, or cause its contractor(s) to
purchase, and to maintain in full force and effect, Railroad Protective
Liability Insurance ("RPL") naming Railroad as the insured. Said RPL policy
shall be written on the form prescribed in the Federal Aid Highway Program
Manual, Volume 6, Chapter 6, Section 2, Subsection 2, as amended from time to
time, or as superseded by the AAR/AAHSTO form, and shall provide available
limits of not less than [ * * * ] per occurrence, [ * * * ] aggregate for
bodily injury and property damage (unless Pathnet designates a hazardous
material Rail Corridor as a Conduit Right-of-Way, and then [ * * * ] per
occurrence, [ * * * ] aggregate). The original of said RPL policy shall be
furnished to and approved by Railroad, prior to the commencement of any entry or
other operations under the Agreements.
18.2 Liability Insurance. Pathnet shall purchase and maintain, until all
of its obligations under the Agreements have been fully discharged and
performed, the following insurance coverage: (a) Commercial General Liability
Insurance ("CGL"), including any applicable umbrella policy, with contractual
liability covering actions assumed in the Agreements by Pathnet, providing for
available limits of not less than [ * * * ] single limit, bodily injury and/or
property damage combined, for damages arising out of bodily injuries to or death
of all persons in any one occurrence and for damage to or destruction of
property, including the loss of use thereof, in any one occurrence, including
Federal Employers Liability Act claims ("FELA") against the Railroad, or other
liability arising out of or incidental to railroad operations; (b) Workers'
Compensation, Employer's Liability Insurance and Occupational Disease Insurance;
and (c) Business Automobile Liability Insurance. If any motor vehicles are used
in connection with the work to be performed under the Agreements, Pathnet shall
purchase and maintain Business Automobile Liability Insurance with limits of not
less than [ * * * ] single limit, bodily injury and/or property damage
combined, for damages to or destruction of property including the loss of use
thereof, in any one occurrence. If, in Railroad's reasonable opinion, a higher
limit of liability is necessary for any insurance policy required hereunder,
Railroad shall so notify Pathnet and Pathnet shall, within thirty (30) days of
receipt of such notice, provide a copy of the endorsement to the appropriate
policy increasing the liability coverage to the required limit.
18.3 Policy Requirements. All insurance required hereunder shall be
effected by valid and enforceable policies issued by insurer(s) of financial
responsibility and authorized to do business in the states where the System
and/or Facilities are located, all subject to the reasonable prior approval of
Railroad. Except for the RPL policy (on which Railroad shall be the named
insured), Pathnet's liability insurance policies shall name Railroad as an
additional insured and will not have any exclusions for liability relating to
railroad operations by endorsement. The Pathnet's Workers' Compensation and
property insurance policies shall include waivers of subrogation rights
endorsements. All policies shall contain a provision for thirty (30) days'
written notice to Railroad prior to any expiration or termination of, or any
change in, the coverage provided. The insurance company shall be required to
provide Railroad with at least thirty (30) days' written notice prior to such
expiration, termination or change in any insurance coverage. Prior to any entry
upon the Rail Corridor pursuant to the Agreements and upon Railroad's request
thereafter, Pathnet shall provide Railroad with the original RPL policy and with
certificates of insurance for all other coverages showing that the required
coverages are in effect for the term of
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the Agreements. The liability assumed by Pathnet under the Agreements,
including, but not limited to, Pathnet's indemnification obligations, shall not
be limited to the insurance coverage stipulated herein.
19. NOTICES.
19.1 General. Unless otherwise provided herein, all notices,
communications and deliveries required or permitted under the Agreements shall
be in writing and shall be (a) delivered personally, (b) sent by facsimile
transmission with subsequently transmitted confirmation of receipt, (c) sent by
overnight commercial air courier (such as Federal Express), or (d) mailed,
postage prepaid, certified or registered mail, return receipt requested; to the
parties at the addresses or facsimile numbers hereinafter set forth:
Pathnet: Railroad:
- --------
Pathnet, Inc. CSX Real Property, Inc.
1015 31st Street, NW 301 West Bay Street, Suite 800 (J915)
Washington, D.C. 20007 Jacksonville, Florida 32202
Attention: President Attention: Assistant Vice President
Network Services
Facsimile No: (202) 625-7369 Real Estate Operations
Facsimile No. (904) 633-4586
With a Copy To: With a Copy To:
- --------------
Pathnet, Inc. CSX Transportation, Inc.
1015 31st Street, NW 500 Water Street (J150)
Washington, D.C. 20007 Jacksonville, Florida 32202
Attention: General Counsel Attention: Assistant General Counsel
Facsimile No: (202) 625-7369 Facsimile No. (904) 359-7518
or at such other address(es) or facsimile number(s) as a party shall have duly
notified the other party.
In addition to the foregoing, any notice, communication or delivery required or
permitted under Sections 17 and 18 shall also be sent to:
CSX Corporation
500 Water Street (J907)
Jacksonville, Florida 32202
Attention: Risk Manager
Risk Management Department
Facsimile No. (904) 633-5096
Any such notice, communication or delivery shall be deemed delivered upon the
earliest to occur of: (a) actual delivery; (b) the same day as facsimile
transmission (or the first business day thereafter if faxed on a Saturday,
Sunday or legal holiday); (c) one (1) business day after shipment
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by commercial air courier as aforesaid; or (d) upon receipt if sent by certified
or registered mailing as aforesaid.
19.2 Planning, Design, Installation and Construction Phase Access Notice.
During the Planning and Design and the Installation and Construction Phases,
Pathnet shall, except in the case of emergency, give Railroad's Engineer at
least ten (10) days' written notice before commencing construction or bringing
any vehicle or equipment onto the Rail Corridor or other Railroad property, and
forty-eight (48) hours' notice before any other entry. Any such written notice
shall state the name(s) of Pathnet employee(s) in charge or contractor(s) or
subcontractor(s) performing work or making such entry.
19.3 Maintenance and Operation Phase Access Notice. During the Maintenance
and Operation Phase, in order to secure safety of operated trains, crews,
passengers and cargo of Railroad, and safety of Pathnet employees and/or
contractors, Pathnet shall give CSXT's local Director of Dispatch, (904)
381-2765 and (904) 359-7551, as representative of Engineer, advance telephone or
telegraph notice of entry onto any portion of the Rail Corridor, which entry
shall be subject to consent and approval of Railroad's Engineer as to method and
timing, which approval may be withheld in his or her sole discretion. Any such
notice shall state the name(s) of Pathnet's employee(s) or contractor(s) or
subcontractor(s) performing work or making such entry.
19.4 Emergency Notice. In case of disaster (such as a train derailment or
System failure) or other emergency demanding immediate examination or repairs to
the existing System or Facilities, notice shall be given by either party to the
other in person or by telephone to the Emergency Response Center(s) designated
on Exhibit H attached hereto or as otherwise designated in writing by each party
to the other. Such initial verbal or telephonic notice, however, must be
confirmed in writing within forty-eight (48) hours. Each party will cooperate
with the other to permit restoration of each party's operations as promptly as
feasible after such emergency.
20. RELOCATIONS; ALTERATIONS.
20.1 Relocation to Accommodate Railroad. If Railroad determines that any
Pathnet Facilities or System must be changed, altered or relocated after initial
construction because of Railroad's own track or facility relocations or rail
operational needs or plans (including additions, changes to track(s) to
accommodate freight or passenger customers of Railroad), or any governmental
agency or requirement, Railroad shall promptly give written notice thereof to
Pathnet of such needs, plans or requirements. Within sixty (60) days of receipt
of such notice, Pathnet shall protect or move the Pathnet Facilities and System,
at Pathnet's sole cost and expense, and in a manner satisfactory to Railroad;
provided, however, that Railroad shall reimburse Pathnet for any such costs or
expenses received by Railroad from a governmental entity or other entity in
connection with such relocation.
20.2 Relocation to Accommodate Third Party. In the event of a Railroad
relocation to accommodate any third party other than as provided in Section
20.1, Pathnet shall protect or move its Facilities and System upon receipt from
Railroad of an agreement, in writing, obligating such third party to reimburse
Pathnet for all costs and expenses incurred by Pathnet, including reasonable
administrative and overhead, in connection therewith, or, if Railroad is unable
to obtain such an agreement from such third party, Railroad's agreement to
reimburse Pathnet for the
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foregoing costs (not to include any reimbursement of lost income). Pathnet shall
submit any invoice to Railroad within ninety (90) days after such relocation
work is completed.
20.3 Replacement Land. In the event of any relocation of Pathnet's System
or Facilities under Section 20.1, Railroad shall not be required to purchase for
Pathnet any replacement land or right-of-way or to pay Pathnet the cost to
secure same if there is not available Rail Corridor. However, Railroad agrees to
allow Pathnet to relocate to any other available adjacent or nearby Rail
Corridor or other land owned by Railroad at Pathnet's sole cost; provided,
however, that Railroad shall not be entitled to any additional payment for such
replacement Railroad land or Rail Corridor and the total mileage of such Rail
Corridor or replacement land to which Pathnet relocates shall be deducted from
and the abandoned Rail Corridor shall be added to the total mileage of
Designated Rail Corridor permitted under the License Agreement.
21. LINE SALES; ABANDONMENT.
21.1 In the event of a sale or other transfer of any portion of the
Designated Rail Corridor, such sale shall be made expressly subject to the
Agreements and the rights of Pathnet thereunder. Notwithstanding any provision
herein to the contrary, Railroad shall have the absolute right, in its sole
discretion, to effect an Abandonment of all or any portion of the Rail Corridor.
22. CONDEMNATION.
22.1 Severance of Interests. In the event that any portion of the
Designated Rail Corridor becomes the subject of a condemnation or appropriation
proceeding or offer to acquire, Pathnet's interest (in its Facilities and/or
System and in its occupation of the Segment) shall be severed from Railroad's
interest (both physical and ownership rights) in such proceedings, and the
parties agree to have any such condemnation or appropriation awards specifically
allocated between Pathnet's interest and Railroad's interest.
22.2 Removal of Facilities. Should any Segment of the Designated Rail
Corridor used by Pathnet for a part of Pathnet's Fiber Optic Communications
System or Facilities be condemned, appropriated and/or acquired by any
governmental agency (or other party cloaked with the power of eminent domain)
for public purpose or use, then to the extent required by the condemning
authority, any Facilities or System of Pathnet within such Designated Rail
Corridor not condemned, appropriated and/or acquired by such agency or authority
shall be promptly removed by Pathnet at Pathnet's cost, unless Pathnet makes
other arrangements with the condemning or appropriating agency or authority.
22.3 Notice. Railroad shall promptly notify Pathnet of any condemnation or
appropriation action filed against any portion of the Designated Rail Corridor.
Railroad shall also promptly notify Pathnet of any threatened condemnation or
offer to acquire by any governmental agency (or other party cloaked with the
power of eminent domain) affecting the Designated Rail Corridor (provided the
Railroad employees administering this Agreement have actual knowledge thereof).
Further, any voluntary sale to the condemning or appropriating agency or
authority pursuant to any threatened condemnation or offer to acquire shall be
in accordance with the provisions of Article 21.
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23. PATHNET DISCONTINUANCE.
23.1 In the event of any Discontinuance by Pathnet of its Facilities,
System, Segment or any substantial portion thereof, Railroad shall have the
option, to be exercised in Railroad's sole discretion, to terminate this
Agreement as to the affected Segment(s) upon written notice to Pathnet. Upon
such termination, removal of Pathnet's Facilities and System within such
affected Segment(s) shall be governed by Section 26.2 hereof.
24. RAILROAD'S RIGHT TO TERMINATE OR REQUIRE SUSPENSION OF ACTIVITIES; FAILURE
TO MAKE TIMELY PAYMENT
24.1 Material Breach; Remedy. If Pathnet or Railroad fails to perform,
violates or defaults under any material terms or conditions of the Agreements
("Material Breach"), and fails to remedy any such Material Breach in accordance
herewith, then and in that event, the non-defaulting party shall have the
following rights and remedies:
(i) if the Material Breach (a) adversely affects railroad safety or
operation, or (b) relates to the payment of any fees and expenses due to
Railroad under the Agreements, Railroad shall have the right to terminate
this Agreement upon written notice to Pathnet; and
(ii) if the Material Breach is not of the type and nature described
in Subsection 24.1(i), Railroad shall have the right, upon written notice
to Pathnet, to suspend immediately all then pending and future
installation, construction, maintenance and/or deployment on the entire
Rail Corridor until such time as the applicable Material Breach is cured
and Pathnet demonstrates to Railroad's reasonable satisfaction that
Pathnet has taken such steps and/or implemented such procedures so that
the particular Material Breach in question will not recur.
Upon termination as provided in this Section 24.1, removal of Pathnet's
Facilities and System shall be governed by Section 26.2 hereof. Railroad's right
to terminate this Agreement shall be limited to occurrences of Material Breaches
of the type and nature described in Subsection 24(i) above.
24.2 Examples of Material Breach. For purposes of this Article, any
substantial noncompliance, or any repeated noncompliance, each of which might be
considered minor or singular, may when considered in the aggregate constitute a
Material Breach. In illustration, but without limitation, failure to give
required notices, or failure to give required approvals without cause, or
failure to comply with final decisions under the Dispute Resolution provisions
of Article 25, may constitute a Material Breach.
24.3 Notice and Cure Period. Pathnet and Railroad agree that neither party
shall proceed against the other for any alleged Material Breach before the
offending party has had written notice and reasonable time to respond and cure
such breach; provided, however, that neither party shall be required to give
time to respond and cure if any such delay will cause irreparable harm or
increased risk of liability or injury. Reasonable time to respond and cure shall
for purposes of Subsections 24.1(i)(b) and 24.1(ii) be presumed to be thirty
(30) days, and for purposes of Subsection 24.1(i)(a) be presumed to be
forty-eight (48) hours. If such breach cannot
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reasonably be cured within the applicable cure period, but the party proceeds
promptly to cure the same and prosecutes such cure with due diligence, the time
for curing such breach shall be extended for such reasonable period of time as
may be necessary under the circumstances to complete the cure, but under no
circumstances shall such additional period extend beyond, (i) for purposes of
Subsection 24.1(ii), one hundred eighty (180) days without the specific written
approval of the non-breaching party, which such approval may be withheld in such
party's reasonable discretion, and (ii) for purposes of Subsection 24.1(i)(a)
and (b), thirty (30) days. With respect to any Material Breach (i) which is not
cured by the breaching party within the applicable cure period, or (ii) for
which an opportunity to cure is not required to be given, the non-breaching
party may, at its sole option, cure any such breach in the manner it deems
appropriate. In such event, the breaching party, within thirty (30) days of
written demand and without deduction, set-off or abatement, shall reimburse the
non-breaching party for any and all expenses incurred as a result of the
non-breaching party's curing of such default together with interest at the
Default Rate. Nothing contained herein shall create an obligation on the part of
the non-breaching party to cure any uncured breach existing at any time under
the Agreements.
24.4 No Continuing Waiver. Any waiver by any party at any time of any of
its rights under the Agreements shall not be deemed to be a continuing waiver of
any breach or default or other matter subsequently occurring.
24.5 Waiver of Certain Damages. Except as otherwise provided in Section
6.5 of the License Agreement, neither party shall be liable to the other party
for any consequential, indirect, special, exemplary or punitive damages,
including, but not limited to, damages attributable to or based upon any loss of
present or future profits, any loss of or injury to customer goodwill, or any
lost or foregone investments and opportunities.
25. LIAISON; COORDINATION AND DISPUTES RESOLUTION.
25.1 Specified Disputes. The parties intend that any disputes which may
arise between them relating to access to the Rail Corridor, or the design, plan,
construction, installation, operation, maintenance, repair, replacement, and
removal of Pathnet's Facilities or System or the safe and uninterrupted
operation of the rail system of Railroad (a "Specified Dispute") be resolved as
quickly as possible, which may, in certain instances, involve immediate
decisions. When such quick resolution is not possible, or depending upon the
phase of installation of Pathnet's Facilities and System, the parties agree to
resolve such Specified Disputes as herein provided.
25.2 Field Representatives. Within thirty (30) days after the designation
by Pathnet of the Route Plan as provided in Exhibit B, Railroad and Pathnet
shall each designate in writing the division or field representative(s) as
point(s) of contact for decision making concerning the Specified Disputes.
25.3 Railroad Operations. Questions of Railroad operations or track safety
shall in all instances be referred to Railroad's Engineer, whose decision shall,
for any emergency situation, be made within twenty-four (24) hours, or for any
non-emergency situations, be made as provided in Section 25.7.
25.4 Access. Specified Disputes concerning Pathnet's right of access to
the Rail Corridor during the Planning and Design and Installation and
Construction Phases, including use
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of an on-rail plow installation machine under Exhibit B, or during the
Maintenance and Operation Phase, or access to or copies of Railroad's documents,
shall be referred initially to the designated representative of the Engineer,
who shall render such decision within twenty-four (24) hours. Decisions of the
Engineer's designated representative shall be referable within twenty-four (24)
hours of such decision, by Pathnet to the Engineer of Railroad, whose decision
shall be issued within twenty-four (24) hours of the notice from Pathnet of
dispute with the authorized representative of Engineer.
25.5 Reserved.
25.6 Communications Facilities. Specified Disputes arising out of or in
conjunction with the communications System or Facilities of Pathnet, of
Railroad, or of both, or the capacity and/or installation, maintenance and/or
use of the same, shall be referred initially to Pathnet's system manager (or
other representative designated by Pathnet) for decision, which shall be
rendered, in writing, within thirty (30) days after submission.
25.7 Remaining Specified Disputes. Any other Specified Dispute between the
parties shall be referred initially to the Engineer for decision, which shall be
rendered, in writing, within fifteen (15) days after submission.
25.8 Mediation or Arbitration. Either party may appeal any decision made
pursuant to Sections 25.2 through 25.7 by requesting either arbitration or
mediation within thirty (30) days after the date of receipt of such decision in
writing. Failure to request mediation or arbitration within such thirty (30) day
period shall result in such decision becoming final and conclusive. The selected
arbitration or mediation shall proceed in Jacksonville, Duval County, Florida,
in accordance with the Arbitration or Mediation Resolution Procedures attached
hereto as Exhibit K. Any arbitration decision or mediation agreement, or other
final decision herein, may be enforced by any court having jurisdiction hereof.
25.9 Work Pending Resolution of Specified Dispute. During the period in
which any Specified Dispute is unresolved, any work on the Rail Corridor by or
for Pathnet shall commence or proceed only with maximum security for Railroad
operations, as determined by Railroad's Engineer, and the determination or
allocation of any costs or additional costs therefor shall be resolved
thereafter in accordance with this Article.
26 TERMINATION; REMOVAL.
26.1 Partial Termination. Pathnet may terminate the Agreements with
respect to any individual Segments of the Designated Rail Corridor at any time
during the Term by providing Railroad with six (6) months' prior written notice
of such termination. Such termination shall be only with respect to the
specified Segment(s) of the Designated Rail Corridor identified in the
termination notice and shall not affect the continuation of the Agreements with
respect to the remaining Segments of the Designated Rail Corridor. With such
partial termination, all further obligations (other than obligations which arose
prior to such termination and any provisions hereof which are intended to
survive the expiration or other termination) shall cease only as to affected
Segment(s) and all terms and conditions of the Agreements shall remain unchanged
and in full force and effect as to the remaining Segments within the Designated
Rail Corridor. In the event of any partial termination hereunder, Pathnet shall
not be entitled to any refund, rebate or
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set off relating to the consideration paid or given pursuant to the License
Agreement nor any adjustment to the mileage bank.
26.2 Removal Upon Termination. Within ninety (90) days of the expiration
or earlier or partial termination of the Agreements (or such longer period as
may be reasonably necessary to remove Pathnet's Facilities and System provided
Pathnet begins removal within such ninety (90) day period and continues
diligently to completion), Pathnet, at its own risk, cost and expense, shall
remove all above ground Facilities, System and appurtenances from the Designated
Rail Corridor, all underground Optical Fibers, and such other underground
Facilities, System and appurtenances as Pathnet desires or Railroad reasonably
requests so as to avoid interference with Railroad operations, and restore the
Designated Rail Corridor and other affected property of Railroad to the
functional or operational condition existing prior to the construction or
installation of such Facilities, System and appurtenances. If Pathnet fails to
timely remove the System and Facilities and restore the Designated Rail Corridor
and other affected property as provided in the preceding sentence, Pathnet shall
be deemed to have abandoned such Facilities and System in place, in which event
such Facilities and System shall become the property of Railroad, for purposes
of resale, use or operation by Railroad in any manner and for any purpose
Railroad deems appropriate, in its sole discretion; or Railroad may cause such
removal and restoration to be performed and all costs incurred by Railroad in
such removal and restoration, together with interest thereon at the Default
Rate, shall be due and payable by Pathnet to Railroad upon written demand.
26.3 Continuing Obligations. The expiration or earlier termination of the
Agreements shall not release any party from any liability or obligation incurred
prior to such expiration or termination or terminate any right or obligation
which would have continuing relevance after such expiration or termination of
this Agreement. Without limiting the foregoing, the indemnification obligations
of Pathnet, the rights of Railroad to review Pathnet's books and records, and
such other provisions which are reasonably intended to have continuing validity,
shall survive the expiration or earlier termination of the Agreements.
27. DOCUMENT CONFIDENTIALITY.
27.1 General. Railroad and Pathnet understand and agree that the
Agreements, and all materials, maps, documents and other information that are
referred to therein or attached thereto, exchanged between the parties in
negotiating the Agreements, or utilized in fulfilling the provisions and intent
hereof or thereof, are and shall be confidential, except as may be required by
law or regulation. Any public announcement or press release concerning the
Agreements by either party shall be subject to the prior approval of the other
party, which approval shall not be unreasonably withheld.
27.2 Restricted Distribution. Railroad and Pathnet each agree to respect
such confidentiality, and shall restrict the distribution of the Agreements and
such materials only to those Persons designated to implement the provisions
hereof, and shall not disclose or furnish to any third parties copies of the
Agreements or any materials referred to herein, without the prior written
consent of the other party hereto or, subject to Section 27.3, a Court Order or
Administrative Subpoena requiring same, except as may be required by law or
regulation. The parties agree that in distributing copies or portions of these
materials to Persons necessary to
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implement the same, such copies or materials shall be clearly marked as
confidential, and indicating that the further distribution, copying or
reproduction of the same is expressly prohibited.
27.3 Redacted Copy. The parties shall jointly prepare redacted copies of
the Agreements which may be furnished, as necessary to implement the provisions
hereof, to (a) Arbitration Panel, (b) Court, (c) Administrative Tribunal, (d)
mortgagee(s) or other financial backers of either party, and (e) prospective
users of Pathnet's Conduit (Innerduct), Cable, Optical Fiber or other Facility
authorized in accordance with the Agreements.
27.4 Injunctive Relief. The parties recognize and acknowledge that any
actual or threatened disclosure of such confidential information by either
party, its agents, employees or contractors, will cause irreparable harm to the
other party, such that monetary remedies available at law will not provide
adequate relief, and therefore the aggrieved party shall be entitled to receive
injunctive relief as an equitable remedy.
27.5 No Right to Non-Material Information. Neither party shall have the
right to obtain any information or documents from the other which are not
material to the provisions or implementation of the Agreements.
28. GENERAL TERMS.
28.1 Entire Agreement. The Agreements, and any exhibits or amendments
which may be attached thereto from time to time, constitute the entire agreement
between the parties hereto with respect to the subject matter thereof and may be
modified only by a writing executed by both parties.
28.2 Incorporation by Reference. The Agreements, as amended by the parties
from time to time in accordance therewith, shall be incorporated by reference
into any Build Supplement, separate finance agreement or other document executed
between the parties, and such incorporation shall include all amendments and
exhibits to the Agreements, even if made or attached subsequent to the date of
the Agreements.
28.3 No Third Party Beneficiaries. Except as otherwise provided in the
Agreements, nothing contained therein, in any provision or exhibit thereof, or
in any agreement or provision included by reference, shall operate or be
construed as being for the benefit of any third person.
28.4 Interpretation. Neither the form of the Agreements, nor any provision
therein, shall be interpreted or construed in favor of or against either party
hereto as the sole drafter thereof.
28.5 Force Majeure. The parties agree that a party shall not be liable for
its failure to perform its obligations under the Agreements during any period in
which such performance is delayed by fire, flood, war, embargo, riot, labor
strike or unrest, the intervention of any government authority, train
derailment, or any other event or condition outside the reasonable control of
such party, provided that such party promptly notifies the other party of the
delay and the reason(s) for such delay. The provisions of this paragraph shall
not apply to Pathnet's payment obligations under the License Agreement.
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28.6 Reasonableness. Wherever the term "reasonable" is used in the
Agreements, the term shall mean: for Railroad, application of standard and
established railroad engineering, operating and safety rules, regulations and
procedures; for Pathnet, application of standard and established carrier
engineering and operating rules.
28.7 Approval or Consent. Wherever the term "approval" or "consent" is
used in the Agreements, unless otherwise specifically qualified, the term shall
mean that such "consent" or "approval" shall not be unreasonably withheld,
delayed or conditioned.
28.8 Parties. Wherever used in the Agreements, the terms "Railroad" and
"Pathnet" shall be construed in the singular or plural as the context may
require or admit, and shall include the permitted successors and assigns of such
parties.
28.9 Severability. The Agreements are executed under the current
interpretations of applicable federal, state, county, municipal and local
statutes, ordinances and laws. However, each separate division (section,
paragraph, clause, item, term, condition, covenant or agreement) thereof shall
have independent and severable status for the determination of the legality
thereof. If any separate division is determined to be void or unenforceable for
any reason, such determination shall have no effect upon the validity or
enforceability of each other separate division, or any combination thereof.
28.10 Governing Law; Venue. The Agreements shall be construed and governed
under the laws of the State of Delaware. It is the particular intent of the
parties that the indemnification obligations contained in the Agreements shall
be enforceable and shall not be deemed to be against public policy. The parties
consent to the personal jurisdiction of and to exclusive venue in the United
States District Court in and for the Middle District of Florida, Jacksonville
Division.
28.11 Assignability.
(a) Except as otherwise specifically provided in the Agreements,
Pathnet shall not assign or transfer any right or interest in the Agreements
without the prior written consent of Railroad, which consent may be withheld in
Railroad's sole discretion. The above requirement for consent shall not apply to
(i) any disposition of all or substantially all of Pathnet's stock or assets;
(ii) any corporate merger, consolidation or reorganization, whether voluntary or
involuntary, involving Pathnet; or (iii) a sublease or assignment of the
Agreements (in whole or in part) by Pathnet to a subsidiary, affiliate, or
parent company, controlled by, under common control with, or controlling, either
indirectly or directly, Pathnet, provided that no assignment not consented to by
Railroad shall relieve Pathnet of any of its obligations or liabilities under
the Agreements and, provided further, that such Assignee agrees in writing to be
bound by the terms of the Agreements. Nothing herein shall prohibit Pathnet (i)
from involving contractors, or strategic or co-development partners in
construction and operation of the fiber optic facilities, on such terms as
Pathnet may determine in its sole discretion, provided all such activities are
conducted in accordance with the terms of the Agreements, and that Pathnet
remains fully liable for all obligations thereunder; and (ii) from granting
liens or other security interests in the fiber optic facilities or Pathnet's
rights under the Agreements in connection with financing or investments made
available to Pathnet; provided that all such parties agree that, if and to the
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extent they acquire an ownership interest thereunder, they shall be bound by and
shall comply with the terms of the Agreements.
(b) Upon request by Pathnet, Railroad shall execute reasonable
documentation to be provided by Pathnet acknowledging the rights of Pathnet's
lender(s) ("Lender") to obtain ownership of any fiber optic facilities if the
Agreements are still in effect and Pathnet is in material default under the
terms of Pathnet's loan to Lender, provided, however, that in such case Lender
shall agree in writing that it shall become an assignee to the Agreements and
shall become subject to all rights and obligations of Pathnet under the terms of
the Agreements (and Pathnet also shall remain subject to all obligations of
Pathnet under the Agreements). In addition to the rights granted to Pathnet
under the Agreements, Pathnet's Lender shall have the additional right to take
possession, sell, assign or otherwise transfer any fiber optic facilities,
including the right to operate, or permit a third-party to operate, any fiber
optic facilities, provided such operation shall be subject to all terms and
conditions of the Agreements and provided further that Railroad shall approve
such party, in Railroad's reasonable discretion.
(c) Railroad may assign the Agreements to any Affiliate, any
purchaser(s) of the Designated Rail Corridor to the extent applicable to such
Rail Corridor, or any Person in connection with any merger or consolidation of
Railroad, provided that any such assignment shall be subject to the terms and
conditions of this Agreement.
28.12 Time is of Essence. Time is of the essence in the performance of
each party's obligations under the Agreements.
28.13 Incorporation of Exhibits. All exhibits attached to the Agreements
are incorporated by this reference and made a part of the Agreements for all
purposes.
28.14 Multiple Counterparts. Each of the Agreements may be executed in
several counterparts, each of which shall be deemed an original, and such
counterparts shall constitute one and the same instrument.
28.15 WAIVER OF JURY TRIAL. RAILROAD AND PATHNET HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION BASED ON, ARISING OUT OF, UNDER OR IN CONNECTION
WITH THE AGREEMENTS OR ANY DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION
THEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER ORAL
OR WRITTEN) OR ACTIONS, RIGHTS OR OBLIGATIONS OF EITHER PARTY ARISING OUT OF OR
RELATED IN ANY MANNER TO THE AGREEMENTS (INCLUDING, WITHOUT LIMITATION, ANY
ACTION TO RESCIND OR CANCEL THE AGREEMENTS OR ANY CLAIMS OR DEFENSES ASSERTING
THAT EITHER OF THE AGREEMENTS WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR
VOIDABLE). THIS WAIVER IS A MATERIAL INDUCEMENT FOR THE PARTIES TO ENTER INTO
AND ACCEPT THE AGREEMENTS.
28.16 Authorization. Railroad and Pathnet represent and warrant that each
has obtained all necessary corporate approvals authorizing the execution and
delivery of the Agreements, and
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that the execution and delivery of the Agreements will not violate the articles
of incorporation or by-laws of such corporation, and will not constitute a
material breach of any contract by which such corporation is bound.
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EXECUTED as of the Effective Date.
Witness: CSX TRANSPORTATION, INC.,
For itself and as Operator for New York
Central Lines LLC, a wholly-owned subsidiary
of Consolidated Rail Corporation
By:
- -------------------- --------------------------------
Name:
- -------------------- Title:
Witness: PATHNET TELECOMMUNICATIONS, INC.
By:
--------------------------------
Name:
Title:
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<PAGE> 31
EXHIBIT A
DESCRIPTION/DEPICTION OF THE PREMISES
[to be agreed to by the parties]
<PAGE> 32
EXHIBIT B
1. ROUTE DESIGNATION; DOCUMENTATION; INSPECTION; ACCESS.
1.1 Documentation. Railroad shall furnish to Utility, electronically
if available, at Utility's cost, copies of Valuation Maps with available indices
thereto within thirty (30) days of the date of Utility's written request.
Railroad shall make available to Utility, for reproduction at Utility's cost,
all available Railroad engineering documents relating to bridges, overpasses or
tunnels on or along such Route Plan. Railroad shall also furnish, at Utility's
cost, copies of maps or other documents to assist Utility in determining the
identity and location of other users of those portions of Railroad's Rail
Corridor designated on Utility's Route Plan. The furnishing of maps, documents
or other materials hereunder, however, shall not be a guarantee by Railroad of
the accuracy or completeness of same.
1.2 Inspection. Railroad agrees to participate with Utility in a joint
inspection of those portions of the Railroad Corridor designated on Utility's
Route Plan for the purpose of identifying problem areas and defining final
Conduit Right-of-Way routes or alternatives. Railroad also agrees to participate
in any additional joint inspections that may be required for the purpose of
detailing and developing solutions for problem areas.
1.3 Route Plan. Prior to the preparation of detailed Construction Plans as
contemplated in Section 1.7, Utility shall submit to Railroad a proposed Route
Plan marked on Railroad Valuation Maps. Railroad shall review and, through its
Engineer, approve or reject the proposed Route Plan. If rejected for reasons
other than Railroad's plans to Abandon a Segment of the Railroad Corridor,
Railroad shall cooperate with Utility to locate an alternative mutually
acceptable route along Railroad's Rail Corridor to the extent available. Upon
Railroad's approval of Utility's proposed Route Plan, such approved Route Plan
shall be attached to this Agreement as Exhibit A-1, for the purpose, among other
things, of defining the Designated Railroad Corridor.
1.4 Planning and Design Phase. From and after the date of submission by
Utility to Railroad of Utility's Route Plan, Utility and its designated
employees, agents and representatives shall have the right to enter upon any
portion of Rail Corridor shown on such Route Plan for a period of one hundred
eighty (180) days for the purpose of surveying and inspecting the same, subject
to all applicable notice, approval and other applicable requirements contained
in this Agreement (the "Planning and Design Phase").
1.5 Conditions of Right of Entry. All surveys or route inspections (or any
other entry by Utility hereunder) shall be made upon reasonable advance notice
to and at times satisfactory to Railroad, in a manner so as not to interfere
with operations of Railroad, and shall be at the sole risk, cost and expense of
Utility. Rights of entry shall not be unreasonably withheld or delayed.
1.6 Construction Planning Schedule. Utility shall furnish to Railroad a
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proposed schedule of construction and installation (commencement and completion
dates) on each portion of the Designated Rail Corridor to be utilized for
Utility's System. Said schedule of construction shall be sufficient to allow the
coordination of Railroad, Utility and construction personnel and operating train
movements. Utility shall schedule installation and construction to avoid
disruption of Railroad operations (including operation of freight and passenger
trains. Utility may request Railroad to reschedule or divert trains, where
possible, to minimize disruption of Utility's construction schedule, and, to the
extent possible and practical, as solely determined by Railroad's Engineer,
Railroad shall make such diversion or rescheduling. Utility further recognizes
that regulations of the Federal Railroad Administration (FRA) may require "Slow
Orders" to be issued by Railroad to trains operating in areas of Utility's
construction, and that such "Slow Orders" may cause delays in train movements,
including delays in movement of freight and passenger trains. Additional costs,
expenses or losses to Railroad generated by any "Slow Order", rescheduling,
delay or diversion (including detours or rerouting) resulting from any request
of or actions or omissions of Utility, its employees, agents, contractors or
subcontractors, or which results from any Fouling of Track(s), plus any damage
to or destruction of Railroad's signals, tracks or other facilities resulting
therefrom, shall be reimbursed by Utility.
1.7 Construction Plans. Whenever Utility desires to install or construct
any part or portion of its Facilities or System, including any structural
attachments, within the Designated Rail Corridor, Utility shall submit written
notice (the "Construction Notice") in two (2) signed counterparts, accompanied
by four (4) copies of the relevant Construction Plans, to Railroad's Engineer
for consent and approval of Railroad, which approval shall not be unreasonably
withheld or delayed. Upon approval by Railroad, one (1) signed counterpart of
the Construction Notice shall be returned by Railroad. Upon receipt of the
signed counterpart of the construction Notice by Utility, the Construction
Notice and the Construction Plans so approved shall be considered as being
incorporated into and made a part of this Agreement for all purposes.
1.8 Limited Scope of Approval. Railroad's right of approval of
Construction Plans, and the location of Utility's Facilities and System, and the
nature of Transmission Technology shall apply only to the extent that
construction or use of Facilities, System or Transmission Technology may affect
train or signal operations or the use of Railroad's Rail Corridor.
1.9 Installation and Construction Phase. From and after the date of
Railroad's approval of Utility's Construction Plans, as provided in Section 1.7,
Utility, its employees, agents and/or contractors, shall have the right, for a
period of one hundred eighty (180) days, to enter and construct and install
Utility's Facilities and System on that Segment designated in the Construction
Plans. Utility shall coordinate with, and secure advance written approval from
Railroad's Engineer, for all access to track and Restricted Working Area of Rail
Corridor, understanding that the operation of Railroad trains over any Rail
Corridor shall have priority. Construction and installation shall also be in
accordance with Fiber Optic Installation SOP (Standard Operating Procedure, MWI
1905-01, Issued 6/30/98), a copy of which is attached hereto as Exhibit M.
1.10 As-Built Drawing. Within ninety (90) days after completion of
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construction and installation of each Segment of Utility's System, Utility shall
furnish to Railroad an As-Built Drawing, referencing Railroad stationing,
Valuation Maps and mileposts for such Segment, which, when approved by Railroad
and as amended from time to time, shall be collectively attached hereto as
Exhibit A-2.
1.11 Maintenance and Operation Phase. Only after construction of each
Segment of Utility's System and approval by Railroad's Engineer of the
applicable As-Built Drawing, shall Utility, its employees, agents and/or
contractors, be permitted operational and maintenance access to such Segment, in
accordance with the provisions of this Agreement. With respect to each
independent Segment, the period after the Planning and Design Phase but prior to
the approval of the applicable As-Built Drawing is herein sometimes called the
"Installation and Construction Phase" and the period after the approval of the
As-Built Drawing is herein sometimes called the "Maintenance and Operation
Phase."
1.12 Reinstallation, Replacement and Removal. The provisions of this
Article 1 shall apply to any reinstallation, replacement or removal of any
Facilities by Utility.
2. SURVEYS AND RECORDS; COSTS.
2.1 Railroad Maps and Surveys. Railroad shall, at Utility's cost and upon
Utility's written request, furnish to Utility a copy of its current System Map,
System Diagram Map and Valuation Maps for Segments identified in the Route Plan
as System Segments. Railroad, however, shall not be deemed to have guaranteed
the accuracy of any map, survey or related records made available to Utility.
2.2 Utility Maps, Surveys and Records.
(a) If Utility performs or contracts to perform formal surveys of the
Rail Corridor, or any constructed Conduit Right-of-Way, Utility shall furnish
Railroad, upon request, a copy thereof, at Utility's cost, subject to lawful
limitations of survey contracts and applicable laws. Utility shall not be deemed
to have guaranteed the accuracy of such surveys. If Utility is required or
chooses to secure and/or file any surveys for any of its Facilities, Utility
shall bear the total cost thereof.
(b) Any copies or records made or data compiled by Utility relating
to Railroad's Rail Corridor (including but not limited to: maps; plans; photos;
video tapes; motion pictures; notes; survey data; cassette tapes and other types
of records and measurements) shall become the sole property of Utility. However,
subject to the document confidentiality provisions hereof, Utility shall provide
such data or records to Railroad.
(c) Utility shall, at its expense, furnish Railroad, annually, a map
of Utility's Fiber Optic Communication System ("Fiber Optic System Map")
depicting the location of Utility's Facilities and System on the Designated Rail
Corridor and fiber count by Segment.
(d) Utility shall update its Fiber Optic System Map after each new
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Segment is constructed, and shall include a copy of the relevant portion thereof
with each As-Built Drawing required in Section 1.10.
3. LOCATION OF UTILITY FACILITIES.
3.1 Perimeter Location. Occupation by Utility of the Rail Corridor
(including any portion that shall pass along or through an active operated
Railroad yard, terminal or station) shall be confined where practical to the
outer perimeter of the Rail Corridor, yard, etc. Minimum distance to the
centerline of the nearest track shall be eleven feet (11') unless otherwise
specifically agreed in writing by Railroad. The exact location and depth shall
be determined on a case-by-case basis during the Planning and Design Phase for
the Facilities.
3.2 Railroad Tunnels. The installation of Cable in Railroad tunnels shall
be avoided whenever possible, by the installation of Cable over Railroad tunnels
within Railroad Rail Corridor. Where such installation over the tunnel is not
reasonably possible, and after specific written approval by Railroad's Engineer,
Cable shall be laid or installed within existing conduits or ducts, where
available and in usable condition, or within suitable conduit (nonflammable,
inert material pipe) installed by Utility on the floor level of the tunnel, at a
point farthest away as practical from the nearest operated rail or track.
3.3 Entrance into Tunnel or onto Bridge. Any entrance by Utility or its
employees, agents or contractors into Railroad's tunnel, onto Railroad's bridge,
or on Railroad's property adjacent to a bridge or tunnel for any purposes, shall
be in accordance with the provisions of Article 12 of this Agreement.
4. CONDUIT (INNERDUCT)/CABLE INSTALLATION AND CONSTRUCTION.
4.1 Underground Installation. In all situations where reasonably possible,
Conduit (Innerduct) or Cable shall be installed by Utility, or its
contractor(s), underground, and in accordance with the "Specifications for
Underground Cables Occupying Railroad Rail Corridor" attached hereto as Exhibit
E. Notwithstanding any contrary provisions contained in Exhibit E, the
installation depths and limits of Cable or Conduit (Innerduct) shall be as
follows:
(a) Where Cable crosses underneath tracks, whether mainline,
secondary or industrial, Cable must be installed in Conduit (Innerduct);
(b) Cable to be installed within fifteen linear feet (15') of the
centerline of any tracks, shall be installed in Conduit (Innerduct);
(c) Conduit (Innerduct) installation is not required for Cable to be
installed more than fifteen linear feet (15') from the centerline of any tracks;
(d) The depth of Conduit (Innerduct) under tracks shall be no less
than sixty inches (60") below the bottom of ties, for a length at least two
linear feet (2') beyond the outer end of such ties;
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(e) Where on-rail plowing is authorized, as provided herein, Cable
and/or Conduit (Innerduct) shall be installed at a depth of no less than
forty-two inches (42") below ground surface;
(f) Cable or Conduit (Innerduct) to be installed within twelve linear
feet (12') of the centerline of the nearest track shall be at a depth of no less
than forty-two inches (42") below ground surface;
(g) Cable or Conduit (Innerduct) to be installed twelve linear feet
(12') or more away from the centerline of the nearest track shall be installed
at a depth of no less than thirty-six inches (36") below ground surface.
4.2 On-Rail Plow. Subject to the sole discretion and approval of
Railroad's Engineer for exact location of use, scheduling and utilization of an
on-rail plow machine, Utility shall have the right to utilize such machine for
construction purposes. If such use is approved, Railroad will provide all
necessary work trains and crews at Utility's sole cost and expense to facilitate
use of such machine. When within fifteen feet (15') of any signal wires,
culverts, grade crossings or other Railroad facilities, Utility must cease all
rail plow installation and (a) utilize only hand-trenching, behind (trackside
of) any Railroad facilities or obstructions (signals, signal boxes, relay cases,
etc.) which have wire or Cable connections to any track, and/or (b) place
Utility Conduit (Innerduct) or Cable only to the front (fieldside) thereof.
Utility shall pay for any repairs to signal wires, culverts, grade crossings or
other Railroad facilities damaged by said plowing or trenching.
4.3 Aerial Attachments. In situations where Utility determines that
underground installations are not reasonably practicable, installations shall be
by aerial attachments in accordance with the Association of American Railroads
"Communications Manual Part 1-B-1, Paragraphs A through S" and "Specifications
for the Construction of Railroad Communication Pole Lines, Section K", copies of
which are attached hereto collectively as Exhibit F. Details of each aerial
section of Cable shall be shown where appropriate as a part of the Construction
Plans and As-Built Surveys furnished to Railroad for approval as required under
this Agreement.
4.4 Water Crossings. In the event that Utility elects to perform submarine
Conduit (Innerduct) or Cable installation rather than installation by attachment
to Railroad's existing pole lines or fixed or movable bridges, such submarine
installation shall be performed by Utility or its contractor(s) at Utility's
sole risk, cost and expense.
4.5 Bridge Attachments. Attachment to all Railroad bridges, where
attachment to an adjacent parallel pole line is not desired by Utility, shall be
as prescribed in the "Specifications for the Attachment of Cables to Railroad
Bridges", a copy of which is attached hereto as Exhibit G.
4.6 Public Roadway Crossings. Cable or Conduit (Innerduct) crossing under
public roadways shall be at a location and depth as required by any applicable
federal, state or local laws, regulations or lawful orders. To the extent not
pre-empted by such
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authorities, such installation shall also be in accordance with Exhibit E.
4.7 Public Utility Crossings. Cable or Conduit (Innerduct) crossing over
or under public utilities shall be located and installed in accordance with all
applicable federal, state and local laws, regulations and lawful orders, and
such lawful requirements as may be stipulated by any governmental agency
(including operators of rail passenger services) or public authority. If in the
conduct of any work, any changes or alterations in pipelines, sewers, drains,
conduits, fences, power, signal or communication lines or other utility or
Railroad facilities are necessary (either temporary or permanent) by reason of
the foregoing or the requirements of Railroad, such changes shall be made or
caused to be made solely by Utility at Utility's sole risk, cost and expense;
provided, however, that costs and expenses for any such work, changes or
alterations necessitated by any other third party shall be paid by such third
party.
4.8 Emergency Repair. Emergency Cable installation, maintenance or repair
methods shall be as set forth in Exhibit H attached hereto.
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<PAGE> 38
EXHIBIT C
LEASE
THIS LEASE, made as of this ____ day of ______________, ______, between CSX
TRANSPORTATION, INC., a Virginia corporation, [as operator for New York Central
Lines LLC, a Delaware limited liability company] whose address is 500 Water
Street, Jacksonville, Florida 32202 ("Lessor"), and Pathnet Telecommunications,
Inc., a Delaware corporation, whose address is 1015 31st Street N.W.,
Washington, D.C. 20007 ("Lessee"):
RECITALS
A. Lessor and Lessee have entered into those certain Fiber Optic Access
and License Agreement and Right of Way Operating Agreement dated as of
____________________, as amended and supplemented from time to time by
the parties (the "Base Agreement").
B. The Base Agreement contemplates Lessee's use of certain land owned by
Lessor for the placement of non-cable facilities including Repeater
(Regen) Sites, or power or auxiliary power stations, or sites for
construction facilities or temporary storage of materials and fuel for
power stations.
C. In order to implement the provisions of the Base Agreement, Lessor and
Lessee desire to enter into this Lease for the premises described
herein and on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
the rental to be paid by Lessee and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee
hereby agree as follows:
1. INCORPORATION OF RECITALS.
The parties represent and acknowledge that the foregoing recitals
are true and correct and are incorporated herein by this reference.
2. DESCRIPTION OF PREMISES.
Lessor does hereby lease unto Lessee that certain parcel of
unimproved land (exclusive of tracks and roadbed) located and more particularly
described or depicted on Exhibit "A" attached hereto and by this reference made
a part hereof (the "Premises").
3. CERTAIN DEFINITIONS.
3.1 General Interpretive Principles. For purposes of this Lease,
except as otherwise expressly provided herein or unless the context otherwise
requires: (i) the terms used herein include the plural as well as the singular,
(ii) the use of any gender herein shall be deemed to include the other gender,
(iii) the word "including" means "including, but not limited to," and (iv) the
headings used herein shall not describe, interpret, define or limit the scope,
extent or intent of any provision hereof.
3.2 Definitions. Except as otherwise expressly defined in this
Article 3 or otherwise herein, the capitalized terms used in this Lease shall
have the meanings set forth in the Base Agreement.
3.2.1 "Lessee" shall mean Lessee as defined in the
introductory paragraph of this Lease, any successor by merger, consolidation or
reorganization, and its permitted assigns.
3.2.2 "Lessor" shall mean Lessor as defined in the
introductory paragraph of this Lease, any of its predecessor railroads, any
successor by merger, consolidation or reorganization, and its permitted assigns.
3.2.3 The term "damages" shall mean any and all damages,
including, but not limited to, civil, criminal, compensatory, consequential,
direct, indirect, treble, punitive, exemplary and special damages and all other
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damages and penalties of any kind available at law and/or in equity.
4. PERMITTED USE.
Lessee shall use and occupy the Premises in accordance with Section 21of
the Base Agreement, and for no other purpose (the "Permitted Use").
5. RENT.
Lessee shall pay to Lessor, as base rent for the Premises, the sum of *
DOLLARS ($*.00) per * payable * in advance from the date hereof for the duration
of the Term ("Base Rent"). Lessee shall pay all real estate taxes levied against
the Premises and the cost of any Lessee improvements placed on the Premises and
all costs of or charges for water, sewage, electricity, heat and any other
utilities furnished to the Premises. If any of the foregoing is paid by Lessor,
Lessee shall reimburse Lessor, as additional rent, within thirty (30) days after
presentation to Lessee of bills therefor ("Additional Rent"). The payment by
Lessee of any sum in advance shall not create an irrevocable lease for the
period for which the same is paid. Lessor reserves the right to periodically
adjust the Base Rent any time after the expiration of twelve (12) months (and to
adjust any adjusted rent thereafter), by giving notice of such adjustment to
Lessee at least sixty (60) days prior to the effective date of such adjustment.
Lessee's continued occupation of the Premises after such effective date shall be
deemed an acceptance of such adjusted Base Rent.
6. APPROVAL OF PLANS, TRACK CLEARANCE.
Lessee, prior to placing any improvement on the Premises, shall submit
plans to, and secure approval in writing of, Lessor, which such approval may be
withheld in Lessor's sole discretion. Lessee shall not erect, place or allow to
be erected or placed on the Premises any buildings, structures, fixtures or
obstructions of any kind, either temporary or permanent, within twenty-five feet
(25') of the centerline of the nearest track, unless Lessee obtains the prior
written consent of Lessor, which may be withheld in Lessor's sole discretion;
provided that the foregoing shall not be construed to permit any track clearance
less than the minimum required by any applicable law, rule, order or regulation.
Any approval by Lessor of any improvement or alteration made by Lessee, or
failure of Lessor to object to any work done or material used, or the method of
construction or installation, shall not be construed as an admission of
responsibility by Lessor or as a waiver of any of Lessor's rights under this
Lease.
7. FIRE PREVENTION.
Lessee shall cooperate with the Risk Management Department of Lessor and
shall promptly comply with fire prevention measures requested by said
Department. Lessee shall make no electrical installations or alterations in and
to the improvements or electrical or other circuits (whether for power, light,
heat or other purposes) now or hereafter located on the Premises, except by a
duly licensed electrician, and shall make no installation of natural gas,
propane, kerosene or other combustion fuel heating or cooling units, except by
licensed heating or cooling contractor. No such alterations or installations
shall be made without prior written approval of Lessor's Risk Management
Department, which may be withheld in its sole discretion.
8. PERMITS, ORDINANCES, REGULATIONS:
8.1 Lessee, at Lessee's sole cost and expense, shall obtain any
applicable permits and shall comply with all applicable permits, ordinances,
rules, regulations, requirements and laws of any Governmental authority having
jurisdiction over the Premises or the Permitted Use thereof or the placement or
use of any improvements thereon, including but not limited to zoning, health,
safety, building or environmental matters. Lessee shall supply Lessor with
copies of all permits and letters or certificates of such authority's consent to
and/or approval of Lessee's use of the Premises.
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8.2 Lessee shall further defend, indemnify and hold Lessor harmless
from all losses, damages, costs of defense (including attorneys' fees) and costs
of compliance relating to any ordinance, rule, regulation, law, citation, order
or notice, any violation thereof, any penalty, levy, fine or assessments
therefrom, including any penalty, levy, fine, assessment, compliance cost or
remedial charge levied during the Term, or after termination of this Lease for
events arising during this Lease.
9. MAINTENANCE, REPAIRS AND COSTS.
Lessee will not create or permit any nuisance in, on or about the Premises,
and Lessee shall repair and maintain, at its sole cost and expense, the Premises
and any improvements thereon, in a neat and clean condition to the reasonable
satisfaction of Lessor.
10. SERVICES, UTILITIES.
Lessor will be under no obligation to furnish the Premises with water, gas,
sewage, electricity, heat, or other services and supplies that may be necessary
or desirable in connection with Lessee's use and occupancy of the Premises.
11. ADJACENT AREAS.
Except as provided in Article 12 hereof, Lessee shall not use any property
of Lessor other than the Premises herein leased without first obtaining Lessor's
prior written consent and complying with all requirements of Lessor applicable
thereto, including payment of such charges, costs or fees as Lessor deems
appropriate, in its sole discretion.
12. INGRESS AND EGRESS.
Lessee shall have the right to use, in common with Lessor and others
authorized by Lessor, existing driveways or other property designated by Lessor
as the means of ingress to and egress from the Premises. Lessor shall be under
no obligation with respect to the condition or maintenance of said driveway(s)
or other property, and Lessee's use of same shall be subject to all of the
covenants, terms and conditions of this Lease.
13. PIPE AND WIRE LINES.
Lessor shall at all times have the right to maintain and/or construct, and
to permit others to maintain and/or construct, overhead and/or underground pipe
and/or wire lines now or hereafter installed upon or across the Premises, and to
use, repair, renew, replace and remove the same.
14. CLAIM OF TITLE.
Lessee shall not at any time claim ownership of or any right, title or
interest in or to the Premises, nor shall the exercise of this Lease for any
length of time give rise to any right, title or interest in or to the Premises,
other than the leasehold herein created.
15. MECHANIC'S LIENS.
Lessee shall promptly pay all debts incurred by, and shall promptly satisfy
all liens of, its contractors, subcontractors, mechanics, laborers and material
men in respect to any construction, alteration, maintenance or repair of, in or
to the Premises, and any improvements thereon, and shall indemnify, defend and
hold Lessor harmless from and against all losses, damages, penalties, fines and
legal costs and charges, including attorneys' fees incurred, in any suit
involving any lien, the enforcement or satisfaction thereof, or encumbrance
caused by the same, with respect to the Premises or any part thereof or any
improvements thereon. Further, Lessee shall have no authority to create any
liens for labor or material on or against Lessor's or Lessee's interest in the
Premises, and shall so specify in all contracts let by Lessee for any
construction, erection, installation, alteration, maintenance or repair of the
Premises or any improvement thereon.
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16. TERM, TERMINATION, BREACH, REMOVAL:
16.1 The initial term of this Lease shall be one (1) year, and shall
thereafter run year-to-year (the "Term"). This Lease may be terminated by either
party for any reason and at any time upon not less than three (3) months'
written notice. Notwithstanding the foregoing, in the event of a breach by
Lessee of any covenant, term or condition of this Lease or of the Base
Agreement, Lessor may, at its sole option, terminate this Lease immediately.
16.2 Upon the expiration or earlier termination of this Lease, Lessee
shall immediately vacate the Premises. Within ninety (90) days of the expiration
or earlier termination of this Lease, Lessee, at its own risk, cost and expense,
shall remove all improvements erected or used by Lessee on the Premises and
shall restore the Premises to the functional and operational condition existing
prior to the execution of this Lease. If within such ninety (90) day period,
Lessee fails to remove such improvements and restore the Premises accordingly,
Lessee shall be deemed to have abandoned its improvements in place, in which
event such improvements shall become the property of Lessor, for purposes of
resale, use or operation by Lessor in any manner and for any purpose Lessor
deems appropriate, in its sole discretion; or Lessor may cause such removal and
restoration to be performed and all costs incurred by Lessor in such removal and
restoration, together with interest thereon at the highest non-usurious interest
rate allowed by law, shall be due and payable by Lessee to Lessor upon written
demand.
16.3 The expiration or earlier termination of this Lease shall not
release either party from any liability or obligation incurred prior to such
expiration or termination nor terminate any right or obligation reasonably
intended to have continuing validity hereunder.
17. RELOCATION.
Lessor shall have the sole and absolute right to require the relocation of
the Premises, including any improvements thereon. The terms and conditions
applicable thereto shall be as stated in the Base Agreement.
18. LIABILITY, INDEMNITY.
18.1 In addition to the indemnification obligations stated elsewhere
herein, Lessee hereby releases Lessor, assumes responsibility for and shall
defend, indemnify and hold Lessor harmless from and against all losses, damages,
claims, fines, costs (including attorneys' fees) and expenses arising from or
relating to:
(a) any breach of this Lease by Lessee,
(b) any violation by Lessee of any law, rule, regulation,
order, notice, ordinance or any other requirement of a
public or governmental authority, including Lessee's
failure to obtain any necessary approval, consent or
permit,
(c) any damage (including environmental damage) to the
Premises, improvements or other property,
(d) any bodily injury, including death, of any person,
including, without limitation, the agents, employees,
contractors, licensees, permittees and invitees of
Lessor or Lessee and trespassers, which occurs on the
Premises or relates to any action or omission on the
Premises, and
(e) any liability arising from or relating to the condition
of the Premises, or Lessee's use or occupancy thereof or
placement or use of any improvements thereon,
whether caused by the fault, failure or negligence of Lessee, Lessor or
otherwise.
18.2 Lessee agrees it shall not have and hereby completely and
absolutely waives its right to any claim against Lessor for damages or any other
legal or equitable relief on account of any deficiencies in Lessor's title to
the Premises. Lessee shall indemnify and hold Lessor harmless from and against
all claims, litigation and damages for trespass, slander of title, overburden of
easement, or other claims arising out of or based upon Lessee's use or occupancy
of the Premises or any placement or use of any improvements thereon.
4
<PAGE> 42
18.3 Nothing contained herein shall amend, alter, modify, abridge or
affect the provisions of the Base Agreement relating to indemnification or the
allocation of liability.
18.4 The provisions of this Article 18 shall survive the expiration or
earlier termination of this Lease.
19. INSURANCE AND LIABILITY.
Each and every policy of insurance required under the Base Agreement
shall, prior to and during Lessee's use or occupancy of the Premises or any
placement or use of any improvements thereon, be amended or modified to provide
such coverage for Lessee's obligations hereunder, Lessee's use and occupancy of
the Premises and Lessee's placement or use of improvements thereon. Lessee shall
provide Lessor's Risk Management Department, 500 Water Street (J-907),
Jacksonville, FL 32202 with certified copies, except that, in the case of the
Railroad Protective Liability ("RPL") Policy, the original, of the insurance
policies amended or modified in accordance herewith. If, in Lessor's sole
opinion, higher limits of insurance coverage are necessary, Lessor shall so
notify Lessee and Lessee shall, within thirty (30) days of receipt of such
notice, provide to Lessor's Risk Management Department a certified copy (or the
original for the RPL Policy) of the endorsement to the appropriate policy
increasing the liability coverage to the required limit. The liability assumed
by Lessee under this Lease, including, but not limited to, Lessee's
indemnification obligations, shall not be limited to the insurance coverage
stipulated herein.
20. CONDEMNATION.
Should the Premises or any part thereof be condemned, appropriated and/or
acquired for public use, then Lessor, at its sole option, may terminate this
Lease. No part of any damages or award shall belong to Lessee, except to the
extent of any specific award from the governmental authority for improvements of
Lessee. The Premises shall be valued as vacant land, without consideration of
this Lease or Lessee's improvements on the Premises as an enhancement or
detriment to said value. Improvements of Lessee not so condemned, appropriated
and/or acquired shall be removed in accordance herewith.
21. SUCCESSORS, ASSIGNS; NO TRANSFER, SUBLEASE OR ASSIGNMENT.
21.1 The terms, covenants and provisions hereof shall inure to the
benefit of and be binding upon the successors and assigns of Lessor and the
successors and permitted assigns of Lessee.
21.2 The foregoing notwithstanding, Lessee shall not transfer, assign,
encumber or sublet this Lease or any part of the Premises or any rights or
privileges herein granted, without the prior written consent of Lessor, which
may be withheld in Lessor's sole discretion. The foregoing covenant shall also
apply whether such sale or transfer is made voluntarily by Lessee or
involuntarily in any proceeding at law or in equity to which Lessee may be a
party whereby any of the rights, duties and obligations of Lessee shall be sold,
transferred, conveyed, encumbered, abrogated or in any manner altered. Any sale,
conveyance, transfer, assignment, sublease, abrogation or encumbrance of this
Lease, all or any portion of the Premises or any of the rights and privileges
hereunder in violation of this Article 21 shall be null and void and Lessor, at
its sole option, may terminate this Lease.
22. BANKRUPTCY RIGHTS.
It is expressly understood and agreed that in the event of any assignment
for the benefit of creditors, or in the event a petition in bankruptcy shall be
filed by Lessee, or if Lessee shall be adjudged bankrupt or insolvent by any
court, or if a trustee in bankruptcy or a receiver of Lessee or Lessee's
property shall be appointed in any suit or proceeding brought by or against
Lessee, and if at such time this Lease is in default by Lessee, then and in such
event Lessor, at its sole option, may (i) immediately terminate this Lease, or
(ii) may request an election of affirmance or rejection of this Lease under
Section 365 of the Bankruptcy Act by giving Lessee or any such assignee,
trustee, or receiver written notice of such demand for election. If Lessee, or
such assignee, trustee or receiver, fails to elect affirmance and fails to
furnish adequate assurances as to the payment of Lessee's existing and future
indebtedness to Lessor and continued performance under the Lease, Lessee shall
be deemed to have rejected the same. If Lessee or such assignee, trustee or
receiver shall
5
<PAGE> 43
reject or be deemed to have rejected this Lease, this Lease shall be deemed
immediately terminated. If Lessee or such assignee, trustee or receiver shall
affirm this Lease, it shall thereupon be bound by all terms hereof, including,
without limitation, the obligation to make payment of all sums then or
thereafter due from Lessee hereunder.
23. SEVERABILITY, GOVERNING LAW, WAIVER, NOTICES.
23.1 Each and every separate division (paragraph, clause, item, term,
condition, covenant or agreement) herein contained shall have independent and
severable status from each other separate division, or combination thereof, for
the determination of legality, so that if any separate division herein is
determined to be unconstitutional, illegal, violative of trade or commerce, in
contravention of public policy, void, voidable, invalid or unenforceable for any
reason, that separate division shall be treated as a nullity, but such holding
or determination shall have no effect upon the validity or enforceability of
each and every other separate division herein contained, or any other
combination thereof.
23.2 This Lease shall be governed by the laws of the State in which
the Premises are located. Nothing contained herein shall amend, alter, modify,
abridge or affect the provisions of the Base Agreement relating to the parties'
choice of governing law as to the rights and obligations contained therein.
23.3 No waiver by Lessor of any breach of any covenant, condition or
agreement herein contained shall operate as a permanent waiver of such covenant,
condition, or agreement, or of any subsequent breach thereof. No payment by
Lessee or receipt by Lessor of a lesser amount than the installments of rent or
other sums due hereunder shall be deemed to be an acceptance thereof or a waiver
of any of Lessor's rights hereunder or a discharge of any obligation of Lessee
hereunder. Lessor shall have the right, in its sole discretion, to apply such
payment to any indebtedness owing from Lessee to Lessor. No endorsement or
statement on any payment or letter accompanying such payment shall be deemed an
accord and satisfaction, and Lessor may accept such payment without prejudice to
Lessor's right to recover any outstanding balance or to pursue any other remedy
provided in this Lease. No re-entry by Lessor after a breach or termination
shall be considered an acceptance of a surrender of the Premises unless
specifically agreed to in writing by Lessor.
23.4 All notices and communications required or permitted under or
otherwise concerning this Lease shall be addressed to Lessor or to Lessee, as
appropriate, at their respective addresses set forth herein, or at such other
address as either party may designate in writing to the other party. Copies of
any notices or communications required or permitted under Section 18 or 19 shall
be provided to Lessor's Risk Management Department, 500 Water Street (J-907),
Jacksonville, FL 32202.
24. OTHER PROVISIONS.
None
6
<PAGE> 44
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed, in duplicate, as of the day and year first above written.
"LESSOR"
CSX TRANSPORTATION, INC.
[as operator for New York Central Lines LLC,
a Delaware limited liability company]
Witnesses:
____________________________ By:_________________________________
Name:_______________________________
____________________________ Title:______________________________
"LESSEE"
PATHNET TELECOMMUNICATIONS, INC.
Name:_______________________________
____________________________ Title:______________________________
7
<PAGE> 45
EXHIBIT D
---------
[LOGO ART]
When working along the Rail Road Right of Way
Make sure you have all the other RR Tenants notified before digging. Long
Distance Telecommunications Companies use RR ROW to route very small Fiber
Optic Cables which carry huge volumes of Telecommunications traffic including:
Banking, Stock Markets, Point of Sale, 911, FAA and Government. Not to mention
YOUR Family trying to call one another.
LONG DISTANCE PHONE CO.
<TABLE>
<S> <C>
WORLDCOM 1-800-248-0133
AT&T 1-800-252-1133
MCI 1-800-624-9675
SPRINT 1-800-521-0579
QWEST 1-800-283-1237
Interstate FiberNet 1-800-374-2350
</TABLE>
ONE-CALL CENTERS
<TABLE>
<S> <C>
Alabama 1-800-292-8525
Connecticut 1-800-922-4455
DC 1-800-257-7777
Delaware 1-800-282-8555
Florida 1-800-432-4770
Georgia 1-800-282-7411
Illinois (Chicago) 1-312-744-7000
Illinois 1-800-892-0123
Indiana 1-800-382-5544
Kentucky 1-800-752-6007
Louisiana 1-800-272-3020
Massachusetts 1-888-344-7233
Maryland 1-800-257-7777
Maryland 1-800-282-8555
Maine 1-888-344-7233
Michigan 1-800-482-7171
Mississippi 1-800-227-6477
North Carolina 1-800-632-4949
New Hampshire 1-888-344-7233
New Jersey 1-800-272-1000
New York City
(Long Island) 1-800-272-4480
New York 1-800-962-7962
Ohio 1-800-362-2764
Pennsylvania 1-800-242-1776
Rhode Island 1-888-344-7233
South Carolina 1-800-922-0983
Tennessee 1-800-351-1111
Virginia (South) 1-800-552-7001
Virginia (North) 1-800-257-7777
Vermont 1-888-344-7233
West Virginia 1-800-245-4848
</TABLE>
.48
<PAGE> 46
EXHIBIT G
SPECIFICATION FOR THE ATTACHMENT
OF CABLES TO RAILROAD BRIDGES
I. AVOIDANCE OF ATTACHMENTS
The cable system preferably should be so graded that it will be unnecessary
to make attachments to railroad bridge structures.
II. ATTACHMENTS TO FIXED BRIDGES
Unless separate written approval of the Railroad's Chief Engineer has been
obtained, cable will be encased in steel conduit, and attachments to steel
bridges shall be made with devices that do not require the drilling or
cutting of the bridge structure or the removal of rivets. Attachments to
each individual bridge shall be in accordance with drawings prepared by or
for Utility and approved by the Railroad. Typical attachment drawings may
be prepared for those types of bridges whose design and construction lend
themselves to repetition of attachment method and detail. However, the
Railroad shall make final determination as to the applicability of any
typical attachment drawings to an individual bridge.
III. ATTACHMENTS TO MOVABLE BRIDGES
All attachments to movable bridges require separate written approval of the
Railroad's Chief Engineer and will be made in accordance with requirements
prescribed for that particular bridge by the Railroad.
IV. TEMPORARY RELOCATION OF ATTACHMENTS
Temporary relocation of cable systems attached to bridges will be made
promptly and without cost to Railroad when necessary for Railroad to
perform bridge maintenance. Notification will not be less than 30 days
prior to date that relocation must be complete, except in case of
emergency. The attachment requirements set forth by the Railroad will
locate the attachment, to the extent possible, such that the occurrence of
such temporary relocations will be minimized.
V. NEW BRIDGES
In the event that new railroad bridges are to be constructed along the
right-of-way occupied by Utility and Utility desires to locate its cable
facility on such bridges, provision for Utility cable will be incorporated
into the bridge design. Costs of design, construction, and materials
attributable solely to Utility's use of the structure, as well as costs of
any temporary relocation of Utility's facilities during bridge
construction, will be paid by Utility.
<PAGE> 47
EXHIBIT H
EMERGENCY AND DISASTER RESPONSES
In the event of an emergency or disaster which results in actual damage to
Facilities or System or to Railroad's facilities or operations, or creates a
situation wherein it is reasonably possible that such damage may occur,
immediate contact shall be established between Railroad's Operations Center, and
applicable division personnel, and Utility's Operation Center and applicable
Area Representatives. Detailed procedures effectuating the above notification
shall be mutually established.
Railroad and Utility will fully cooperate with each other and coordinate their
efforts to jointly and severally restore operation of their respective rail and
communication systems, with each being solely responsible for all costs incurred
in repairing its own facilities. In the event such cooperation results in one
party incurring costs that are for the benefit of the other (e.g., Railroad
providing railroad equipment to Utility), such costs shall be subsequently fully
reimbursed.
Utility will maintain emergency material and repair kits at various points
throughout its System.
Railroad shall have the right to establish priorities for making repairs which
impact upon rail operations, but shall permit Utility to move forward in making
repairs to Utility's System or Facilities when to do so would not impair rail
operations.
<PAGE> 48
EXHIBIT J
CSX TRANSPORTATION - EB2 PUBLICATION SCHEDULE OF LABOR OVERHEAD RATES USED FOR
BILLING OUTSIDE PARTIES OTHER THAN GOVERNMENT AGENCIES AND RAILROADS
ITEM 1. SUMMARY OF LABOR SURCHARGES TO BE APPLIED TO DIRECT LABOR EFFECTIVE
1/1/97:
<TABLE>
<CAPTION>
NON-
DESCRIPTION MOW SIG M OF E TRANS GOB/SS CONTRACT
- ----------- ---- --- ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Vacation and other 8.35% 6.42% 7.59% 10.60% 12.82% 5.74%
Holiday 3.97% 3.65% 3.87% 0.69% 3.46% 0.00%
RRUI 27.01% 26.48% 26.48% 24.76% 26.64% 18.46%
Suppl. Annuity Tax 1.86% 1.64% 1.74% 1.60% 1.66% 0.00%
Suppl. Sick Ins. 1.07% 0.88% 1.21% 0.00% 0.00% 0.00%
Health & Welfare 16.13% 15.81% 16.01% 15.99% 16.70% 7.44%
Small tools 2.00% 2.00% 0.00% 0.00% 0.00% 0.00%
Safety/Training 4.00% 4.00% 4.00% 3.00% 0.00% 0.00%
Supervision 67.10% 61.33% 32.23% 31.98% 19.32% 0.00%
Force Acct. Ins. 23.00% 23.00% 23.00% 23.00% 0.00% 0.00%
Funded Pension 0.00% 0.00% 0.00% 0.00% 0.00% 7.36%
Composite Rate 154.49% 145.21% 116.13% 111.62% 80.60% 39.00%
</TABLE>
* Other included sick leave, personal leave, jury duty, bereavement,
compassionate leave.
Note: The rates above do not include the surcharge of 24.6% for Signal Shop
Labor
<PAGE> 49
EXHIBIT K
ARBITRATION OR MEDIATION RESOLUTION PROCEDURES
A. In the event of any controversy, claim or dispute between Utility and
Railroad referred to arbitration or mediation pursuant to this Agreement
(hereinafter referred to as "Dispute"), the parties agree to use the procedure
herein.
B. The parties agree that the only circumstances in which a Dispute will
not be subject to the provisions of this Exhibit are: (i) where a party makes a
good faith determination that a breach of the terms of the Agreement by the
other party will cause irreparable damage to the complaining party unless such
breach is enjoined by a court of competent jurisdiction; or (ii) where one party
has been made a party to a judicial proceeding, and the other party is an
appropriate additional party to such proceeding. Breach of the Agreement will be
deemed to cause irreparable damage if it is incapable of adequate redress if not
promptly enjoined, so that a temporary or preliminary restraining order or other
immediate injunctive relief is the only adequate remedy. If one party files a
pleading seeking injunctive relief, and such pleading is challenged by the other
party, and the injunctive relief sought is not awarded in substantial part, the
party filing the pleading seeking immediate injunctive relief shall pay all the
costs, attorneys' fees and expenses of the party successfully challenging the
pleading.
1. Notice of Arbitration or Mediation. If the parties have not
succeeded in negotiating a resolution of a Dispute within thirty (30) business
days following the Trigger Notice (which period may be extended by mutual
agreement of the parties), arbitration or mediation shall be conducted as set
forth below. The Trigger Notice shall specify in reasonable detail the nature of
the Dispute and comply with the procedures set forth in Paragraph 2 or Paragraph
3.
2. Arbitration Procedures. Arbitration shall be conducted in
accordance with the then-current CPR Non-Administered Arbitration Rules (the
"Rules"). The provisions of the Agreement shall control if they conflict with
the Rules. Arbitration shall be before three (3) arbitrators. Each party shall
appoint one (1) arbitrator within fifteen (15) business days following the
commencement of the procedure by Trigger Notice above (which period may be
extended by mutual agreement). Within fifteen (15) business days following their
appointment, the two (2) arbitrators so selected shall appoint the third
arbitrator, who shall serve as Chairman of the arbitration panel. The Chairman
shall be an attorney at law admitted to practice in the United States and
experienced in arbitration. The arbitrators shall determine issues of
arbitrability in accordance with federal law, but may not limit, expand or
otherwise modify the terms of the Agreement. Arbitration shall be governed by
the United States Arbitration Act, 9 U.S.C. Sections 1-16, and judgment upon the
award may be entered by any court having jurisdiction thereof. In addition, the
following shall apply with respect to any arbitration conducted pursuant to this
Appendix:
(a) Costs/Fees. If either party submits a matter to arbitration,
and provided that one of the parties prevails over the other, the
arbitrators may award such prevailing party an amount equal to its
reasonable attorneys' fees and expenses, experts' fees, and other
reasonable costs and expenses that it has incurred in connection with the
arbitration. Otherwise, each party shall be responsible for its own fees
and expenses.
(b) Remedies. Upon a showing of material breach of the Agreement,
the arbitrators are empowered to award actual or compensatory damages,
unless prohibited by applicable state law or the Agreement. The arbitrators
may not award consequential, punitive or multiple damages; the parties
expressly waiving any entitlement to such relief.
(c) Location of Arbitration. The place of the arbitration shall be
Jacksonville, Florida.
(d) Confidentiality. The parties, their representatives, the
arbitrators and any other participants in the arbitration shall treat all
aspects of the arbitration as confidential, including but not limited to
all documents, testimony, information or other things produced, inspected
or otherwise
1
<PAGE> 50
made available in connection with the arbitration. Neither the parties nor
the arbitrators may disclose the existence, content or results of the
arbitration, except as necessary to comply with applicable law or
regulatory requirements. Before making any such disclosure, the party
seeking disclosure shall give written notice to the other party, and shall
afford such party a reasonable opportunity to protect its interests. In no
event shall a disclosure necessary to comply with legal or regulatory
requirements be deemed to waive the confidential nature of the disclosed
information.
(e) Discovery. The arbitrators shall permit and facilitate such
discovery in accordance with Federal Rules of Evidence and Federal Rules of
Civil Procedure, as they shall determine is appropriate under the
circumstances, taking into account the needs of the parties, the relevance
of the requested discovery to the matter in controversy and the
desirability of making discovery expeditious and cost-effective. The
parties agree that the following information shall not be subject to
discovery in connection with the arbitration unless it is expressly
authorized by the arbitrators upon a showing of substantial need by the
party seeking discovery: (i) information relating to Railroad's agreements
with any customers; (ii) information relating to Utility's cost structure,
contribution or profits under third party usages allowed under the
Agreement.
3. Mediation Procedures. Mediation is a voluntary process in which a
neutral third party, who lacks authority to impose a solution, helps
participants reach their own agreement for resolving a dispute or transaction.
Utility and Railroad agree to act in good faith negotiation, with the jointly
appointed mediator, to reach an agreement, utilizing the following basic roles
of the mediator in the Dispute resolution:
- urging participants to agree to talk;
- helping participants understand the mediation process;
- carrying messages between parties;
- helping participants agree upon an agenda;
- setting an agenda;
- providing a suitable environment for negotiation;
- maintaining order;
- helping participants understand the problem(s);
- defusing unrealistic expectations;
- helping participants develop their own proposals;
- helping participants negotiate;
- persuading participants to accept a particular solution.
(a) Mediation shall be held in Jacksonville, Florida.
(b) Each party shall be responsible for its own attorney
fees, and costs (including exhibits, witness fees, etc.), and shall each
pay one-half (1/2) of the Mediator's fee(s).
(c) The mediator shall be jointly selected as follows:
(1) Railroad shall designate five (5) members from the listed
panel of the U.S. District Court, Middle District of Florida as
a Potential Mediation Panel;
(2) Utility shall select one (1) of such Panel as the mediator;
(3) If the selected mediator does not accept the mediation
appointment, Utility shall designate an alternative, and
continue until a selected mediator accepts the mediation
appointment;
(4) If none of the Panel accepts the appointment, Utility shall
designate a new Potential Mediation Panel of five (5) from the
list in Paragraph 2.(b)(1), and Railroad shall select one (1)
of such Panel, as in Paragraphs (2) and (3).
(d) The form of the Agreement to Mediate shall be as follows:
2
<PAGE> 51
AGREEMENT TO MEDIATE
Railroad and Utility, through their respective counsel, stipulate
that:
1. The Dispute embodied in the Agreement stated is hereby submitted to
mediation.
2. The parties have selected _________________________ to be the
mediator in this case.
3. Parties agree to meet with the mediator at _________ on _________,
and continue to engage in the mediation process thereafter, if appropriate,
as agreed to by the parties.
4. The mediator shall be paid an hourly fee of $__________, with said
fee apportioned equally among the parties.
5. The mediation shall be private, unless the parties and the mediator
otherwise agree. No session shall be recorded, and there shall be no
stenographic record maintained.
6. Parties and counsel agree that the mediator's work product, case
file and any communication made in the course of the mediation (other than
the final signed Mediation Agreement) shall be confidential and not subject
to disclosure in any subsequent judicial, administrative or private
proceeding.
7. Parties and counsel agree that any information, writings or
disclosures made during the mediation process are governed by Rule 408 of
the Federal Rules of Evidence, and shall not be admissible in any
subsequent proceedings unless otherwise discoverable.
8. Parties and counsel agree to participate fully in the mediation
process and to do so in good faith.
9. The mediator shall not be liable to any party for any act or
omission in connection with the mediation conducted in this case.
10. If possible, officers of the parties with full authority to settle
the Dispute shall be present at the Mediation. Should officers of the
parties, for whatever reason, not be present, counsel for each party agrees
to attend the mediation and have full and immediate access to the person
authorized to settle during the entire course of the mediation.
11. An agreement shall be executed by the parties if the Dispute is
resolved.
12. The mediation shall commence at the offices of __________________,
on ____________________, at ____________________.
RAILROAD: By:___________________________ Date:___________________________
RAILROAD ATTORNEY:_______________________________________
UTILITY: By:___________________________ Date:___________________________
UTILITY ATTORNEY:________________________________________
Accepted by Mediator:____________________ Date:___________________________
4. Modification. These procedures may be modified by the parties hereto
without necessity of amending the Agreement.
3
<PAGE> 52
EXHIBIT L
AUTHORIZATION FOR FIBER OPTIC CABLE WORK
FOR __________________________________________________ ("UTILITY")
CSX TRANSPORTATION, INC.
EXPENDITURES BILLING - J686
6735 Southpoint Drive, S
Jacksonville, FL 32216-6177
ATTENTION: GAIL A. LYCETT
(904) 279-6667 - FAX
THIS NOTICE CONFIRMS UTILITY'S AUTHORIZATION FOR FIBER OPTIC CABLE MAINTENANCE
OR EMERGENCY REPAIRS ON CSXT RIGHT-OF-WAY.
CSXT COST COLLECTION NUMBER (OSP):______________________________________________
EFFECTIVE DATE:_________________________________________________________________
LOCATION (S): CITY_____________________________________________ STATE__________
MILEPOST (S):___________________________________________________________________
UTILITY'S PROJECT NUMBER:_______________________________________________________
WORK DESCRIPTION:_______________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
BEGINNING/ENDING DATES: 1. START________________________________________
2. END ________________________________________
IF YOU HAVE ANY ADDITIONAL QUESTIONS, PLEASE CALL _________________________
Utility Representative's Phone Number)
APPROVED:
_________________________________ ______________________________
NAME TITLE
CC: L. L. GALBREATH - CSXT (904)245-1030FAX
<PAGE> 1
Portions of this exhibit have been omitted
and filed separately with the Securities and Exchange
Commission. These portions are designated
"[ * * * ]"
EXHIBIT 10.28
[IXC LOGO]
IXC
MASTER SERVICE AGREEMENT
This Agreement for telecommunications services is made as of the date of last
execution below (the "Effective Date") and entered into by and between IXC
COMMUNICATIONS SERVICES, INC., a Delaware corporation with its principal place
of business at 1122 Capital of Texas Hwy. South, Austin, Texas 78746-6426
("Supplier"), and PATHNET, INC., a Delaware corporation with its principal place
of business at 1015 31st Street Northwest, Suite 500, Washington, DC 20007
("Customer").
WHEREAS, Customer desires to obtain telecommunications services as described
below (the "Service") from Supplier, and Supplier is willing to provide the
Service for the rates attached hereto.
NOW, THEREFORE, Customer and Supplier hereby mutually agree as follows:
CREDIT REQUIREMENTS:
SERVICE, TERM AND RATES: Supplier agrees to provide and Customer agrees to
purchase Service(s) indicated below. This agreement, including any terms and
conditions, addenda, schedules, supplements or exhibits which are attached
hereto and incorporated herein, constitutes the entire agreement (the
"Agreement") by Supplier and Customer pertaining to the subject matter(s) hereof
and supersedes all prior and contemporaneous agreements and understandings in
connection herewith.
IXC - CONFIDENTIAL 06/03/99
<PAGE> 2
<TABLE>
<CAPTION>
SERVICE TYPE:
- ------------
<S> <C>
SWITCHED SERVICE: BROADBAND SERVICE:
/s/ KJB Xclusive /s/ KJB ATM
---------------- -----------------
Xnet LATA Frame Relay
---------------- -----------------
Xnet LEx Network Management Services
---------------- -----------------
PRIVATE LINE SERVICE: Training
X Digital -----------------
---------------- CUSTOMER INTERFACE:
X Optical Rack Space & Power
---------------- -----------------
Shelf Space
-----------------
Collocation
-----------------
</TABLE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date last
written below.
<TABLE>
<CAPTION>
IXC COMMUNICATIONS SERVICES, INC. PATHNET, INC.
<S> <C>
BY: /s/ LEO WELSH BY: /s/ KEVIN J. BENNIS
---------------------------------- --------------------------------------
NAME: LEO WELSH NAME: KEVIN J. BENNIS
-------------------------------- ------------------------------------
TITLE: PRES-WHOLESALE TITLE: PRESIDENT - COMMUNICATION SERVICES
------------------------------- -----------------------------------
DATE: 6/17/99 DATE: 6/4/99
-------------------------------- ------------------------------------
FULL BUSINESS ADDRESS: FULL BUSINESS ADDRESS:
1122 CAPITAL OF TEXAS HWY. SOUTH 1015 31ST STREET NORTHWEST, SUITE 500
AUSTIN, TEXAS 78746-6426 WASHINGTON, DC 20007
TELEPHONE: (512) 427-3700 TELEPHONE: (202) 625-7284
FACSIMILE: (512) 328-7902 FACSIMILE: (202) 625-7369
BILLING CONTACT: BILL COTTA
-------------------------
TELEPHONE: 202-295-3100
-------------------------------
</TABLE>
IXC - CONFIDENTIAL 06/03/99
<PAGE> 3
MASTER SERVICE AGREEMENT
TERMS & CONDITIONS
1. CREDIT. All Services ordered hereunder are subject to credit approval.
Customer shall complete a credit application form attached hereto as
Exhibit A.
2. PROVISION OF BALANCE SHEET. Prior to commencement of Service, Customer
shall provide Supplier with financial statements including a consolidated
balance sheet of Customer as of the end of the most recent quarter and
consolidated statements of income and retained earnings of such quarter and
the fiscal year to date through such quarter, all in reasonable detail and
certified by Customer's chief financial officer as having been prepared in
accordance with generally accepted accounting principles, consistently
applied. Customer shall provide updated financial statements as reasonably
requested by Supplier.
3. PAYMENT TERMS. Invoices for Service are due and payable within thirty (30)
days of the receipt of invoice (unless otherwise indicated in the Credit
Requirements section of the Master Service Agreement), without demand or
set off by Customer. Payments not received within thirty (30) days of the
receipt of invoice are considered past due. In addition to Supplier
undertaking any of the actions set forth in this Agreement, if any invoice
is not paid when due, Supplier may: (i) impose a late charge equal to
1-1/2% (or the maximum legal rate, if less) of the unpaid balance per
month; (ii) require an increase in the amount of Security Deposit, as set
forth in Section 5.
4. BILLING DISPUTES. If Customer in good faith disputes any portion of any
Supplier invoice, Customer shall submit to Supplier, within thirty (30)
days following the date of the invoice, full payment of the undisputed
portion of the invoice and written documentation identifying and
substantiating the disputed amount. If Customer does not report a dispute
within the thirty (30) day period, Customer shall have waived its dispute
rights for that invoice. Supplier and Customer agree to use their
respective best efforts to resolve any dispute within fifteen (15) days
after Supplier receives written notice of the dispute from Customer. Any
disputed amounts resolved in favor of Customer shall be credited to
Customer's account on the next invoice following resolution of the dispute.
Any disputed amounts determined to be payable to Supplier shall be due
within ten (10) days of the resolution of the dispute.
Any dispute arising out of or relating to this Agreement which has not been
resolved by the good faith efforts of the parties will be settled by
binding arbitration conducted expeditiously in accordance with Section 16.
5. ADDITIONAL ASSURANCES. If at any time during the term of this Agreement
there is a material and adverse change in Customer's creditworthiness,
which shall be determined by Supplier in its sole and absolute discretion,
then Supplier may demand that Customer increase the amount of the/or
provide a Security Deposit pursuant to Supplier's standard terms and
conditions, by either requiring cash or a letter of credit, as security for
the full and faithful performance of Customer of the terms, conditions and
covenants of this Agreement; provided, however, that in no event shall the
amount of the Security Deposit ever exceed two months' estimated Usage
Charges and other amounts payable by Customer to Supplier hereunder.
6. CERTIFICATION. If applicable, Customer and Supplier hereby represent and
warrant that each of them is certified to do business in all jurisdictions
in which it conducts business and is in good standing in all such
jurisdictions. Customer and Supplier further represent and warrant that
each of them is certified by the proper regulatory agencies to provide
whatever interstate, intrastate and international long distance services to
users in those jurisdictions where such services are to be provided.
Customer and Supplier shall keep current during the term of this Agreement,
copies of their Certificates of Public Convenience and Necessity or similar
documents certifying interstate, intrastate, or international operating
authority in any local, state, or federal jurisdiction (collectively,
"Service Compliance Certificates") and furnish copies thereof to each other
within ten days of written request. Supplier reserves the right to refuse
or withhold Service in any jurisdiction in which Customer's Service
Compliance Certificate has not been furnished to Supplier in a timely
manner. Customer shall defend and indemnify Supplier from any losses,
expenses, demands and claims in connection with Customer's failure to
provide Supplier with such Service Compliance Certificates. Such
indemnification includes costs and expenses (including reasonable
attorney's fees) incurred by Supplier in settling, defending or appealing
any claims or actions brought against it relating to Customer's failure to
provide such Service Compliance Certificates. Supplier shall defend and
indemnify Customer from any losses, expenses, demands and claims in
connection with Supplier's failure to provide Customer with such Service
Compliance Certificates. Such indemnification includes costs and expenses
(including reasonable attorney's fees) incurred by Customer in settling,
defending or appealing any claims or actions brought against it relating to
Supplier's failure to provide such Service Compliance Certificates.
7. GOVERNING LAW. This Agreement shall be construed and enforced in accordance
with, and the validity and performance hereof, shall be governed by the
laws of the State of Delaware without regard to its principles of choice of
law.
8. NOTICES. All notices and other communications hereunder shall be in writing
and shall be deemed to have been duly given as of the date of delivery,
facsimile transmission or mailing, and if mailed, first class postage
prepaid, certified or registered mail, return receipt requested to the
following persons, unless contrary instructions are given by the parties in
writing:
If to Supplier: IXC Communications Services, Inc.
1122 Capital of Texas Hwy. South
Austin, Texas 78746-6426
Attention: Contract Administration
IXC - CONFIDENTIAL 1 06/03/99
<PAGE> 4
If to Customer: Pathnet, Inc.
1015 31st Street, NW, Suite 500
Washington, DC 20007
Attention: General Counsel__________
9. WAIVER OF BREACH OR VIOLATION NOT DEEMED CONTINUING. The waiver by either
party of a breach or violation of any provision of this Agreement shall not
operate as or be construed to be a waiver of any subsequent breach hereof.
10. BANKRUPTCY. In the event of the bankruptcy or insolvency of either party
hereto or if either party hereto shall make an assignment for the benefit
of creditors or take advantage of any act or law for relief of debtors, the
other party to this Agreement shall have the right to terminate this
Agreement without further obligation or liability on its part.
11. BUSINESS RELATIONSHIP. This Agreement shall not create any agency,
employment, joint venture, partnership, representation, or fiduciary
relationship between the parties. Neither party shall have the authority
to, nor shall any party attempt to, create any obligation on behalf of the
other party.
12. EVENTS OF DEFAULT:
A "DEFAULT" shall occur if: (a) Customer fails to make any payment required
to be made by it under this Agreement and any such failure remains
uncorrected for five (5) business days after written notice of such
failure; or (b) either party fails to perform or observe any material term
or obligation (other than making payment) contained in this Agreement, and
any such failure remains uncorrected for thirty (30) calendar days after
written notice from the non-defaulting party informing the defaulting party
of such failure.
13. INDEMNITY.
A. Each party shall indemnify, defend, release and hold harmless the other
party and all of its officers, agents, directors, shareholders,
subcontractors, subsidiaries, employees and other affiliates (collectively
"Affiliates") from and against any action, claim, court cost, damage,
demand, expense, liability, loss, penalty, proceeding or suit,
(collectively, together with related reasonable attorneys' fees; including
costs and disbursements, "Claims") imposed upon either party by reason of
damages to property or injuries, including death, as a result of an
intentional or a negligent act or omission on the part of the indemnifying
party or any of its Affiliates in connection with: (i) the performance of
this Agreement; or (ii) other activities relating to the property or
facilities which are the subject of this Agreement, whether or not the
Claims result from a sole negligent act or omission on the part of the
indemnifying party, whether the Claims result from the concurrent negligent
act or omission on the part of both parties, or whether the Claims result
from the negligent act or omission of the indemnifying party and some other
third party. In the event a Clam relates to the negligence of both
parties, the relative burden of the Claim shall be attributed equitably
between the parties in accordance with the principles of comparative
negligence.
B. In the event any action shall be brought against the indemnified party,
such party shall immediately notify the indemnifying party in writing, and
the indemnifying party, upon the request of the indemnified party, shall
assume the defense thereof on behalf of the indemnified party and its
Affiliates and shall pay all reasonable expenses and satisfy all judgments
which may be incurred by or rendered against the indemnified party or its
Affiliates in connection therewith, provided that the indemnified party
shall not be liable for any settlement of any such action effected without
its written consent.
C. Notwithstanding the termination of this Agreement for any reason, this
Section 12 shall survive such termination.
14. INSURANCE. Throughout the term of this Agreement and any extension thereof,
each party shall maintain and, upon written request, shall provide to the
other proof of adequate liability insurance:
(i) Worker's compensation insurance up to the amount of the statutory limit
in the state or states where work is to be performed;
(ii) Employer's liability insurance with a limit of not less than $200,000
per claim with an all-states endorsement;
(iii) Comprehensive general liability insurance with a limit of not less
than $1,000,000 per occurrence for bodily injury liability and property
damage liability, including coverage extensions for blanket contractual
liability, personal injury liability and products and completed operations
liability; and
(iv) Comprehensive Auto Liability insurance with a limit of not less than
$1,000,000 per accident for Bodily Injury Liability and Property Damage
Liability arising out of the ownership, maintenance or use of any vehicle
in the performance of this Agreement.
15. AUTHORIZED USE OF NAME. Without Supplier's prior written consent, Customer
shall not: (i) refer to itself as an authorized representative of Supplier
in promotional, advertising or other materials; or (ii) use Supplier's
logos, trade marks, service marks, or any variations thereof in any of its
promotional, advertising or other materials or in any activity using or
displaying Supplier's name or the Services to be provided by Supplier.
Customer agrees to change or correct, at Customer's expense, any such
material or activity which Supplier, in its sole judgment, determines to be
inaccurate, misleading or otherwise objectionable in relation to using or
marketing Supplier's services. Customer is explicitly authorized to only
use the following statements in its sales literature: (i) "Customer
utilizes the Supplier's network"; (ii) "Customer utilizes Supplier's
facilities"; (iii) "Supplier provides only the network facilities"; and
(iv) "Supplier is our network services provider". Without Customer's prior
written consent, Supplier shall not refer to Customer in any promotional
context, in any media. It is expressly understood that Supplier may refer
to Customer as may be necessary for public company reporting purposes.
16. ASSIGNMENT. Neither party hereto may assign this Agreement without the
express written consent of the other party hereto, which consent shall not
be unreasonably withheld. Notwithstanding the foregoing: (i) a security
interest in this Agreement may be granted by Supplier to any lender to
secure borrowings by Supplier or any of its
IXC - CONFIDENTIAL 2 06/03/99
<PAGE> 5
affiliates; (ii) Supplier may assign all its rights and obligations
hereunder to any Affiliate; and (iii) any subsidiary of Supplier may assign
any amounts due from Customer under any Supplement to Supplier for billing
purposes.
17. BINDING ARBITRATION. The parties will attempt in good faith to resolve any
controversy or claim arising out of or relating to this Agreement promptly
through discussions between themselves at the operational level. In the
event a resolution cannot be reached, such controversy or claim shall be
negotiated between appointed counsel or senior executives of the parties
who have authority to settle the controversy.
The disputing party shall give the other party written notice of the
dispute. If the parties fail to resolve such controversy or claim within
thirty (30) days of the disputing party's notice, either party may seek
arbitration as set forth below.
Any controversy or claim arising out of or relating to this Agreement, or a
breach of this Agreement, shall be finally settled by arbitration in
Austin, Texas, and shall be resolved under the laws of the State of
Delaware. The arbitration shall be conducted before a single arbitrator in
accordance with the commercial rules and practices of the American
Arbitration Association then in effect, with the exception that discovery
shall be conducted in accordance with the Federal Rules of Civil Procedures
with all discovery disputes to be resolved by the arbitrator.
The arbitrator shall have the power to order specific performance if
requested. Any award, order, or judgment pursuant to such arbitration shall
be deemed final and binding and may be enforced in any court of competent
jurisdiction. The parties agree that the arbitrator shall have no power or
authority to make awards or issue orders of any kind except as expressly
permitted by this Agreement, and in no event shall the arbitrator have the
authority to make any award that provides for punitive or exemplary
damages. All such arbitration proceedings shall be conducted on a
confidential basis. The arbitrator may, as part of the arbitration award,
permit the substantially prevailing party to recover all or part of its
attorney's fees and other out-of-pocket costs incurred in connection with
such arbitration. Customer may, at its option, continue to accept what it
considers to be below-standard Services and pay the charges hereunder
relating thereto during such pendency of such arbitration, without
prejudice thereto.
18. LEGAL CONSTRUCTION. In the event one or more of the provisions contained in
this Agreement shall, for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and this
Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
In the event of any conflict between the provisions of these Terms &
Conditions and the applicable Supplement and Exhibits, the conflict shall
be resolved by reference to the following order of priority of
interpretation: a) Exhibits; b) Supplement; and c) Terms & Conditions. Not
withstanding the foregoing no Exhibit requiring execution shall be binding
unless and until such Exhibit has been executed by an authorized officer of
Customer.
19. NO PERSONAL LIABILITY. Each action or claim of any party arising under or
relating to this Agreement shall be made only against the other party as a
corporation, and any liability relating thereto shall be enforceable only
against the corporate assets of such party. No party shall seek to pierce
the corporate veil or otherwise seek to impose any liability relating to,
or arising from, this Agreement against any shareholder, employee, officer
or director of the other party. Each of such persons is an intended
beneficiary of the mutual promises set forth in this Section and shall be
entitled to enforce the obligations of this Section.
20. NOTICE OF BREACH OF AGREEMENT. To be effective, written notice of any
material breach (except Payment Default) must prominently contain the
following sentences in capital letters: "THIS IS FORMAL NOTICE OF A BREACH
OF CONTRACT. FAILURE TO CURE SUCH BREACH WILL HAVE SIGNIFICANT LEGAL
CONSEQUENCES."
21. LIMITATION OF LIABILITY. Supplier's liability arising out of delays in
restoration of the Services to be provided under this Agreement or out of
mistakes, accidents, omissions, interruptions, or errors or defects in
interruption of Services, shall be subject to the limitations set forth
below and in the applicable Tariff. EXCEPT OTHERWISE PROVIDED HEREIN, IN NO
EVENT SHALL SUPPLIER BE LIABLE TO CUSTOMER OR ANY OF THE CUSTOMER'S OWN
CUSTOMERS OR ANY OTHER THIRD PARTY IN ANY RESPECT, INCLUDING, WITHOUT
LIMITATION, FOR ANY DAMAGES, EITHER DIRECT, INDIRECT, CONSEQUENTIAL,
SPECIAL, INCIDENTAL, ACTUAL, PUNITIVE, OR ANY OTHER DAMAGES, OR FOR ANY
LOST PROFITS OF ANY KIND OR NATURE WHATSOEVER, ARISING OUT OF MISTAKES,
ACCIDENTS, ERRORS, OMISSIONS, INTERRUPTIONS, OR DEFECTS IN TRANSMISSION, OR
DELAYS, INCLUDING THOSE WHICH MAY BE CAUSED BY REGULATORY OR JUDICIAL
AUTHORITIES, ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
OBLIGATIONS OF SUPPLIER PURSUANT TO THIS AGREEMENT; AND IN NO EVENT SHALL
SUPPLIER BE LIABLE AT ANY TIME FOR ANY AMOUNT IN EXCESS OF THE AGGREGATE
AMOUNT IT HAS PRIOR TO SUCH TIME COLLECTED FROM CUSTOMER WITH RESPECT TO
SERVICES DELIVERED HEREUNDER. SUPPLIER MAKES NO WARRANTY TO CUSTOMER OR ANY
OTHER PERSON OR ENTITY, WHETHER EXPRESS, IMPLIED, OR STATUTORY, AS TO THE
DESCRIPTION, QUALITY, MERCHANTABILITY, COMPLETENESS OR FITNESS FOR ANY
PURPOSE OF ANY SERVICE PROVIDED HEREUNDER OR DESCRIBED HEREIN, OR AS TO ANY
OTHER MATTER, ALL OF WHICH WARRANTIES BY SUPPLIER ARE HEREBY EXCLUDED AND
DISCLAIMED. For purposes of this Section, the term "Supplier" shall be
deemed to include Supplier, its shareholders, directors, officers and
employees, and any
IXC - CONFIDENTIAL 3 06/03/99
<PAGE> 6
person or entity assisting Supplier in its performance pursuant to this
Agreement.
22. SYSTEM MAINTENANCE. In the event Supplier determines to interrupt Services
for the performance of routine system maintenance, Supplier will use
reasonable efforts to notify Customer prior to the interruption and to
conduct such maintenance during non-peak hours. In no event shall
interruption for system maintenance constitute a Failure of Performance by
Supplier.
23. MAINTENANCE & TROUBLE REPORTING. Supplier's standard fees for Customer
maintenance support services are as follows:
Maintenance services shall be defined as all work performed by Supplier on
equipment provided by or on behalf of the Customer, or supervision of the
Customer's work within Supplier's terminal facilities. Maintenance Service
charges are not billed for troubles found within that portion of a circuit
provided by Supplier. The following billing rates apply for these services:
A. [* * *] per hour ([* * *] hour minimum - if dispatch is required) Monday
through Friday during the business hours of 8:00 a.m. - 5:00 p.m. local
time, exclusive of the following holidays: New Year's Day, President's Day,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and the day
after Thanksgiving and Christmas Day.
B. [* * *] per hour ([* * *] hour minimum) for overtime work done after
business hours (defined above) and/or on holidays (defined above) and/or
all day on Saturdays and Sundays.
C. As requests for maintenance services are typically made via telephone,
Supplier must be advised in writing as to the person(s) who are authorized
to request service. It is the Customer's responsibility to keep Supplier
apprised of any changes to its list of representative(s).
D. To request technical assistance and help under the maintenance services,
a call must be made to Supplier's Network Control Center at 1-800-526-2488.
This number should be used for Supplier technical assistance,
troubleshooting or testing of circuits, not for service impairment or
outages. The person calling in must be on the authorized list in order to
commit for charges for this technical assistance. If that person is not on
the list, the request cannot be accommodated.
The Network Control Center personnel will take the call, record the
caller's name and phone number along with facts concerning the assistance
and support needed. The caller will then be given the number of the
"Assistance Ticket."
Upon completion of work, this "Assistance Ticket" will be given to
Supplier's Accounting Department, and the Customer will subsequently be
billed based upon the information on that ticket. A copy will be attached
to the invoice.
Except for emergencies, Supplier's technicians cannot be dispatched unless
requests are made in accordance with the above call-out procedure.
24. SUBJECT TO LAWS. This Agreement is subject to, and Customer agrees to
comply with, all applicable federal, state and local laws, and regulations,
rulings and orders of governmental agencies, including, but not limited to,
the Communications Act of 1934, the Telecommunications Act of 1996, the
Rules and Regulations of the Federal Communications Commission ("FCC") and
state public utility or service commissions ("PSC"), tariffs and the
obtaining and continuance of any required certification, permit, license,
approval or authorization of the FCC and PSC or any governmental body,
including, but not limited to regulations applying to feature group
termination and Letter of Agencies ("LOAs").
25. FCC PERMITS, AUTHORIZATION AND FILINGS. Supplier represents and warrants
that it has taken all necessary and appropriate steps, and will continue to
take all such steps as soon as possible, to procure from the FCC the
necessary authorizations, if any, to deliver Services hereunder to
Customer and whatever approvals are necessary from any other federal or
state agency. Supplier will not voluntarily take or accede to any action,
including the filing of a tariff, that would have the effect of materially
modifying the rates contained herein without the prior written consent of
Customer.
26. COUNTERPARTS. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, and when taken together shall
constitute one document.
27. CONFIDENTIAL INFORMATION AND NONSOLICITATION. "Confidential Information"
shall mean all information disclosed in writing by one party to the other
party which is clearly marked "CONFIDENTIAL" by the disclosing party at the
time of disclosure. "Confidential Information" shall also include certain
oral information disclosed by one party to the other party, provided that
the disclosing party designates such information as confidential at the
time of disclosure and gives recipient a written summary of such
information within five business days after the oral disclosure was made.
Notwithstanding the foregoing, all information concerning the traffic
volume/distribution of Supplier, pricing rates, and customer lists is
hereby deemed to be Confidential Information regardless of whether it is so
identified. The term "Confidential Information" does not include any
information which: (i) was already known by the receiving party free of any
obligation to keep it confidential at the time of its disclosure by the
disclosing party, (ii) becomes publicly known through no wrongful act of
the receiving party, (iii) is rightfully received from a third person
without knowledge of any confidentiality obligation, (iv) is independently
acquired or developed without violating any of the obligations under this
Agreement, (v) is disclosed to a third person by the disclosing party
without similar confidentiality restrictions on such third person rights,
or (vi) is approved for release by written authorization of the disclosing
party.
Further, the recipient may disclose Confidential Information pursuant to
any judicial or governmental
IXC - CONFIDENTIAL 4 06/03/99
<PAGE> 7
request, requirement or order. The recipient, however, shall take
reasonable steps to give the disclosing party sufficient prior notice to
contest such request, requirement or order. Confidential Information shall
remain the property of the disclosing party, and shall be returned to the
disclosing party or destroyed upon request of the disclosing party.
Supplier may make such Confidential Information available to its lenders.
Accordingly, in the event of a breach or threatened breach of the foregoing
provisions, Supplier shall be entitled to an injunction or restraining
order, in addition to such other rights or remedies as may be available
under this Agreement, at law or in equity, including but not limited to
money damages.
28. FORCE MAJEURE. Supplier shall not be liable for any failure of performance
hereunder due to causes beyond its reasonable control, including, but not
limited to: acts of God, fire, explosion, vandalism, cable cut, storm or
other similar catastrophes; any law, order, regulation, direction, action
or request of the United States government, or of any other government,
including state and local governments having jurisdiction over either of
the parties, or of any department, agency, commission, court, bureau,
corporation or other instrumentality of any one or more of said governments
(provided that Supplier uses best efforts to prevent such government
actions, whenever possible); administrative delays by governmental
agencies; national emergencies; insurrections; riots; wars; or strikes,
lock outs, work stoppages or other labor difficulties.
29. SURVIVAL. The covenants and agreements of Customer contained in this
Agreement with respect to payment of amounts due, confidentiality and
indemnification shall survive any termination of this Agreement. The rights
and obligations under this Agreement shall survive any merger or sale of
either party and shall be binding upon the successors and permitted assigns
of each party.
30. REGULATORY. Customer is responsible for payment of, or reimbursement to
Supplier for, Universal Service Fund and Lifeline Assistance Charges
(Presubscribed line charges) set forth in the National Exchange Carrier
Association (NECA) Tariff FCC #5, sections 8.5., 8.5.2 and 17.1.4 (A) &
(B), as the same may be amended from time to time, or any successor tariffs
or sections, with respect to any Customer ANI's subscribed to Supplier and
sold to End User customers (non-carrier sales). In addition, with respect
to the Services, Customer is responsible for payment of, or reimbursement
to Supplier for: (i) telecommunication relay service charges required by
the Americans with Disabilities Act or otherwise (both federal and state);
(ii) interexchange carrier fees payable to the FCC under the Omnibus Budget
Reconciliation Act of 1993 or otherwise; (iii) payphone service provider
compensation as determined by the FCC in CC Docket No.96-128; (iv)
universal service fund charges, intraLATA compensation charges; and (v)
other federal or state fees or charges imposed on Supplier, as required by
law in connection with sales to end user customer's (non-carrier sales).
Supplier will furnish, at Customer's request, documentation to support the
fees or charges payable by Customer to Supplier pursuant to this Section
29.
Customer shall furnish to Supplier valid and appropriate tax exemption
certificates for all applicable jurisdictions (federal, state and local) in
which it performs customer billing. Customer is responsible for properly
charging tax to its subscribers and for the proper and timely reporting and
payment of applicable taxes to the taxing authorities and shall defend and
indemnify Supplier from payment and reporting of all applicable federal,
state and local taxes, including, but not limited to, gross receipts taxes,
surcharges, franchise fees, occupational, excise and other taxes (and
penalties and interest thereon), relating to the Services. Such
indemnification includes costs and expenses (including reasonable
attorney's fees) incurred by Supplier in settling, defending or appealing
any claims or actions brought against it relating to said taxes. If
Customer fails to provide and maintain the required certificates, Supplier
may charge Customer and Customer shall pay such applicable taxes.
The amounts payable by Customer under this Agreement do not include any
state and local sales or use taxes, or utility taxes, however designated,
which may be levied on the goods and services provided by Supplier
hereunder. With respect to such taxes, if applicable, Customer shall
furnish Supplier with an appropriate exemption certificate or pay to
Supplier, upon timely presentation of invoices therefore, such amounts
thereof as Supplier may be by law required to collect or pay. Any and all
other taxes, including but not limited to franchise, net or gross income,
license, occupation, and real or personal property taxes, shall be timely
paid by Supplier. Customer shall pay to Supplier any such taxes that
Supplier may be required to collect or pay.
31. OBLIGATIONS SEVERAL AND NOT JOINT. Each party shall be responsible only
for its own performance under the Agreement (including any attachments,
exhibits, schedules or addenda) and not for that of any other party.
32. AMENDMENTS. This Agreement may only be modified or supplemented by an
instrument in writing executed by each party.
IXC - CONFIDENTIAL 5 06/03/99
<PAGE> 8
PRIVATE LINE SERVICE SUPPLEMENT
DIGITAL SERVICE
1. SCOPE AND RATES. Supplier shall use its best efforts (considering the needs
of its other customers) to provide Service for which a Purchase Order has
been accepted. A form of Purchase Order is attached hereto as Exhibit A.
The rates for Service are set forth in Exhibit D, unless otherwise
specified in the applicable Purchase Order. Such rates are valid for the
term of this Agreement. Supplier may thereafter change such rates, but not
for any Circuit then in service. Customer may also order the services
listed in Exhibit B, subject to availability. Supplier's On-Net City
listing is attached hereto as Exhibit C.
2. TERM. The Agreement is for a term of three (3) years commencing on the
Effective Date and shall continue through the end of the Circuit Lease Term
which is last to expire. If Service continues after such Circuit Lease
Term, the applicable rates will be equal to 100% of the rates hereunder,
and Service shall be automatically continued for automatic six (6) month
extensions, unless either party provides 30 days' notice of its desire to
discontinue such extension for the Circuit Lease Term.
3. INVOICE. Customer will be invoiced monthly for: (i) the monthly lease rate
(prorated for any partial month) for each Available Circuit; and (ii) the
charges for other services received. The first invoice shall be for the
first two months; each invoice thereafter shall be for the following month.
4. TERMINATION. Customer may terminate any Circuit upon 45 calendar days prior
written notice, provided that if termination occurs: (i) prior to the
Activation Date, Customer shall reimburse Supplier for all costs of the
implementation of such Circuit; or (ii) on or after such date Customer
shall pay: (A) all charges for Service previously rendered; and (B) the
amount due through the end of the applicable Circuit Lease Term (Supplier
shall try to re-lease such Circuit for such term, refunding to Customer the
amount so collected, if any). If Supplier fails to provide Service within
sixty (60) days of the Firm Order Commitment, Customer may, as its only
remedy, terminate the affected Circuit. If Supplier fails to cure a
material breach hereof within 10 calendar days of written notice from
Customer, Customer may terminate the affected Circuit.
5. OUTAGE CREDITS. Supplier shall give Customer a credit in accordance with
its then-current outage policy for periods in which any Circuit loses
continuity and fails to comply with applicable specifications. Such credit
shall be Customer's sole remedy with respect to such an event; provided,
however, that no such credits shall be allowed and Supplier shall not be
liable for any Service defect from causes outside its control, including
accidents, cable cuts, fires, floods, emergencies, government regulation
(provided that Supplier uses best efforts to prevent such government
regulation, wherever possible), wars, or acts of God. SUPPLIER DISCLAIMS
ALL EXPRESS AND IMPLIED WARRANTIES RELATING TO SERVICE, INCLUDING BUT NOT
LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR
PURPOSE. CUSTOMER HAS NOT RELIED ON ANY REPRESENTATION NOT SET FORTH
HEREIN. CUSTOMER SHALL INDEMNIFY SUPPLIER FROM ANY CLAIMS MADE BY ANY
CUSTOMER OF CUSTOMER.
6. DEFINITIONS. For purposes hereof: "Available" means all necessary Supplier
equipment for a Circuit has been installed. "Activation Date" means the
date a Circuit is first made Available to Customer. "Circuit" means a DS-0,
DS-1, DS-3, OC-3 or a OC-12. "Circuit Lease Term" means the term of a
Circuit specified in the applicable Purchase Order. "Circuit Mileage" means
the length of a Circuit specified in the applicable Purchase Order. "DS-0"
means a circuit complying with TR-TSY-000333 "Switched and Special Access
Services - Transmission Parameter Limits and Interface Combinations" Issue
1, July 1990. A "DS-1" is a signal conforming to the requirements set forth
in Sections 9.3 and 10.2 of Bellcore TR-NWT-000499, Issue 5, December,
1993. A "DS-3" is a signal conforming to the requirements set forth in
Section 9.6 and 10.5 of Bellcore TR-NWT-000499, Issue 5, December, 1993. A
"Firm Order Commitment" means the written confirmation provided to Customer
which confirms the specific date that the Circuit is available to Customer.
An "OC-3" is a signal based on the SONET frame structure as specified in
Bellcore GR-253-CORE, Synchronous Optical Network (SONET) Transport
Systems: Common Criteria Physical Layer, and ANSI T1.105, Digital
Hierarchy-Optical Interface Rates and Formats Specifications. An "OC-12" is
a signal based on the SONET frame structure as specified in Bellcore
GR-253-CORE, Synchronous Optical Network (SONET) Transport Systems: Common
Criteria Physical Layer, and ANSI T1.105, Digital Hierarchy-Optical
Interface Rates and Formats Specifications. "Purchase Order" means any
Customer purchase order accepted by Supplier. "Requested Service Date"
means the date Service on a Circuit is requested to commence specified in
the applicable Purchase Order. "Service" means transmission service
provided between North American DSX standard cross-connect panels located
in Supplier's terminal locations.
IXC - CONFIDENTIAL 1 06/03/99
<PAGE> 9
EXHIBIT A
[FORM OF PURCHASE ORDER/MARKET SERVICE ORDER]
<PAGE> 10
EXHIBIT B
PRIVATE LINE SERVICE ANCILLARY PRICING
[ * * * ]
<PAGE> 11
EXHIBIT C
On Net City Listing for Private Line
[ * * * ]
<PAGE> 12
EXHIBIT D
Private Line Pricing
[ * * * ]
<PAGE> 13
Exhibit E
Taxes on Telecommunications Service
[ * * * ]
<PAGE> 14
AMENDMENT NO. 1 TO IXC
MASTER SERVICE AGREEMENT
[IXC COMMUNICATIONS LOGO]
This Amendment No. 1 to the Master Service Agreement is made and entered into
by and between IXC COMMUNICATIONS SERVICES, INC., a Delaware corporation with
its principal place of busines at 1122 Capital of Texas Hwy. South, Austin,
Texas 78746-6426 ("Supplier"), and PATHNET, INC., a Delaware corporation with
its principal place of business at 1015 31st Street Northwest, Suite 500,
Washington DC 20007 ("Customer").
For purposes of this Amendment, the rates, terms and conditions set forth
herein shall become effective on the first day of the next IXC billing cycle
following the last date of execution below (the "Amendment Effective Date").
This Amendment is made with reference to the following facts:
A. Customer and Supplier are parties to that certain Master Service
Agreement dated as of June 17, 1999 (the "Agreement").
B. The parties desire to amend the Agreement pursuant to the terms set
forth below.
TERMS OF AMENDMENT
Accordingly, in consideration of the mutual promises set forth below, the
parties agree as follows:
1. Exhibit D -- Private Line Pricing, shall be modified and reinstated
with Exhibit D, Private Line Pricing, attached hereto.
2. The following shall be added in its entirety as Section 33, Year 2000
Compliance, to the Master Service Agreement Terms and Conditions:
33. YEAR 2000 COMPLIANCE. Each party represents that its Services will
operate on and after January 1, 2000, in the same manner, and with the
same functionality, as the Services would and do on or before December
31, 1999. Each party represents that its monitoring and maintenance
capabilities accommodate the four-digit data field requirement for the
year 2000 and beyond and will lose no functionality with respect to
the introduction of records containing dates falling on or after
January 1, 2000.
3. Section 6, Definitions, of Private Line Service Supplement shall be
modified and reinstated as follows:
6. DEFINITIONS. For purposes hereof: "Activation Date" means the date a
Circuit is first made Available to Customer. "Available" means all
necessary Supplier equipment for a Circuit has been installed.
"Circuit" means a DS-0, DS-1, DS-3, OC-3, OC-12 or an OC-48. "Circuit
Lease Term" means the term of a Circuit specified in the applicable
Purchase Order. "Circuit Mileage" means the length of a Circuit
specified in the applicable Purchase Order. "DS-0" means a circuit
complying with TR-TSY-000333 "Switched and Special Access Services -
Transmission Parameter Limits and Interface Combinations" Issue 1, July
1990. A "DS-l" is a signal conforming to the requirements set forth in
Sections 9.3 and 10.2 of Bellcore TR-NWT-000499, Issue 5, December
1993. A "DS-3" is a signal conforming to the requirements set forth in
Section 9.6 and 10.5 of Bellcore TR-NWT-000499, Issue 5, December 1993.
"FOC" means Firm Order Confirmation, the form Supplier submits to
Customer indicating the date that an ordered Circuit will be activated.
An "OC-3c" is a signal based on the SONET frame structure as specified
in Bellcore GR-253-CORE, Synchronous Optical Network (SONET) Transport
Systems: Common Criteria Physical Layer, and ANSI T1.105, Digital
Hierarchy- Optical Interface Rates and Formats Specifications. An
"OC-12c" is a signal based on the SONET frame structure as specified in
Bellcore GR-253-CORE, Synchronous Optical Network (SONET) Transport
Systems: Common Criteria Physical Layer, and ANSI TI.105, Digital
Hierarchy-Optical Interface Rates and Formats Specifications. An
"OC-48c" is a signal based on the SONET frame structure as specified in
Bellcore GR-253-CORE, Synchronous Optical Network (SONET) Transport
Systems: Common Criteria Physical Layer, and ANSI T1.105, Digital
Hierarchy-Optical Interface Rates and Formats Specifications. "On-Net"
means a Circuit(s) provided on Supplier's network between two cities.
"Purchase Order" means any Customer purchase
IXC-CONFIDENTIAL IXC CONTRACT NO. 7188 PAGE 1 OF AMENDMENT NO.1 TO MSA 08/12/99
<PAGE> 15
order accepted by Supplier. "Requested Service Date" means the date
Service on a Circuit is requested to commence specified in the
applicable Purchase Order. "Service" means transmission service
provided between North American DSX standard cross-connect panels
located in Supplier's terminal locations or when provided via IXC LDX
Optical cross-connect panels located in Supplier's terminal locations.
4. Section 7, Billing Commencement Date, below shall be added in its
entirety to the Private Line Service Supplement:
7. BILLING COMMENCEMENT DATE. If Circuit is made available prior to the
FOC date, billing shall commence on the Circuit Activation Date after
Customer has tested and accepted Circuit, or on the scheduled FOC
date, provided Circuit has been made available to Customer. In no
event shall billing commence prior to the FOC date without Customer
acceptance.
5. All other terms and conditions, provisions, supplements and exhibits
of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
last written below.
<TABLE>
<CAPTION>
IXC COMMUNICATIONS SERVICES, INC. PATHNET, INC.
<S> <C>
BY: /s/ DAVE HUGHART BY: /s/ MICHAEL A LUBIN
------------------------------- -------------------------------
NAME: Dave Hughart NAME: MICHAEL A LUBIN
----------------------------- -----------------------------
TITLE: President, Sales TITLE: Vice President
---------------------------- ----------------------------
DATE: 8/26/99 DATE: 8/19/99
----------------------------- -----------------------------
FULL BUSINESS ADDRESS: FULL BUSINESS ADDRESS:
1122 CAPITAL OF TEXAS HWY. SOUTH 1015 31st STREET NORTHWEST, SUITE 500
AUSTIN, TEXAS 78746-6426 APPROVED AS TO FORM WASHINGTON DC 20007
TELEPHONE: 512-427-3700 LEGAL DEPT. TELEPHONE: 202-625-7284 OR 202-295-3988
FACSIMILE: 512-328-7902 FACSIMILE: 202-625-7368
BILLING CONTACT: BILL COTTA
TELEPHONE: 202-295-3100
</TABLE>
IXC-CONFIDENTIAL IXC CONTRACT NO. 7188 PAGE 2 OF AMENDMENT NO. 1 TO MSA 08/12/99
<PAGE> 16
EXHIBIT D
Private Line Pricing
[ * * * ]
<PAGE> 17
[IXC COMMUNICATIONS LOGO] AMENDMENT NO.2 TO IXC
MASTER SERVICE AGREEMENT
This Amendment No. 2 to the Master Service Agreement is made and entered into
by and between IXC COMMUNICATIONS SERVICES, INC., a Delaware corporation with
its principal place of business at 1122 Capital of Texas Hwy. South, Austin,
Texas 78746-6426 ("Supplier"), and PATHNET, INC, a Delaware corporation with its
principal place of business at 1015 31st Street Northwest, Suite 500,
Washington DC 20007 ("Customer").
For purposes of this Amendment, the rates, terms and conditions set forth
herein shall become effective on the first day of the next IXC billing cycle
following the last date of execution below (the "Amendment Effective Date").
This Amendment is made with reference to the following facts:
A. Customer and Supplier are parties to that certain Master Service
Agreement dated as of June 17, 1999 and subsequent Amendment No. 1 dated August
26, 1999 (as amended, the "Agreement").
B. The parties desire to amend the Agreement pursuant to the terms set
forth below.
TERMS OF AMENDMENT
Accordingly, in consideration of the mutual promises set forth below, the
parties agree as follows:
1. Exhibit B, Private Line Service Ancillary Page, shall be replaced in
its entirety with Exhibit B, Private Line Service Ancillary Page, attached
hereto.
2. Exhibit D, Private Line Pricing, shall be replaced in its entirety with
Exhibit D, Private Line Pricing, attached hereto.
3. All other terms and conditions, provisions, supplements and exhibits
of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date last
written below.
<TABLE>
<CAPTION>
IXC COMMUNICATIONS SERVICES, INC. PATHNET, INC.
<S> <C> <C>
BY: /s/ DAVID HUGHART BY: /s/ MICHAEL A LUBIN
------------------------------- -------------------------------
NAME: David Hughart NAME: MICHAEL A LUBIN
----------------------------- -----------------------------
TITLE: President-Sales TITLE: Vice President
---------------------------- ----------------------------
DATE: 10/13/99 DATE: 10/8/99
----------------------------- -----------------------------
FULL BUSINESS ADDRESS: FULL BUSINESS ADDRESS:
1122 CAPITAL OF TEXAS HWY. SOUTH 1015 31st STREET NORTHWEST, SUITE 500
AUSTIN, TEXAS 78746-6426 APPROVED AS TO FORM WASHINGTON DC 20007
TELEPHONE: 512-427-3700 LEGAL DEPT. TELEPHONE: 202-625-7284 OR 202-295-3988
FACSIMILE: 512-328-7902 FACSIMILE: 202-625-7368
BILLING CONTACT: BILL COTTA
TELEPHONE: 202-295-3100
</TABLE>
IXC-CONFIDENTIAL IXC CONTRACT NO. 7188 PAGE 1 OF AMENDMENT NO. 2 TO MSA 09/29/99
<PAGE> 18
EXHIBIT B
Private Line Services Ancillary Pricing
[ * * * ]
<PAGE> 19
EXHIBIT D
Private Line Service Rates
[ * * * ]
<PAGE> 1
Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission. These portions are designated "[ * * * ]".
EXHIBIT 10.29
[FRONTIER LOGO]
CAPACITY AGREEMENT
BETWEEN
FRONTIER COMMUNICATIONS OF THE WEST, INC.
AND
PATHNET, INC.
08/16/99 CONFIDENTIAL
<PAGE> 2
CAPACITY AGREEMENT
This Capacity Agreement ("Agreement") is entered into between the provider of
service, Frontier Communications of the West, Inc. on behalf of itself and its
affiliates that may provide a portion of the services hereunder ("Frontier"), a
California corporation located at 90 Castilian Drive, Goleta, CA 93117 and
Pathnet, Inc. ("Pathnet" or "Purchaser"), a Delaware corporation with its
principal place of business located at lOl5 31st Street NW, Washington DC 20007
(hereinafter, Frontier and Pathnet may be referred to in the aggregate as
"Parties", and each singularly as a "Party".)
PURPOSE
Pathnet desires to purchase dedicated circuit capacity from Frontier for the
transport of Pathnet's telecommunications traffic. For valuable consideration,
receipt of which is hereby acknowledged, the Parties hereto agree as follows.
DEFINITIONS (not otherwise defined in the body of this Agreement or an
attachment).
A. "Affiliate" means any entity directly or indirectly controlling,
controlled by or under common control with a Party.
B. "Billing Cycle" is the Frontier billing cycle to which Pathnet's
account hereunder is assigned by Frontier (a full billing cycle
approximates 30 days).
C. "Business Day" is Monday through Friday, 8:00 am to 5:00 PM EST,
excluding nationally recognized holidays. Unless otherwise stated,
"days" refers to calendar days.
D. "Delinquent" (whether capitalized or not) means any invoiced amounts
not properly disputed under Section 4 of this Agreement and remaining
unpaid on the due date of the invoice.
1. SERVICES; CIRCUIT TERM; CIRCUIT AVAILABILITY DATE:
1.1 Frontier shall, in accordance with the terms of this Agreement,
provide Pathnet with DS-1, DS-3, OC-3 and OC-12 circuit capacity as
the same may be ordered by Pathnet and the order accepted by Frontier
hereunder from time to time. All such circuit capacity collectively
referred to as the "Services" or "Private Line Services.
1.2 Unless one Party provides the other with at least 90 days prior
written notice of its intent not to renew a circuit after the
circuit's minimum commitment period expires, then, unless the Parties
agree otherwise in writing, a circuit shall automatically renew on a
month to month basis at Frontier's then-current rates and charges for
that circuit type or as the parties may mutually agree in writing.
08/16/99 3
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Initials
--------
<PAGE> 3
1.3 Frontier shall provide a 48 hour turnaround response to a Pathnet
feasibility request. Response shall include provider's POP to POP
capacity availability and detailed price quote for the POP to POP
service. Once Frontier fully defines a process for quoting local loops
on DS1 and DS3 level circuits, Frontier agrees to provide Pathnet with
a detailed price quote in writing and in a time frame agreed to by the
Parties. Interval calculation shall commence upon the issuance of a
completed order by Pathnet and acceptance by Frontier. Frontier shall
provide notification and appropriate circuit provisioning information
on the following provisioning dates:
a. ORC -- Order Receipt Date: The date upon which Frontier shall
notify Pathnet that Pathnet's firm order request has been
received and accepted and any standard interval quote has
commenced.
b. FOC -- Firm Order Confirmation: The date upon which Frontier
shall notify Pathnet of the firm due date as well as final
pricing details for both POP to POP and any third party access.
c. DLRD -- Design Layout and Design: The date upon which Frontier
shall notify Pathnet regarding specific circuit configuration to
include POP to POP locations, Circuit ID, Circuit ID of each
access line and provider as well as any demarc/interconnect
information.
d. Service Turnup -- The date upon which Frontier will notify
Pathnet when the end to end circuit including any third party
access ordered and coordinated by Frontier has passed the circuit
acceptance criteria.
Pathnet will be responsible for accepting/rejecting the end to
end service within 48 hours of Service Turnup from Frontier.
Frontier will not start billing of any part of the end to end
(Pathnet premises to Pathnet premises) service until acceptance
of the service from Pathnet which shall occur within 48 hours. If
Pathnet does not communicate a good faith rejection of the
circuit within 48 hours, it shall be deemed to have been
accepted. Upon receipt of a complete and accurate service order
for a circuit, Frontier shall notify Pathnet of its target date
for the delivery of each circuit (the "Estimated Availability
Date"). Any Estimated Availability Date given by Frontier to
Pathnet shall be subject to Frontier's then-current standard and
expedited interval guidelines. Frontier shall use reasonable
efforts to install each circuit on or before the Estimated
Availability Date, but the inability of Frontier to deliver a
circuit by such date, or within the interval guidelines, shall
not be deemed a breach of this Agreement by Frontier. If Frontier
fails to make any circuit available within 90 days after
acceptance by Frontier of the service order with respect to such
circuit (or such greater time as is set forth in the interval
guidelines), Pathnet's sole remedy shall be to cancel the service
order which pertains to such circuit upon ten days prior written
notice to Frontier.
08/16/99 4
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Initials
--------
<PAGE> 4
1.4 At each end of the city pairs on which Pathnet orders circuits,
Frontier shall provide appropriate equipment in its SONET POP
locations necessary to connect the circuits to Pathnet's
Interconnection Facilities. If Pathnet desires to install its own
equipment in one or more SONET POP, and Frontier, in its sole
discretion, agrees to such installation, the Parties shall execute a
collocation agreement acceptable to both Parties. Pathnet agrees that
its Interconnection Facilities shall connect to the circuits provided
by Frontier hereunder at the network interface points located in the
Frontier SONET POPs. As used herein, the term "Interconnection
Facilities" shall mean transmission capacity provided by Pathnet or
its third party Frontier to extend the circuits provided by Frontier
from a SONET POP to any other location (e.g., a local access telephone
service provided by a local telephone company).
1.5 For DS-3 and lesser capacity circuits, Frontier shall use reasonable
efforts to order Interconnection Facilities on behalf of Pathnet from
Pathnet's designated Frontier, provided that Pathnet furnishes
Frontier with an acceptable letter of agency. Pathnet shall be billed
directly by Frontier of such Interconnection Facilities, and shall
defend and indemnify Frontier from any loss or liability incurred by
Frontier as a result of Frontier's ordering Interconnection Facilities
from any third party on Pathnet's behalf. Pathnet may, at its
election, but subject to Frontier's prior written approval, order its
own Interconnection Facilities. If any party other than Frontier
provides Interconnection Facilities, then unavailability,
incompatibility, delay in installation, or other impairment of
Interconnection Facilities shall not excuse Pathnet's obligation to
pay Frontier all rates or charges applicable to the circuits, whether
or not such circuits are useable by Pathnet. Frontier will not order
Interconnection Facilities on behalf of Pathnet for OC-N circuits.
2. TERM OF THE AGREEMENT:
This Agreement is binding on the Parties upon the date of execution by
Frontier ("Effective Date") and, subject to the termination provisions of
this Agreement, shall continue in effect for a period of three (3) years
from the Effective Date (the" Initial Term"). If a circuit remains
installed beyond the term of this Agreement, then this Agreement shall
remain in effect as long as a circuit is installed hereunder.
3. BILLING AND PAYMENT; MINIMUM COMMITMENTS:
3.1 Pathnet shall pay Frontier for the Services at the rates and charges
set out in Exhibit A or as the Parties may otherwise agree in writing.
Pathnet is also liable for applicable taxes and governmental
assessments with respect to its use of the Services. If Pathnet is
required to provide security for payment hereunder, then Frontier is
not obligated to accept orders, or provide or continue to provide any
Services or circuits, until the required security is received by
Frontier. That commencement may be delayed by Pathnet for a cumulative
period of 30 days from Firm Order Confirmation date without penalty.
All invoices shall include the itemized detail of price elements
comprising each service, including all charges and credits. The
Pathnet circuit ID entered on the originating Service Order request
shall be cross-referenced on a separate report setting forth the
appropriate Frontier circuit ID. All discounts and promotions, if any,
and taxes, will be included in the monthly invoice. All pro-rated
monthly charges will be based upon a 30 day month. Billing for a POP
to POP circuit shall commence upon the earlier to occur of (i) 30 days
following the date Frontier notifies Pathnet, in writing or via
electronic transmission, that the ordered circuit capacity is
available from Frontier (regardless of whether or not Pathnet's
Interconnection Facilities are installed and operational), and (ii)
the date the ordered circuit capacity is first utilized by Pathnet
(the "Service Date").
08/16/99 5
Initials MAL
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Initials
--------
<PAGE> 5
3.2 Pathnet shall provide Frontier with financial security in the amount
of $0.
3.3 Pathnet's initial credit limit hereunder shall be [ * * * ]. If
Pathnet's monthly charges for the Services exceed its credit limit,
Frontier may require security of its choice from Pathnet in an amount
equal to Pathnet's highest invoice over the prior six month period (or
such lesser period if this Agreement has not been in effect for six
months) as a condition to continuing to provide the Services. In
addition, if Pathnet is delinquent in payment of an invoice and
Frontier does not have security from Pathnet in an amount equal to
Pathnet's highest invoice over the prior six month period (or such
lesser period if this Agreement has not been in effect for six
months), Frontier may require additional security of its choice from
Pathnet in such amount. Any such additional security shall be provided
by Pathnet to Frontier within 48 hours (if the security is to be other
than a letter of credit and within ten Business Days if the security
is to be a letter of credit) from its receipt of Frontier's written
request for additional security.
3.4 Monthly recurring charges ("MRC") shall be invoiced by Frontier on a
monthly basis in advance and non-recurring charges shall be invoiced
in arrears. If the Service Date for any circuit falls on other than
the first day of any Billing Cycle, the initial charge to Pathnet
shall consist of: (i) the pro-rata portion of the applicable monthly
charge covering the period from the Service Date to the first day of
the subsequent Billing Cycle, and (ii) the monthly charge for the
following Billing Cycle. Payment terms are net 30 days from the
invoice date. Any invoice not paid by its due date shall bear late
payment fees at the rate of 1-1/2% per month (or such lower amount as
maybe required by law) until paid.
3.5 The pricing in this Agreement and any attached Exhibits applies only
to the Private Line Services provided between the "on-net" nodes set
out in the Frontier SONET POP List attached hereto as Exhibit B or as
amended and is valid for the term of this Agreement. If Frontier's
cost in providing the Private Line Services is increased due to
circumstances beyond its reasonable control, or Frontier elects to
pass through any governmental or regulatory assessments related to its
provision of the Private Line Services, then Frontier may revise the
rates and charges in this Agreement and any attached Exhibits upon 30
days written notice to Pathnet. Pathnet may cancel any circuits
subject to a rate/charge increase upon written notice to Frontier
given no later than 30 days after Pathnet's receipt of the increase
notice.
3.6 Commencing with the twelfth (12th) month following the Effective
Date, Pathnet shall be liable for a monthly minimum usage charge for
the Services of $150,000 (the "Minimum Charge"). If during the term of
the contract, Pathnet's net charges for the Services are less than the
Minimum Charge, Pathnet shall pay rates as outlined in Exhibit A
Standard Pricing. If this Agreement is terminated prior to the time
the Minimum Charge becomes effective (other than termination by
Pathnet for an uncured breach by Frontier), Pathnet shall be liable
for an amount equal to the Minimum Charge for the remaining portion of
the unexpired term of this Agreement.
3.7 Pathnet shall be liable for the applicable minimum circuit terms and
minimum circuit commitment charges set out in Exhibit A.
Notwithstanding the foregoing, should Pathnet fail to place an order
for the two OC-12 circuits (as stated in Exhibit A) (the "Pathnet
Specific Circuits") by September 30, 1999, then the Pathnet Specific
Circuits shall be considered null and void and will require
re-negotiation between the Parties.
08/16/99 6
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Initials
--------
<PAGE> 6
Frontier agrees to provide the Special Pricing for circuits ordered
with one year terms during Pathnet's ramp up period and shall continue
at such pricing level provided Pathnet is attaining its Minimum Charge
obligation under this Agreement. In the event, Pathnet is not meeting
its Minimum Charge obligation, then Pathnet will be charged the
Standard Pricing for any circuits ordered.
3.8 If a circuit is canceled prior to expiration of its minimum term
commitment, except if canceled by Pathnet under Section 3.5 hereof, or
this Agreement is terminated for Frontier's uncured breach, Pathnet
shall be liable for, and shall pay to Frontier upon demand, an early
termination fee in an amount equal to the applicable monthly per
circuit minimum charge times the number of months remaining on the
unexpired term commitment (whether the initial or a renewal term) for
the circuit.
3.9 Pathnet agrees that any minimum charge shortfall and any early
termination fees for which it may be liable under this Agreement are
based on agreed upon minimum commitments on its part and corresponding
rate concessions on Frontier's part, and are not penalties or
consequential or other damages under Section 6.3 hereof.
3.10 Pathnet agrees that a breach of any other agreement it may have with
Frontier or a Frontier Affiliate shall be deemed a material breach of
this Agreement.
4. BILLING DISPUTES: Pathnet shall have the affirmative obligation of
providing written notice of any dispute with an invoice within 90 days
after receipt of the invoice by Pathnet (which notice shall include
sufficient detail for Frontier to investigate the dispute). Pathnet may
withhold payment only on amounts so disputed within 30 Business Days after
Pathnet's receipt of the invoice. Pathnet may not withhold payment of
amounts disputed after such 30 Business Day period. Pathnet shall not be
responsible for the payment of any charges nor shall Frontier invoice any
charges for Services that were not invoiced within 90 days after the
Service for the charge was actually rendered other than third party charges
not invoiced within the same 90 day period. If Pathnet does not report a
dispute with respect to an invoice within the 90 day period, Pathnet is
deemed to have waived its dispute rights for that invoice and to have
agreed to pay the same. Provided Pathnet has provided sufficient detail for
investigation of the dispute, Frontier will use reasonable efforts to
resolve and communicate its resolution of the dispute within 30 Business
Days of its receipt of the dispute notice. If the dispute is resolved in
Frontier's favor any amounts to be paid by Pathnet shall be subject to the
late payment charges under Section 3.4 hereof retroactive to the due date
of the disputed invoice. Notwithstanding anything herein to the contrary,
Pathnet shall not withhold any disputed amounts while its Frontier account
is delinquent.
5. TERMINATION RIGHTS:
5.1 Either Party may terminate this Agreement upon the other Party's
insolvency, dissolution or cessation of business operations.
5.2 Frontier may, upon written notice, only immediately terminate this
Agreement for (i) Pathnet's failure to pay any delinquent invoice, or
(ii) to pay any security or additional security within the time-frame
required under this Agreement.
08/16/99 7
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Initials
--------
<PAGE> 7
5.3 In the event of a breach of any material term or condition of this
Agreement by a Party (other than a failure to pay or provide security
which is covered under Section 5.2 hereof), the other Party may
terminate this Agreement upon 30 days written notice, unless the
breaching Party cures the breach during the 30 day period. A breach
that cannot be reasonably cured within a 30 day period may be
addressed by a written waiver of this paragraph signed by the Parties.
In addition to any other rights hereunder, Pathnet may terminate this
Agreement and/or the affected Service without early termination fee or
penalty, except for unpaid charges as of the effective date of
termination, as follows:
Pathnet shall have the right to terminate a circuit, without incurring
early termination liability, upon ten days written notice to Frontier
that the circuit has experienced repeated or chronic Service Outages
(as defined below). For purposes of this Section, "repeated or chronic
Service Outages" is defined as the occurrence of four (4) or more
Pathnet reported service interruptions or outages (excepting planned
maintenance and force majeure events) in the same circuit of more than
one (1) hour duration each in any month.
5.4 If this Agreement is terminated prior to expiration of a circuit's
term commitment, except if terminated by Pathnet under Section 5.3
hereof, then Pathnet shall pay to Frontier upon demand an early
termination fee in an amount equal to the aggregate sum of each
existing circuit's monthly minimum commitment, times the number of
months remaining on each circuit's minimum commitment period.
6. WARRANTIES AND LIMITATION OF LIABILITY:
6.1 The Services shall be provided by Frontier in accordance with the
applicable technical standards established for dedicated circuit
capacity by the telecommunications industry for a digital fiber optic
network. FRONTIER MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED, WITH
RESPECT TO TRANSMISSION, EQUIPMENT OR SERVICE PROVIDED HEREUNDER, AND
EXPRESSLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY
PARTICULAR PURPOSE OR FUNCTION.
6.2 The entire liability of Frontier for all claims of whatever nature
arising out of its provision of the Private Line Services (including
its negligence), and not caused by (i) Pathnet or third parties, or
(ii) a scheduled or emergency interruption, shall be a credit for
service interruptions greater than 120 continuous minutes for linear
routes and 60 continuous minutes for protected routes (hereafter an
"Outage"). The amount of the credit is computed in accordance with the
following formula (the "Outage Credit"):
<TABLE>
<S> <C>
Example: Outage Credit = Hours of Outage - 2 hours x Total MRC for Affected Circuit
-------------------------
720 hours
</TABLE>
A. The Outage Credit shall apply to the charges for any circuit
affected by an Outage; provided, however, that if any portion of
the affected circuit remains useable by Pathnet, the Outage
Credit shall not apply to that pro-rata portion of the mileage.
The duration of each Outage shall be calculated in hours and
shall include fractional portions thereof. An Outage shall be
deemed to have commenced one hour after verifiable notification
thereof by Pathnet to Frontier, or, when indicated by network
control information actually known to Frontier network personnel,
whichever is earlier for SONET protected routes and after two
hours for linear routes. Each Outage shall be deemed to terminate
upon restoration of the affected circuit as evidenced by
appropriate network tests by Frontier. Frontier shall give notice
to Pathnet of any scheduled interruption as early as is
practicable.
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B. Outage Credits shall not be granted if the malfunction of any
end-to-end circuit is due to an outage or other defect occurring
in Pathnet's Interconnection Facilities.
C. All Outage Credits shall be credited on the next monthly invoice
for the affected circuit after receipt of Pathnet's written
request for credit. The total of all Outage Credits applicable to
or accruing in any given month shall not exceed the amount
payable by Pathnet to Frontier for that same month for the
affected circuit.
D. The Outage Credit described in this Section shall be the sole and
exclusive remedy of Pathnet in the event of any Outage or other
failure in the Services, and under no circumstance shall an
Outage or other such failure be deemed a breach of this Agreement
by Frontier.
6.3 In no event shall either Party be liable to the other Party for
incidental and consequential damages, loss of goodwill, anticipated
profit, or other claims for indirect damages in any manner related to
this Agreement or the Services.
7. INDEMNIFICATION: Each Party shall defend and indemnify the other Party and
its directors, officers, employees, representatives and agents from any and
all claims, taxes, penalties, interest, expenses, damages, lawsuits or
other liabilities (including without limitation, reasonable attorney fees
and court costs) relating to or arising out of (i) acts or omissions in the
operation of its business, and (ii) its breach of this Agreement; provided,
however, Frontier shall not be liable and shall not be obligated to
indemnify Pathnet, and Pathnet shall defend and indemnify Frontier
hereunder, for any claims by any third party, including Pathnet's
customers, with respect to services provided by Pathnet which may
incorporate any of the Services.
8. REPRESENTATION: The Parties acknowledge and agree that the relationship
between them is solely that of independent contractors. Neither Party, nor
their respective employees, agents or representatives, has any right, power
or authority to act or create any obligation, express or implied, on behalf
of the other Party.
9. FORCE MAJEURE: Other than with respect to failure to make payments due
hereunder, neither Party shall be liable under this Agreement for delays,
failures to perform, damages, losses or destruction, or malfunction of any
equipment, or any consequence thereof, caused or occasioned by, or due to
fire, earthquake, flood, water, the elements, labor disputes or shortages,
utility curtailments, power failures, explosions, civil disturbances,
governmental actions, shortages of equipment or supplies, unavailability of
transportation, acts or omissions of third parties, or any other cause
beyond its reasonable control.
10. WAIVERS: Failure of either Party to enforce or insist upon compliance with
the provisions of this Agreement shall not be construed as a general waiver
or relinquishment of any provision or right under this Agreement.
11. ASSIGNMENT: Neither Party may assign or transfer its rights or obligations
under this Agreement without the other Party's written consent, which
consent may not be unreasonably withheld, except that Frontier may assign
this Agreement to its Affiliates or successors in interest without
Pathnet's consent. Any assignment or transfer without the required consent
is void.
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12. CONFIDENTIALITY: Each Party agrees that all information furnished to it by
the other Party, or to which it has access under this Agreement, shall be
deemed the confidential and proprietary information or trade secrets
(collectively referred to as "Proprietary Information") of the Disclosing
Party and shall remain the sole and exclusive property of the Disclosing
Party (the Party furnishing the Proprietary Information referred to as the
"Disclosing Party" and the other Party referred to as the "Receiving
Party"). Each Party shall treat the Proprietary Information and the
contents of this Agreement in a confidential manner and, except to the
extent necessary in connection with the performance of its obligations
under this Agreement, neither Party may directly or indirectly disclose the
same to anyone other than its employees on a need to know basis and who
agree to be bound by the terms of this Section, without the written consent
of the Disclosing Party.
13. INTEGRATION: This Agreement and all Exhibits and other attachments
incorporated herein, represent the entire agreement between the Parties
with respect to the subject matter hereof and supersede and merge all prior
agreements, promises, understandings, statements, representations,
warranties, indemnities and inducements to the making of this Agreement
relied upon by either Party, whether written or oral.
14. GOVERNING LAW: Frontier currently maintains regional service and operations
centers to support customer accounts in New York, California and Michigan.
This Agreement will be construed and enforced in accordance with the law of
the state where Pathnet's account is supported, as designated by Frontier
in this Agreement or as designated in Exhibits or amendments to this
Agreement, without regard to that state's choice of law principles. The
Parties agree that any action related to this Agreement shall be brought
and maintained only: (i) in the Superior court of the State of California
for the County of Santa Barbara, if the designated customer support center
is located in California; (ii) in a Federal or State court of competent
jurisdiction located in Monroe County, New York, if the designated customer
support center is located in New York; or (iii) in the Federal District
Court for the Eastern District of Michigan or a State court of competent
jurisdiction located in Oakland County, Michigan, if the designated
customer support center is located in Michigan. The Parties each consent to
the jurisdiction and venue of such courts and waive any right to object to
such jurisdiction and venue.
15. NOTICES: All notices, including but not limited to, demands, requests and
other communications required or permitted hereunder (not including
Invoices) shall be in writing and shall be deemed given: (i) when delivered
in person, (ii) 24 hours after deposit with an overnight delivery service
for next day delivery, (ii) the same day when sent by facsimile
transmission during normal business hours, receipt confirmed by sender's
equipment, or (iii) 72 hours after deposit in the United States mail,
postage prepaid, registered or certified mail, return receipt requested,
and addressed to the recipient Party at the address set forth below:
If to Frontier: Frontier Communications
180 South Clinton Ave.
Rochester, NY 14646
Attn: Brian Fitzpatrick or Vice President Carrier Services
Facsimile #: (716) 232-9168
with a copy to: Frontier Communications
90 Castilian Drive
Goleta, CA 93117
Attn: Peggy Palak Manager, National Contract Admin.
Facsimile #: (800) 689-2395
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If to Pathnet Pathnet, Inc.
1015 31st Street, NW
Washington, DC 20007
Attn: General Counsel
Facsimilie #: (202) 625-7369
16. COMPLIANCE WITH LAWS: During the term of this Agreement, the Parties shall
comply with all local, state and federal laws and regulations applicable to
this Agreement and to their respective businesses.
17. SURVIVAL OF PROVISIONS: Any obligations of the Parties relating to monies
owed, as well as those provisions relating to confidentiality, limitations
on liability and indemnification, shall survive termination of this
Agreement.
18. UNENFORCEABLE PROVISIONS: The illegality or unenforceability of any
provision of this Agreement does not affect the legality of enforceability
of any other provision or portion. If any provision or portion of this
Agreement is deemed illegal or unenforceable for any reason, there shall be
deemed to be made such minimum change in such provision or portion as is
necessary to make it valid and enforceable as so modified.
19. CUMULATIVE RIGHTS AND REMEDIES: Except as may otherwise be provided herein,
the assertion by a Party of any right or the obtaining of any remedy
hereunder shall not preclude such Party from asserting or obtaining any
other right or remedy, at law or in equity, hereunder.
20. AMENDMENTS: This Agreement is voidable by Frontier if the text is modified
by Pathnet without the written or initialed consent of a Frontier Vice
President. Except as may otherwise be provided herein, any amendments or
modifications to this Agreement must be in writing and signed by a Frontier
Vice President (or higher level officer) and an authorized officer of
Pathnet.
21. NON-SOLICITATION: Pathnet agrees that while this Agreement is in effect,
and for a period of 12 months following expiration or termination of this
Agreement, neither it nor its representatives will directly or indirectly
solicit Frontier employees to leave their employment with Frontier.
22. AUTHORITY: Each individual executing below on behalf of a Party hereby
represents and warrants to the other Party that such individual is duly
authorized to so execute, and to deliver, this Agreement. By its signature
below, each Party acknowledges and agrees that sufficient allowance has
been made for review of this Agreement by respective counsel and that each
Party has been advised by its legal counsel as to its legal rights, duties
and obligations under this Agreement.
Frontier Communications of the West, Inc. Pathnet, Inc.
By:/s/ BRIAN V. FITZPATRICK 8/20/99 By:/s/ MICHAEL A. LUBIN
---------------------------------- --------------------------------
Brian v. Fitzpatrick, SVP Carrier Sales Michael A. Lubin, Vice President
Frontier Carrier Services Group
Date: 8/20/99 Date:
--------------------------------- ----------------------------
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<PAGE> 11
EXHIBIT A
Rates and Charges
[ * * * ]
<PAGE> 12
EXHIBIT B
Natural Fiber Network POP Location (By Site)
<TABLE>
<CAPTION>
Expected
Site Service Date State LATA POP Location Zip Code NPA-NXX
- ---- ------------ ----- ---- ------------ -------- -------
[***] [***] [***] [***] [***] [***] [***]
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 1
Exhibit 10.30
COLLOCATION AGREEMENT
BY AND BETWEEN
BELLSOUTH TELECOMMUNICATIONS, INC.
AND
PATHNET, INC.
<PAGE> 2
BELLSOUTH PHYSICAL COLLOCATION
MASTER AGREEMENT
THIS AGREEMENT, made this 29 day of July, 1999, by and between BellSouth
Telecommunications, Inc., ("BellSouth") a corporation organized and
existing under the laws of the State of Georgia, and Pathnet, Inc., ("Pathnet")
a (corporation) organized and existing under the laws of Delaware;
W I T N E S S E T H
WHEREAS, Pathnet is a telecommunications carrier and wishes to
occupy BellSouth Central Office Collocation Space as defined herein for the
purpose of interconnection to BellSouth's facilities;
WHEREAS, BellSouth has space available in its Central Office(s)
which Pathnet desires to utilize; and
WHEREAS, BellSouth is willing to make such space available to
Pathnet within its Central Office(s) subject to all terms and conditions of this
Agreement;
NOW THEREFORE, in consideration of the mutual agreements and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereto agree as follows:
1. SCOPE OF AGREEMENT
1.1 Scope of Agreement. The rates, terms, and conditions contained
within this Agreement shall only apply when Pathnet is occupying the collocation
space as a sole occupant or as a Host pursuant to Section 4.
1.2 Right to occupy. Subject to Section 4 of this Agreement,
BellSouth hereby grants to Pathnet a right to occupy that certain area
designated by BellSouth within a BellSouth central office premises, of a size
which is specified by Pathnet and agreed to by BellSouth (hereinafter
"Collocation Space"). Notwithstanding the foregoing, BellSouth shall consider in
its designation for cageless collocation any unused space within the BellSouth
central office premises. The size specified by Pathnet may contemplate a request
for space sufficient to accommodate Pathnet's growth within a two year period
unless otherwise agreed to by the Parties.
1.2.1 Space Reclamation. In the event of space exhaust within
a central office premises, Pathnet may be required to release space to BellSouth
to be allocated to other physical collocation applicants when a minimum of fifty
percent of the total amount of space in Pathnet's collocation arrangement is not
being utilized within the first year of operation, or 100% of the total amount
of space by the end of the second year of operation. Pathnet will first have the
option of subleasing any amount of space not being utilized pursuant to this
sub-Section in lieu of releasing space to BellSouth.
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<PAGE> 3
1.3 Use of Space. Pathnet shall use the Collocation Space for the
purposes of installing, maintaining and operating Pathnet's equipment (to
include testing and monitoring equipment) used or useful primarily to
interconnect with BellSouth services and facilities, including access to
unbundled network elements, for the provision of telecommunications services.
Pursuant to Section 5 following, Pathnet may at its option, place Pathnet-owned
fiber entrance facilities to the Collocation Space. In addition to, and not in
lieu of, interconnection to BellSouth services and facilities, Pathnet may
connect to other interconnectors within the designated BellSouth Central Office
(including to its other virtual or physical collocated arrangements) through
co-carrier cross connect facilities designated by Pathnet pursuant to section
5.6 following. The Collocation Space may be used for no other purposes except as
specifically described herein or authorized in writing by BellSouth.
1.4 Rates and charges. Pathnet agrees to pay the rates and charges
identified at Exhibit A attached hereto.
1.5 Term. The term of this Agreement shall be for an initial
period of two (2) years, beginning on the Agreement date stated above and ending
two (2) years later on the month and day corresponding to such date. This
agreement shall become the collocation section of an interconnection agreement
that may be negotiated pursuant to the Communications Act of 1934 as amended by
the Communications Act of 1996, if in fact that interconnection agreement is
requested by Pathnet and provided that such interconnection agreement is
executed prior to the expiration of the term of this Agreement.
2. SPACE NOTIFICATION
2.1 Availability of Space. Upon submission of an application
pursuant to Section 6, BellSouth will permit Pathnet to physically collocate,
pursuant to the terms of this Agreement, at any BellSouth central office
premises, unless BellSouth has determined that there is no space available due
to space limitations or no space available due to technical infeasibility.
BellSouth will respond to an application within ten (10) business days as to
whether space is available or not available within a BellSouth central office
premises.
2.2 Reporting. Upon request from Pathnet, BellSouth will provide a
written report specifying the amount of collocation space available at the
central office premises requested, the number of collocators present at the
central office premises, any modifications in the use of the space since the
last report or the central office premises requested and the measures BellSouth
is taking to make additional space available for collocation arrangements.
2.2.1 The request from Pathnet must be written and must
include the central office premises and Common Language Location Identification
(CLLI) code of the central office premises. Such information regarding central
office premises and CLLI code is located in the National Exchange Carriers
Association (NECA) Tariff FCC No. 4.
2.2.2 BellSouth will respond to a request for a particular
Central Office location within ten (10) business days of receipt of such
request. BellSouth will make best efforts to respond in ten (10) business days
to such a request when the request includes up to and including five (5) Central
Office locations within the same state. The response time for requests of more
than five (5) shall be negotiated between the Parties. If BellSouth cannot meet
the ten business day response time, BellSouth shall notify Pathnet and inform
Pathnet of the time frame
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<PAGE> 4
under which it can respond and provide such information to Pathnet as it becomes
available to BellSouth on a site by site basis.
2.3 Denial of Application. After notifying Pathnet that BellSouth
has no available space in the requested Central Office ("Denial of
Application"), BellSouth will allow Pathnet, upon request, to tour the entire
Central Office within ten (10) business days of such Denial of Application. In
order to schedule said tour within ten (10) business days, the request for a
tour of the Central Office must be received by BellSouth within five (5)
business days of the Denial of Application.
2.4 Filing of Petition for Waiver. Upon Denial of Application
BellSouth will timely file a petition with the Commission pursuant to 47 U.S.C.
Section 251(c)(6).
2.5 Waiting List. On a first come first served basis, BellSouth
will maintain a waiting list of requesting carriers who have either received a
Denial of Application or, where it is publicly known that the central office
premises is out of space, have submitted a Letter of Intent to collocate.
BellSouth will notify the telecommunications carriers on the waiting list when
space becomes available according to how much space becomes available and the
position of telecommunications carrier on said waiting list. Upon request
BellSouth will advise Pathnet as to its position on the list.
2.6 Public Notification. BellSouth will maintain on its
Interconnection Services website a notification document that will indicate all
central office premises that are without available space. BellSouth shall update
such document within ten (10) business days of the Denial of Application date.
BellSouth will also post a document on its Interconnection Services website that
contains a general notice where space has become available in a Central Office
previously on the space exhaust list. BellSouth shall allocate said available
space pursuant to the waiting list referenced in Section 2.5.
2.7 State Agency Procedures. Notwithstanding the foregoing, should
any state regulatory agency impose a procedure different than procedures set
forth in this section, that procedure shall supersede the requirements set forth
herein.
3. COLLOCATION OPTIONS
3.1 Cageless. Except where local building code does not allow
cageless collocation, BellSouth shall allow Pathnet to collocate Pathnet's
equipment and facilities without requiring the construction of a cage or similar
structure and without requiring the creation of a separate entrance to the
Collocation Space. BellSouth shall allow Pathnet to have direct access to its
equipment and facilities but may require Pathnet to use a central entrance to
the BellSouth Central Office. BellSouth shall make cageless collocation
available in single bay increments pursuant to Section 7. Except where Pathnet's
equipment requires special technical considerations (e.g., special cable
racking, isolated ground plane), BellSouth shall assign cageless Collocation
Space in conventional equipment rack lineups where feasible. For equipment
requiring special technical considerations, Pathnet must provide the equipment
layout, including spatial dimensions for such equipment pursuant to generic
requirements contained in BellCore (Telcordia) GR-63-Core and shall be
responsible for constructing all
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<PAGE> 5
special technical requirements associated with such equipment pursuant to
Section 6.5 following.
3.2 Cages and Adjacent Arrangement Enclosures. BellSouth shall
authorize the enclosure of Pathnet's equipment and facilities at Pathnet's
option or if required by local building code. Pathnet must arrange with a
BellSouth certified contractor to construct a collocation arrangement enclosure
in accordance with BellSouth's guidelines and specifications and at its sole
expense. BellSouth will provide guidelines and specifications upon request.
Where local building codes require enclosure specifications more stringent than
BellSouth's standard enclosure specification, Pathnet and Pathnet's BellSouth
certified contractor must comply with local building code requirements.
Pathnet's BellSouth certified contractor shall be responsible for filing and
receiving any and all necessary permits and/or licenses for such construction.
The Certified Vendor shall bill Pathnet directly for all work performed for
Pathnet pursuant to this Agreement and BellSouth shall have no liability for nor
responsibility to pay such charges imposed by the Certified Vendor. Pathnet must
provide the local BellSouth building contact with two Access Keys used to enter
the locked enclosure. Except in case of emergency, BellSouth will not access
Pathnet's locked enclosure prior to notifying Pathnet.
3.2.1 BellSouth has the right to review Pathnet's plans and
specifications prior to allowing construction to start. BellSouth has the right
to inspect the enclosure after construction to make sure it is designed and
constructed according to BellSouth's guidelines and specifications and to
require Pathnet to remove or correct at Pathnet's cost any structure that does
not meet these standards.
3.3 Shared (Subleased) Caged Collocation. Pathnet may allow other
telecommunications carriers to share Pathnet's caged collocation arrangement
pursuant to terms and conditions agreed to by Pathnet ("Host") and other
telecommunications carriers ("Guests") and pursuant to this section with the
following exceptions: (1) where local building code does not allow Shared
(Subleased) Caged Collocation and (2) where the BellSouth central office
premises is located within a leased space and BellSouth is prohibited by said
lease from offering such an option,. The terms and conditions of the agreement
between the Host and its Guests shall be written and a copy provided to the
BellSouth contact specified in Section 15 within ten (10) business days of its
execution and prior to any Firm Order. Further, said agreement shall incorporate
by reference the rates, terms, and conditions of this Agreement between
BellSouth and Pathnet.
3.3.1 Pathnet shall be the sole interface and responsible
party to BellSouth for the purpose of submitting applications for initial and
additional equipment placements of Guest; for assessment of rates and charges
contained within this Agreement; and for the purposes of ensuring that the
safety and security requirements of this Agreement are fully complied with by
the Guest, its employees and agents. The initial Guest application shall require
the assessment of an Application Fee, as set forth in Exhibit A. Notwithstanding
the foregoing, Guest may arrange directly with BellSouth for the provision of
the interconnecting facilities between BellSouth and Guest and for the
provisions of the services and access to unbundled network elements.
3.3.2 Pathnet shall indemnify and hold harmless BellSouth from
any and all claims, actions, causes of action, of whatever kind or nature
arising out of the presence of Pathnet's Guests in the Collocation Space.
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<PAGE> 6
3.4 Adjacent Collocation. BellSouth will provide adjacent
collocation arrangements ("Adjacent Arrangement") where space within the Central
Office is legitimately exhausted, subject to technical feasibility, where the
Adjacent Arrangement does not interfere with access to existing or planned
structures or facilities on the Central Office property and where permitted by
zoning and other applicable state and local regulations. The Adjacent
Arrangement shall be constructed or procured by Pathnet and in conformance with
BellSouth's design and construction specifications. Further, Pathnet shall
construct, procure, maintain and operate said Adjacent Arrangement(s) pursuant
to all of the terms and conditions set forth in this Agreement. Rates shall be
negotiated at the time of the request for Adjacent Collocation.
3.4.1 Should Pathnet elect such option, Pathnet must arrange
with a BellSouth certified contractor to construct an Adjacent Arrangement
structure in accordance with BellSouth's guidelines and specifications.
BellSouth will provide guidelines and specifications upon request. Where local
building codes require enclosure specifications more stringent than BellSouth's
standard specification, Pathnet and Pathnet's contractor must comply with local
building code requirements. Pathnet's contractor shall be responsible for filing
and receiving any and all necessary zoning, permits and/or licenses for such
construction. Pathnet's BellSouth Certified Vendor shall bill Pathnet directly
for all work performed for Pathnet pursuant to this Agreement and BellSouth
shall have no liability for nor responsibility to pay such charges imposed by
the Certified Vendor. Pathnet must provide the local BellSouth building contact
with two cards, keys or other access device used to enter the locked enclosure.
Except in cases of emergency, BellSouth shall not access Pathnet's locked
enclosure prior to notifying Pathnet.
3.4.2 BellSouth maintains the right to review Pathnet's plans
and specifications prior to construction of an Adjacent Arrangement(s).
BellSouth may inspect the Adjacent Arrangement(s) following construction and
prior to commencement, as defined in Section 4.1 following, to ensure the design
and construction comply with BellSouth's guidelines and specifications.
BellSouth may require Pathnet, at Pathnet's sole cost, to correct any deviations
from BellSouth's guidelines and specifications found during such inspection(s),
up to and including removal of the Adjacent Arrangement, within five (5)
business days of BellSouth's inspection, unless the Parties mutually agree to an
alternative time frame.
3.4.3 Pathnet shall provide a concrete pad, the structure
housing the arrangement, HVAC, lighting, and all facilities that connect the
structure (i.e. racking, conduits, etc.) to the BellSouth point of
interconnection. At Pathnet's option, BellSouth shall provide an AC power source
and access to physical collocation services and facilities subject to the same
nondiscriminatory requirements as applicable to any other physical collocation
arrangement.
3.4.4 BellSouth shall allow Shared (Subleased) Caged
Collocation within an Adjacent Arrangement pursuant to the terms and conditions
set forth in Section 3.3 proceeding.
3.5 Microwave Collocation. Bell South will provide to Pathnet
Microwave Collocation and appropriate entrance facilities pursuant to Attachment
A of this Agreement.
4. OCCUPANCY
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<PAGE> 7
4.1 Commencement Date. The "Commencement Date" shall be the day
Pathnet's equipment becomes operational as described in Article 4.2, following.
4.2 Occupancy. BellSouth will notify Pathnet in writing that the
Collocation Space is ready for occupancy. Pathnet must place operational
telecommunications equipment in the Collocation Space and connect with
BellSouth's network within one hundred eighty (180) days after receipt of such
notice. Pathnet must notify BellSouth in writing that collocation equipment
installation is complete and is operational with BellSouth's network. BellSouth
may, at its option, not accept orders for interconnected service until receipt
of such notice. If Pathnet fails to place operational telecommunications
equipment in the Collocation Space within 180 calendar days and such failure
continues for a period of thirty (30) days after receipt of written notice from
BellSouth and the reason for such failure to connect with BellSouth during such
time frame is not due to any actions or in-actions on the part of BellSouth,
then and in that event Pathnet's right to occupy the Collocation Space
terminates and BellSouth shall have no further obligations to Pathnet with
respect to said Collocation Space. Termination of Pathnet's rights to the
Collocation Space pursuant to this paragraph shall not operate to release
Pathnet from its obligation to reimburse BellSouth for all costs reasonably
incurred by BellSouth in preparing the Collocation Space, but rather such
obligation shall survive this Agreement. For purposes of this paragraph,
Pathnet's telecommunications equipment will be deemed operational when
cross-connected to BellSouth's network for the purpose of service provision.
4.3 Termination. Except where otherwise agreed to by the Parties,
Pathnet may terminate occupancy in a particular Collocation Space upon thirty
(30) days prior written notice to BellSouth. Upon termination of such occupancy,
Pathnet at its expense shall remove its equipment and other property from the
Collocation Space. Pathnet shall have thirty (30) days from the termination date
to complete such removal, including the removal of all equipment and facilities
of Pathnet's Guests; provided, however, that Pathnet shall continue payment of
monthly fees to BellSouth until such date as Pathnet has fully vacated the
Collocation Space. Should Pathnet fail to vacate the Collocation Space within
thirty (30) days from the termination date, BellSouth shall have the right to
remove the equipment and other property of Pathnet at Pathnet's expense and with
no liability for damage or injury to Pathnet's property unless caused by the
gross negligence or intentional misconduct of BellSouth. Upon expiration of this
Agreement, Pathnet shall surrender the Collocation Space to BellSouth in the
same condition as when first occupied by the Pathnet except for ordinary wear
and tear. Pathnet shall be responsible for the cost of removing any enclosure,
together with all support structures (e.g., racking, conduits), of an Adjacent
Collocation arrangement at the termination of occupancy and restoring the
grounds to their original condition.
5. USE OF COLLOCATION SPACE
5.1 Equipment Type. BellSouth permits the collocation of any type
of equipment used or useful for interconnection to BellSouth's network or for
access to unbundled network elements in the provision of telecommunications
services. Such equipment used or useful for interconnection and access to
unbundled network elements includes, but is not limited to transmission
equipment including, but not limited to, optical terminating equipment and
multiplexers, and digital subscriber line access multiplexers, routers,
asyncronous transfer mode multiplexers, and remote switching modules. Nothing in
this section requires BellSouth to permit collocation of equipment used solely
to provide enhanced services; provided, however, that
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<PAGE> 8
BellSouth may not place any limitations on the ability of requesting carriers to
use all the features, functions, and capabilities of equipment collocated
pursuant to this section. Microwave transmission equipment will be allowed in
any physical collocation arrangement pursuant to Section 5.9 of this Agreement.
5.1.1 Such equipment must at a minimum meet the following
BellCore (Telcordia) Network Equipment Building Systems (NEBS) General Equipment
Requirements: Criteria Level 1 requirements as outlined in the BellCore
(Telcordia) Special Report SR-3580, Issue 1; equipment design spatial
requirements per GR-63-CORE, Section 2; thermal heat dissipation per
GR-063-CORE, Section 4, Criteria 77-79; acoustic noise per GR-063-CORE, Section
4, Criterion 128, and National Electric Code standards.
5.1.2 Pathnet shall not use the Collocation Space for
marketing purposes nor shall it place any identifying signs or markings in the
area surrounding the Collocation Space or on the grounds of the central office
premises.
5.1.3 Pathnet shall place a plaque or other identification
affixed to Pathnet's equipment necessary to identify Pathnet's equipment,
including a list of emergency contacts with telephone numbers.
5.2 Entrance Facilities. Pathnet may elect to place Pathnet-owned
or Pathnet-leased fiber entrance facilities into the Collocation Space.
BellSouth will designate the point of interconnection in close proximity to the
Central Office building housing the Collocation Space, such as an entrance
manhole or a cable vault which are physically accessible by both parties.
Pathnet will provide and place fiber cable at the point of interconnection of
sufficient length to be pulled through conduit and into the splice location.
Pathnet will provide and install a sufficient length of fire retardant riser
cable, to which the entrance cable will be spliced, which will extend from the
splice location to the Pathnet's equipment in the Collocation Space. In the
event Pathnet utilizes a non-metallic, riser-type entrance facility, a splice
will not be required. Pathnet must contact BellSouth for instructions prior to
placing the entrance facility cable in the manhole. Pathnet is responsible for
maintenance of the entrance facilities. In the event Pathnet requests more than
one (1) waveguide cable entry, BellSouth shall consider such entry(s) pursuant
to sub-Section 5.2.1.
5.2.1 Dual Entrance. BellSouth will provide at least two
interconnection points at each central office premises where there are at least
two such interconnection points available and where capacity exists. Upon
receipt of a request for physical collocation under this Agreement, BellSouth
shall provide Pathnet with information regarding BellSouth's capacity to
accommodate dual entrance facilities. If conduit in the serving manhole(s) or an
existing wall penetration is available and is not reserved for another purpose
for utilization within 12 months of the receipt of an application for
collocation, BellSouth will make the requested conduit space or existing wall
penetration available for installing a second entrance facility to Pathnet's
arrangement. The location of the serving manhole(s) or existing wall penetration
will be determined at the sole discretion of BellSouth. Where dual entrance is
not available due to lack of capacity, BellSouth will so state in the
Application Response.
5.2.2 Shared Use. Pathnet may utilize spare capacity on an
existing Interconnector entrance facility for the purpose of providing an
entrance facility to another Pathnet collocation arrangement within the same
BellSouth Central Office. Pathnet must
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arrange with BellSouth for BellSouth to splice the utilized entrance facility
capacity to Pathnet-provided riser cable.
5.3 Splicing in the Entrance Manhole. Although not generally
permitted, should Pathnet request a splice to occur in the entrance manhole(s),
BellSouth, at its sole discretion, may grant such a request, provided that
BellSouth will not unreasonably withhold approval of requests to make such a
splice. When the request for a splice is granted to Pathnet by BellSouth,
Pathnet shall ensure its employees or agents entering and/or performing work in
the entrance manhole(s) are trained and comply with BellSouth procedures and
OSHA requirements regarding access to manholes and that BellSouth personnel are
notified and present for all entrances and work performed in the entrance
manhole(s). Manhole covers shall be properly closed and secured at the
conclusion of entry and/or work. Advance notification to BellSouth shall occur
at a minimum of 48 hours prior to desired entry for normal work activities and
at a minimum of 2 hours prior to desired entry in an out of service condition.
5.4 Demarcation Point. BellSouth will designate the point(s) of
interconnection between Pathnet's equipment and/or network and BellSouth's
network. Each party will be responsible for maintenance and operation of all
equipment/facilities on its side of the demarcation point. For 2-wire and 4-wire
connections to BellSouth's network, the demarcation point shall be a common
block on the BellSouth designated conventional distributing frame. Pathnet shall
be responsible for providing, and Pathnet's BellSouth Certified Vendor shall be
responsible for installing and properly labelling/stenciling, the common block,
and necessary cabling pursuant to Section 6.4. For all other terminations
BellSouth shall designate a demarcation point on a per arrangement basis.
Pathnet or its agent must perform all required maintenance to
equipment/facilities on its side of the demarcation point, pursuant to
subsection 5.5, following, and may self-provision cross-connects that may be
required within the collocation space to activate service requests. At Pathnet's
option, a Point of Termination (POT) bay or frame may be placed in the
Collocation Space.
5.5 Pathnet's Equipment and Facilities. Pathnet, or if required by
this Agreement, Pathnet's BellSouth certified vendor, is solely responsible for
the design, engineering, installation, testing, provisioning, performance,
monitoring, maintenance and repair of the equipment and facilities used by
Pathnet. Such equipment and facilities may include but are not limited to
cable(s); equipment; and point of termination connections.
5.6 Co-Carrier Cross-connect. In addition to, and not in lieu of,
obtaining interconnection with, or access to, BellSouth telecommunications
services, unbundled network elements, and facilities, Pathnet may directly
connect to other Interconnectors within the designated BellSouth Central Office
(including to its other virtual or physical collocated arrangements) through
facilities owned by Pathnet or through BellSouth facilities designated by
Pathnet, at Pathnet's option. Such connections to other carriers may be made
using either optical or electrical facilities. Pathnet may deploy such optical
or electrical connections directly between its own facilities and the facilities
of other Interconnector(s) without being routed through BellSouth equipment.
5.6.1 If Pathnet requests a co-Carrier cross-connect after the
initial installation i.e., Pathnet must submit an application with a Subsequent
Application Fee.Pathnet must use a Certified Vendor to place the co-Carrier
cross connect, except in cases where the Pathnet equipment and the equipment of
the other Interconnector are located within the same
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collocation area or are within contiguous collocation spaces. In cases where
Pathnet's equipment and the equipment of the other Interconnector are located in
the same collocation area or are in contiguous collocation spaces, Pathnet will
have the option to deploy the co-Carrier cross connects between the sets of
equipment. Where cable support structure exists for such connection there will
be a recurring charge per linear foot of support structure used. When cable
support structures do not exist and must be constructed a non-recurring charge
for the individual case will be assessed.
5.7 Easement Space. From time to time BellSouth may require access
to the Collocation Space. BellSouth retains the right to access such space for
the purpose of making BellSouth equipment and building modifications (e.g.,
running, altering or removing racking, ducts, electrical wiring, HVAC, and
cables). BellSouth will give reasonable notice to Pathnet when access to the
Collocation Space is required. Pathnet may elect to be present whenever
BellSouth performs work in the Collocation Space. The Parties agree that Pathnet
will not bear any of the expense associated with this work.
5.8 Access. Pursuant to Section 11, Pathnet shall have
unencumbered access to the Collocation Space twenty-four (24) hours a day, seven
(7) days a week. Pathnet agrees to provide the name, social security number, and
date of birth of each employee, contractor, or agents provided with Access Keys
or cards ("Access Keys") prior to the issuance of said Access Keys. Access Keys
shall not be duplicated under any circumstances. Pathnet agrees to be
responsible for all Access Keys and for the return of all said Access Keys in
the possession of Pathnet employees, contractors, Guests, or agents after
termination of the employment relationship, contractual obligation with Pathnet
or upon the termination of this Agreement or the termination of occupancy of an
individual collocation arrangement.
5.8.1 Lost or Stolen Access Keys. Pathnet shall notify
BellSouth in writing immediately in the case of lost or stolen Access Keys.
Pathnet will pay BellSouth $250.00 per Access Key(s) lost or stolen. Should it
become necessary for BellSouth to re-key buildings as a result of a lost Access
Key(s) or for failure to return an Access Key(s), Pathnet shall pay for all
reasonable costs associated with the re-keying.
5.9 Interference or Impairment. Notwithstanding any other
provisions of this Agreement, equipment and facilities placed in the Collocation
Space shall not interfere with or impair service provided by BellSouth or by any
other Interconnector located in the Central Office; shall not endanger or damage
the facilities of BellSouth or of any other Interconnector, the Collocation
Space, or the Central Office; shall not compromise the privacy of any
communications carried in, from, or through the Central Office; and shall not
create an unreasonable risk of injury or death to any individual or to the
public. If BellSouth reasonably determines that any equipment or facilities of
Pathnet violates the provisions of this paragraph, BellSouth shall give written
notice to Pathnet, which notice shall direct Pathnet to cure the violation
within forty-eight (48) hours of Pathnet's actual receipt of written notice or,
at a minimum, to commence curative measures within 24 hours and to exercise
reasonable diligence to complete such measures as soon as possible thereafter.
After receipt of the notice, the parties agree to consult immediately and, if
necessary, to inspect the arrangement. If Pathnet fails to take curative action
within 48 hours or if the violation is of a character which poses an immediate
and substantial threat of damage to property, injury or death to any person, or
interference/impairment of the services provided by BellSouth or any other
interconnector, then and only in that event BellSouth may take such action as it
deems appropriate to correct the
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violation, including without limitation the interruption of electrical power to
Pathnet's equipment. BellSouth will endeavor, but is not required, to provide
notice to Pathnet prior to taking such action and shall have no liability to
Pathnet for any damages arising from such action, except to the extent that such
action by BellSouth constitutes willful misconduct.
5.10 Personalty and its Removal. Subject to requirements of this
Agreement, Pathnet may place or install in or on the Collocation Space such
facilities and equipment, including storage for and spare equipment, as it deems
desirable for the conduct of business; Provided that such equipment is
telecommunications equipment, does not violate floor loading requirements,
imposes or could impose or contains or could contain environmental conditions or
hazards. Personal property, facilities and equipment placed by Pathnet in the
Collocation Space shall not become a part of the Collocation Space, even if
nailed, screwed or otherwise fastened to the Collocation Space, but shall retain
their status as personalty and may be removed by Pathnet at any time. Any damage
caused to the Collocation Space by Pathnet's employees, agents or
representatives during the removal of such property shall be promptly repaired
by Pathnet at its expense.
5.11 Alterations. In no case shall Pathnet or any person acting on
behalf of Pathnet make any rearrangement, modification, improvement, addition,
repair, or other alteration to the Collocation Space or the BellSouth Central
Office without the written consent of BellSouth, which consent shall not be
unreasonably withheld. The cost of any such specialized alterations shall be
paid by Pathnet.
5.12 Janitorial Service. Pathnet shall be responsible for the
general upkeep and cleaning of the Caged Collocation Space and shall arrange
directly with a BellSouth certified contractor for janitorial services.
BellSouth shall provide a list of such contractors on a site-specific basis upon
request.
6. ORDERING AND PREPARATION OF COLLOCATION SPACE
6.1 Application for Space. Pathnet shall submit an application
document when Pathnet or Pathnet's Guest(s), as defined in Section 3.3, desires
to request or modify the use of the Collocation Space.
6.1.1 Initial Application. For Pathnet or Pathnet's Guest(s)
initial equipment placement, Pathnet shall submit to BellSouth a complete and
accurate Application and Inquiry document (Bona Fide Application), together with
payment of the Application Fee as stated in Exhibit A. The Bona Fide Application
shall contain a detailed description and schematic drawing of the equipment to
be placed in Pathnet's Collocation Space(s) and an estimate of the amount of
square footage required.
6.1.2 Subsequent Application Fee. In the event Pathnet or
Pathnet's Guest(s) desire to modify the use of the Collocation Space, Pathnet
shall complete an Application document detailing all information regarding the
mofidication to the Collocation Space together with payment of the minimum
Subsequent Application Fee as stated in Exhibit A. Said minimum Subsequent
Application Fee shall be considered a partial payment of the applicable
Subsequent Application Fee which shall be calculated as set forth below.
BellSouth shall determine what modifications, if any, to the Central Office
premises are required to accommodate the change
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requested by Pathnet in the Application. Such necessary modifications to the
Central Office premises may include but are not limited to, floor loading
changes, changes necessary to meet HVAC requirements, changes to power plant
requirements, and equipment additions. The fee paid by Pathnet for its request
to modify the use of the Collocation Space shall be dependent upon the
modification requested. Where the subsequent application does not require
provisioning or construction work by BellSouth, no Subsequent Application Fee
will be required and the pre-paid fee shall be refunded to Pathnet. The fee for
an application where the modification requested has limited effect (e.g., does
not require capital expenditure by BellSouth) shall be the Subsequent
Application Fee as set forth in Exhibit A. All other modifications shall require
a Subsequent Application Fee assessed at the applicable application fee. In the
event such modifications require the assessment of a full Application Fee as set
forth in Exhibit A, the outstanding balance shall be due by Pathnet within 30
calendar days following Pathnet's receipt of a bill or invoice from BellSouth.
6.2 Application Response. In addition to the notice of space
availability pursuant to Section 2.1, BellSouth will respond within ten (10)
business days of receipt of an Application whether the Application is Bona Fide,
and if it is not Bona Fide, the items necessary to cause the Application to
become Bona Fide. When space has been determined to be available, BellSouth will
provide a comprehensive written response within thirty (30) business days of
receipt of a complete application. When multiple applications are submitted
within a fifteen business day window, BellSouth will respond to the applications
as soon as possible, but no later than the following: within thirty (30)
business days for applications 1-5; within thirty-six (36) business days for
applications 6-10; within forty-two (42) business days for applications 11-15.
Response intervals for multiple applications submitted within the same timeframe
for the same state in excess of 15 must be negotiated. All negotiations shall
consider the total volume from all requests from telecommunications companies
for collocation. The Application Response will detail whether the amount of
space requested is available or if the amount of space requested is not
available, the amount of space that is available. The response will also include
the configuration of the space. When BellSouth's response includes an amount of
space less than that requested by Pathnet or differently configured, Pathnet
must amend its application to reflect the actual space available prior to
submitting a Bona Fide Firm Order.
6.3 Bona Fide Firm Order. Pathnet shall indicate its intent to
proceed with equipment installation in a BellSouth Central Office by submitting
a Bona Fide Firm Order to BellSouth. A Bona Fide Firm Order requires Pathnet to
complete the Application/Inquiry process described in Subsection 6.1, preceding,
and submit the Expanded Interconnection Bona Fide Firm Order document
(BSTEI-1P-F) indicating acceptance of the written application response provided
by BellSouth ("Bona Fide Firm Order") and all appropriate fees. The Bona Fide
Firm Order must be received by BellSouth no later than thirty (30) calendar days
after BellSouth's response to Pathnet's Application/Inquiry. If Pathnet makes
changes to its application in light of BellSouth's written Application Response,
BellSouth will be required to re-evaluate and respond to the change(s). In this
event, BellSouth's provisioning interval will not start until the re-evaluation
and response to the change(s) is complete and the Bona Fide Firm Order is
received by BellSouth and all appropriate fees and duties have been executed. If
BellSouth needs to reevaluate Pathnet's application as a result of changes
requested by Pathnet to Pathnet's original application, then BellSouth will
charge Pathnet a fee based upon the additional engineering hours required to do
the reassessment. Major changes such as requesting additional space or
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adding additional equipment may require Pathnet to resubmit the application with
an application fee.
6.3.1 BellSouth will establish a firm order date, per request,
based upon the date BellSouth is in receipt of a Bona Fide Firm Order. BellSouth
will acknowledge the receipt of Pathnet's Bona Fide Firm Order within five (5)
business days of receipt indicating that the Bona Fide Firm Order has been
received. A BellSouth response to a Bona Fide Firm Order will include a Firm
Order Confirmation containing the firm order date.
6.3.2 BellSouth will permit one accompanied site visit to
Pathnet's designated collocation arrangement location after receipt of the Bona
Fide Firm Order without charge to Pathnet.
6.3.3 Space preparation for the Collocation Space will not
begin until BellSouth receives the Bona Fide Firm Order and all applicable fees.
6.3.4 Pathnet must submit to BellSouth the completed Access
Control Request Form (RF-2906-A) for all employees or agents requiring access to
the BellSouth Central Office a minimum of 30 calendar days prior to the date
Pathnet desires access to the Collocation Space.
6.4 Construction and Provisioning Interval. BellSouth will
negotiate construction and provisioning intervals per request on an individual
case basis. Excluding the time interval required to secure the appropriate
government licenses and permits, BellSouth will use best efforts to complete
construction for collocation arrangements under ordinary conditions as soon as
possible and within a maximum of 90 business days from receipt of a complete and
accurate Bona Fide Firm Order. Ordinary conditions are defined as space
available with only minor changes to support systems required, such as but not
limited to, HVAC, cabling and the power plant(s). Excluding the time interval
required to secure the appropriate government licenses and permits, BellSouth
will use best efforts to complete construction of all other collocation space
("extraordinary conditions") within 130 business days of the receipt of a
complete and accurate Bona Fide Firm Order. Extraordinary conditions are defined
to include but are not limited to major BellSouth equipment rearrangement or
addition; power plant addition or upgrade; major mechanical addition or upgrade;
major upgrade for ADA compliance; environmental hazard or hazardous materials
abatement.
6.4.1 Joint Planning Meeting. Unless otherwise agreed to by
the Parties, a joint planning meeting or other method of joint planning between
BellSouth and Pathnet will commence within a maximum of 15 business days from
BellSouth's receipt of a Bona Fide Firm Order and the payment of agreed upon
fees. At such meeting, the Parties will agree to the preliminary design of the
Collocation Space and the equipment configuration requirements as reflected in
the Application and affirmed in the Bona Fide Firm Order. The Collocation Space
Completion time period will be provided to Pathnet during the joint planning
meeting or as soon as possible thereafter. BellSouth will complete all design
work following the joint planning meeting.
6.4.2 Permits. Each Party or its agents will diligently pursue
filing for the permits required for the scope of work to be performed by that
Party or its agents within 7 business days of the completion of finalized
construction designs and specifications.
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6.4.3 Acceptance Walk Through. Pathnet and BellSouth will
complete an acceptance walk through of each Collocation Space requested from
BellSouth by Pathnet. BellSouth will correct any deviations to Pathnet's
original or jointly amended requirements within five (5) business days after the
walk through, unless the Parties jointly agree upon a different time frame.
6.5 Use of Certified Vendor. Pathnet shall select a vendor which
has been approved as a BellSouth Certified Vendor to perform all engineering and
installation work required in the Collocation Space. In some cases, Pathnet must
select separate BellSouth Certified Vendors for transmission equipment,
switching equipment and power equipment. BellSouth shall provide Pathnet with a
list of Certified Vendors upon request. The Certified Vendor(s) shall be
responsible for installing Pathnet's equipment and components, installing
co-carrier cross connects, extending power cabling to the BellSouth power
distribution frame, performing operational tests after installation is complete,
and notifying BellSouth's equipment engineers and Pathnet upon successful
completion of installation. The Certified Vendor shall bill Pathnet directly for
all work performed for Pathnet pursuant to this Agreement and BellSouth shall
have no liability for nor responsibility to pay such charges imposed by the
Certified Vendor. BellSouth shall consider certifying Pathnet or any vendor
proposed by Pathnet.
6.6 Alarm and Monitoring. BellSouth shall place environmental
alarms in the Central Office for the protection of BellSouth equipment and
facilities. Pathnet shall be responsible for placement, monitoring and removal
of environmental and equipment alarms used to service Pathnet's Collocation
Space. Upon request, BellSouth will provide Pathnet with applicable tariffed
service(s) to facilitate remote monitoring of collocated equipment by Pathnet.
Both parties shall use best efforts to notify the other of any verified
environmental hazard known to that party. The parties agree to utilize and
adhere to the Environmental Hazard Guidelines identified as Exhibit B attached
hereto.
6.7 Basic Telephone Service. Upon request of Pathnet, BellSouth
will provide basic telephone service to the Collocation Space under the rates,
terms and conditions of the current tariff offering for the service requested.
6.8 Space Preparation. BellSouth shall pro rate the costs of any
renovation or upgrade to Central Office space or support mechanisms which is
required to accommodate physical collocation. Pathnet's pro rated share will be
calculated by multiplying such cost by a percentage equal to the amount of
square footage occupied by Pathnet divided by the total Central Office square
footage receiving renovation or upgrade. For this section, support mechanisms
provided by BellSouth may include, but not be limited to heating/ventilation/air
conditioning (HVAC) equipment, HVAC duct work, cable support structure, fire
wall(s), mechanical upgrade, asbestos abatement, or ground plane addition. Such
renovation or upgrade will be evaluated and the charges assessed on a per
Central Office basis. BellSouth will reimburse Pathnetin an amount equal to
Pathnet reasonable, demonstrative and mitigated expenditures incurred as a
direct result of delays to the completion and turnover dates caused by
BellSouth.
6.9 Virtual Collocation Transition. BellSouth offers Virtual
Collocation pursuant to the rates, terms and conditions set forth in its F.C.C.
Tariff No. 1. For the interconnection to BellSouth's network and access to
BellSouth unbundled network elements, Pathnet may
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purchase 2-wire and 4-wire Cross-Connects as set forth in Exhibit A, and Pathnet
may place within its Virtual Collocation arrangements the telecommunications
equipment set forth in Section 5.1. In the event physical collocation space was
previously denied at a location due to technical reasons or space limitations,
and that physical collocation space has subsequently become available, Pathnet
may transition its virtual collocation arrangements to physical collocation
arrangements and pay the appropriate non-recurring fees for physical collocation
and for the rearrangement or reconfiguration of services terminated in the
virtual collocation arrangement. In the event that BellSouth knows when
additional space for physical collocation may become available at the location
requested by Pathnet, such information will be provided to Pathnet in
BellSouth's written denial of physical collocation. To the extent that (i)
physical collocation space becomes available to Pathnet within 180 days of
BellSouth's written denial of Pathnet's request for physical collocation, and
(ii) Pathnet was not informed in the written denial that physical collocation
space would become available within such 180 days, then Pathnet may transition
its virtual collocation arrangement to a physical collocation arrangement and
will receive a credit for any nonrecurring charges previously paid for such
virtual collocation credit for any Pathnet must arrange with a BellSouth
certified vendor for the relocation of equipment from its virtual collocation
space to its physical collocation space and will bear the cost of such
relocation.
6.10 Cancellation. If, at anytime, Pathnet cancels its order for
the Collocation Space(s), Pathnet will reimburse BellSouth for any expenses
incurred up to the date that written notice of the cancellation is received. In
no event will the level of reimbursement under this paragraph exceed the maximum
amount Pathnet would have otherwise paid for work undertaken by BellSouth if no
cancellation of the order had occurred.
6.11 Licenses. Pathnet, at its own expense, will be solely
responsible for obtaining from governmental authorities, and any other
appropriate agency, entity, or person, all rights, privileges, and licenses
necessary or required to operate as a provider of telecommunications services to
the public or to occupy the Collocation Space.
7. RATES AND CHARGES
7.1 Non-recurring Fees. In addition to the Application Fee
referenced in Section 6, preceding, Pathnet shall remit payment of a Cable
Installation Fee and one-half (1/2) of the estimated Space Preparation Fee, as
applicable, coincident with submission of a Bona Fide Firm Order. The
outstanding balance of the actual Space Preparation Fee shall be due thirty (30)
calendar days following Pathnet's receipt of a bill or invoice from BellSouth.
Once the installation of the initial equipment arrangement is complete, a
subsequent application fee may apply (as described in Subsection 7.4, when
Pathnet requests a modification to the arrangement.
7.2 Documentation. BellSouth shall provide documentation to
establish the actual Space Preparation Fee. The Space Preparation Fee will be
pro rated as prescribed in Section 6, preceding.
7.3 Cable Installation. Cable Installation Fee(s) are assessed
per entrance fiber placed.
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7.4 Floor Space. The floor space charge includes reasonable
charges for lighting, heat, air conditioning, ventilation and other allocated
expenses associated with maintenance of the Central Office but does not include
amperage necessary to power Pathnet's equipment. When the Collocation Space is
enclosed, Pathnet shall pay floor space charges based upon the number of square
feet so enclosed. When the Collocation Space is not enclosed, Pathnet shall pay
floor space charges based upon the following floor space calculation: [(depth of
the equipment lineup in which the rack is placed) + (0.5 x maintenance aisle
depth) + (0.5 x wiring aisle depth)] X (width of rack and spacers). For purposes
of this calculation, the depth of the equipment lineup shall consider the
footprint of equipment racks plus any equipment overhang. BellSouth will assign
unenclosed Collocation Space in conventional equipment rack lineups where
feasible. In the event Pathnet's collocated equipment requires special cable
racking, isolated grounding or other treatment which prevents placement within
conventional equipment rack lineups, Pathnet shall be required to request an
amount of floor space sufficient to accommodate the total equipment arrangement.
Floor space charges are due beginning with the date on which BellSouth releases
the Collocation Space for occupancy or on the date Pathnet first occupies the
Collocation Space, whichever is sooner.
7.5 Power. BellSouth shall make power, including back-up power,
available to Pathnet on a level and manner that is at least at parity to the
level and manner which BellSouth provides itself, its subsidiaries, affiliates,
or any other CLEC. BellSouth shall supply -48 Volt (-48V) DC power for Pathnet's
Collocation Space within the central office premises and shall make available AC
power at Pathnet's option for Adjacent Arrangement collocation.
7.5.1 Charges for -48V DC power will be assessed per ampere
per month based upon the certified vendor engineered and installed power feed
fused ampere capacity. Rates include redundant feeder fuse positions (A&B) and
cable rack to Pathnet's equipment or space enclosure. When obtaining power from
a BellSouth Battery Distribution Fuse Bay, fuses and power cables (A&B) must be
engineered (sized), furnished and installed by Pathnet's certified vendor. When
obtaining power from a BellSouth Power Board, power cables (A&B) must be
engineered (sized), furnished and installed by Pathnet's certified power vendor.
Pathnet's certified vendor must also provide a copy of the engineering power
specification prior to the Commencement Date. In the event BellSouth shall be
required to construct additional DC power plant or upgrade the existing DC power
plant in a Central Office as a result of Pathnet's request to collocate in that
Central Office ("Power Plant Construction"), Pathnet shall pay its pro-rata
share of costs associated with the Power Plant Construction. The determination
of whether Power Plant Construction is necessary shall be within BellSouth's
sole, but reasonable, discretion. BellSouth shall comply with all BellCore
(Telcordia) and ANSI Standards regarding power cabling, including BellCore
(Telcordia) Network Equipment Building System (NEBS) StandardGR-63-CORE.
BellSouth will notify Pathnet of the need for the Power Plant Construction and
will estimate the costs associated with the Power Plant Construction if
BellSouth were to perform the Power Plant Construction. The costs of power plant
construction shall be pro-rated and shared among all who benefit from that
construction. Pathnet shall pay BellSouth one-half of its prorata share of the
estimated Power Plant Construction costs prior to commencement of the work.
Pathnet shall pay BellSouth the balance due (actual cost less one-half of the
estimated cost) within thirty (30) days of completion of the Power Plant
Construction. Pathnet has the option to perform the Power Plant Construction
itself; provided, however, that such work shall be performed by a BellSouth
certified contractor and such contractor shall comply with BellSouth's
guidelines and specifications. Where the Power Plant Construction results in
construction of a new power plant room, upon termination of this Agreement
Pathnet
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shall have the right to remove its equipment from the power plant room, but
shall otherwise leave the room intact. Where the Power Plant Construction
results in an upgrade to BellSouth's existing power plant, upon termination of
this Agreement, such upgrades shall become the property of BellSouth.
7.5.2 Charges for AC power will be assessed per breaker ampere
per month based upon the certified vendor engineered and installed power feed
fused ampere capacity. Rates include the provision of commercial and standby AC
power. When obtaining power from a BellSouth Distribution Fuse Bay, Power Board
or Service Panel, fuses and power cables must be engineered (sized), furnished
and installed by Pathnet's certified vendor. Pathnet's certified vendor must
also provide a copy of the engineering power specification prior to the
Commencement Date. Charges for AC power shall be assessed pursuant to the rates
specified in Exhibit A. AC power voltage and phase ratings shall be determined
on a per location basis.
7.6 Security Escort. A security escort will be required whenever
Pathnet or its approved agent desires access to the entrance manhole or must
have access to the Central Office Premises after the one accompanied site visit
allowed pursuant to subsection 6.2.2 prior to completing BellSouth's Security
Training requirements and/or prior to Space Acceptance. Rates for a security
escort are assessed in one-half (1/2) hour increments according to the schedule
appended hereto as Exhibit A.
7.7 Rate "True-Up." The Parties agree that the prices reflected as
interim herein shall be "trued-up" (up or down) based on final prices either
determined by further agreement or by final order, including any appeals, in a
proceeding involving BellSouth before the regulatory authority for the state in
which the services are being performed or any other body having jurisdiction
over this agreement (hereinafter "Commission"). Under the "true-up" process, the
interim price for each service shall be multiplied by the volume of that service
purchased to arrive at the total interim amount paid for that service ("Total
Interim Price"). The final price for that service shall be multiplied by the
volume purchased to arrive at the total final amount due ("Total Final Price").
The Total Interim Price shall be compared with the Total Final Price. If the
Total Final Price is more than the Total Interim Price, Pathnet shall pay the
difference to BellSouth. If the Total Final Price is less than the Total Interim
Price, BellSouth shall pay the difference to Pathnet. Each party shall keep its
own records upon which a "true-up" can be based and any final payment from one
party to the other shall be in an amount agreed upon by the Parties based on
such records. In the event of any disagreement as between the records or the
Parties regarding the amount of such "true-up," the Parties agree that the
Commission shall be called upon to resolve such differences.
7.8 Other. If no rate is identified in the contract, the rate for
the specific service or function will be negotiated by the parties upon request
by either party. Payment of all other charges under this Agreement shall be due
thirty (30) days after receipt of the bill (payment due date). Pathnet will pay
a late payment charge of one and one-half percent (1-1/2%) assessed monthly on
any balance which remains unpaid after the payment due date.
8. INSURANCE
8.1 Pathnet shall, at its sole cost and expense, procure,
maintain, and keep in force insurance as specified in this Article VI and
underwritten by insurance companies licensed to do
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business in the states applicable under this Agreement and having a BEST
Insurance Rating of B ++ X (B ++ ten).
8.2 Pathnet shall maintain the following specific coverage:
8.2.1 Commercial General Liability coverage in the amount of
ten million dollars ($10,000,000.00) or a combination of Commercial General
Liability and Excess/Umbrella coverage totaling not less than ten million
dollars ($10,000,000.00). BellSouth shall be named as an ADDITIONAL INSURED on
ALL applicable policies as specified herein.
8.2.2 Statutory Workers Compensation coverage and Employers
Liability coverage in the amount of one hundred thousand dollars ($100,000.00)
each accident, one hundred thousand dollars ($100,000.00) each employee by
disease, and five hundred thousand dollars ($500,000.00) policy limit by
disease.
8.2.3 Pathnet may elect to purchase business interruption and
contingent business interruption insurance, having been advised that BellSouth
assumes no liability for loss of profit or revenues should an interruption of
service occur.
8.3 The limits set forth in Subsection 6.2 above may be increased
by BellSouth from time to time during the term of this Agreement upon thirty
(30) days notice to Pathnet to at least such minimum limits as shall then be
customary with respect to comparable occupancy of BellSouth structures.
8.4 All policies purchased by Pathnet shall be deemed to be
primary and not contributing to or in excess of any similar coverage purchased
by BellSouth. All insurance must be in effect on or before the date equipment is
delivered to BellSouth's Central Office and shall remain in effect for the term
of this Agreement or until all Pathnet's property has been removed from
BellSouth's Central Office, whichever period is longer. If Pathnet fails to
maintain required coverage, BellSouth may pay the premiums thereon and seek
reimbursement of same from Pathnet.
8.5 Pathnet shall submit certificates of insurance reflecting the
coverage required pursuant to this Section a minimum of ten (10) days prior to
the commencement of any work in the Collocation Space. Failure to meet this
interval may result in construction and equipment installation delays. Pathnet
shall arrange for BellSouth to receive thirty (30) days advance notice of
cancellation from Pathnet's insurance company. Pathnet shall forward a
certificate of insurance and notice of cancellation to BellSouth at the
following address:
BellSouth Telecommunications, Inc.
Attn.: Risk Management Coordinator
600 N. 19th Street, 18B3
Birmingham, Alabama 35203
8.6 Pathnet must conform to recommendations made by BellSouth's
fire insurance company to the extent BellSouth has agreed to, or shall hereafter
agree to, such recommendations.
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8.7 Failure to comply with the provisions of this Section will be
deemed a material breach of this Agreement.
9. MECHANICS LIENS
9.1 If any mechanics lien or other liens shall be filed against
property of either party (BellSouth or Pathnet), or any improvement thereon by
reason of or arising out of any labor or materials furnished or alleged to have
been furnished or to be furnished to or for the other party or by reason of any
changes, or additions to said property made at the request or under the
direction of the other party, the other party directing or requesting those
changes shall, within thirty (30) days after receipt of written notice from the
party against whose property said lien has been filed, either pay such lien or
cause the same to be bonded off the affected property in the manner provided by
law. The party causing said lien to be placed against the property of the other
shall also defend, at its sole cost and expense, on behalf of the other, any
action, suit or proceeding which may be brought for the enforcement of such
liens and shall pay any damage and discharge any judgment entered thereon.
10. INSPECTIONS
10.1 BellSouth shall conduct an inspection of Pathnet's equipment
and facilities in the Collocation Space(s) prior to the activation of facilities
between Pathnet's equipment and equipment of BellSouth. BellSouth may conduct an
inspection if Pathnet adds equipment and may otherwise conduct routine
inspections at reasonable intervals mutually agreed upon by the Parties.
BellSouth shall provide Pathnet with a minimum of forty-eight (48) hours or two
(2) business days, whichever is greater, advance notice of all such inspections.
All costs of such inspection shall be borne by BellSouth.
11. SECURITY AND SAFETY REQUIREMENTS
11.1 Only BellSouth employees, BellSouth certified vendors and
authorized employees, authorized Guests, pursuant to Section 3.3, preceding, or
authorized agents of Pathnet will be permitted in the BellSouth Central Office.
Pathnet shall provide its employees and agents with picture identification which
must be worn and visible at all times while in the Collocation Space or other
areas in or around the Central Office. The photo Identification card shall bear,
at a minimum, the employee's name and photo, and the Pathnet name. BellSouth
reserves the right to remove from its premises any employee of Pathnet not
possessing identification issued by Pathnet. Pathnet shall hold BellSouth
harmless for any damages resulting from such removal of its personnel from
BellSouth premises. Pathnet shall be solely responsible for ensuring that any
Guest of Pathnet is in compliance with all subsections of this Section 11.
11.1.1 Pathnet will be required, at its own expense, to
conduct a statewide investigation of criminal history records for each Pathnet
employee being considered for work on the BellSouth Central Office, for the
states/counties where the Pathnet employee has worked and lived for the past
five years. Where state law does not permit statewide collection or reporting,
an investigation of the applicable counties is acceptable.
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11.1.2 Pathnet will be required to administer to their
personnel assigned to the BellSouth Central Office security training either
provided by BellSouth, or meeting criteria defined by BellSouth. BellSouth will
provide Pathnet with such security training documentation upon execution of this
Agreement.
11.1.3 Pathnet shall not assign to the BellSouth Central
Office any personnel with records of felony criminal convictions. Pathnet shall
not assign to the BellSouth Central Office any personnel with records of
misdemeanor convictions, without advising BellSouth of the nature and gravity of
the offense(s). BellSouth reserves the right to refuse building access to any
Pathnet personnel who have been identified to have misdemeanor criminal
convictions.
11.1.4 For each Pathnet employee requiring access to a
BellSouth Central Office pursuant to this agreement, Pathnet shall furnish
BellSouth, prior to an employee gaining such access, a notarized affidavit
certifying that the aforementioned background check and security training were
completed. The affidavit will contain a statement certifying no felony
convictions were found and certifying that the security training was completed
by the employee. If the employee's criminal history includes misdemeanor
convictions, Pathnet will disclose the nature of the convictions to BellSouth at
that time.
11.1.5 At BellSouth's request, Pathnet shall promptly remove
from the BellSouth's premises any employee of Pathnet BellSouth does not wish to
grant access to its premises pursuant to any investigation conducted by
BellSouth.
11.2 Notification to BellSouth. BST reserves the right to
interview Pathnet's employees, agents, or contractors. Pathnet and its
contractors shall cooperate fully with BellSouth's investigation into
allegations of wrongdoing or criminal conduct committed by or involving
Pathnet's employees, agents, or contractors. Additionally, BellSouth reserves
the right to bill Pathnet for all costs associated with investigations involving
its employees, agents, or contractors if it can be reasonably established that
Pathnet's employees, agents, or contractors are responsible for the alleged act.
BellSouth shall bill Pathnet for BellSouth property which is stolen or damaged
where an investigation determines the culpability of Pathnet's employees,
agents, or contractors. Pathnet shall notify BellSouth in writing immediately in
the event that the CLEC discovers one of its employees already working on the
BellSouth premises is a possible security risk. BellSouth reserves the right to
permanently remove from its premises any employee of Pathnet identified as
posing a security risk to BellSouth or any other CLEC, or having violated
BellSouth policies set forth in the BellSouth CLEC Security Training. Pathnet
shall hold BellSouth harmless for any damages resulting from such removal of its
personnel from BellSouth premises.
11.3 Use of BellSouth Supplies by Pathnet Employees. Use of any
BellSouth supplies by a Pathnet employee, whether or not used routinely to
provide telephone service (e.g. plug-in cards,) will be considered theft and
will be handled accordingly. Costs associated with such unauthorized use of
BellSouth property may be charged to Pathnet as may be all associated
investigative costs. At BellSouth's request, Pathnet shall promptly and
permanently remove from BellSouth's Central Office any employee of Pathnet found
to be in violation of this rule.
11.4 Use of Official Lines by Pathnet Employees. Except for local
calls necessary in the performance of their work, Pathnet employees shall not
use the telephones on BellSouth
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Central Office. Charges for unauthorized telephone calls made by a Pathnet's
employees may be charged to Pathnet as may be all associated investigative
costs. At BellSouth's request, Pathnet shall promptly and permanently remove
from BellSouth's premises any employee of Pathnet found to be in violation of
this rule.
11.5 Accountability. Full compliance with the Security requirements
of this section shall in no way limit the accountability of any CLEC for the
improper actions of its employees.
12. DESTRUCTION OF COLLOCATION SPACE
12.1 In the event a Collocation Space is wholly or partially
damaged by fire, windstorm, tornado, flood or by similar causes to such an
extent as to be rendered wholly unsuitable for Pathnet's permitted use
hereunder, then either party may elect within ten (10) days after such damage,
to terminate this Agreement, and if either party shall so elect, by giving the
other written notice of termination, both parties shall stand released of and
from further liability under the terms hereof. If the Collocation Space shall
suffer only minor damage and shall not be rendered wholly unsuitable for
Pathnet's permitted use, or is damaged and the option to terminate is not
exercised by either party, BellSouth covenants and agrees to proceed promptly
without expense to Pathnet, except for improvements not the property of
BellSouth, to repair the damage. BellSouth shall have a reasonable time within
which to rebuild or make any repairs, and such rebuilding and repairing shall be
subject to delays caused by storms, shortages of labor and materials, government
regulations, strikes, walkouts, and causes beyond the control of BellSouth,
which causes shall not be construed as limiting factors, but as exemplary only.
Pathnet may, at its own expense, accelerate the rebuild of its collocated space
and equipment provided however that a certified vendor is used and the necessary
space preparation has been completed. Rebuild of equipment must be performed by
a BellSouth Certified Vendor. If Pathnet's acceleration of the project increases
the cost of the project, then those additional charges will be incurred by
Pathnet. Where allowed and where practical, Pathnet may erect a temporary
facility while BellSouth rebuilds or makes repairs. In all cases where the
Collocation Space shall be rebuilt or repaired, Pathnet shall be entitled to an
equitable abatement of rent and other charges, depending upon the unsuitability
of the Collocation Space for Pathnet's permitted use, until such Collocation
Space is fully repaired and restored and Pathnet's equipment installed therein
(but in no event later than thirty (30) days after the Collocation Space is
fully repaired and restored). Where Pathnet has placed an Adjacent Arrangement
pursuant to section 3.4, Pathnet shall have the sole responsibility to repair or
replace said Adjacent Arrangement provided herein. Pursuant to this section,
BellSouth will restore the associated services to the Adjacent Arrangement.
13. EMINENT DOMAIN
13.1 If the whole of a Collocation Space or Adjacent Arrangement
shall be taken by any public authority under the power of eminent domain, then
this Agreement shall terminate as of the day possession shall be taken by such
public authority and rent and other charges for the Collocation Space or
Adjacent Arrangement shall be paid up to that day with proportionate refund by
BellSouth of such rent and charges as may have been paid in advance for a period
subsequent to the date of the taking. If any part of the Collocation Space or
Adjacent Arrangement shall be taken under eminent domain, BellSouth and Pathnet
shall each have the
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right to terminate this Agreement and declare the same null and void, by written
notice of such intention to the other party within ten (10) days after such
taking.
14. NONEXCLUSIVITY
12.1 Pathnet understands that this Agreement is not exclusive and
that BellSouth may enter into similar agreements with other parties. Assignment
of space pursuant to all such agreements shall be determined by space
availability and made on a first come, first served basis.
15. NOTICES
15.1 Except as otherwise provided herein, any notices or demands
that are required by law or under the terms of this Agreement shall be given or
made by Pathnet or BellSouth in writing and shall be given by hand delivery, or
by certified or registered mail, and addressed to the parties as follows:
To BellSouth: To Pathnet:
600 N. 19th Str 1015 31st Street, N.W.
9th Floor Suite 500
Birmingham, AL 35240 Washington, D.C. 20007
ATTN: CLEC Account Team ATTN: Al Baird
15.2 Such notices shall be deemed to have been given in the case of
certified or registered mail when deposited in the United States mail with
postage prepaid.
16. INDEMNITY / LIMITATION OF LIABILITY
16.1 Pathnet shall be liable for any damage to property, equipment
or facilities or injury to person caused by the activities of Pathnet, its
agents or employees pursuant to, or in furtherance of, rights granted under this
Agreement. Pathnet shall indemnify and hold BellSouth harmless from and against
any judgments, fees, costs or other expenses resulting or claimed to result from
such activities by Pathnet, its agents or employees. Likewise, BellSouth shall
be liable for any damage to property, equipment or facilities or injury to
person caused by the activites of BellSouth, its agents or employees pursuant
to, or in furtherance of, providing the Collocation Space(s) under this
Agreement. BellSouth shall indemnify and hold PathNet harmless from and against
any judgments, fees, costs or other expenses resulting or claimed to result from
such activities by BellSouth, its agents or employees.
16.2 BellSouth shall not be liable to Pathnet for any interruption
of Pathnet's service or for interference with the operation of Pathnet's
communications facilities, or for any special,
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indirect, incidental or consequential damages arising in any manner, including
BellSouth's negligence, out of the use of the Collocation Space(s) and Pathnet
shall indemnify, defend and hold BellSouth harmless from and against any and all
claims, demands, causes of action, costs and reasonable attorneys' fees with
respect to such special, indirect, incidental or consequential damages.
16.3 BellSouth assumes no responsibility, and shall not be liable
to Pathnet for, any damage to the property, equipment or facilities of Pathnet
or for injury to any person caused by the activities of another Interconnector,
its agents or employees.
17. PUBLICITY
17.1 Pathnet agrees to submit to BellSouth all advertising, sales
promotion, press releases, and other publicity matters relating to this
Agreement or mentioning or implying the tradenames, logos, trademarks or service
marks (hereinafter "Marks") of BellSouth Corporation and/or any of its
affiliated companies or language from which the connection of said Marks
therewith may be inferred or implied, or mentioning or implying the names of any
personnel of BellSouth Corporation and/or any of its affiliated companies, and
Pathnet further agrees not to publish or use such advertising, sales promotions,
press releases, or publicity matters without BellSouth's prior written consent.
18. FORCE MAJEURE
18.1 Neither party shall be in default by reason of any failure in
performance of this Agreement, in accordance with its terms and conditions, if
such failure arises out of causes beyond the control of the nonperforming party
including, but not restricted to, acts of God, acts of government,
insurrections, fires, floods, accidents, epidemics, quarantines, restrictions,
strikes, freight embargoes, inability to secure raw materials or transportation
facilities, acts or omissions of carriers or any and all other causes beyond the
party's control.
19. YEAR 2000 COMPLIANCE
19.1 Each party warrants that it has implemented a program the goal
of which is to ensure that all collocated equipment, software, hardware and
related materials (collectively called "Systems") delivered, connected with
BellSouth or supplied in the furtherance of the terms and conditions specified
in this Agreement: (i) will record, store, process and display calendar dates
falling on or after January 1, 2000, in the same manner, and with the same
functionality as such software records, stores, processes and calendar dates
falling on or before December 31, 1999; and (ii) shall include without
limitation date data century recognition, calculations that accommodate same
century and multicentury formulas and date values, and date data interface
values that reflect the century.
20. ASSIGNMENT
20.1 Pathnet acknowledges that this Agreement does not convey any
right, title or interest in the Central Office to Pathnet. This Agreement is not
assignable by either party without the prior written consent of the other party,
and any attempt to assign any of the rights,
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duties or obligations of this Agreement without such consent is void.
Notwithstanding the foregoing, either party may assign any rights, duties or
obligations of this Agreement to a parent, subsidiary or affiliate without the
consent of the other party.
21. NO IMPLIED WAIVER
21.1 No consent or waiver by either party to or of any breach of
any covenant, term, condition, provision or duty of the other party under this
Agreement shall be construed as a consent to or waiver of any other breach of
the same or any other covenant, term, condition, provision or duty. No such
consent or waiver shall be valid unless in writing and signed by the party
granting such consent or waiver.
22. RESOLUTION OF DISPUTES
22.1 Except as otherwise stated in this Agreement, the Parties
agree that if any dispute arises as to the interpretation of any provision of
this Agreement or as to the proper implementation of this Agreement, the parties
will petition the Commission in the state where the services are provided
pursuant to this Agreement for a resolution of the dispute. However, each party
reserves any rights it may have to seek judicial review of any ruling made by
the Public Service Commission concerning this Agreement.
23. SECTION HEADINGS
23.1 The section headings used herein are for convenience only,
and shall not be deemed to constitute integral provisions of this Agreement.
24. AUTHORITY
24.1 Each of the parties hereto warrants to the other that the
person or persons executing this Agreement on behalf of such party has the full
right, power and authority to enter into and execute this Agreement on such
party's behalf and that no consent from any other person or entity is required
as a condition precedent to the legal effect of this Agreement.
25. REVIEW OF AGREEMENT
25.1 The parties acknowledge that each has had an opportunity to
review and negotiate this Agreement and has executed this Agreement only after
such review and negotiation. The Parties further agree that this Agreement shall
be deemed to have been drafted by both BellSouth and Pathnet and the terms and
conditions contained herein shall not be construed any more strictly against one
party or the other.
26. FILING OF AGREEMENT
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26.1 Upon execution of this Agreement it shall be filed with the
appropriate state regulatory agency pursuant to the requirements of section 252
of the Act. If the regulatory agency imposes any filing or public interest
notice fees regarding the filing or approval of the Agreement, said costs shall
be borne by Pathnet.
27. ENTIRE AGREEMENT
27.1 This Agreement contains the full understanding of the Parties
(superseding all prior or contemporaneous correspondence between the Parties)
and shall constitute the entire agreement between BellSouth and Pathnet and may
not be modified or amended other than by a written instrument signed by both
parties. If any conflict arises between the terms and conditions contained in
this Agreement and those contained in a filed tariff, the terms and conditions
of this Agreement shall control.
IN WITNESS WHEREOF, the Parties have executed this Agreement by their duly
authorized representatives in one or more counterparts, each of which shall
constitute an original, on the day and year first above written.
BELLSOUTH TELECOMMUNICATIONS, (Pathnet's Full Company Name)
INC.
/s/ JERRY HENDRIX /s/ MICHAEAL A. LUBIN
- ---------------------------------- -------------------------------
Authorized Signature Authorized Signature
Jerry Hendrix Michael Lubin
- ---------------------------------- -------------------------------
Print or Type Name Print or Type Name
Senior Director V.P. and General Counsel
- ---------------------------------- -------------------------------
Title Title
7/29/99 7/26/99
- ---------------------------------- -------------------------------
Date Date
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Exhibit 10.31
INTERIM
COLLOCATION AGREEMENT
AGREEMENT NUMBER
CDS-990616-0108
BETWEEN
U S WEST COMMUNICATIONS, INC.
AND
PATHNET, INC.
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COLLOCATION AGREEMENT
THIS COLLOCATION AGREEMENT ("Agreement") is made and effective as of
August 12, 1999, by and between U S WEST Communications, Inc., a Colorado
corporation ("USW"), and Pathnet, Inc., a Delaware corporation ("Pathnet").
WHEREAS, USW is an incumbent local exchange carrier having a
statutory duty to provide for "Collocation" of equipment necessary for
interconnection or access to unbundled network elements at its Premises, in
accordance with the Telecommunications Act of 1996 (the "Act"); and
WHEREAS, Pathnet wishes to physically locate certain of its equipment within the
Space (as defined herein) and connect with USW in accordance with the Act;
WHEREAS, Pathnet must have a state approved Interconnection agreement with USW
in the states covered by this Agreement before Pathnet can order local
interconnection trunks for the purpose of exchanging traffic between the
Parties' networks.
NOW THEREFORE, in consideration of the mutual agreements and covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, USW and Pathnet (the "Parties") agree as follows:
SECTION 1. TERM
This Agreement is prepared in order for USW to process Pathnet's Collocation
requests for the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Nebraska,
New Mexico, North Dakota and Wyoming (other states can be requested through a
general amendment to this contract) while the Parties finalize the
Interconnection Agreement between USW and Pathnet ("Interconnection Agreement").
The Parties intend to submit the Interconnection Agreement to the state public
utilities commissions having jurisdiction, for approval under the provisions of
47 U.S.C. Section 252. This Agreement will remain in effect until April 1, 2000,
or until approval of that Interconnection Agreement, whichever occurs first. At
such time of Commission approval of the Interconnection Agreement, this
Agreement will terminate and the terms and conditions of the approved
Interconnection Agreement will prevail. In the event the Interconnection
Agreement is not approved by the Commission Pathnet shall vacate the Space and
pay USW all of the expenses and costs that USW has incurred that have not been
fully reimbursed to USW by the nonrecurring charges paid by Pathnet to USW.
Pathnet shall have the option to convert cageless collocation to a virtual
collocation in this event as defined under the FCC tariffs dealing with the USW
Expanded Interconnection Services and shall pay charges for such conversion. USW
shall not refund any sum paid to it by or on behalf of Pathnet.
SECTION 2. COLLOCATION DESCRIPTION
2.1 Collocation allows for the placing of telecommunications
equipment owned by Pathnet within USW's Central Office
for the purpose of accessing Unbundled Network Elements
(UNEs) and/or terminating EAS/Local and ancillary
traffic.
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2.1.1 Virtual Collocation
With a Virtual Collocation arrangement,
Pathnet is responsible for the procurement
of its own telecommunications equipment
which USW installs and maintains. Pathnet
does not have physical access to its
equipment in the USW Central Office but will
be granted access to the appropriate
cross-connect for making any cross
connections it may require for access to USW
UNEs.
2.1.2 Caged Physical Collocation
Caged Physical Collocation allows Pathnet to
lease caged floor space approximately in 100
square foot increments, up to a maximum of
400 square feet, for placement of its
telecommunications equipment within USW's
Central Office for the purpose of
interconnecting with USW finished services
or UNEs. Pathnet is responsible for the
procurement, installation and on-going
maintenance of its equipment as well as the
cross connections required at the
appropriate cross-connect device for
connecting its equipment to USW UNEs.
2.1.3 Cageless Physical Collocation
Cageless Physical Collocation is a non-caged
area within a USW Central Office. Space will
be made available in standard 9 square foot,
single bay increments. Pathnet will be
responsible for the procurement,
installation and maintenance of the bays and
telecommunications equipment. As with both
Virtual and Caged Physical Collocation,
Cageless Physical Collocation will also
include access to the appropriate
cross-connect device in which Pathnet can
make connections to USW UNEs.
2.1.4 Shared Space Caged Physical Collocation
Shared Space Caged Physical Collocation
offers Co-Providers the opportunity to share
a caged physical space with each other for
the purpose of interconnecting with UNEs.
Each collocator will be responsible for
ordering entrance, power and terminations
from USW at time of application. In order to
address issues around warehousing of space,
the original collocator will not be allowed
to charge the shared occupant a per square
foot charge in excess of the rate that the
original collocator is presently charged by
USW. There are some limitations set on the
original collocator as to rates and terms of
the arrangement such as a per square foot
charge not exceeding the recurring amount
that USW is charging.
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2.1.5 Interconnection Distribution Frame (ICDF)
Collocation
Where Pathnet does not require its equipment
to be placed in a USW Central Office, but
wishes only to combine USW UNEs, ICDF
Collocation is available, where allowed by
law.
The combination of the UNEs shall be
completed at the appropriate USW
cross-connect device. Such devices will be
located within USW Central Offices for
common or dedicated usage. The cross-connect
devices accommodate DS0, DS1, DS3 and OCn
terminations. Tie cable arrangements between
the various USW distribution frames may be
required and will be provided in a
nondiscriminatory manner.
2.1.6 Microwave Collocation - See Attachment 1
2.1.7 Adjacent Collocation
2.1.7.1 USW will provide adjacent
collocation arrangements
("Adjacent Arrangement") on
contiguous property where space
within the Central Office is
legitimately exhausted, subject
to technical feasibility, where
the Adjacent Arrangement does
not interfere with access to
existing or planned structures
or facilities on the Central
Office property and where
permitted by zoning and other
applicable state and local
regulations. The Adjacent
Arrangement shall be constructed
or procured by Pathnet and in
conformance with USW's design
and construction specifications.
Further, Pathnet shall
construct, procure, maintain and
operate said Adjacent
Arrangement(s) pursuant to all
of the terms and conditions set
forth in this Agreement. Rates
shall be negotiated at the time
of the request for Adjacent
Collocation.
2.1.7.2 Should Pathnet elect such
option, Pathnet must arrange
with a USW certified contractor
to construct an Adjacent
Arrangement structure in
accordance with USW's guidelines
and specifications. USW will
provide guidelines and
specifications upon request.
Where local building codes
require enclosure specifications
more stringent than USW's
standard specification, Pathnet
and Pathnet's contractor must
comply with local building code
requirements. Pathnet's
contractor shall be responsible
for filing and receiving any and
all necessary zoning, permits
and/or licenses for such
construction. Pathnet's USW
Certified Vendor shall bill
Pathnet directly for all work
performed for Pathnet pursuant
to this Agreement and USW shall
have no liability for nor
responsibility to pay such
charges imposed by the Certified
Vendor. Pathnet must provide the
local USW building contact with
two cards, keys or other access
device used to enter the
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locked enclosure. Except in
cases of emergency, USW shall
not access Pathnet's locked
enclosure prior to notifying
Pathnet.
2.1.7.3 USW maintains the right to
review Pathnet's plans and
specifications prior to
construction of an Adjacent
Arrangement(s). USW may inspect
the Adjacent Arrangement(s)
following construction and prior
to commencement, as defined in
Section 4.1 following, to ensure
the design and construction
comply with USW's guidelines and
specifications. USW may require
Pathnet, at Pathnet's sole cost,
to correct any deviations from
USW's guidelines and
specifications found during such
inspection(s), up to and
including removal of the
Adjacent Arrangement, within
five (5) business days of USW's
inspection, unless the Parties
mutually agree to an alternative
time frame.
2.1.7.4 Pathnet shall provide a concrete
pad, the structure housing the
arrangement, HVAC, lighting, and
all facilities that connect the
structure (i.e. racking,
conduits, etc.) to the USW point
of interconnection. At Pathnet's
option, and to the extent
technically feasible, USW shall
provide an AC power source and
access to physical collocation
services and facilities subject
to the same nondiscriminatory
requirements as applicable to
any other physical collocation
arrangement. Due to the distance
limitations of power cable, USW
will accommodate requests to a
reasonable distance within 300
feet of the Central Office power
source, or 200 feet from the
Central Office outside wall.
2.1.7.5 USW shall allow Shared
(Subleased) Caged Collocation
within an Adjacent Arrangement
pursuant to the terms and
conditions set forth in Section
3.3 following. Pathnet shall
make all necessary arrangements
with a third party property
owner.
SECTION 3. COLLOCATION TERMS AND CONDITIONS - ALL COLLOCATION
3.1 With respect to any technical requirements or
performance standards specified in this Section, USW
shall provide Collocation in a nondiscriminatory manner
on rates, terms and conditions that are just, reasonable
and nondiscriminatory.
3.2 Pathnet will only collocate telecommunications equipment
which is necessary for interconnection and access to
unbundled elements. Pathnet must identify what
telecommunications equipment will be installed and the
vendor technical specifications of such equipment so
that USW may engineer the power, floor loading, heat
release, environmental particulate level, and HVAC.
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3.3 Collocation requests require that space be provided for
the placement of Pathnet telecommunications equipment
within or adjacent to USW's Central Office. USW will
also provide, at a cost to Pathnet, the structure that
is necessary in support of this equipment. This includes
but is not limited to, physical space, a cage (for Caged
Physical Collocation), HVAC, any required cabling
between Pathnet's telecommunications equipment and the
Distribution Frame and any other associated hardware.
3.4 All equipment placed will meet NEBS Level 1 standards
and will be installed in accordance with USW Technical
Publications 77350, 77351, 77355, 77367, 77386 and
77390. USW shall provide standard Central Office
alarming pursuant to Technical Publication 77390.
3.5 Collocation is offered on a first-come, first-served
basis. Requests for Collocation may be denied due to the
lack of sufficient space in a USW Central Office for
placement of Pathnet's equipment. If USW determines that
the amount of space requested by Pathnet for Caged
Physical Collocation is not available, Pathnet will be
offered Collocation in the closest 100 square foot
increment that is determined to be available in relation
to the original request, or Pathnet will be offered
Cageless Physical Collocation (bay at a time), or
Virtual Collocation as an alternative to Caged Physical
Collocation.
3.6 Requests for Collocation from Pathnet will be
prioritized by USW, but in the event Pathnet submits
requests for Collocation, such that more than five (5)
requests per week, per state are in process by USW, the
following procedure shall apply:
3.6.1 USW and Pathnet shall work cooperatively and
in good faith to establish a project plan
and schedule to implement Pathnet's requests
for Collocation. The project plan shall
establish staggered due dates on both the
up-front and ready-for-service dates, and
outline responsibilities for each Party;
3.6.2 The project plan established by USW and
Pathnet to implement Pathnet's request for
Collocation may also be used by Pathnet to
prioritize implementation of Collocation
requests in the event that five (5) or fewer
requests for Collocation per week, per state
submitted by Pathnet are being processed by
USW;
3.6.3 Should the Parties not reach agreement on
the project plan, Pathnet's requests for
Collocation shall be addressed by USW on an
individual case basis.
3.7 If a request for Collocation is denied due to a total
lack of appropriate space in a USW Central Office,
Pathnet may request USW to provide a cost quote for the
reclamation of space and/or equipment, or an adjacent
collocation arrangement. Quotes will be developed within
sixty (60) business days including the estimated time
frames for the work that is required in order to satisfy
the Collocation request. Pathnet has thirty (30)
business days to accept the quote. If Pathnet
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accepts the quote, work will begin on receipt of 50% of
the quoted charges, with the balance due on completion.
Reclamation may include the following:
Grooming - The moving of circuits from
working equipment to other equipment bays
with similar functionality for the purpose
of providing space for Interconnection.
Space Reclamation - Administrative space
that can be reconditioned, downsized or
modified for the placement of
telecommunications equipment.
3.8 Out of Space
USW will provide documentation with the specific state
Commission whenever a Collocation request is denied due
to insufficient space. Additionally, if Pathnet's
request is denied, and Pathnet requests the
documentation, USW will furnish a marked copy of that
Central Office floor plan to Pathnet. Tours of the
affected Central Office, when requested, will be
arranged through USW channels, including USW Legal
Department, State Interconnection Management, and
Account Management teams.
3.9 All equipment and installation shall meet the state
specific earthquake rating requirements for Virtual or
Cageless Collocation.
3.10 USW will designate the POI for network Interconnection
for Virtual, Physical, Adjacent, Cageless or Caged
Physical Collocation arrangements. Pathnet will be
allowed access to the POI on non-discriminatory terms.
3.11 Pathnet is responsible for providing its own fiber
facilities to the POI outside USW's Central Office. USW
will extend the fiber facility from the POI on a USW
fiber cable from the POI to a Fiber Distribution Panel
(FDP). From the FDP additional fiber, conduit and
associated riser structure will then be provided by USW
to continue the run to Pathnet's telecommunications
equipment or Collocation area. Where there is an
adjacent collocation arrangement, the specifics will be
determined on a site to site basis.
3.12 The Collocation entrance facility is assumed to be fiber
optic cable and meets industry standards (GR. 20 Core).
Metallic sheath cable is not considered a standard
Collocation entrance facility. Requests for non-standard
entrances will be considered on an individual case basis
including an evaluation of the feasibility of the
request. All costs and provisioning intervals will be
developed on an individual case basis.
3.13 Dual entry into a USW Central Office will be provided
only when two entry points pre-exist and duct space is
available. USW will not initiate construction of a
second, separate Collocation entrance facility solely
for Collocation. If USW
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requires a Collocation entrance facility for its own
use, then the needs of Pathnet will also be taken into
consideration.
3.14 Where Collocation entrance facilities are not available,
USW will offer Pathnet USW OCn, DS3, or DS1 Private Line
Transport Services in accordance with Tariff terms and
conditions, in lieu of entrance facilities to be
terminated at Pathnet's collocated equipment.
3.15 USW will review the security requirements and hours of
access with Pathnet. This will include issuing keys, ID
cards, and explaining the access control processes,
including but not limited to the requirement that all
Pathnet approved personnel are subject to trespass
violations if outside of designated and approved areas
or if found to be providing access to unauthorized
individuals. Pathnet personnel found outside of
designated and approved areas, those being only those
areas directly adjacent to Pathnet equipment or Pathnet
terminated equipment, will be escorted away from those
non-approved areas and reported to USW Security.
Repeated violations will result in denial of access to
USW facilities and a possibility of criminal penalties.
3.16 USW shall provide access to existing eyewash stations,
bathrooms, and drinking water within the collocated
facility on a twenty-four (24) hours per day, seven (7)
days per week basis for Pathnet personnel and its
designated agents.
3.17 Pathnet shall be restricted to corridors, stairways, and
elevators that provide direct access to Pathnet's space,
or to the nearest restroom facility from Pathnet's
designated space, and such direct access will be
outlined during Pathnet's orientation meeting. Access
shall not be permitted to any other portion of the
building, except to the roof top where microwave
collocation has been installed.
3.18 Nothing herein shall be construed to limit Pathnet's
ability to obtain any or all types of USW Caged Physical
Collocation in a single location, provided space is
available.
3.19 Conversion of the Virtual Collocation (e.g.,
Virtual-to-Cageless Physical) is available upon request
and submission of a Quote Preparation Fee (QPF) by
Pathnet. Pathnet must pay all associated conversion
charges. Conversions shall be in accordance with USW's
standard Collocation provisioning processes. If
required, Pathnet will submit separate service orders
for grooming Pathnet's existing end user circuits to the
new Collocation. Upon request, Pathnet may convert a
non-completed Virtual Collocation Order to a Cageless
Physical Collocation. USW will consider requests to use
existing time frames if possible; such requests shall
not be unreasonably denied.
SECTION 4. COLLOCATION TERMS AND CONDITIONS - VIRTUAL COLLOCATION
4.1 USW is responsible for installing and maintaining
Virtually Collocated equipment for the purpose of
Interconnection of the mutual networks and to access
UNEs.
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4.2 Pathnet will be responsible for obtaining and providing
to USW administrative codes, (e.g., common language
codes, for all equipment provided by Pathnet and
installed in Wire Center buildings).
4.3 Pathnet shall ensure that upon receipt of Pathnet's
Virtually Collocated equipment by USW, all warranties
and access to ongoing technical support are passed
through to USW, all at Pathnet's expense. Pathnet shall
advise the manufacturer and seller of the virtually
collocated equipment that Pathnet's equipment will be
possessed, installed and maintained by USW.
4.4 Pathnet's virtually collocated equipment must comply
with the Bellcore Network Equipment Building System
(NEBS) Level 1 Generic Equipment Requirements
TR-NWT-000063, USW Wire Center environmental and
transmission standards and any statutory (local, state
or federal) and/or regulatory requirements in effect at
the time of equipment installation or that subsequently
become effective. Pathnet shall provide USW interface
specifications (e.g., electrical, functional, physical
and software) of Pathnet's virtually collocated
equipment.
4.5 Pathnet must specify all software options and associated
plug-ins for its virtually collocated equipment.
4.6 Pathnet will be responsible for payment of USW Direct
Training Charges associated with training USW employees
for the maintenance, operation and installation of
Pathnet's Virtually Collocated equipment when such
equipment is different than the standard equipment used
by USW in that Central Office. This includes per diem
charges (i.e., expenses based upon effective USW labor
agreements), travel and lodging incurred by USW
employees attending a vendor-provided training course.
4.7 Pathnet will be responsible for payment of charges
incurred in the maintenance and/or repair of Pathnet's
virtually collocated equipment.
SECTION 5. COLLOCATION TERMS AND CONDITIONS - CAGED PHYSICAL COLLOCATION
5.1 USW shall provide Caged Physical Collocation to Pathnet
for access to UNEs and/or terminating EAS/Local traffic,
except that USW may provide for Cageless Physical or
Virtual Collocation if USW demonstrates to the
Commission that Caged Physical Collocation is not
practical for technical reasons such as space
limitations, as provided in Section 251(c)(6) of the
Act. USW shall provide basic telephone service with a
connection jack at the request of Pathnet for the
Physical or Cageless Physical Collocated space. Upon
Pathnet's request, this service shall be available per
standard USW business service provisioning processes.
5.2 Caged Physical Collocation is offered in Wire Centers on
a space-available, first come, first-served basis.
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5.3 The minimum standard amount of leased floor space is 100
square feet. Pathnet must begin equipment installation
within sixty (60) days of cage acceptance and actively
use 50% of the space to provide telecommunication
services within twelve (12) months of acceptance. If USW
identifies under utilized space, in caged collocation
installations over 100 square feet, USW reserves the
right to reclaim the unused portion and allocate it to
another Co-Provider if a request is pending and an out
of space condition exists in that Central Office,
provided that the space granted to the Co-Provider shall
not be less than 100 square feet unless agreed to by
both Parties.
5.4 Pathnet's leased floor space will be separated from
other Co-Providers and USW space through a cage
enclosure unless the space is provided under a shared
space Collocation arrangement in which case there will
not be any cage delineation. USW will construct the cage
enclosure. All Pathnet equipment placed will meet NEBS
Level 1 standards, will be installed in accordance USW
Technical Publications 77390 and 77367, and will comply
with any local, state, or federal regulatory
requirements in effect at the time of equipment
installation or that subsequently become effective.
These two Technical Publications must be in the
possession of Pathnet and its agents at the site during
all work activities.
5.5 USW will designate and design the floor space within
each Wire Center which will constitute Pathnet's leased
space.
5.6 When USW constructs the Caged Physical space, USW will
ensure that the necessary construction work (racking,
ducting, caging, grounding, terminations, environmental
designs, AC and DC power, etc.) is performed to build
Pathnet's leased physical space and the riser from the
vault to the leased physical space, pursuant to
Technical Publication 77350.
5.7 Pathnet owns and is responsible for the installation,
maintenance and repair of its telecommunications
equipment located within the physically collocated space
rented from USW.
5.8 Shared Space Caged and Cageless Physical Collocation is
covered in subsequent Sections of this Agreement.
5.9 For Collocation entrance facilities, USW will extend
USW-provided and owned fiber optic cable from the POI to
Pathnet's leased physical space. Pathnet will procure,
install and maintain all fiber optic facilities up to
the USW designated POI.
5.10 Testing of the completed Collocation components will be
performed. USW will test to the demarcation points of
its portion of affected circuits. Subsequent joint
testing between the Parties will be conducted in
accordance with the rates and terms of this Agreement.
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5.11 If, during installation, USW determines Pathnet
activities or equipment do not comply with the NEBS
standards listed in this Section or are otherwise
unsafe, non-standard or in violation of any applicable
laws or regulations, USW has the right to stop all
Collocation work until the situation is remedied. If
such conditions pose an immediate threat to the safety
of USW employees, interfere with the performance of
USW's service obligations, or pose an immediate threat
to the physical integrity of the conduit system, cable
facilities or other equipment in the Central Office, USW
may perform such work and/or take action as is necessary
to correct the condition at Pathnet's expense.
5.12 If, at any time, USW determines that the equipment or
the installation does not meet technical standard
requirements, Pathnet will be responsible for the costs
associated with the removal (should Pathnet opt for
removal as resolution), modification to, or installation
of the equipment to bring it into compliance. If Pathnet
fails to correct any non-compliance within fifteen (15)
calendar days of written notice of non-compliance, USW
will have the equipment removed or the condition
corrected at Pathnet's expense.
SECTION 6. COLLOCATION TERMS AND CONDITIONS - CAGELESS PHYSICAL COLLOCATION
6.1 Pathnet owns and is responsible for the installation,
maintenance and repair of its telecommunications bays
and equipment located within the space leased from USW.
Pathnet may access its own Collocated equipment.
6.2 Requests for multiple bay space will be provided in
adjacent bays where possible. When contiguous space is
not available, bays may be commingled with other
Co-Providers' equipment bays. Pathnet may request
through the USW Space Reclamation Policy, a price quote
to rearrange USW equipment to provide Pathnet with
adjacent space.
6.3 All equipment placed will be subject to random audits
conducted by USW. These audits will determine whether
the equipment meets the standards required by this
Agreement. Pathnet will be notified of the results of
this audit and shall rectify all non-conformities within
thirty (30) calendar days of notification. All
non-conforming items remaining after this thirty (30)
day period may be rectified by USW and the cost assessed
to Pathnet.
SECTION 7. RATE ELEMENTS - ALL COLLOCATION
7.1 USW will recover Collocation costs through both
recurring and nonrecurring charges. The charges are
determined by the scope of work to be performed based on
the information provided by Pathnet on the Collocation
Order Form. If feasibility determines space is
available, a quote is then developed by USW for the work
to be performed.
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7.2 The following elements as specified in Exhibit 1 of this
Agreement are used to develop a price quotation in
support of Collocation.
7.3 Quote Preparation Fee. A non-refundable charge for the
work required to verify space and develop a price quote
for the total costs to Pathnet for its Collocation
request. The QPF is not credited against the total
nonrecurring charges of the job and recovers the
engineering and processing costs of the order.
7.4 Collocation Entrance Facility Charge. Depending on the
number of Entrance Facilities requested (single or dual)
the Entrance Facility charge is applied per fiber pair.
At each entrance Pathnet will deliver a minimum 12
strand fiber cable to the USW POI. The facilities from
the POI to the collocated equipment are owned, provided,
engineered, installed and maintained by USW. The
Collocation Entrance Facility includes riser, racking,
fiber placement, splicing, entrance closure,
conduit/innerduct, and core drilling.
7.5 Cable Splicing Charge. Represents the labor and
equipment to perform a subsequent splice to Pathnet
provided fiber optic cable after the initial
installation splice. Includes per-setup and
per-fiber-spliced rate elements.
7.6 -48 Volt DC Power Charge. Provides -48 volt DC power to
Pathnet collocated equipment. Charged on a per ampere
basis.
7.7 -48 Volt DC Power Cable Charge. Provides for the
transmission of -48 volt DC power to the collocated
equipment. It includes engineering, furnishing and
installing the main distribution bay power breaker,
associated power cable, cable rack and local power bay
to the closest power distribution bay. It also includes
the power cable (A and B feeds) from the local power
distribution bay to the leased physical space (for
Cageless or Caged Physical Collocation) or to the
collocated equipment (for Virtual Collocation). Charged
per A and B feeder, per foot.
7.8 Inspector Labor Charge. Provides for USW qualified
personnel, acting as an inspector, when Pathnet requires
access to the POI after the initial installation. A
call-out of an inspector after business hours is subject
to a minimum charge of three (3) hours. The minimum
call-out charge shall apply when no other employee is
present in the location, and an 'off-shift' USW employee
(or contract employee) is required to go 'on-shift' on
behalf of Pathnet.
7.9 Channel Regeneration Charge. Required when the distance
from the leased physical space (for Caged Physical
Collocation or Cageless Physical Collocation) or from
the collocated equipment (for Virtual Collocation) to
the USW network is of sufficient length to require
regeneration. The cost associated with regeneration will
be borne by Pathnet.
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7.10 Cross-Connect Terminations
7.10.1 If USW provides the equipment cable for
Pathnet, terminations of that cable,
including hardware and installation, will be
provided in the following increments:
DS0 - In blocks of 100 terminations.
DS1 - In increments of 28 terminations
DS-3 - In increments of 1 coax pair
OCn Level Terminations - In increments of 1
fiber pair
These elements include USW provided
equipment cables, terminating blocks,
installation labor and associated racking
required between Pathnet collocated
equipment and the appropriate cross-connect
device.
7.10.2 If Pathnet elects to provide the equipment
cable, rates are applied on a per
termination basis for DS0, DS1, and DS3s as
shown below:
DS0 Per Termination
DS1 Per Termination
DS3 Per Termination
OCn Level Per Termination
These elements include USW provided
termination blocks, installation labor and
associated racking between Pathnet
collocated equipment and the appropriate
cross-connect device .
7.11 Collocation Cable Racking. A charge for cable racking
required for placement of Pathnet's supplied equipment
cables from its equipment to the appropriate
cross-connect device which is provided in conjunction
with the DS0, DS1, DS3 and OCn terminations. Cable
Racking is assessed on a per foot charge based on number
of cable pairs terminated at the various cross-connect
devices.
7.12 Collocation Grounding Charge. A charge associated with
providing grounding for Pathnet's cage enclosure and
equipment. Recurring and nonrecurring charges are
assessed per foot to Pathnet's cage enclosure or common
space where required.
7.13 Heating and Air Conditioning Charge. Environmental
temperature control required for proper operation of
electronic telecommunications equipment.
7.14 Security Charge- The keys/card readers and video cameras
as may be required for Pathnet access to the USW Central
Office for the purpose of Collocation. Flat rate charges
are assessed per Pathnet, per each USW Central Office to
which access is required. If Pathnet desires to enter
unauthorized area and an escort is required, additional
charges will apply.
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SECTION 8. RATE ELEMENTS - VIRTUAL COLLOCATION
The following rate elements apply uniquely to Virtual Collocation.
8.1 Maintenance Labor -- Provides for the labor necessary
for repair of out of service and/or service-affecting
conditions and preventative maintenance of Pathnet
virtually collocated equipment. Pathnet is responsible
for ordering and delivering maintenance spares. USW will
perform maintenance and/or repair work upon receipt of
the replacement maintenance spare and/or equipment from
Pathnet. A call-out of a maintenance technician after
business hours is subject to a minimum charge of three
(3) hours.
8.2 Training Labor -- Provides for the billing of
vendor-provided training for USW personnel on a
metropolitan service area basis, necessary for Pathnet
virtually collocated equipment which is different from
USW provided equipment. USW will require three USW
employees to be trained per metropolitan service area in
which Pathnet virtually collocated equipment is located.
If, by an act of USW, trained employees are relocated,
retired, or are no longer available, USW will not
require Pathnet to provide training for additional USW
employees for the same virtually collocated equipment in
the same metropolitan area.
8.3 Equipment Bay -- Provides mounting space for Pathnet
virtually collocated equipment. Each bay includes the 7
foot bay (or metric equivalent), its installation, and
all necessary environmental supports. Mounting space on
the bay, including space for the fuse panel and air gaps
necessary for heat dissipation is limited to 78 inches.
The monthly rate is applied per shelf.
8.4 Engineering Labor -- Provides the planning and
engineering of Pathnet virtually collocated equipment at
the time of installation, change or removal.
8.5 Installation Labor -- Provides for the installation,
change or removal of Pathnet virtually collocated
equipment.
SECTION 9. RATE ELEMENTS - CAGED PHYSICAL COLLOCATION
9.1 Cage Enclosure. The Cage Enclosure element includes the
material and labor to construct the enclosure. Pathnet
may choose from USW approved contractors to construct
the cage, in accordance with USW's installation
Technical Publication 77350. It includes a nine foot
cage enclosure available in increments of 100, 200, 300
or 400 square feet, (or other size mutually agreed to),
air conditioning (to support Pathnet loads specified),
lighting (not to exceed 2 watts per square foot), and
convenience outlets (3 per cage or number required by
building code). Pricing for the Cage Enclosure will be
provided on an individual basis due to the uniqueness of
Pathnet's requirements, Central Office structure and
arrangements.
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9.2 Floor Space Lease. Provides the monthly lease for the
leased physical space, property taxes and base operating
cost without -48 volt DC power. Includes convenience 110
AC, 15 amp electrical outlets provided in accordance
with local codes and may not be used to power
telecommunications equipment or -48 volt DC power
generating equipment. Also includes maintenance for the
leased space; provides for the preventative maintenance
(climate controls, filters, fire and life systems and
alarms, mechanical systems, standard HVAC); biweekly
housekeeping services (sweeping, spot cleaning, trash
removal) of USW Wire Center areas surrounding the leased
physical space and general repair and maintenance. The
Floor Space Lease includes required aisle space on each
side of the cage enclosure, as applicable.
9.3 AC Power Charge- Standard AC outlet used by Pathnet for
the purpose of powering test equipment, tools etc.
9.4 Grounding Charge- Used to connect the Central Office
common ground to Pathnet's equipment.
SECTION 10. RATE ELEMENTS - CAGELESS PHYSICAL COLLOCATION
The supporting structure and rate elements for Cageless Physical Collocation are
the same as Caged Physical Collocation, excluding the nonrecurring cage
enclosure and grounding charge. The minimum square footage is 9 square feet per
bay. AC power outlet will be provided to every other bay in the lineup. In those
instances where single bays are requested and placed, the single bay will have
it's own AC outlet.
SECTION 11. RATE ELEMENTS - ICDF COLLOCATION
11.1 The nonrecurring rates for the appropriate cross-connect
device recover USW's investment (including engineering
and installation) for all DS0, DS1, DS3 terminations,
including tie cables, appropriate cross-connect device
terminations, and terminations on the applicable USW
frame.
11.2 The recurring rate element for the appropriate
cross-connect device recovers USW's expense for the
maintenance and administration for all DS0, DS1, DS3
terminations, including tie cables, appropriate
cross-connect device terminations, and termination on
the applicable USW frame.
SECTION 12. ORDERING - VIRTUAL COLLOCATION
12.1 Upon receipt of a Collocation Order Form and QPF, USW
will perform a feasibility study to determine if
adequate space can be found for the placement of
Pathnet's equipment within the Central Office. The
feasibility study will be completed within seven (7)
calendar days of receipt of the QPF. If space is
available, USW will develop a price quotation within
thirty five (35) calendar days of completion of the
feasibility study. Subsequent requests to augment an
existing Collocation also require receipt of a Change
Order Form and QPF. Adding plug-ins, e.g., DS1 or
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DS3 cards to existing Virtually Collocated equipment
will be processed with a shorter interval.
12.2 Virtual Collocation price quotes will be honored for
thirty (30) calendar days from the date the quote is
provided to Pathnet. During this period the Collocation
entrance facility and space is reserved pending
Pathnet's approval of the quoted charges. If Pathnet
agrees to terms as stated in the Collocation Price
Quote, Pathnet must respond within 30 calendar days with
a signed quote, a down payment check for 50% down of the
quoted charges and proof of insurance. Under normal
conditions, USW will complete the installation within
ninety (90) calendar days from receipt of Pathnet's
equipment provided that space and power is available.
Depending on specific Wire Center conditions, shorter
intervals may be available. Any portions that cannot be
completed within ninety (90) calendar days will be
negotiated with Pathnet on an individual case basis. The
installation of line cards and other minor modifications
shall be performed by USW on shorter intervals and in no
instance shall any such interval exceed thirty (30)
calendar days. Final Payment is due upon completion.
Recurring monthly charges for the Collocation commences
upon completion of the Collocation.
SECTION 13. ORDERING - CAGED PHYSICAL COLLOCATION
13.1 Upon receipt of a Collocation Order Form and QPF, USW
will perform a feasibility study to determine if
adequate space can be found for the placement of
Pathnet's equipment within the Central Office. The
feasibility study will be provided within ten (10)
calendar days from date of receipt of the QPF. If
Collocation entrance facilities and office space are
found to be available, USW will develop a quote for the
supporting structure within thirty five (35) calendar
days of providing the feasibility study. Caged Physical
Collocation price quotes will be honored for thirty (30)
calendar days from the date the quote is provided. Upon
receipt of the signed quote, 50% down and proof of
insurance, space will be reserved and construction by
USW will begin. The cage will be available to Pathnet
for placement of its equipment within ninety (90)
calendar days of receipt of the 50% down payment.
Depending on specific Wire Center conditions, shorter
intervals may be available. Final payment is due upon
completion of work. Recurring monthly charges for the
Collocation commence upon the completion of the
Collocation.
13.2 Due to variables in equipment availability and scope of
the work to be performed, additional time may be
required for implementation of the structure required to
support the Collocation request. Examples of structure
that may not be completed within ninety (90) calendar
days may include additional time for placement of a POI,
DC power upgrades and space reclamation required to meet
Pathnet's Collocation request.
SECTION 14 ORDERING - CAGELESS PHYSICAL COLLOCATION
14.1 Upon receipt of a Collocation Order Form and QPF, USW
will perform a feasibility study to determine if
adequate space can be found for the placement of
Pathnet's equipment within the Central Office. The
feasibility study will be provided within
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ten (10) calendar days from date of receipt of the
Collocation Order Form and QPF. If Collocation entrance
facilities and office space are found to be available,
USW will develop a quote for supporting structure within
thirty-five (35) calendar days of providing the
feasibility study. Cageless Physical Collocation price
quotes will be honored for thirty (30) calendar days
from the date the quote is provided. If Pathnet agrees
to terms as stated in the Collocation Price Quote,
Pathnet must respond within thirty (30) calendar days
with a signed quote, a check for 50% of the quoted
charges and proof of insurance. Upon receipt of the
signed quote, 50% payment and proof of insurance,
construction by USW will begin. The cageless, physical
space including equipment bays provided by Pathnet and
associated apparatus provided by USW, will be available
to Pathnet for placement of its equipment within ninety
(90) calendar days of receipt of the 50% down payment.
Depending on specific Wire Center conditions, shorter
intervals may be available. Final payment is due upon
completion of work. Recurring monthly charges for the
Collocation commence upon the completion of the
Collocation.
14.2 Due to variables in equipment availability and scope of
the work to be performed, additional time may be
required for implementation of the structure required to
support the Collocation request. Examples of structure
that may not be completed within ninety (90) calendar
days may include additional time for placement of a POI,
DC power upgrades and space reclamation required to meet
Pathnet's Collocation request.
SECTION 15. ORDERING - ICDF COLLOCATION
15.1 Upon receipt of a Collocation Order Form, USW will
verify if ICDF capacity is available at the requested
Central Office. Verification of cross-connection
capacity will be completed within seven (7) calendar
days. USW will develop a cost quotation for the
requested Collocation within thirty five (35) calendar
days from verification. Should the requested Central
Office require additional cross-connection capability
for capacity, USW will make such additional capacity
available as soon as reasonably possible.
15.2 Within thirty five (35) calendar days of the receipt by
USW from Pathnet of a request for appropriate
cross-connect device and tie cable capacity, USW will
provide Pathnet with a quotation for all recurring,
nonrecurring and construction charges associated with
the request. The estimated date of the appropriate
cross-connect device availability will also be included.
15.3 Within thirty (30) calendar days of USW providing the
quotation, Pathnet will accept or reject the quotation.
Acceptance shall require payment to USW of fifty percent
of the nonrecurring and construction charges provided on
the quotation.
15.4 As part of the ordering process, Pathnet will provide at
a minimum an eighteen month non-binding forecast for
each Wire Center in which it intends to utilize the
appropriate cross-connect device. Included in this
forecast will be the termination type (DS0, DS1, DS3)
and the quantity of each termination required.
Appropriate
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cross-connect device terminations must be ordered in
multiples of the following quantities:
100 DSO terminations
28 DS1 terminations
1 DS3 termination
SECTION 16. ORDERING - ALL COLLOCATION
Any changes, modifications or additional engineering requested by Pathnet,
subsequent to its initial order, as to the type and quantity of equipment or
other aspects of the original Collocation request, must be submitted with a
subsequent QPF and Collocation Change Form. Such requests will cause the
original Collocation job to vary from the committed ready for service date.
SECTION 17. BILLING - ALL COLLOCATION
17.1 Upon completion of the Collocation construction
activities and payment of the remaining nonrecurring
balance, USW will provide Pathnet a completion package
that will initiate the recurring Collocation charges.
USW will begin billing the monthly recurring charges
stated in the quote and completion package.
17.2 In the event USW has completed all associated
construction activities and Pathnet has not completed
its associated activities (e.g., delivering fiber to the
POI, providing tie cables for connecting to the
distribution frames, etc.), and provided that no such
Pathnet delays are directly caused by any act or
omission of USW in the provision of information
necessary to complete the engineering necessary to bring
Pathnet's fiber to the POI, USW will begin billing for
all monthly Collocation charges. When Pathnet is ready
to complete its activities, final test and turn-up will
be performed under the maintenance and repair process
contained herein.
SECTION 18. BILLING - VIRTUAL COLLOCATION
Virtual Collocation will be considered complete when the POI has been
constructed, the shared fiber Collocation entrance facility has been
provisioned, and the collocated equipment has been installed. Cooperative
testing between Pathnet and USW may be negotiated and performed to ensure
continuity and acceptable transmission parameters in the facility and equipment.
Any additional joint testing can be provided under rates and terms specified in
this Agreement.
SECTION 19. BILLING - CAGED AND CAGELESS PHYSICAL COLLOCATION
Upon completion of USW construction activities and Pathnet payment of the
remainder of the nonrecurring charges, USW will allow Pathnet access to the
Collocation space. USW will activate monthly billing for the leased space and
turn over access to the space with all security and access privileges. Pathnet
will sign off on the completion of the physical space via the Caged or Cageless
Physical Collocation completion package. Pathnet may then proceed with the
installation of its equipment in the Collocation space. Once Pathnet's equipment
has been installed and cable is provided for the Pathnet's equipment
terminations, USW will complete all remaining work activities.
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SECTION 20. MAINTENANCE AND REPAIR
20.1 Virtual Collocation
20.1.1 Maintenance Labor, Inspector Labor,
Engineering Labor and Equipment Labor
business hours are considered to be Monday
through Friday, 8:00am to 5:00pm (local
time) and after business hours are after
5:00pm and before 8:00am (local time),
Monday through Friday, all day Saturday,
Sunday and holidays.
20.1.2 Installation and maintenance of Pathnet's
virtually collocated equipment will be
performed by USW or a USW authorized
vendor.
20.1.3 Upon failure of Pathnet's virtually
collocated equipment, Pathnet is
responsible for transportation and
delivery of maintenance spares to USW at
the Wire Center housing the failed
equipment. Pathnet is responsible for
purchasing and maintaining a supply of
spares.
20.2 Caged Physical Collocation
Pathnet is solely responsible for the maintenance and
repair of its equipment located within Pathnet's caged
space. If two or more Co-Providers agree to a Shared
Space Caged Physical Collocation arrangement, such
collocators are solely responsible for any and all
maintenance, security and repair arrangements
necessitated by such sharing. USW assumes no liability
for any damages of any kind relating to Shared Space
Caged Physical Collocation or related personnel disputes
among the parties to those arrangements.
20.3 Cageless Physical Collocation
Pathnet is solely responsible for the maintenance and
repair of its equipment located within Pathnet's
cageless physical space.
20.4 ICDF Collocation
Pathnet is responsible for block and jumper maintenance
at the appropriate cross-connect device and using
correct procedures to dress and terminate jumpers on the
appropriate cross-connect device, including using
fanning strips, retaining rings, and having jumper wire
on hand, as needed. Additionally, Pathnet is required to
provide its own tools for such operations.
SECTION 21. PAYMENT
21.1 Amounts payable under this Agreement are due and payable
within thirty (30) calendar days after the date of
invoice.
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21.2 Should Pathnet dispute, in good faith, any portion of
the monthly billing under this Agreement, Pathnet will
notify USW in writing within thirty (30) calendar days
of the receipt of such billing, identifying the amount,
reason and rationale of such dispute. Pathnet shall pay
all amounts due. Both Pathnet and USW agree to expedite
the investigation of any disputed amounts in an effort
to resolve and settle the dispute prior to initiating
any other rights or remedies. Should the dispute be
resolved in Pathnet's favor and the resolved amount did
not appear as a credit on Pathnet's next invoice from
USW, USW will reimburse Pathnet the resolved amount plus
interest from the date of payment. The amount of
interest will be calculated using the late payment
factor that would have applied to such amount had it not
been paid on time. Similarly, in the event Pathnet
withholds payment for a disputed charge, and upon
resolution of the matter it is determined that such
payments should have been made to USW, USW is entitled
to collect interest on the withheld amount, subject to
the above provisions.
21.3 USW will determine Pathnet's credit status based on
previous payment history with USW or credit reports such
as Dun and Bradstreet. If Pathnet has not established
satisfactory credit with USW or if Pathnet is repeatedly
delinquent in making its payments, USW may require a
deposit to be held as security for the payment of
charges. "Repeatedly delinquent" means being thirty (30)
calendar days or more delinquent for three (3)
consecutive months. The deposit may not exceed the
estimated total monthly charges for a two (2) month
period. The deposit may be a surety bond, a letter of
credit with terms and conditions acceptable to USW or
some other form of mutually acceptable security such as
a cash deposit. Required deposits are due and payable
within ten (10) calendar days after demand in accordance
with Commission requirements.
21.4 Interest will be paid on cash deposits at the rate
applying to deposits under applicable Commission rules,
regulations, or Tariffs. Cash deposits and accrued
interest will be credited to Pathnet's account or
refunded, as appropriate, upon the earlier of the
termination of this Agreement or the establishment of
satisfactory credit with USW, which will generally be
one full year of timely payments in full by Pathnet. The
fact that a deposit has been made does not relieve
Pathnet from any requirements of this Agreement.
21.5 USW may review Pathnet's credit standing and modify the
amount of deposit required.
21.6 The late payment charge for amounts that are billed
under this Agreement shall be in accordance with
Commission requirements.
SECTION 22. TAXES
Each Party purchasing services hereunder shall pay or otherwise be responsible
for all federal, state, or local sales, use, excise, gross receipts, transaction
or similar taxes, fees or surcharges levied against or upon such purchasing
Party (or the providing Party when such providing Party is permitted to pass
along to the purchasing Party such taxes, fees or surcharges), except for any
tax on either Party's corporate existence, status or income. Whenever possible,
these
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amounts shall be billed as a separate item on the invoice. To the extent a sale
is claimed to be for resale tax exemption, the purchasing Party shall furnish
the providing Party a proper resale tax exemption certificate as authorized or
required by statute or regulation by the jurisdiction providing said resale tax
exemption. Until such time as a resale tax exemption certificate is provided, no
exemptions will be applied.
SECTION 23. INSURANCE
Pathnet shall at all times during the term of this Agreement, at its own cost
and expense, carry and maintain the insurance coverage listed below with
insurers having a "Best's" rating of B+XIII.
23.1 Workers' Compensation with statutory limits as required
in the state of operation; and Employers' Liability
insurance with limits of not less than $100,000 each
accident.
23.2 Commercial General Liability insurance covering claims
for bodily injury, death, personal injury or property
damage occurring or arising out of the use or occupancy
of the premises, including coverage for independent
contractor's protection (required if any work will be
subcontracted), premises-operations, products and/or
completed operations and contractual liability with
respect to the liability assumed by Pathnet hereunder.
The limits of insurance shall not be less than
$1,000,000 each occurrence and $2,000,000 general
aggregate limit.
23.3 Comprehensive automobile liability insurance covering
the ownership, operation and maintenance of all owned,
non-owned and hired motor vehicles with limits of not
less than $1,000,000 per occurrence for bodily injury
and property damage.
23.4 Umbrella/Excess Liability insurance in an amount of
$10,000,000 excess of Commercial General Liability
insurance specified above. These limits may be obtained
through any combination of primary and excess or
umbrella liability insurance so long as the total limit
is $11,000,000.
23.5 "All Risk" Property coverage on a full replacement cost
basis insuring all of Pathnet personal property situated
on or within the premises. Pathnet may elect to purchase
business interruption and contingent business
interruption insurance. USW has no liability for loss of
profit or revenues should an interruption of service
occur.
23.6 Pathnet and USW each waive any and all rights of
recovery against the other, or against the officers,
employees, agents, representatives or the other, or
other tenants for loss or damage to such waiving Party
arising from any cause covered by any property insurance
required to be carried by such Party. Each Party shall
give notice to insurance carrier(s) that the mutual
waiver of subrogation is contained in this Agreement.
23.7 Upon the execution hereof, Pathnet shall provide
certificate(s) of insurance evidencing coverage, and
annually thereafter within ten (10) calendar days of
renewal of any coverage maintained pursuant to this
Section. Such certificates
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shall; (1) name USW as an additional insured under
commercial general liability coverage as respects USW's
interests; (2) provide USW thirty (30) calendar days
prior written notice of cancellation of, material change
or exclusions in the policy(s) to which certificate(s)
relate; (3) indicate that coverage is primary and not
excess of, or contributory with, any other valid and
collectible insurance purchased by USW; and (4)
policy(s) provide severability of interest/cross
liability coverage.
SECTION 24. FORCE MAJEURE
Neither Party shall be liable for any delay or failure in performance of any
part of this Agreement from any cause beyond its control and without its fault
or negligence including, without limitation, acts of nature, acts of civil or
military authority, government regulations, embargoes, epidemics, terrorist
acts, riots, insurrections, fires, explosions, earthquakes, nuclear accidents,
floods, work stoppages, equipment failure, power blackouts, volcanic action,
other major environmental disturbances, unusually severe weather conditions,
inability to secure products or services of other persons or transportation
facilities or acts or omissions of transportation carriers (collectively, a
"Force Majeure Event"). The Party affected by a Force Majeure Event shall give
prompt notice to the other Party, shall be excused from performance of its
obligations hereunder on a day to day basis to the extent those obligations are
prevented by the Force Majeure Event, and shall use reasonable efforts to remove
or mitigate the Force Majeure Event. In the event of a labor dispute or strike
the Parties agree to provide service to each other at a level equivalent to the
level they provide themselves.
SECTION 25. LIMITATION OF LIABILITY
25.1 Each Party shall be liable to the other for direct
damages for any loss, defect or equipment failure
resulting from the causing Party's conduct or the
conduct of its agents or contractors in performing the
obligations contained in this Agreement.
25.2 Neither Party shall be liable to the other for indirect,
incidental, consequential, or special damages, including
(without limitation) damages for lost profits, lost
revenues, lost savings suffered by the other Party
regardless of the form of action, whether in contract,
warranty, strict liability, tort, including (without
limitation) negligence of any kind and regardless of
whether the Parties know the possibility that such
damages could result.
25.3 Except for indemnity obligations, each Party's liability
to the other Party for any loss relating to or arising
out of any act or omission in its performance of this
Agreement, whether in contract or in tort, shall be
limited to the total amount that is or would have been
charged to the other Party by such breaching Party for
the service(s) or function(s) not performed or
improperly performed.
25.4 Nothing contained in this Section shall limit either
Party's liability to the other for intentional,
malicious misconduct.
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25.5 Nothing contained in this Section shall limit either
Party's obligations of indemnification as specified in
the Indemnity Section of this Agreement.
25.6 Neither Party shall be liable to the other under any
theory including indemnity on account of such Party's
failure or neglect to have or maintain a system or
systems that are Year 2000 compliant. As the Parties
approach the Year 2000, date information associated with
any interfaces between the Parties is expected to remain
as it is. Any changes in the interface format associated
with date information will be negotiated and agreed to
by the Parties prior to any changes.
SECTION 26. INDEMNITY
26.1 With respect to third party claims, the Parties agree to
indemnify each other as follows:
26.1.1 Except for claims made by end users of one
Party against the other Party, which claims
are based on defective or faulty services
provided by the other Party to the one
Party, each of the Parties agrees to
release, indemnify, defend and hold harmless
the other Party and each of its officers,
directors, employees and agents (each an
"Indemnitee") from and against and in
respect of any loss, debt, liability,
damage, obligation, claim, demand, judgment
or settlement of any nature or kind, known
or unknown, liquidated or unliquidated
including, but not limited to, costs and
attorneys' fees, whether suffered, made,
instituted, or asserted by any other party
or person, for invasion of privacy, personal
injury to or death of any person or persons,
or for loss, damage to, or destruction of
property, whether or not owned by others,
resulting from the indemnifying Party's
performance, breach of applicable law, or
status of its employees, agents and
subcontractors; or for failure to perform
under this Agreement, regardless of the form
of action.
26.1.2 Where the third party claim is made by (or
through) an end user of one Party against
the other Party, which claim is based on
defective or faulty services provided by the
other Party to the one Party then there
shall be no obligation of indemnity unless
the act or omission giving rise to the
defective or faulty services is shown to be
intentional, malicious misconduct of the
other Party.
26.1.3 If the claim is made by (or through) an end
user and where a claim is in the nature of a
claim for invasion of privacy, liable,
slander, or other claim based on the content
of a transmission, and it is made against a
Party who is not the immediate provider of
the Telecommunications Service to the end
user (the indemnified provider), then in the
absence of fault or neglect on the part of
the indemnified provider, the Party who is
the immediate seller of such
Telecommunications Service shall indemnify,
defend and hold harmless the indemnified
provider from such claim.
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26.2 The indemnification provided herein shall be conditioned
upon:
26.2.1 The indemnified Party shall
promptly notify the indemnifying
Party of any action taken against
the indemnified Party relating to
the indemnification. Failure to so
notify the indemnifying Party shall
not relieve the indemnifying Party
of any liability that the
indemnifying Party might have,
except to the extent that such
failure prejudices the indemnifying
Party's ability to defend such
claim.
26.2.2 The indemnifying Party shall have
sole authority to defend any such
action, including the selection of
legal counsel, and the indemnified
Party may engage separate legal
counsel only at its sole cost and
expense.
26.2.3 In no event shall the indemnifying
Party settle or consent to any
judgment pertaining to any such
action without the prior written
consent of the indemnified Party.
SECTION 27. WARRANTIES
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, THE PARTIES AGREE THAT
NEITHER PARTY HAS MADE, AND THAT THERE DOES NOT EXIST, ANY WARRANTY, EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS
FOR A PARTICULAR PURPOSE.
SECTION 28. ASSIGNMENT
28.1 Neither Party may assign or transfer (whether by
operation of law or otherwise) this Agreement (or any
rights or obligations hereunder) to a third party
without the prior written consent of the other Party.
Notwithstanding the foregoing, either Party may assign
or transfer this Agreement to a corporate affiliate or
an entity under its common control; however, if
Pathnet's assignee or transferee has an Interconnection
Agreement with USW, no assignment or transfer of this
Agreement shall be effective without the prior written
consent of USW. Such consent shall include appropriate
resolutions of conflicts and discrepancies between the
assignee's or transferee's Interconnection agreement and
this Agreement. Any attempted assignment or transfer
that is not permitted is void ab initio. Without
limiting the generality of the foregoing, this Agreement
shall be binding upon and shall inure to the benefit of
the Parties' respective successors and assigns.
28.2 Without limiting the generality of the foregoing
subsection, any merger, dissolution, consolidation or
other reorganization of Pathnet, or any sale, transfer,
pledge or other disposition by Pathnet of securities
representing more than 50% of the securities entitled to
vote in an election of Pathnet's board of directors or
other similar governing body, or any sale, transfer,
pledge or other disposition by Pathnet of substantially
all of its assets, shall be deemed a transfer of
control. If
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any entity, other than Pathnet, involved in such merger,
dissolution, consolidation, reorganization, sale,
transfer, pledge or other disposition of Pathnet has an
Interconnection Agreement with USW, the Parties agree
that only one agreement, either this Agreement or the
Interconnection Agreement of the other entity, will
remain valid. All other interconnection agreements will
be terminated. The Parties agree to work together to
determine which Interconnection Agreement should remain
valid and which should terminate. In the event the
Parties cannot reach agreement on this issue, the issue
shall be resolved through the Dispute Resolution process
contained in this Agreement.
SECTION 29. DEFAULT
If either Party defaults in the payment of any amount due hereunder, or if
either Party violates any other material provision of this Agreement, and such
default or violation shall continue for thirty (30) calendar days after written
notice thereof, the other Party may seek relief in accordance with the Dispute
Resolution provision of this Agreement. The failure of either Party to enforce
any of the provisions of this Agreement or the waiver thereof in any instance
shall not be construed as a general waiver or relinquishment on its part of any
such provision, but the same shall, nevertheless, be and remain in full force
and effect.
SECTION 30. DISCLAIMER OF AGENCY
Except for provisions herein expressly authorizing a Party to act for another,
nothing in this Agreement shall constitute a Party as a legal representative or
agent of the other Party, nor shall a Party have the right or authority to
assume, create or incur any liability or any obligation of any kind, express or
implied, against or in the name or on behalf of the other Party unless otherwise
expressly permitted by such other Party. Except as otherwise expressly provided
in this Agreement, no Party undertakes to perform any obligation of the other
Party whether regulatory or contractual, or to assume any responsibility for the
management of the other Party's business.
SECTION 31. NONDISCLOSURE
31.1 All information, including but not limited to
specifications, microfilm, photocopies, magnetic disks,
magnetic tapes, drawings, sketches, models, samples,
tools, technical information, data, employee records,
maps, financial reports, and market data, (i) furnished
by one Party to the other Party dealing with end user
specific, facility specific, or usage specific
information, other than end user information
communicated for the purpose of providing directory
assistance or publication of directory database, or (ii)
in written, graphic, electromagnetic, or other tangible
form and marked at the time of delivery as
"Confidential" or "Proprietary", or (iii) communicated
and declared to the receiving Party at the time of
delivery, or by written notice given to the receiving
Party within ten (10) calendar days after delivery, to
be "Confidential" or "Proprietary" (collectively
referred to as "Proprietary Information"), shall remain
the property of the disclosing Party. A Party who
receives Proprietary Information via an oral
communication may request written confirmation that the
material is Proprietary Information. A Party who
delivers Proprietary Information via an oral
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communication may request written confirmation that the
Party receiving the information understands that the
material is Proprietary Information.
31.2 Upon request by the disclosing Party, the receiving
Party shall return all tangible copies of Proprietary
Information, whether written, graphic or otherwise,
except that the receiving Party may retain one copy for
archival purposes.
31.3 Each Party shall keep all of the other Party's
Proprietary Information confidential and shall use the
other Party's Proprietary Information only in connection
with this Agreement. Neither Party shall use the other
Party's Proprietary Information for any other purpose
except upon such terms and conditions as may be agreed
upon between the Parties in writing.
31.4 Unless otherwise agreed, the obligations of
confidentiality and non-use set forth in this Agreement
do not apply to such Proprietary Information as:
31.4.1 was at the time of receipt already known to
the receiving Party free of any obligation
to keep it confidential evidenced by written
records prepared prior to delivery by the
disclosing Party; or
31.4.2 is or becomes publicly known through no
wrongful act of the receiving Party; or
31.4.3 is rightfully received from a third person
having no direct or indirect secrecy or
confidentiality obligation to the disclosing
Party with respect to such information; or
31.4.4 is independently developed by an employee,
agent, or contractor of the receiving Party
which individual is not involved in any
manner with the provision of services
pursuant to the Agreement and does not have
any direct or indirect access to the
Proprietary Information; or
31.4.5 is disclosed to a third person by the
disclosing Party without similar
restrictions on such third person's rights;
or
31.4.6 is approved for release by written
authorization of the disclosing Party; or
31.4.7 is required to be made public by the
receiving Party pursuant to applicable law
or regulation provided that the receiving
Party shall give sufficient notice of the
requirement to the disclosing Party to
enable the disclosing Party to seek
protective orders.
31.5 Nothing herein is intended to prohibit a Party from
supplying factual information about its network and
Telecommunications Services on or connected to its
network to regulatory agencies including the Federal
Communications Commission and the Commission so long as
any confidential obligation is protected.
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31.6 Effective Date Of This Section. Notwithstanding any
other provision of this Agreement, the Proprietary
Information provisions of this Agreement shall apply to
all information furnished by either Party to the other
in furtherance of the purpose of this Agreement, even if
furnished before the date of this Agreement.
SECTION 32. SURVIVAL
Any liabilities or obligations of a Party for acts or omissions prior to the
cancellation or termination of this Agreement; any obligation of a Party under
the provisions regarding indemnification, Confidential or Proprietary
Information, limitations of liability, and any other provisions of this
Agreement which, by their terms, are contemplated to survive (or to be performed
after) termination of this Agreement, shall survive cancellation or termination
hereof.
SECTION 33. DISPUTE RESOLUTION
33.1 If any claim, controversy or dispute between the
Parties, their agents, employees, officers, directors or
affiliated agents should arise, and the Parties do not
resolve it in the ordinary course of their dealings (the
"Dispute"), then it shall be resolved in accordance with
the dispute resolution process set forth in this
Section. Each notice of default, unless cured within the
applicable cure period, shall be resolved in accordance
herewith.
33.2 At the written request of either Party, and prior to any
other formal dispute resolution proceedings, each Party
shall designate an officer-level employee, at no less
than the vice president level, to review, meet, and
negotiate, in good faith, to resolve the Dispute. The
Parties intend that these negotiations be conducted by
non-lawyer, business representatives, and the locations,
format, frequency, duration, and conclusions of these
discussions shall be at the discretion of the
representatives. By mutual agreement, the
representatives may use other procedures, such as
mediation, to assist in these negotiations. The
discussions and correspondence among the representatives
for the purposes of these negotiations shall be treated
as Confidential Information developed for purposes of
settlement, and shall be exempt from discovery and
production, and shall not be admissible in any
subsequent arbitration or other proceedings without the
concurrence of both of the Parties.
33.3 If the vice-presidential level representatives have not
reached a resolution of the Dispute within thirty (30)
calendar days after the matter is referred to them, then
either Party may demand that the Dispute be settled by
arbitration. Such an arbitration proceeding shall be
conducted by a single arbitrator, knowledgeable about
the telecommunications industry. The arbitration
proceedings shall be conducted under the then current
rules of the American Arbitration Association ("AAA").
The Federal Arbitration Act, 9 U.S.C. Sections 1-16, not
state law, shall govern the arbitrability of the
Dispute. The arbitrator shall not have authority to
award punitive damages. All expedited procedures
prescribed by the AAA rules shall apply. The
arbitrator's award shall be final and binding and may be
entered in any court having jurisdiction thereof. Each
Party shall bear its own costs and
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attorneys' fees, and shall share equally in the fees and
expenses of the arbitrator. The arbitration proceedings
shall occur in the state where the dispute is taking
place in a mutually agreed upon city. It is acknowledged
that the Parties, by mutual, written agreement, may
change any of these arbitration practices for a
particular, some, or all Dispute(s).
33.4 Should it become necessary to resort to court
proceedings to enforce a Party's compliance with the
dispute resolution process set forth herein, and the
court directs or otherwise requires compliance herewith,
then all of the costs and expenses, including its
reasonable attorney fees, incurred by the Party
requesting such enforcement shall be reimbursed by the
non-complying Party to the requesting Party.
33.5 Nothing in this Section is intended to divest or limit
the jurisdiction and authority of the Commission or the
Federal Communications Commission as provided by state
or federal law.
33.6 No Dispute, regardless of the form of action, arising
out of this Agreement, may be brought by either Party
more than two (2) years after the cause of action
accrues.
SECTION 34. CONTROLLING LAW
This Agreement was negotiated by the Parties in accordance with the terms of the
Act and the laws of the state where service is provided hereunder. It shall be
interpreted solely in accordance with the terms of the Act and the applicable
state law in the state where the service is provided.
SECTION 35. JOINT WORK PRODUCT
This Agreement is the joint work product of the Parties and has been negotiated
by the Parties and their respective counsel and shall be fairly interpreted in
accordance with its terms and, in the event of any ambiguities, no inferences
shall be drawn against either Party.
SECTION 36. RESPONSIBILITY FOR ENVIRONMENTAL CONTAMINATION
Neither Party shall be liable to the other for any costs whatsoever resulting
from the presence or release of any environmental hazard that either Party did
not introduce to the affected work location. Both Parties shall defend and hold
harmless the other, its officers, directors and employees from and against any
losses, damages, claims, demands, suits, liabilities, fines, penalties and
expenses (including reasonable attorneys' fees) that arise out of or result from
(i) any environmental hazard that the indemnifying Party, its contractors or
agents introduce to the work locations or (ii) the presence or release of any
environmental hazard for which the indemnifying Party is responsible under
applicable law.
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SECTION 37. NOTICES
Any notices required by or concerning this Agreement shall be sent to the
Parties at the addresses shown below:
USW
Director - Interconnection Compliance
1801 California Street, Suite 2410
Denver, CO 80202
With copy to:
U S WEST Law Department
Attention: General Counsel, Interconnection
1801 California Street, Suite 5100
Denver, CO 80202
Pathnet
General Counsel
Suite 500
1015 31st Street NW
Washington, DC 20007
Each Party shall inform the other of any changes in the above
addresses.
SECTION 38. RESPONSIBILITY OF EACH PARTY
Each Party is an independent contractor, and has and hereby retains the right to
exercise full control of and supervision over its own performance of its
obligations under this Agreement and retains full control over the employment,
direction, compensation and discharge of all employees assisting in the
performance of such obligations. Each Party will be solely responsible for all
matters relating to payment of such employees, including compliance with social
security taxes, withholding taxes and all other regulations governing such
matters. Each Party will be solely responsible for proper handling, storage,
transport and disposal at its own expense of all (i) substances or materials
that it or its contractors or agents bring to, create or assume control over at
work locations or, (ii) waste resulting therefrom or otherwise generated in
connection with its or its contractors' or agents' activities at the work
locations. Subject to the limitations on liability and except as otherwise
provided in this Agreement, each Party shall be responsible for (i) its own acts
and performance of all obligations imposed by applicable law in connection with
its activities, legal status and property, real or personal and, (ii) the acts
of its own affiliates, employees, agents and contractors during the performance
of that Party's obligations hereunder.
SECTION 39. NO THIRD PARTY BENEFICIARIES
This Agreement does not provide and shall not be construed to provide third
parties with any remedy, claim, liability, reimbursement, cause of action, or
other privilege.
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SECTION 40. REFERENCED DOCUMENT
All references to Sections shall be deemed to be references to Sections of this
Agreement unless the context shall otherwise require. Whenever any provision of
this Agreement refers to a technical reference, technical publication, Pathnet
practice, USW practice, any publication of telecommunications industry
administrative or technical standards, or any other document specifically
incorporated into this Agreement, it will be deemed to be a reference to the
most recent version or edition (including any amendments, supplements, addenda,
or successors) of such document that is in effect, and will include the most
recent version or edition (including any amendments, supplements, addenda, or
successors) of each document incorporated by reference in such a technical
reference, technical publication, Pathnet practice, USW practice, or publication
of industry standards. The existing configuration of either Party's network may
not be in immediate compliance with the latest release of applicable referenced
documents.
SECTION 41. PUBLICITY
Neither Party shall publish or use any publicity materials with respect to the
execution and delivery or existence of this Agreement without the prior written
approval of the other Party.
SECTION 42. AMENDMENT
Pathnet and USW may mutually agree to amend this Agreement in writing. Since it
is possible that amendments to this Agreement may be needed to fully satisfy the
purposes and objectives of this Agreement, the Parties agree to work
cooperatively, promptly and in good faith to negotiate and implement any such
additions, changes and corrections to this Agreement.
SECTION 43. EXECUTED IN COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original; but such counterparts shall together constitute one
and the same instrument.
SECTION 44. HEADINGS OF NO FORCE OR EFFECT
The headings of Sections of this Agreement are for convenience of reference
only, and shall in no way define, modify or restrict the meaning or
interpretation of the terms or provisions of this Agreement.
SECTION 45. COMPLIANCE
Each Party shall comply with all applicable federal, state, and local laws,
rules and regulations applicable to its performance under this Agreement.
Without limiting the foregoing, USW and Pathnet agree to take all action
necessary to keep and maintain in full force and effect all permits, licenses,
certificates, and other authorities needed to perform their respective
obligations hereunder.
29
<PAGE> 31
SECTION 46. COMPLIANCE WITH THE COMMUNICATIONS ASSISTANCE LAW ENFORCEMENT ACT OF
1994 ("CALEA")
Each Party represents and warrants that any equipment, facilities or services
provided to the other Party under this Agreement comply with CALEA. Each Party
shall indemnify and hold the other Party harmless from any and all penalties
imposed upon the other Party for such noncompliance and shall at the
non-compliant Party's sole cost and expense, modify or replace any equipment,
facilities or services provided to the other Party under this Agreement to
ensure that such equipment, facilities and services fully comply with CALEA.
SECTION 47. COOPERATION
The Parties agree that this Agreement involves the provision of USW services in
ways such services were not previously available and the introduction of new
processes and procedures to provide and bill such services. Accordingly, the
Parties agree to work jointly and cooperatively in testing and implementing
processes for pre-ordering, ordering, maintenance, provisioning and billing and
in reasonably resolving issues which result from such implementation on a timely
basis.
SECTION 48. ENTIRE AGREEMENT
This Agreement and all exhibits, schedules, and amendments and supplements
hereto and including, but not limited to any Adjacent Collocation Arrangements,
constitutes the entire agreement between the Parties and supersedes all prior
oral or written agreements, representations, statements, negotiations,
understandings, proposals and undertakings with respect to the subject matter
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective duly authorized representatives.
PATHNET, INC. U S WEST COMMUNICATIONS, INC.
/s/ MICHAEL A. LUBIN /s/ KATHY FLEMMING
- ---------------------------- --------------------------------
Signature Signature
Michael A. Lubin Kathy Flemming
- ---------------------------- --------------------------------
Name Printed/Typed Name Printed/Typed
V.P. and General Counsel V.P. Interconnect Implementation
- ---------------------------- --------------------------------
Title Title
8/16/99 8/18/99
- ---------------------------- --------------------------------
Date Date
30
<PAGE> 1
EXHIBIT 10.39
[PATHNET LOGO]
1015 31ST STREET, N.W.
WASHINGTON, D.C. 20007
November 4, 1999
Mr. David Schaeffer
11017 Riverwood Drive
Potomac, Maryland 20854
Dear Mr. Schaeffer:
We refer to the Contribution Agreement being executed as of even
date herewith by and among yourself, Pathnet Inc. ("Pathnet" or "we" or "us")
and Pathnet Telecommunications, Inc. In connection with certain special
concessions that have been negotiated to the terms of the proposed Pathnet
Telecommunications, Inc., Stockholders Agreement, you and we hereby agree as
follows:
1. You have tendered your resignation as a director of Pathnet. The
undersigned hereby acknowledges receipt of your resignation as a director of
Pathnet and hereby agrees promptly to cause your reelection as a director of
Pathnet pursuant to the terms of the existing Pathnet Investment and
Stockholders Agreement, dated as of October 31, 1997, and as amended to date
(the "Pathnet Investment and Stockholders Agreement"), in the event that:
(i) a registration statement with Pathnet Telecommunications, Inc. as
issuer has not been filed within 60 days of the date hereof; or
(ii) the contribution and share exchange transaction (as contemplated
by the Contribution Agreement described above) has not closed
within 150 days of the date hereof.
By their countersignatures below, certain holders of the shares of Series A, B
and C Convertible Preferred Stock of Pathnet hereby agree to be bound by the
agreement set forth in this paragraph, and to vote their shares in accordance
with the terms hereof.
2. Although you remain subject to the terms of the Pathnet Investors and
Stockholders Agreement and all other surviving provisions of your Employee
Agreement Regarding Non-Disclosure, Assignment of Inventions and
Non-competition, dated August
<PAGE> 2
Mr. David Schaeffer
November 4, 1999
Page 2
28, 1995, you agree not to assert at any time or from time to time hereafter,
except in accordance with the terms of this letter agreement, any rights under
such Investment and Stockholders Agreement to elect a director of Pathnet. In
furtherance of the foregoing, you further agree that you shall cease to have
rights under the Pathnet Investment and Stockholders Agreement upon the closing
of the transactions contemplated in the Contribution Agreement.
3. Of the options that you were granted under Pathnet's 1997 Stock Option
Plan (pursuant to the Non-qualified Option Agreement, dated October 31, 1997,
between you and Pathnet), you and we hereby agree that:
(i) options for a total of 107,389 shares of Common Stock of Pathnet, Inc.
(which options shall be converted into options for a like number of
shares of Common Stock of Pathnet Telecommunications, Inc., pursuant
to a separate Stock Option Award Amendment Agreement being executed as
of even date herewith), have become fully vested and shall have an
exercise price of $3.67 per share;
(ii) all of your remaining options under such 1997 Stock Option Plan have
not vested and are hereby terminated; and
(iii) you have no other stock option or similar rights to purchase equity
securities of either Pathnet or Pathnet Telecommunications, Inc.,
except as contemplated hereby or by the terms of the Contribution
Agreement.
4. You agree that, subject to the agreements set forth herein, including
the agreements with respect to the options set forth in paragraph 3 above, you,
for and on behalf of yourself and (to the fullest extent that you have the
authority so to do) on behalf of each and all of your affiliates, do hereby
irrevocably release and forever discharge Pathnet and its affiliates from and of
any and all past, present or (if based, in whole or in part, on facts, actions,
claims or matters existing or occurring from the beginning of the world to the
date hereof) future liabilities, claims, demands, obligations, suits, damages,
levies, executions, judgments, debts, charges, actions, or causes of action, at
law or in equity, whether arising by statute, common law, or otherwise, both
direct and indirect, of whatever kind or nature (including, without limitation,
claims arising under federal or state antitrust laws, fiduciary claims, claims
for contribution or indemnification, or otherwise) arising out of, in connection
with, or in any way relating to your employment and the termination of your
position as an employee and officer of Pathnet, including without limitation,
(a) any and all rights you may otherwise have under (1) the Age Discrimination
in Employment Act of 1967, as amended; (2) any and all other federal, state or
municipal laws prohibiting discrimination in employment on the basis of sex,
race, national origin, religion, age, handicap or other invidious factor; and
(3) any and all theories of contract or tort law, whether based on common law or
otherwise relating to such employment or termination, or (b) any and all rights
you may otherwise have under stock options (including the options described in
paragraph (iii) hereof, as so modified), stock incentive
<PAGE> 3
Mr. David Schaeffer
November 4, 1999
Page 3
plans, salary, bonuses, other benefits or compensation from or on behalf of
Pathnet in your capacity as an employee thereof, or in any way relating to those
matters alleged or otherwise addressed in (c) your letter, dated July 9, 1999,
addressed to Kevin Maroni and Peter Barris, and (d) that certain letter, dated
September 23, 1999, from Nancy F. Lesser, Esq., as your legal counsel, to Bruce
Wilson, as counsel to the Company.
5. You further covenant and agree not to bring, and (to the fullest extent
that you have the authority so to do) to cause each of your affiliates not to
bring, any action, proceeding, suit, or claim, or to execute, attach, levy,
distrain or pursue any other legal process or take any steps in furtherance of
the same against any or all of Pathnet and its affiliates or their properties in
respect of the matters released under paragraph 4 hereof. For purposes of this
letter agreement the term affiliates shall be defined in the same way as the
term "Affiliates" in the Stockholders Agreement to executed pursuant to the
Contribution Agreement being executed between you and Pathnet as of the date
hereof.
6. You and we specifically and expressly contemplate that the agreements in
paragraphs 4 and 5 of this letter cover known and unknown claims for unknown as
well as known damages, claims for anticipated and unanticipated damages, and
claims for expected and unexpected consequences of both known and unknown
damages.
7. You and we agree and understand that the release of claims agreed to
herein is not intended to, and will not, affect the enforceability of this
letter agreement in any subsequent proceeding for breach of the releases given
in paragraphs 4 and 5, and is otherwise not intended to, and will not affect the
enforceability of the promises contained therein. You and we acknowledge that
the release of claims set forth in such paragraphs is not an admission of
liability by you or us.
8. In signing this letter and making the agreements contained herein, you
warrant and represent to us that (a) you have proceeded with the advice of
attorneys of your own choosing, (b) you have read the terms of this letter
agreement, (c) the terms of this letter agreement have been fully and completely
read and explained to you by your attorneys, (d) those terms are fully
understood and voluntarily accepted by you under no compulsion or duress of any
kind whatsoever, and (e) your agreement hereunder is not made in reliance on any
inducement, promise or representation, whether express or implied, other than
the inducements, representations and promises expressly set forth herein. In
signing this letter and making the agreements contained herein, we warrant and
represent to you that (a) we have proceeded with the advice of attorneys of our
own choosing, (b) we have read the terms of this letter agreement, (c) the terms
of this letter agreement have been fully and completely read and explained to us
by our attorneys, (d) those terms are fully understood and voluntarily accepted
by us under no compulsion or duress of any kind whatsoever, and (e) our
agreement hereunder is not made in reliance on any inducement, promise or
representation, whether express or implied, other than the inducements,
representations and promises expressly set forth herein.
<PAGE> 4
Mr. David Schaeffer
November 4, 1999
Page 4
9. You and we each represent, warrant and covenant to each other that
neither of us has made any assignment of, nor will either of us make any
assignment, of any claim released hereunder. You and we further covenant and
agree that any suit, action, or proceeding, whether claim or counterclaim,
brought or instituted by with or us or by our respective affiliates with respect
to this letter agreement or which in any way relates, directly or indirectly, to
the agreements of you and us or the matters described herein shall be tried only
by a court and not by a jury. You and we therefore waive any right to a trial by
jury. You and we also agree that (i) any breach of this letter agreement shall
give rise to a claim for damages, which may include without limitation,
attorneys' fees and litigation expenses and (ii) this letter agreement shall be
construed and interpreted in accordance with the laws of the Commonwealth of
Virginia applicable to contracts made and to be performed entirely within such
State.
10. You and we agree that each of us, our assigns, attorneys, agents and
representatives, and each of them, will keep the terms, amount and fact of this
letter agreement completely confidential and will not disclose any information
concerning said matters to any third party except as required by applicable law
or regulation. However, this letter may be used as evidence in any subsequent
proceeding in which either of us alleges a breach of the agreements contained
herein, and you acknowledge that we will be required to disclose the existence
and terms of this letter to the new strategic investors participating in the
contribution and reorganization transaction with Pathnet Telecommunications,
Inc.
11. You and we further agree and acknowledge by executing this letter
agreement that this document constitutes the full and complete understanding
between them with respect to the matters contained herein and that no other
understanding, verbal or written, exists between you and us.
If the foregoing accurately reflects our agreement, please so indicate by
executing this letter agreement in the space indicated below.
Sincerely,
PATHNET, INC.
By:_________________________
Name:
Title:
<PAGE> 5
Mr. David Schaeffer
November 4, 1999
Page 5
The undersigned hereby agree to be bound by the provisions of paragraph 1 of
this letter agreement:
SPECTRUM EQUITY INVESTORS, L.P.
By: _________________________________
Name:
Title:
SPECTRUM EQUITY INVESTORS II, L.P.
By: ________________________________
Name:
Title:
NEW ENTERPRISE ASSOCIATES VI,
LIMITED PARTNERSHIP
By: ________________________________
Name:
Title:
GROTECH PARTNERS IV, L.P.
By: _______________________________
Name:
Title:
<PAGE> 6
Mr. David Schaeffer
November 4, 1999
Page 6
The foregoing terms are hereby acknowledged, accepted, and agreed:
_______________________________
David Schaeffer
Date: __________________
STATE OF__________________
COUNTY OF_________________
On this ____ day of ______________________, 1999, before me, a Notary
Public within and for said County, personally appeared David Schaeffer, to me
known (or proved to me on the basis of satisfactory evidence), who, being by me
duly sworn did say that said instrument is his free act and deed.
WITNESS my hand and official seal.
_________________________________
Notary Public
<PAGE> 1
EXHIBIT 10.40
LICENSE OF MARKS
WHEREAS, Pathnet, Inc., a Delaware corporation having offices at 1015
31st Street, N.W., Washington, D.C., 20007 ("Licensor"), has adopted, used and
is using certain trademarks, service marks, logos and designs (collectively, the
"Marks"); and
WHEREAS, Pathnet Telecommunications, Inc., a Delaware corporation having
offices at 1015 31st Street, N.W., Washington, D.C., 20007 ("Licensee"), is
desirous of a license to use the Marks;
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. License. Licensor does hereby grant to Licensee the
non-exclusive right and license to use the Marks on a royalty-free basis in
connection with Licensee's telecommunications business; provided, however, that
Licensee shall retain the right to use the Marks; and provided, further, that
the aforementioned license shall terminate 180 days after the date hereof, or
sooner if revoked by Licensor by notice to Licensee, which revocation may be
made by Licensor at any time at Licensor's sole discretion.
2. Ownership of Marks. Licensee acknowledges and agrees that (a)
Licensor is the owner of the entire right, title and interest in and to the
Marks and the Marks, or any form or embodiment thereof (as well as the goodwill
now or hereafter attached to the same) are the property of and all use thereof
shall inure to the benefit of Licensor, and (b) Licensee shall have no rights to
the Marks other than those set forth in this License of Marks.
3. Approvals/Quality Control. Licensee shall, upon request of
Licensor, submit representative samples of Licensee's use of the Marks to
Licensor, without charge to Licensor, and Licensor shall have a period of ten
(10) days to notify Licensee of their acceptance or rejection.
4. Representations, Warranties and Covenants of Licensor. Licensor
represents and warrants that it is the owner of the Marks and the registrant
therefor, that Licensor has the full power and authority to license the right to
use the Marks, that Licensor has not entered into any agreements in conflict
with this License of Marks, and that there are no actions, suits or proceedings
pending or, to Licensor's knowledge, threatened against Licensor with respect to
the Marks. Licensor agrees to take all such further actions, and to execute any
and all such further documents and instruments, as may be necessary or desirable
to confirm the license executed hereby.
5. Assignment. Neither party may assign any or all of its rights or
delegate any of its duties under this Agreement without the consent of the other
party, provided, that either party hereto may assign its rights, but not its
obligations, to any Affiliate without the consent of the other party. For the
purposes of this Section 5, "Affiliate" shall mean a subsidiary or other entity
under common ownership or control.
<PAGE> 2
IN WITNESS WHEREOF, this LICENSE OF MARKS is made and effective as of
the 10 of November, 1999.
PATHNET, INC.
By /s/ MICHAEL A. LUBIN
----------------------
Name: Michael A. Lubin
Title: V.P. and General Counsel
Dated: November 10, 1999
------------------------
PATHNET TELECOMMUNICATIONS, INC.
By /s/ JAMES CRAIG
----------------------
Name: James Craig
Title: E.V.P.
Dated: November 10, 1999
------------------------
-2-
<PAGE> 1
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 25, 1995
(DATE OF
INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------------------
1995 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss before income taxes ...... $ (426,826) $ (1,743,635) $ (3,977,400) $(36,296,596)
------------ ------------ ------------ ------------
Fixed charges:
Interest expensed .............. - 415,357 - 32,572,454
Interest capitalized ........... - - - 362,321
------------ ------------ ------------ ------------
Interest ....................... - 415,357 - 32,934,775
Amortization of bond discount .. - - - 307,125
Interest factor or rent
expense......................... 13 1,466 38,224 129,990
------------ ------------ ------------ ------------
Total fixed charges ............... 13 416,823 38,224 33,371,890
Amortization of capitalized
interest ........................ - - - -
Interest capitalized............... - - - (362,321)
------------ ------------ ------------ ------------
Earnings (loss)before fixed
charges ......................... (426,813) (1,326,812) (3,939,176) (3,287,027)
============ ============ ============ ============
Ratio of earnings to fixed
charges ........................... * * * *
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 25, 1995
NINE MONTHS ENDED (DATE OF
SEPTEMBER 30, INCEPTION) TO
-------------------------------- DECEMBER 31,
1998 1999 1999
------------ ------------ ------------------
<S> <C> <C> <C>
Net loss before income taxes ...... $(25,014,744) $(40,409,110) $ (82,853,567)
------------ ------------ --------------
Fixed charges:
Interest expensed .............. 21,862,169 30,318,331 63,306,142
Interest capitalized ........... 362,321 1,837,922 2,200,243
------------ ------------ --------------
Interest ....................... 22,224,490 32,156,253 65,506,385
Amortization of bond discount .. 204,750 307,125 614,250
Interest factor or rent
expense......................... 78,970 174,845 344,538
------------ ------------ --------------
Total fixed charges ............... 22,508,210 32,638,223 66,465,173
Amortization of capitalized
interest......................... - 9,949 9,949
Interest capitalized............... (362,321) (1,837,922) (2,200,243)
------------ ------------ --------------
Earnings (loss)before fixed
charges ......................... (2,868,855) (9,598,860) (18,578,688)
============ ============ ==============
Ratio of earnings to fixed
charges ........................... * * *
============ ============ ==============
</TABLE>
* - The ratio of earnings to fixed charges is computed by dividing fixed
charges into income before income taxes plus fixed charges. Fixed
charges include interest expense and that portion of rental expense
(one-third) deemed representative of the interest factor. The ratio of
earnings to fixed charges is computed using pre-tax income. On this
basis, earnings before fixed charges for the period August 25, 1995
(date of inception) to December 31, 1995, the years ended December 31,
1996, 1997 and 1998, the nine months ended September 30, 1998 and 1999
and the period from August 25, 1995 (date of inception) to December 31,
1999 were not adequate to cover fixed charges by $426,826, $1,743,635,
$3,977,400, $36,658,917, $25,377,065, $42,237,083 and $85,043,861,
respectively.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-1 (File
No. 333-) of our report dated February 14, 1999, except for Note 14 for which
the date is November 22, 1999, relating to the consolidated financial
statements of Pathnet, Inc. and Subsidiaries (a development stage company),
which appear in such Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
November 22, 1999
<PAGE> 1
CONSENT OF COVINGTON & BURLING
We hereby consent to the use of our name in the Registration Statement and in
the prospectus in the Registration Statement as the same appears in the caption
"Legal Matters" and to the use of this letter as an exhibit to the Registration
Statement.
Very truly yours,
Covington & Burling
/s/ Covington & Burling
-----------------------
Covington & Burling
Washington, D.C.
November 22, 1999
<PAGE> 1
EXHIBIT 99.1
CONSENT
The undersigned hereby consents to the use of the information
contained in its report prepared for and presented to the Board of Directors of
Pathnet, Inc. on September 14, 1999 and the back up materials and models
relating to such report in Pathnet Telecommunications, Inc.'s Registration
Statement on Form S-1, and the Prospectus included therein, and to the use of
its name as the source of such information.
THE YANKEE GROUP
By: /s/ DONALD BRADSHAW
-----------------------
Name: Donald Bradshaw
Title: Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
