<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PATHNET, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 52-1941838
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
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:
PAUL D. GINSBERG, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
(212) 373-3000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
12 1/4% Senior Notes due 2008.............. $350,000,000 100% $350,000,000(1) $103,250
</TABLE>
(1) Estimated pursuant to Rule 457 under the Securities Act of 1933, as amended,
solely for purposes of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 22, 1998
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS SUBJECT TO COMPLETION OR
AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
<PAGE>
PROSPECTUS
[LOGO]
OFFER TO EXCHANGE ITS 12 1/4% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING
12 1/4% SENIOR NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON ,
1998, UNLESS EXTENDED.
------------------------
Pathnet, Inc., a Delaware corporation ("Pathnet" or the "Company") hereby
offers to exchange up to $350,000,000 aggregate principal amount of its 12 1/4%
Senior Notes due 2008 (the "New Notes") which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement (as defined herein) of which this Prospectus constitutes
a part, for any and all outstanding 12 1/4% Senior Notes due 2008 (the "Existing
Notes," and, together with the New Notes, the "Notes"), upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (the "Letter of Transmittal" and together with this
Prospectus, the "Exchange Offer"). The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of Existing Notes being tendered for
exchange pursuant to the Exchange Offer. However, the Exchange Offer is subject
to the absence of certain conditions which may be waived by the Company. See
"The Exchange Offer--Conditions to the Exchange Offer." Subject to the absence
or waiver of such conditions, the Company will accept for exchange any and all
Existing Notes validly tendered on or prior to 5:00 p.m., New York City time, on
, 1998, unless the Exchange Offer is extended (the "Expiration Date").
Existing Notes may be tendered only in integral multiples of $1,000. The date of
acceptance and exchange of the Existing Notes (the "Exchange Date") will be the
third business day following the Expiration Date, unless an earlier date is
selected by the Company. Existing Notes tendered pursuant to the Exchange Offer
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date; otherwise such tenders are irrevocable. The New Notes will be
issued and delivered promptly after the Exchange Date.
The terms of the New Notes are identical in all material respects to the
terms of the Existing Notes, except that the New 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. See "The Exchange Offer-- Consequences of
Failure to Exchange; Resales of New Notes." The New Notes will evidence the same
debt as the Existing Notes and will be issued under, and entitled to the
benefits of, the indenture, dated April 8, 1998 (the "Indenture"), between the
Company and The Bank of New York, as trustee (the "Trustee"), governing the
Existing Notes. For a complete description of the terms of the New Notes, see
"Description of the Notes."
Interest on the New Notes will accrue at an annual rate of 12 1/4% and will
be payable semiannually in arrears on April 15 and October 15 of each year,
commencing October 15, 1998. For each Existing Note accepted for exchange, the
holder of such Existing Note will receive a New Note having a principal amount
equal to that of the surrendered Existing Note. The New Notes will bear interest
from the most recent date to which interest has been paid on the Existing Notes
or, if no interest has been paid on the Existing Notes, from April 8, 1998.
Accordingly, if the relevant record date for interest payment occurs after the
consummation of the Exchange Offer, registered holders of New Notes on such
record date will receive interest accruing from the most recent date to which
interest has been paid or, if no interest has been paid, from April 8, 1998. If,
however, the relevant record date for interest payment occurs prior to the
consummation of the Exchange Offer, registered holders of the Existing Notes on
such record date will receive interest accruing from the most recent date to
which interest has been paid or, if no interest has been paid, from April 8,
1998. Existing Notes accepted for exchange will cease to accrue interest from
and after the date of consummation of the Exchange Offer, except as set forth in
the immediately preceding sentence. Holders of Existing Notes whose Existing
Notes are accepted for exchange will not receive any payment in respect of
interest on such Existing Notes otherwise payable on any interest payment date
the record date for which occurs on or after the consummation of the Exchange
Offer. The New Notes will mature April 15, 2008. The New Notes are redeemable
for cash at any time on or after April 15, 2003 at the option of the Company, in
whole or in part, at the redemption prices set forth in this Prospectus,
together with accrued and unpaid interest, if any, thereon to the date of
redemption. In addition, at any time on or prior to April 15, 2001, the Company
may redeem up to 35% of the aggregate principal amount of the
(CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY HOLDERS OF EXISTING NOTES AND PROSPECTIVE
PURCHASERS OF NEW NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1998.
<PAGE>
(CONTINUED FROM COVER PAGE)
originally issued Notes with the net cash proceeds of one or more Public Equity
Offerings (as defined herein) at a redemption price equal to 112.25% of the
principal amount thereof, together with accrued and unpaid interest, if any,
thereon; PROVIDED that not less than 65% of the aggregate principal amount of
Notes originally issued remain outstanding immediately after such redemption.
Upon the occurrence of a Change of Control (as defined herein), each holder of
the Notes may require the Company to repurchase all or a portion of such
holder's Notes at a purchase price in cash equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, thereon to the date
of repurchase. See "Description of the Notes--Redemption" and "--Certain
Covenants."
The Company used $81.1 million of the net proceeds of the issuance of the
Units (as defined herein), consisting of Existing Notes and Warrants (as defined
herein) to purchase Pledged Securities (as defined herein) which have been
pledged as security for repayment of the Notes. See "Description of the Notes."
Proceeds from the Pledged Securities shall be sufficient to provide for payment
in full of the interest due on the Notes through April 15, 2000.
The New Notes will be unsecured senior obligations of the Company and, as
such, will rank PARI PASSU in right of payment with all other existing and
future unsecured Indebtedness (as defined herein) of the Company that is not by
its terms expressly subordinated in right and payment to the New Notes. The New
Notes will be effectively subordinated to secured Indebtedness of the Company as
to the assets securing such Indebtedness. In addition, the business operations
of the Company will be conducted through its subsidiaries and the Notes will be
effectively subordinated to all existing and future Indebtedness and other
liabilities and commitments of the Company's subsidiaries, including trade
payables. See "Description of the Notes."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Notes Registration Rights Agreement,
dated as of April 8, 1998 (the "Registration Rights Agreement"), among the
Company, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns &
Co. Inc., TD Securities (USA) Inc. and Salomon Brothers Inc, as the initial
purchasers (collectively, the "Initial Purchasers") of the Existing Notes, with
respect to the initial sale of the Existing Notes.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. The Company
expressly reserves the right to terminate or amend the Exchange Offer and not to
accept for exchange any Existing Notes not theretofore accepted for exchange
upon the occurrence of any of the events specified under "The Exchange
Offer--Conditions to the Exchange Offer." If any such termination or amendment
occurs, the Company will notify The Bank of New York (in such capacity, the
"Exchange Agent") and will either issue a press release or give oral or written
notice to the holders of the Existing Notes as promptly as practicable. In the
event the Company terminates the Exchange Offer and does not accept for exchange
any Existing Notes with respect to the Exchange Offer, the Company will promptly
return such Existing Notes to the holders thereof. See "The Exchange Offer."
The Existing Notes were originally issued and sold on April 8, 1998 in a
transaction not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act. Accordingly, the
Existing Notes may not be reoffered, resold, or otherwise pledged, hypothecated
or transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is available.
Based upon interpretations by the staff of the Securities and Exchange
Commission (the "Commission") issued to third parties, the Company believes that
New Notes issued pursuant to the Exchange Offer in exchange for Existing Notes
may be offered for resale, resold and otherwise transferred by holders thereof
(other than any holder which is a broker-dealer or an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act
provided that such New Notes are acquired in the ordinary course of business and
such holders have no arrangement with any person to participate in the
distribution of such New Notes. Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivery of a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Existing Notes where such
Existing Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
The New Notes will constitute a new issue of securities with no established
trading market. The Company does not intend to list any Notes on a national
securities exchange or to apply for quotation of any Notes through the National
Association of Securities Dealers Automated Quotation System. Any Existing Notes
not tendered and accepted in the Exchange Offer will remain outstanding. To the
extent that Existing Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered and tendered but unaccepted Existing Notes
could be adversely affected. Following consummation of the Exchange Offer, the
holders of Existing Notes will continue to be subject to the existing
restrictions on transfers thereof, and the Company will have no further
obligation to such holders to provide for the registration under the Securities
Act of the Existing Notes held by them. No assurance can be given as to the
liquidity of the trading market for either the Existing Notes or the New Notes.
ii
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION CONCERNING THE COMPANY OR THE NEW NOTES NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR THE OFFERING, SALE OR DELIVERY OF ANY NEW NOTE SHALL CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME
AFTER THE DATE OF THIS PROSPECTUS OR THAT THERE HAS BEEN NO CHANGE IN THE
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS OR PROSPECTS OF THE COMPANY
SINCE THE DATE OF THIS PROSPECTUS.
THE DISTRIBUTION OF THIS PROSPECTUS AND THE OFFER, SALE AND DELIVERY OF THE
NEW NOTES IN CERTAIN JURISDICTIONS MAY BE RESTRICTED BY LAW. PERSONS INTO WHOSE
POSSESSION THIS PROSPECTUS COMES ARE REQUIRED TO INFORM THEMSELVES ABOUT AND TO
OBSERVE ANY SUCH RESTRICTIONS.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the New
Notes being offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the New Notes, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions in such exhibit, to which reference
is hereby made. Upon completion of the Exchange Offer, the Company will be
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith, will file
reports and other information with the Commission. Copies of the Registration
Statement and reports and other information filed by the Company with the
Commission pursuant to the informational requirements of the Exchange Act may be
examined without charge at the Public Reference Section of the Commission, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
regional offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of such material can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, upon payment of certain fees prescribed by
the Commission. The Commission maintains an Internet Web Site at
http://www.sec.gov that contains all reports and other information filed
electronically by the Company with the Commission.
Pursuant to the Indenture, the Company has agreed, whether or not subject to
the informational requirements of the Exchange Act, to provide the Trustee and
holders of the Notes with annual, quarterly and other reports at the times and
containing in all material respects the information specified in Sections 13 and
15(d) of the Exchange Act and to file such reports with the Commission.
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements." Certain, but not
necessarily all, of such forward-looking statements can be identified by the use
of forward-looking terminology such as "believes," "anticipates," "expects,"
"may," "will," or "should" or the negative of such terminology or other
variations on such terminology or comparable terminology, or by discussions of
strategies that involve risks and uncertainties. All statements other than
statements of historical facts included in this Prospectus including, without
limitation, such statements under "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
located elsewhere in this Prospectus,
iii
<PAGE>
regarding the Company or any of the transactions described in this Prospectus,
including the timing, financing, strategies and effects of such transaction, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from expectations
are disclosed in this Prospectus, including, without limitation, the amount of
capital needed to deploy the Company's network as described in this Prospectus;
the Company's substantial leverage and its need to service it indebtedness; the
restrictions imposed by the Company's current and possible future financing
arrangements; the ability of the Company to successfully manage the cost
effective and timely completion of its network and its ability to attract and
retain customers for its services; the ability of the Company to retain and
attract relationships with the incumbent owners of the telecommunications assets
with which the Company expects to build its network; the Company's ability to
retain and attract key management and other personnel as well as the Company's
ability to manage the rapid expansion of its business and operations; the
Company's ability to compete in the highly competitive telecommunications
industry in terms of price, service, reliability and technology; the Company's
dependence on the reliability of its network equipment, its reliance on key
suppliers of network equipment and the risk that its technology will become
obsolete or otherwise not economically viable; the Company's ability to conduct
its business in a regulated environment; and the other factors described in
conjunction with the forward-looking statements in this Prospectus and/or under
the caption "Risk Factors." The Company does not intend to update these
forward-looking statements.
iv
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES THERETO AND THE OTHER
FINANCIAL DATA CONTAINED ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS
SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN UNDER THE CAPTION "RISK
FACTORS" AND ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. PLEASE REFER TO
THE GLOSSARY FOR DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY
AND ELSEWHERE IN THE PROSPECTUS WITHOUT DEFINITION. UNLESS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS (I) GIVES EFFECT TO THE CONVERSION OF ALL
OUTSTANDING SHARES OF THE COMPANY'S PREFERRED STOCK INTO COMMON STOCK (THE
"PREFERRED STOCK CONVERSION") AND, (II) GIVES EFFECT TO A FIVE-FOR-ONE SPLIT OF
THE COMPANY'S COMMON STOCK (THE "STOCK SPLIT"). UNLESS OTHERWISE NOTED,
STATEMENTS IN THIS PROSPECTUS CONCERNING ROUTE MILES HAVE BEEN DERIVED FROM
INFORMATION PUBLICLY AVAILABLE FROM THE FEDERAL COMMUNICATIONS COMMISSION (THE
"FCC"). UNLESS OTHERWISE SPECIFIED OR THE CONTEXT OTHERWISE REQUIRES, REFERENCES
IN THIS PROSPECTUS TO THE "UNITED STATES" MEAN THE 48 CONTINENTAL STATES OF THE
UNITED STATES OF AMERICA AND REFERENCES TO THE "COMPANY" OR "PATHNET" MEAN
PATHNET, INC. AND ITS SUBSIDIARIES, COLLECTIVELY.
THE COMPANY
Pathnet intends to become a leading provider of high quality, low cost, long
haul telecommunications capacity to second and third tier markets throughout the
United States primarily by upgrading existing wireless infrastructure to develop
a state-of-the-art, digital SONET network. The Company is positioning itself
primarily as a 'carrier's carrier,' providing a high capacity, dedicated network
to interexchange carriers ("IXCs"), local exchange carriers ("LECs"), Internet
service providers ("ISPs"), the Regional Bell Operating Companies ("RBOCs"),
other 'carrier's carriers,' cellular operators and resellers (collectively,
"Telecom Service Providers"). The Company plans to deploy its digital network by
upgrading, integrating and leveraging existing telecommunications assets, sites
and rights of way, including those utilized by railroads, utilities, state and
local governments and pipelines ("Incumbents"). By integrating the existing
networks of Incumbents, the Company expects to obtain the equivalent of a
nationwide spectrum license at minimal licensing cost.
The Company's goal is to deploy a network covering 29,000 route miles within
two years and ultimately to deploy a network encompassing more than 100,000
route miles. Based on market research prepared for the Company by the Yankee
Group, a leading telecommunications research firm, the estimated addressable
market for the Company's services is expected to grow from approximately $6
billion in 1998 to approximately $17 billion by 2008. The Company believes its
strategy of developing a high quality, low cost, digital network primarily in
smaller markets will enable the Company to take advantage of (i) the limited
capacity currently available or expected to be constructed in smaller markets,
(ii) higher prices generally available in those markets and (iii) technological
and cost advantages of the Company's deployment strategy. The Company is
currently in various stages of designing, constructing, testing and
commissioning its digital network, which will initially serve markets in 34
states. The Company has completed over 800 route miles of its network, is
currently constructing approximately 2,100 additional route miles and has
entered into one agreement relating to the sale of capacity on its network.
The Company's core strategy for deploying its network is to form strategic
relationships with Incumbents and other owners of telecommunications assets that
will enable the Company to leverage these existing assets and thereby reduce the
Company's time to market and capital costs. The Company believes that Incumbents
will find a strategic relationship with the Company to be attractive due to the
opportunity for the Incumbents to (i) reduce the costs of upgrading internal
network infrastructure, (ii) receive incremental capacity which has greater
reliability characteristics than most of the Incumbents' existing systems and
(iii) leverage under-utilized assets and receive a share of the incremental
revenues generated by Pathnet. The Company has identified Incumbents currently
holding or operating private networks in the United States that in the aggregate
cover approximately 465,000 route miles. Through its sales staff and other
engineering, financial and legal professionals, the Company has held meetings
with over 300 of these Incumbents. To date, 47 of these entities, which together
control approximately 89,000 route miles, have
1
<PAGE>
authorized the Company in writing to prepare preliminary engineering evaluations
of their networks for the intended purpose of entering into a long-term
strategic relationship with the Company. Of these 47 entities, seven, which
collectively control approximately 11,000 route miles, have entered into binding
agreements relating to the initial design and construction of approximately
7,000 route miles of network. Six of these binding agreements are long-term
fixed point microwave services agreements ("FPM Agreements") with Enron, Idaho
Power Company, KN Energy, Northeast Missouri Electric Power Cooperative,
Northern Indiana Public Service Company ("NIPSCO") and Texaco or their
affiliates. The seventh agreement is a binding term sheet with American Tower
Corporation ("ATC"), which controls certain telecommunications assets, including
certain assets divested by CSX Railroad, ARCO Pipeline and MCI Communications
Corporation ("MCI"). In addition, the Company is currently pursuing long-term
strategic relationships with 25 out of the 47 entities which control
approximately 63,000 additional route miles of network. These potential
relationships are in varying stages of evaluation, system design and business
and contract negotiations. In addition to deploying its network by forming
long-term relationships with Incumbents, the Company may enter into alternative
markets or acquire or deploy complementary telecommunications assets or
technologies.
The Company's network is being designed for maximum reliability and security
and will be capable of carrying a full array of voice, data and video
communications. Bell Communications Research ("Bellcore"), an independent
telecommunications technical consultant, has evaluated the Company's system
design and existing network and has confirmed that the Company's network will be
built using proven, off-the-shelf components and will meet or exceed prevailing
industry standards for reliability and error free operation. The Company's
network will employ various design features that enhance its reliability,
including SONET architecture.
Pathnet was founded in August 1995, and its initial investors include a
group of financial sponsors led by Spectrum Equity Investors ("Spectrum") and
New Enterprise Associates ("NEA"). The Company's current investors also include
Dennis R. Patrick, former Chairman of the FCC. The Company's Chairman, David
Schaeffer, has more than 20 years of business and entrepreneurial experience,
including building and operating wireless networks. Richard A. Jalkut, the
Company's President and Chief Executive Officer, has over 30 years of
telecommunications experience, including as President of NYNEX
Telecommunications, an operating subsidiary of NYNEX Corporation with more than
$12.0 billion in annual revenues and 60,000 employees. Kevin J. Bennis, formerly
President of Frontier Communications, is Executive Vice President of the Company
serving as President of the Company's Communications Services Division. Prior to
working at Frontier Communications, Mr. Bennis served in various positions for
21 years at MCI, including as Senior Vice President of Marketing. Michael L.
Brooks, the Company's Vice President of Network Development, directed the
initial construction of the 3,500-mile digital microwave network at Qwest
Microwave Communications, a predecessor of Qwest Communications International
Inc. ("Qwest"), as its Vice President of Engineering.
MARKET OPPORTUNITY
The Company believes there is a substantial market opportunity to provide
high quality, low cost, long haul telecommunications capacity for second and
third tier markets throughout the United States. The Company commissioned the
Yankee Group to study the Company's addressable market. The Yankee Group study
estimated the potential addressable market for the Company's services to be
approximately $6 billion in 1998 and estimated that such market will grow to
approximately $17 billion by 2008, indicating a compounded annual growth rate of
approximately 11% per year. The Yankee Group attributes this growth to (i) an
expected shift in market share of interexchange services away from established
carriers, such as AT&T Corporation ("AT&T"), MCI and Sprint Corporation
("Sprint"), to non-facilities-based IXCs that are more likely to rely on
alternative carriers such as the Company to transmit traffic, (ii) the
development of the Internet, (iii) growth in data traffic, including WANs,
extranets, CAD/CAM and other applications which require substantial amounts of
bandwidth and (iv) continued growth in voice traffic.
2
<PAGE>
Based on FCC data and other publicly available information, the Company
estimates that most existing or planned facilities-based long distance
providers' networks are designed to connect primarily the top 120 Metropolitan
Statistical Areas ("MSAs") in the United States. Facilities-based IXCs and other
telecommunications providers must rely, directly or indirectly, on facilities
provided primarily by incumbent local exchange carriers ("ILECs") to transmit
calls beyond their existing owned or leased facilities. Current facilities-based
providers serve the second and third tier markets primarily utilizing a
combination of copper, fiber or microwave transport facilities. The Company
believes that many Telecom Service Providers will choose the Company's network
for long haul capacity serving second and third tier markets as a result of its
(i) availability in markets where there are currently insufficient or limited
high capacity facilities, (ii) lower prices compared to those currently offered
by ILECs, (iii) ubiquity in these markets compared to many other long haul
carriers due to the projected reach of the Company's network, as well as an
increased number of access and termination points compared to most other long
haul networks, (iv) greater product flexibility as a result of the ability to
sell capacity in increments as small as DS-1s and as large as OC-24s, (v)
non-competitive marketing position as primarily a 'carrier's carrier', (vi)
comparable or greater reliability due to the digital SONET architecture of the
Company's network and (vii) ability to provide network redundancy and enhanced
reliability by offering an alternative to the existing network.
COMPETITIVE ADVANTAGES
The Company believes that it will enjoy the following competitive
advantages:
UBIQUITOUS COVERAGE. The Company's goal is to deploy a network covering
29,000 route miles within 24 months and ultimately to deploy a network
encompassing more than 100,000 route miles. The extensive scope of such existing
networks, combined with the attractive characteristics of Pathnet's network
architecture, should enable the Company to provide greater ubiquity than many
other long haul carriers. Pathnet's network architecture enables the Company to
provide access and termination points approximately every 25 miles, which is not
economically feasible for most fiber optic networks. This architecture increases
the number of cities that can be served cost effectively on each route. In
addition, the Company expects that its tower rights will enable it to
interconnect with Telecom Service Providers by digital microwave anywhere within
an approximate 25-mile line of sight surrounding any transmission tower on its
network. This will allow Pathnet in many cases to bypass existing local
infrastructure and deliver traffic directly to an access tandem, local serving
office, mobile switching office, ISP point of presence ("POP") or large
end-user.
LOWER NETWORK COST. By leveraging the resources of Incumbents and other
owners of telecommunications assets and by utilizing lower-cost wireless
technology, the Company believes it will gain a significant competitive
advantage over carriers seeking to deploy newly constructed digital networks to
serve the Company's target markets. The Company intends to reduce its initial
costs by utilizing the assets, including towers and rights-of-way, of Incumbents
and other owners of existing telecommunications assets. In addition, the Company
will be able to utilize many of the requisite local permits and local regulatory
approvals already in place. Based upon publicly available information, the
Company believes that, for capacity of OC-24, the Company's average capital cost
per DS-0 circuit mile will be approximately $1.55 versus approximately $1.90 for
newly constructed digital microwave capacity, approximately $3.00 for newly
constructed aerial fiber and approximately $4.10 for newly constructed fiber
buried in conduit.
SUCCESS-BASED CAPITAL EXPENDITURE. The Company's network is designed to
reduce the risk of capital investment by deploying a substantial portion of its
network on a demand-driven basis. After an Initial System is deployed, the
Company's additional capital expenditures will relate primarily to deploying
incremental equipment to provide additional capacity in response to specific
customer demand. As a result, the Company believes that a majority of its
capital expenditures will be success-based. The modular design of its network
should allow the Company to expand rapidly in response to increased customer
demand or to delay the deployment of network equipment until justified by
specific customer demand. In
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addition, the Company will be able to mitigate its capital expenditures by
redeploying network equipment to respond to shifting customer demand.
BARRIERS TO ENTRY. The Company's strategy of entering into long-term
relationships with Incumbents is designed to enable the Company to minimize the
significant costs and obstacles associated with the development of long haul
telecommunications capacity. Leveraging the existing assets of Incumbents will
enable the Company to avoid certain capital expenditures related to real estate
and right-of-way acquisition, permits and zoning requirements, and generally is
expected to shift to Incumbents certain costs of shelter development, tower
upgrades and enhancement of utility service. The Company's relationships with
Incumbents also are expected to mitigate maintenance and ongoing administrative
costs by using Incumbents' existing technicians to perform facility and
equipment maintenance and on-site circuit provisioning and by leaving ongoing
utility, real estate taxes and other infrastructure costs with Incumbents. The
Company believes that fiber networks, the primary alternative source of
bandwidth, may be too expensive to install in the smaller markets targeted by
the Company. The greater capacity offered by fiber networks may not be cost
effective in smaller markets due to the higher costs per bit of capacity sold to
low volume markets.
HIGH QUALITY, TECHNOLOGICALLY ADVANCED NETWORK. The Company's network is
being deployed using a high capacity digital SONET platform, which will provide
high quality voice, data and video transmission comparable to or exceeding that
of most fiber optic networks. The Company expects to deliver 99.999% network
reliability on any individual path with a bit error rate of no greater than
10(-13). The capacity created by Pathnet is expected to meet the highest
industry standards, including those of AT&T and MCI, and Bellcore specifications
for reliability. The Company will continuously monitor and maintain high quality
control of its network on a 24 hours per day, seven days per week basis through
its Network Operations Center (the "NOC").
EXPERIENCED MANAGEMENT. Pathnet's management team includes its Chief
Executive Officer, Richard A. Jalkut, the former President of NYNEX
Telecommunications, and Kevin J. Bennis, who is Executive Vice President serving
as President of the Company's Communications Services Division and was formerly
President of Frontier Communications and Senior Vice President of Marketing at
MCI. The Company has commenced development of its network under the direction of
Michael L. Brooks, who was responsible, as Vice President of Engineering of
Qwest Microwave Communications, a predecessor of Qwest, for the initial
construction of Qwest's 3,500-mile digital microwave network. This team has
significant and proven operational, technical, financial and regulatory
experience in the telecommunications industry.
BUSINESS STRATEGY
Key components of the Company's business and operating strategies are
described below:
FOCUS ON SMALLER, CAPACITY CONSTRAINED MARKETS. The Company intends to focus
on smaller markets that typically have limited access to transmission capacity
and that currently are served by ILECs and few other competitors. Private line
rates in second and third tier markets are believed by the Company to be
significantly higher than rates between larger markets because there are few
suppliers. Smaller markets are often unattractive to new entrants because their
relatively limited traffic does not normally economically justify new network
construction. Focusing on smaller markets should enable the Company to take
advantage of its low cost, flexible network, which is capable of servicing
markets requiring small increments of capacity.
POSITION THE COMPANY AS A 'CARRIER'S CARRIER.' The Company intends to sell a
majority of its capacity to Telecom Service Providers. The Company believes
there are substantial benefits to a 'carrier's carrier' strategy, including (i)
lower sales, marketing and servicing costs, (ii) elimination of significant
capital outlays to provide switching services to end-users, (iii) the ability to
carry most of its customer traffic on its own network, thereby increasing
operating margins, and (iv) increased attractiveness to Telecom Service
Providers, who will not view the Company as a potential competitor.
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ESTABLISH STRATEGIC RELATIONSHIPS WITH INCUMBENTS AND OTHER OWNERS OF
TELECOMMUNICATIONS ASSETS. The Company's core strategy for deploying its network
is to form strategic relationships with Incumbents and other owners of
telecommunications assets that will enable the Company to utilize existing
infrastructure, permits and other regulatory approvals in order to reduce the
Company's time to market and construction costs. The Company believes that
Incumbents will find a strategic relationship with the Company to be attractive
due to the opportunity for Incumbents to (i) reduce the costs of upgrading the
Incumbent's infrastructure, (ii) receive incremental capacity which has greater
reliability characteristics than most of the Incumbents' existing systems, and
(iii) leverage under-utilized assets and receive a share of the incremental
revenues generated by Pathnet. See "Risk Factors--Dependence on Relationship
with Incumbents; Rights of Incumbents to Certain Assets."
BUILD EFFECTIVE SALES FORCE AND PROVIDE SUPERIOR CUSTOMER SERVICE. The
Company is building a national accounts sales force that will use a consultative
approach designed to provide a systematic review of a large carrier's network
requirements in smaller markets and to offer solutions to reduce the carrier's
network costs and improve its reliability. The Company will also build a
regional sales force that will market the Company's network capacity to smaller
carriers and to selected large end-users. The Company expects to offer high
reliability and superior customer service, including maintaining a centralized
NOC to initiate new services and monitor existing circuit capacity more easily.
In addition, pursuant to the FPM Agreements, the Company utilizes Incumbents as
an alternative sales channel to sell to large end-users who reside in the cities
near Incumbents' facilities.
FINANCING PLAN
To date, the Company has funded its expenditures primarily with equity
investments made by the Company's stockholders and the proceeds from the
Company's debt financing, including the Existing Notes. The development of the
Company's business plan will require substantial additional capital to fund
capital expenditures, working capital and operating losses. The Company's
principal capital expenditures include costs related to the installation of
digital transmission equipment and, to a lesser extent, site preparation work.
The Company projects that a majority of its capital expenditures will relate to
deploying incremental capacity to meet specific customer demand. This
characteristic of the Company's network is expected to reduce materially the
risks associated with the Company's capital investment. The Company currently
forecasts that it will require approximately $380 million to fund the Company's
operating losses, working capital and capital expenditures for the next 24
months, at which time the Company expects to have completed a 29,000 route mile
network. Proceeds from the Debt Offering (defined below), proceeds from the
Company's initial public equity offering (the "Initial Public Offering") and
cash on hand are expected to provide the Company with adequate resources to meet
these projected capital requirements. The Company intends to use any additional
available funds to accelerate its development plans. The Company's financing
plan consists of the following components:
- DEBT OFFERING. On April 8, 1998, the Company completed the issuance and
sale of the 350,000 units (collectively, the "Units"), consisting of
Existing Notes and warrants to purchase shares of Common Stock (the
"Warrants"), resulting in net proceeds to the Company of $339.5 million
(the "Debt Offering"). The Company used $81.1 million of the net proceeds
of the Debt Offering to purchase securities (the "Pledged Securities")
which have been pledged as security for repayment of the Notes. Proceeds
from the Pledged Securities shall be sufficient to provide for payment in
full of the interest due on the Notes through April 15, 2000.
- PRIVATE EQUITY INVESTMENT. Concurrently with the Debt Offering, the
Company completed the issuance and sale of 1,879,699 shares of Series C
Preferred Stock at an aggregate price of $20.0 million (the "1998 Private
Equity Investment"), bringing the total investment by the Company's
private equity investors to $36.0 million.
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- INITIAL PUBLIC OFFERING. On May 8, 1998 the Company filed a registration
statement pursuant to the Securities Act regarding the Initial Public
Offering. Net proceeds of the Initial Public Offering to the Company are
estimated to be $ million. In connection with the Initial Public
Offering, all of the Company's outstanding preferred stock will be
converted into an aggregate of 27,352,975 shares of Common Stock.
The Debt Offering, the 1998 Private Equity Investment, the Initial Public
Offering and the Preferred Stock Conversion are collectively referred to herein
as the "Transactions."
In addition, the Company is currently exploring several vendor financing
alternatives and other credit facilities. Although the Company has received
commitments (subject to definitive documentation) from certain of its vendors
and prospective lenders in connection with two such proposed vendor financing
facilities, as of the date of this Prospectus, the Company has not decided to
pursue any one particular proposed facility.
The actual amount of the Company's future capital requirements will depend
upon many factors, including the costs of the development of its network in each
of its markets, the speed of the development of the Company's network, the
extent of competition and pricing of telecommunications services in its markets,
other strategic opportunities pursued by the Company and the acceptance of the
Company's services. See "Risk Factors--Significant Capital Requirements;
Uncertainty of Additional Financing."
------------------------
The Company was formed under the laws of the State of Delaware and commenced
operations in August 1995. The Company's principal executive office is located
at 1015 31st Street, N.W., Washington, D.C. 20007, and its telephone number is
(202) 625-7284.
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THE EXCHANGE OFFER
FOR DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED HEREIN, SEE "DESCRIPTION
OF THE NOTES."
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Securities Offered..................... Up to $350,000,000 aggregate principal amount of
12 1/4% Senior Notes due 2008 (the "New Notes")
which have been registered under the Securities
Act. The terms of the New Notes and those of the
Existing Notes are identical in all material
respects, except that the New Notes have been
registered under the Securities Act and are freely
transferable by holders thereof (other than as
provided herein) and are not subject to any
registration rights under the Securities Act.
The Exchange Offer..................... The New Notes are being offered in exchange for a
like principal amount of Existing Notes. Existing
Notes may be exchanged only in integral multiples
of $1,000. The issuance of the New Notes is
intended to satisfy obligations of the Company
under the Registration Rights Agreement.
Expiration Date; Withdrawal of
Tender............................... The Exchange Offer will expire at 5:00 p.m, New
York City time, on , 1998, or such later
date and time to which it is extended by the
Company. The tender of Existing Notes pursuant to
the Exchange Offer may be withdrawn at any time
prior to the Expiration Date. Any Existing Notes
not accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
Conditions to the Exchange Offer....... The Exchange Offer is subject to certain
conditions, which may be waived by the Company. The
Company currently expects that each of the
conditions will be satisfied and that no waivers
will be necessary. See "The Exchange
Offer--Conditions to the Exchange Offer."
Procedures for Tendering Existing
Notes................................ Each holder of Existing Notes wishing to accept the
Exchange Offer must complete, sign and date a
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Existing Notes and any other required
documentation, to the Exchange Agent at the address
set forth herein. See "The Exchange Offer--
Procedures for Tendering Existing Notes."
Letters of Transmittal and certificates
representing Existing Notes should not be sent to
the Company. Such documents should only be sent to
the Exchange Agent. Questions regarding how to
tender and requests for information should be
directed to the Exchange Agent. See "The Exchange
Offer--Exchange Agent."
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Use of Proceeds........................ There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
Certain Federal Income
Tax Considerations................... The exchange of an Existing Note for a New Note
pursuant to the Exchange Offer will not be a
taxable event for U.S. federal income tax purposes.
See "Certain United States Federal Income Tax
Considerations."
Exchange Agent......................... The Bank of New York is serving as the Exchange
Agent in connection with the Exchange Offer.
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CONSEQUENCE OF EXCHANGING EXISTING NOTES
PURSUANT TO THE EXCHANGE OFFER
Based on certain no-action letters issued by the staff of the Commission to
third parties in unrelated transactions, the Company believes that New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any holder who is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or (ii) any broker-dealer that purchases Notes from the Company to resell
pursuant to Rule 144A under the Securities Act ("Rule 144A") or any other
available exemption) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of the holder's business and such holders have
no arrangement or understanding with any person to participate in a distribution
of such New Notes and are not participating in, and do not intend to participate
in, the distribution of such New Notes. By tendering, each holder will represent
to the Company in the Letter of Transmittal that, among other things, the New
Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary
course of business of the person receiving such New Notes, whether or not such
person is the holder, that neither the holder nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such New Notes, that neither the holder nor any such person is participating
in or intends to participate in the distribution of such New Notes and that
neither the holder nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company. Each broker-dealer that receives
New Notes for its own account in exchange for Existing Notes must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution." In addition, to comply with the securities
laws of certain jurisdictions, if applicable, the New Notes may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdiction or any exemption from registration or qualification is available
and complied with. The Company has agreed, pursuant to the Registration Rights
Agreement and subject to certain specified limitations therein, to register or
qualify the New Notes for offer or sale under the securities or blue sky laws of
such jurisdictions as any holder of the Notes reasonably requests in writing. If
a holder of Existing Notes does not exchange such Existing Notes for New Notes
pursuant to the Exchange Offer, such Existing Notes will continue to be subject
to the restrictions on transfer contained in the legend thereon. In general, the
Existing Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. See "The
Exchange Offer--Consequences of Failure to Exchange; Resales of New Notes."
The Existing Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
Following commencement of the Exchange Offer but prior to its consummation, the
Existing Notes may continue to be traded in the PORTAL market. Following
consummation of the Exchange Offer, the New Notes will not be eligible for
PORTAL trading.
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THE NOTES
Except as otherwise indicated, the following description relates both to the
Existing Notes and to the New Notes to be issued in exchange for Existing Notes
pursuant to the Exchange Offer. The New Notes will be obligations of the Company
evidencing the same indebtedness as the Existing Notes, and will be entitled to
the benefits of the same Indenture. The form and terms of the New Notes are the
same as the form and terms of the Existing Notes, except that the New Notes have
been registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof. For a more complete description of the Notes,
see "Description of the Notes." Throughout this Prospectus, references to the
"Notes" refer to the New Notes and the Existing Notes collectively.
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Notes Offered.......................... $350,000,000 aggregate principal amount of 12 1/4%
Senior Notes due 2008.
Maturity Date.......................... April 15, 2008.
Interest............................... April 15 and October 15 of each year, commencing
October 15, 1998. For each Existing Note accepted
for exchange, the holder of such Existing Note will
receive a New Note having a principal amount equal
to that of the surrendered Existing Note. The New
Notes will bear interest from the most recent date
to which interest has been paid on the Existing
Notes or, if no interest has been paid on the
Existing Notes, from April 8, 1998. Accordingly, if
the relevant record date for interest payment
occurs after the consummation of the Exchange
Offer, registered holders of New Notes on such
record date will receive interest accruing from the
most recent date to which interest has been paid
or, if no interest has been paid, from April 8,
1998. If, however, the relevant record date for
interest payment occurs prior to the consummation
of the Exchange Offer, registered holders of the
Existing Notes on such record date will receive
interest accruing from the most recent date to
which interest has been paid or, if no interest has
been paid, from April 8, 1998. Existing Notes
accepted for exchange will cease to accrue interest
from and after the date of consummation of the
Exchange Offer, except as set forth in the
immediately preceding sentence. Holders of Existing
Notes whose Existing Notes are accepted for
exchange will not receive any payment in respect of
interest on such Existing Notes otherwise payable
on any interest payment date the record date for
which occurs on or after the consummation of the
Exchange Offer.
Pledged Securities..................... The Company used $81.1 million of net proceeds of
the Debt Offering to purchase the Pledged
Securities in an amount sufficient to provide for
payment in full of the interest due on the Notes
through April 15, 2000. The Pledged Securities have
been pledged by the Company to the Trustee for the
benefit of the holders of the Notes pursuant to the
Pledge Agreement (as defined herein) and
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are held by the Trustee in the Escrow Account. See
"Description of the Notes--Security."
Original Issue Discount................ Each New Note will have original issue discount for
United States federal income tax purposes. If the
Company's allocation of the Unit issue price
between the Existing Notes and the Warrants is
respected by the Internal Revenue Service, then the
Notes should be treated as issued with a "DE
MINIMIS amount" of original issue discount, in
which case the amount of original issue discount
will be treated as zero. See "Certain United States
Federal Tax Considerations."
Optional Redemption.................... The Notes are redeemable for cash at any time on or
after April 15, 2003 at the option of the Company,
in whole or in part, at the redemption prices set
forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. See
"Description of the Notes--Redemption."
In addition, at any time prior to April 15, 2001,
the Company may redeem up to 35% of the aggregate
principal amount of the originally issued Notes
with the net cash proceeds of one or more Public
Equity Offerings (as defined herein) at a
redemption price of 112.25% of the principal amount
thereof, together with accrued and unpaid interest,
if any, thereon to the date of redemption; PROVIDED
that not less than 65% of the aggregate principal
amount of originally issued Notes remain
outstanding. See "Description of the
Notes--Redemption."
Change of Control...................... Upon the occurrence of a Change of Control, each
holder of the Notes may require the Company to
repurchase all or a portion of such holder's Notes
at a purchase price in cash equal to 101% of the
principal amount thereof, together with accrued and
unpaid interest, if any, thereon to the date of
repurchase. See "Description of the Notes-- Certain
Covenants--Purchase of Notes Upon a Change of
Control."
Ranking................................ The Notes are unsecured senior obligations of the
Company and, as such, will rank equally in right of
payment with all other existing and future senior
unsecured Indebtedness of the Company that is not
by its terms expressly subordinated in right and
priority of payment to the Notes. The Notes will be
effectively subordinated to secured Indebtedness of
the Company as to the assets securing such
Indebtedness. As of March 31, 1998, on a pro forma
basis after giving effect to the Transactions, the
Company had no Indebtedness outstanding other than
the Notes and approximately $ million of other
liabilities outstanding. In addition, the business
operations of the Company will be conducted through
its subsidiaries, and the Notes will be effectively
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subordinated to all existing and future
Indebtedness and other liabilities and commitments
of the Company's subsidiaries, including trade
payables. See "Risk Factors-- Holding Company
Structure; Priority of Secured Debt" and
"--Dependence on Relationship with Incumbents;
Rights of Incumbents to Certain Assets."
Restrictive Covenants.................. The Indenture contains certain restrictive
covenants, including, but not limited to, covenants
with respect to the following matters: (i)
limitation on indebtedness; (ii) limitation on
restricted payments; (iii) limitation on issuances
and sales of capital stock of subsidiaries; (iv)
limitations on transactions with affiliates; (v)
limitation on liens; (vi) limitation on guarantees
and issuances of Debt Securities (as defined
herein) by subsidiaries; (vii) limitation on sales
of assets; (viii) limitation on dividend and other
payment restrictions affecting subsidiaries; and
(ix) restrictions on mergers, consolidations and
the transfer of all or substantially all of the
assets of the Company. The covenants require the
Company to make an offer to purchase specified
amounts of Notes in the event of certain asset
sales. There can be no assurance that the Company
will have sufficient funds to complete any purchase
of Notes upon such a sale of assets. See
"Description of the Notes--Certain Covenants."
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RISK FACTORS
Purchasers of the Units should carefully consider the risk factors set forth
under the caption "Risk Factors" and the other information included in this
Prospectus prior to making an investment decision. See "Risk Factors."
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RISK FACTORS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS
AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN
THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. HOLDERS OF EXISTING NOTES AND
PROSPECTIVE PURCHASERS OF THE NEW NOTES SHOULD CAREFULLY CONSIDER, TOGETHER WITH
OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS.
LIMITED HISTORY OF OPERATIONS; OPERATING LOSSES AND NEGATIVE CASH FLOW
The Company was formed in August 1995 to begin deployment of its digital
network. The Company has completed over 800 route miles of its network, which
are commercially available, and to date has entered into one customer capacity
contract. There can be no assurance that the Company will enter into any
additional customer contracts. Based on Pathnet's experience, it expects that it
may take between six and 18 months from the initial contact with an Incumbent to
complete a long-term contract and 12 months thereafter to complete a
commercially available system. Prospective investors, therefore, have extremely
limited historical financial information about the Company upon which to base an
evaluation of the Company's performance and an investment in the New Notes. As a
result of development and operating expenses, the Company has incurred
significant operating and net losses to date. The Company's operations have
resulted in cumulative net losses of $8.8 million and cumulative net losses
before interest income (expense), income tax benefit, depreciation and
amortization of $8.8 million from inception in 1995 through March 31, 1998.
The Company expects to incur significant operating losses, to generate
negative cash flows from operating activities and to invest substantial funds to
construct its digital network during the next several years. There can be no
assurance that the Company will achieve or sustain profitability or generate
sufficient positive cash flow to meet its debt service obligations, capital
expenditure requirements or working capital requirements. If the Company cannot
achieve operating profitability or positive cash flows from operating
activities, it will not be able to meet its debt service obligations (including
its obligations under the Notes), capital expenditure requirements or working
capital requirements, which would have a material adverse effect on the
financial condition and results of operations of the Company. See "--Significant
Capital Requirements; Uncertainty of Additional Financing," "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements included elsewhere in this
Prospectus.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS
The Company is highly leveraged. As of March 31, 1998, on a pro forma basis
after giving effect to the Transactions, the Company would have had $345.9
million of indebtedness outstanding (__% of total invested capital). The Company
will incur substantial additional indebtedness (including secured indebtedness)
following the Exchange Offer, for the development of its network and other
capital and operating requirements. The level of the Company's indebtedness
could adversely affect the Company in a number of ways. For example, (i) the
ability of the Company to obtain necessary financing in the future for working
capital, capital expenditures, debt service requirements or other purposes may
be limited; (ii) the Company's level of indebtedness could limit its flexibility
in planning for, or reacting to, changes in its business; (iii) the Company will
be more highly leveraged than some of its competitors, which may place it at a
competitive disadvantage; (iv) the Company's degree of indebtedness may make it
more vulnerable to a downturn in its business or the economy generally; (v) the
terms of the existing and future indebtedness restrict, or may restrict, the
payment of dividends by the Company; and (vi) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness and will not be available for other
purposes.
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The Indenture and certain of the Company's FPM Agreements contain, or will
contain, restrictions on the Company and its subsidiaries that will affect, and
in certain cases significantly limit or prohibit, among other things, the
ability of the Company and its subsidiaries to create liens, make investments,
pay dividends and make certain other restricted payments, issue stock of
subsidiaries, consolidate, merge, sell assets and incur additional indebtedness.
There can be no assurance that such covenants and restrictions will not
adversely affect the Company's ability to finance its future operations or
capital needs or to engage in other business activities that may be in the
interest of the Company. See "Description of the Notes," "Description of Certain
Indebtedness" and "Business--Agreements with Incumbents and Other Owners of
Telecommunications Assets--Fixed Point Microwave Services Agreements."
In addition, any future indebtedness incurred by the Company or its
subsidiaries is likely to impose similar restrictions. Failure by the Company or
its subsidiaries to comply with these restrictions could lead to a default under
the terms of the Notes or the Company's other indebtedness notwithstanding the
ability of the Company to meet its debt service obligations. In the event of
such a default, the holders of such indebtedness could elect to declare all such
indebtedness due and payable, together with accrued and unpaid interest. In such
event, a significant portion of the Company's indebtedness may become
immediately due and payable, and there can be no assurance that the Company
would be able to make such payments or borrow sufficient funds from alternative
sources to make any such payments. Even if additional financing could be
obtained, there can be no assurance that it would be on terms that would be
acceptable to the Company.
The successful implementation of the Company's strategy, including expanding
its digital network and obtaining and retaining a sufficient number of
customers, and significant and sustained growth in the Company's cash flow will
be necessary for the Company to meet its debt service requirements, including
its obligations under the Notes. The Company does not currently, and there can
be no assurance that the Company will be able to, generate sufficient cash flows
to enable it to meet its debt service obligations. If the Company were unable to
generate sufficient cash flow or otherwise obtain funds necessary to make
required payments, or if the Company otherwise fails to comply with the various
covenants under the terms of its existing or future indebtedness, it could
trigger a default under the terms thereof, which would permit the holders of
such indebtedness to accelerate the maturity of such indebtedness and could
cause defaults under other indebtedness of the Company. Such defaults could
result in a default under the Notes and could delay or preclude payment of
interest and principal on the Notes. The ability of the Company to meet its
obligations will be dependent upon the future performance of the Company, which
will be subject to prevailing economic conditions and to financial, business,
regulatory and other factors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Description of the Notes."
HOLDING COMPANY STRUCTURE; PRIORITY OF SECURED DEBT
Pathnet, Inc. will be a holding company with no direct operations and no
significant assets other than the stock of its subsidiaries. As such, the
Company will be dependent on the cash flows of its subsidiaries to meet its
obligations, including the payment of principal and interest on the Notes. The
Company's subsidiaries will be separate legal entities that have no obligation
to pay any amounts due under the Notes or to make any funds available therefor,
whether by dividends, loans or other payments. The Company's subsidiaries will
not guarantee the payment of the Notes and the Notes will therefore be
effectively subordinated to the claims of the creditors of any such subsidiary
(including trade creditors and holders of indebtedness of such subsidiary),
except if and to the extent the Company is itself a creditor of such subsidiary,
in which case the claims of the Company would still be effectively subordinated
to any security interest in the assets of such subsidiary held by other
creditors or under the FPM Agreements. On the date of this Prospectus, the
Company's subsidiaries held no assets and had no liabilities. The Company
expects that its current and future subsidiaries will incur significant amounts
of equipment financing and other indebtedness in connection with the development
of its network. See "Management's Discussion and
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Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of the Notes."
The Notes are unsecured and therefore will be effectively subordinated to
any secured indebtedness of the Company to the extent of the value of the assets
securing such indebtedness. The Indenture will permit the Company and its
subsidiaries to incur an unlimited amount of secured indebtedness to finance the
acquisition of equipment, inventory and network assets. See "Description of the
Notes." Consequently, in the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding with respect to the Company, assets would
be available to satisfy obligations of such secured debt before any payment
could be made on the Notes. In addition, to the extent such assets did not
satisfy in full the secured indebtedness, the holders of such indebtedness would
have a claim for any shortfall that would rank equally in right of payment (or
effectively senior if the indebtedness were issued by a subsidiary) with the
Notes. Accordingly, there may only be a limited amount of assets available to
satisfy any claims of the holders of the Notes upon an acceleration of the
maturity of Notes.
SIGNIFICANT CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FINANCING
Deployment of the Company's network and expansion of the Company's
operations and services will require significant capital expenditures, primarily
for continued development and construction of its network and implementation of
the Company's sales and marketing strategy. The Company anticipates that it will
require approximately $120 million and $260 million to fund capital
expenditures, working capital and operating losses for the twelve-month periods
ending June 30, 1999 and 2000, respectively. By March 31, 2000, the Company
expects to have approximately 29,000 route miles operational plus additional
route miles under construction. The Company will need to seek additional
financing to fund capital expenditures and working capital to expand further its
network to its target of approximately 100,000 route miles. The Company
estimates that this will require substantial additional external financing but
presently has no negotiated commitments for any such additional financing. The
Company may also require additional capital for activities complementary to its
currently planned businesses, or in the event it decides to pursue network
development through acquisitions, joint ventures or strategic alliances. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of the Notes."
The actual amount of the Company's future capital requirements will depend
upon many factors, including the costs of network deployment in each of its
markets, the speed of the development of the Company's network, the extent of
competition and pricing of telecommunications services in its markets, other
strategic opportunities pursued by the Company and the acceptance of the
Company's services. Accordingly, there can be no assurance that the actual
amount of the Company's financing needs will not exceed, perhaps significantly,
the current estimates.
There can be no assurance that the Company will be successful in raising
additional capital on terms that it will consider acceptable, that the terms of
such indebtedness or other capital will not impair the Company's ability to
develop its business or that all available capital will be sufficient to service
its indebtedness. Sources of additional capital may include cash flow from
operations, additional equipment financing facilities and public and private
equity and debt financings. In addition, the Indenture contains, and other debt
instruments governing future indebtedness may contain, covenants that limit the
operational and financial flexibility of the Company. Failure to raise
sufficient funds may require the Company to modify, delay or abandon some of its
planned future expansion or expenditures, which could have a material adverse
effect on the Company's business, financial condition and results of operations,
including the Company's ability to make principal and interest payments on the
Notes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Description of the
Notes."
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RISKS OF COMPLETING THE COMPANY'S NETWORK; MARKET ACCEPTANCE
The Company's ability to achieve its strategic objectives will depend in
large part upon the successful, timely and cost effective completion of its
network, as well as on selling a substantial amount of its capacity. The
successful completion of the Company's network may be affected by a variety of
factors, uncertainties and contingencies, many of which are beyond the Company's
control. Although the Company believes that its cost estimates and build-out
schedules are reasonable, only 12% of route miles under contract have been
completed to date. There can be no assurance that the Company's network will be
completed as planned at the cost and within the time frame currently estimated,
if at all. In addition, the Company currently has only one contract relating to
the sale of capacity to Telecom Service Providers and there can be no assurances
that the Company will attract additional purchasers of capacity.
The successful and timely construction of the Company's network will depend
upon, among other things, the Company's ability to (i) obtain substantial
amounts of additional capital and financing at reasonable cost and on
satisfactory terms and conditions, (ii) manage effectively and efficiently the
construction of its network, (iii) enter into agreements with Incumbents and
other owners of telecommunications assets that will enable the Company to
leverage the assets of Incumbents and of other owners of telecommunications
assets, (iv) access markets and enter into customer contracts to sell capacity
on its network, (v) integrate successfully such networks and associated rights
acquired in connection with the development of the Company's network including
cost effective interconnections and (vi) obtain necessary FCC licenses and other
approvals. Successful construction of the Company's network also will depend
upon the timely performance by third party contractors of their obligations.
There can be no assurance that the Company will achieve any or all of these
objectives. Any failure by the Company to accomplish these objectives may have a
material adverse affect on the Company's business, financial condition and
results of operations. See "--Significant Capital Requirements; Uncertainties of
Additional Financing" and "-- Dependence on Relationship with Incumbents; Rights
of Incumbents to Certain Assets."
The development of the Company's network and the expansion of the Company's
business may involve acquisitions of other telecommunications businesses and
assets and implementation of other technologies either in lieu of or as a
supplement to the excess capacity created by upgrading Incumbents' networks. In
addition, the Company may enter into relationships with Telecom Service
Providers or other entities to manage existing assets or to deploy alternative
telecommunications technologies. If pursued, these opportunities could divert
the resources and management time of the Company and could require integration
with the Company's other operations. There can be no assurance that any such
opportunity, if pursued, could be successfully integrated into the Company's
operations or that any such opportunity would perform as expected. Furthermore,
as the Company builds out its network, there can be no assurance that the
Company will enter into agreements with the best suited Incumbents or such other
owners of telecommunications assets, as the case may be, or that the Company
will continue to pursue its core strategy of leveraging the assets of Incumbents
as opposed to other telecommunications assets, technologies or other markets.
Moreover, there can be no assurance that the resulting network will match or be
responsive to the demand for telecommunications capacity or will maximize the
possible revenue to be earned by the Company. There can be no assurance the
Company will be able to develop and expand its business and enter new markets as
currently planned. Failure of the Company to implement its expansion and growth
strategy successfully could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON RELATIONSHIP WITH INCUMBENTS; RIGHTS OF INCUMBENTS TO CERTAIN
ASSETS
Although the Company has entered into long-term contracts with six
Incumbents, entered into one binding term sheet with an independent tower
company, and is currently pursuing long-term contracts with 25 additional
Incumbents, there can be no assurances that existing long-term relationships
will be maintained or that additional long-term relationships will result on
terms acceptable to the Company, on
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terms substantially similar to those described herein or at all. If the Company
is not successful in negotiating such agreements, its ability to deploy its
network would be adversely affected.
The Company does not typically expect to own the underlying sites and
facilities upon which its network is deployed. Instead, the Company expects to
enter into long-term relationships with Incumbents whereby each such Incumbent
agrees to grant to the Company a leasehold interest in or a similar right to use
such Incumbent's facilities and infrastructure as is required for the Company to
deploy its network. In some cases, system assets may be held by subsidiaries in
which both the Company and the Incumbent own an interest. In the case of Idaho
Power, the Incumbent owns a majority interest in a subsidiary formed in April
1998 to hold its Initial System. As a result, the Company will depend on the
facilities and infrastructure of its Incumbents for the operation of its
business. Long-term relationships with Incumbents may expire or terminate if the
Company does not satisfy certain performance targets with respect to sales of
excess capacity or fails to commission an Initial System within specified time
periods. In such case, certain equipment relating to the Initial System will be
transferred to the Incumbent. Any such earlier than expected expiration of a
relationship with an Incumbent, and the resulting loss of use of the Initial
System and opportunity to utilize such segment of its network, could result in
the Company not being able to recoup its initial capital expenditure with
respect to such segment and could have a material adverse effect on the business
and financial condition of the Company. In addition, such a loss under certain
circumstances could result in an event of default under the Notes or the
Company's other financings. There can be no assurance that the Company will
continue to have access to such Incumbent's sites and facilities after the
expiration of such agreements or in the event that an Incumbent elects to
terminate its agreement with the Company. If such an agreement were terminated
or expires and the Company were forced to remove or abandon a significant
portion of its network, such termination or expiration, as the case may be,
could have a material adverse effect on the business, financial condition and
results of operations of the Company. See "Business--Agreements with Incumbents
and Other Owners of Telecommunications Assets."
The Company expects to rely significantly on its Incumbents for the
maintenance and provisioning of circuits on its network. The Company has entered
into maintenance agreements with three Incumbents and expects to enter into
agreements with additional Incumbents pursuant to which, among other things, the
Company will pay the Incumbent a monthly maintenance fee and a provisioning
services fee in exchange for such Incumbent providing maintenance and
provisioning services for that portion of the Company's network that primarily
resides along such Incumbent's system. Failure by the Company to enter
successfully into similar agreements with other Incumbents or the cancellation
or non-renewal of any of such existing agreements could have a material adverse
effect on the Company's business. To the extent the Company is unable to
establish similar arrangements in new markets with additional Incumbents or
establish replacement arrangements on systems where a maintenance agreement with
a particular Incumbent is canceled or not renewed, the Company may be required
to maintain its network and provision circuits on its network through
establishment of its own maintenance and provisioning workforce or by
outsourcing maintenance and provisioning to a third party. The Company's
operating costs under these conditions may increase. See "Business--Agreements
with Incumbents and Other Owners of Telecommunications Assets--Network
Maintenance and Provisioning of Circuits."
MANAGEMENT OF GROWTH
The Company's business plan may, if successfully implemented, result in
rapid expansion of its operations. Rapid expansion of the Company's operations
may place a significant strain on the Company's management, financial and other
resources. The Company's ability to manage future growth, should it occur, will
depend upon its ability to monitor operations, control costs, maintain
regulatory compliance, maintain effective quality controls and expand
significantly the Company's internal management, technical, information and
accounting systems and to attract and retain additional qualified personnel. See
"--Dependence on Key Personnel." Furthermore, as the Company's business develops
and expands, the
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Company will need additional facilities for its growing workforce. There can be
no assurance that the Company will successfully implement and maintain such
operational and financial systems or successfully obtain, integrate and utilize
the employees and management, operational and financial resources necessary to
manage a developing and expanding business in an evolving and increasingly
competitive industry which is subject to regulatory change. Any failure to
expand these areas and to implement and improve such systems, procedures and
controls in an efficient manner at a pace consistent with the growth of the
Company's business could have a material adverse effect on the business,
financial condition and results of operations of the Company.
The expansion and development of the Company's business will depend on,
among other things, the Company's ability to implement successfully its sales
and marketing strategy, evaluate markets, design network path routes, secure
financing, install facilities, obtain any required government authorizations,
implement interconnection to, and co-location with, facilities owned by
Incumbents, purchasers of capacity and other owners of telecommunications
assets. The Company's ability to implement its growth strategy successfully will
require the Company to enhance its operational, management, financial and
information systems and controls and to hire and retain qualified sales,
marketing, administrative, operating and technical personnel. There can be no
assurance that the Company will be able to do so, and any failure to accomplish
these objectives could result in lower than expected levels of customer service,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The success of the Company will depend to a significant extent upon the
abilities and continued efforts of its senior management, particularly members
of its senior management team, including David Schaeffer, Chairman, Richard A.
Jalkut, President and Chief Executive Officer, Kevin J. Bennis, Executive Vice
President serving as President of the Company's Communications Services Division
and Michael L. Brooks, Vice President of Network Development. Other than its
Employment Agreement with Richard Jalkut, the Company does not have any
employment agreements with, nor does the Company maintain "key man" insurance
on, these employees. The loss of the services of any such individuals could have
a material adverse effect on the Company's business, financial condition and
results of operations. The success of the Company will also depend, in part,
upon the Company's ability to identify, hire and retain additional key
management personnel, including the senior management, who are also being sought
by other businesses. Competition for qualified personnel in the
telecommunications industry is intense. The inability to identify, hire and
retain such personnel could have a material adverse effect on the Company's
results of operations. See "--Management of Growth" and "Management--Directors
and Executive Officers."
COMPETITION; PRICING PRESSURES
The telecommunications industry is highly competitive. In particular, price
competition in the 'carrier's carrier' market has generally been intense and is
expected to increase. The Company competes and expects to compete with numerous
competitors who have substantially greater financial and technical resources,
long-standing relationships with their customers and potential to subsidize
competitive services from less competitive service revenues and from federal
universal service subsidies. Such competitors may be operators of existing or
newly deployed wireline or wireless telecommunications networks. The Company
will also face intense competition due to an increased supply of
telecommunications capacity, the effects of deregulation and the development of
new technologies, including technologies that will increase the capacity of
existing networks.
The Company anticipates that prices for its 'carrier's carrier' services
will continue to decline over the next several years. The Company is aware that
certain long distance carriers are expanding their capacity and believes that
other long distance carriers, as well as potential new entrants to the industry,
are constructing new microwave, fiber optic and other long distance transmission
networks in the United
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States. If industry capacity expansion results in capacity that exceeds overall
demand along the Company's routes, severe additional pricing pressure could
develop. As a result, within a few years, the Company could face dramatic and
substantial price reductions. Such pricing pressure could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
While the Company generally will not compete with Telecom Service Providers
for end-user customers, the Company may compete, on certain routes, as a
'carrier's carrier' with long-distance carriers such as AT&T, MCI, Sprint,
WorldCom, Inc. ("WorldCom") and operators of nationwide fiber optic systems such
as IXC Communications, Inc., Qwest and Level 3 Communications, Inc. who would
otherwise be the Company's customers in second and third tier markets. The
Company will also face competition increasingly in the long haul market from
local exchange carriers, regional network providers, resellers and satellite
carriers and may eventually compete with public utilities and cable companies.
In particular, RBOCs are now allowed to provide inter-LATA long distance
services outside their home regions, as well as inter-LATA mobile services
within their regions. RBOCs will be allowed to provide inter-LATA long distance
services within their regions after meeting certain regulatory requirements
intended to foster opportunities for local telephone competition. Certain RBOCs
have requested regulatory approval to provide inter-LATA data services within
their regions. The RBOCs already have extensive fiber optic cable, switching,
and other network facilities in their respective regions that can be used for
their long distance services after a waiting period. In addition, other new
competitors may build additional fiber capacity in the geographic areas served
and to be served by the Company.
The Company may also face competitors seeking to deploy a digital wireless
network in the same manner as the Company by leveraging the assets of Incumbents
or other owners of telecommunications assets or from Incumbents leveraging their
own assets. Although the Company believes its strategy will provide it with a
cost advantage, there can be no assurance that technological developments will
not result in competitors achieving even greater cost efficiency and therefore a
competitive advantage. See "--Risk of Rapid Technological Changes."
A continuing trend toward business combinations and strategic alliances in
the telecommunications industry may create stronger competitors to the Company,
as the resulting firms and alliances are likely to have significant
technological, marketing and financing resources which will, in many cases, be
greater than those available to the Company. See "Business--Competition."
RELIANCE ON EQUIPMENT SUPPLIERS
The Company currently purchases most of its telecommunications equipment
pursuant to an agreement with NEC America Inc. and its affiliates ("NEC") and
has entered into an equipment purchase agreement with Andrew Equipment
Corporation ("Andrew"). Any reduction or interruption in supply from either
supplier or any increase in prices for such equipment could have a disruptive
effect on the Company. Currently NEC is the only manufacturer of SONET radios
that are compatible with the Company's proposed system design and reliability
standards, although Northern Telecom Ltd. ("Nortel"), Harris Corporation and
Alcatel Alsthom Compagnie Generale d'Electricite SA ("Alcatel") are in the
process of developing and testing a similar product which would be compatible
with the Company's SONET wireless network. Further, the Company does not
manufacture, nor does it have the capability to manufacture, any of the
telecommunications equipment used on its network. As a result, the failure of
the Company to procure sufficient equipment produced by NEC at reasonable prices
could adversely affect the Company's successful deployment of its network and
results of operations. See "Business--Equipment Supply Agreements."
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TECHNICAL LIMITATIONS OF THE NETWORK
The Company's network requires a direct line of sight between two antennae
(each such interval comprising a "path") and are subject to distance
limitations, freespace fade, multipath fade and rain attenuation. In order to
meet industry standards for reliability, the maximum length of a single path
similar to those being designed by the Company is generally limited to 40 miles
and, as a result, intermediate sites in the form of back-to-back terminals or
repeaters are required to permit digital wireless transmission beyond this limit
based on the climate and topographic conditions of each path. In the absence of
a direct line of sight, additional sites may be required to circumvent
obstacles, such as tall buildings in urban areas or mountains in rural areas.
Topographic conditions of a path and climate can cause reflections of signals
from the ground which can affect the transmission quality of digital wireless
services. In addition, in areas of heavy rainfall, the intensity of rainfall and
the size of the raindrops can affect the transmission quality of digital
wireless services. Paths in these areas are engineered for shorter distances to
maintain transmission quality and use space diversity, frequency diversity,
adaptive power control and forward error correction to minimize transmission
errors. The Company will not be able to offer route diversity until such time as
it has completed a substantial portion of its mature network. The use of
additional sites and shorter paths to overcome obstructions, multipath fade or
rain attenuation will increase the Company's capital costs. While these
increased costs may not be significant in all cases, such costs may render
digital wireless services uneconomical in certain circumstances.
Due to line of sight limitations, the Company currently installs its
antennae on towers, the rooftops of buildings or other tall structures. Line of
sight and distance limitations generally do not present problems because
Incumbents have already selected, developed and constructed unobstructed
transmission sites. In certain instances, however, the additional frequencies
required for the excess capacity to be installed by the Company may not be
available from Incumbents' existing sites. In these instances, the Company
generally expects to use another developed site already owned or leased by such
Incumbent. In some instances, however, the Company has encountered, and may in
the future encounter, line of sight, frequency blockage and distance limitations
that cannot be solved economically. While the effect on the financial condition
and results of operations of the Company resulting from such cases has been
minimal to date, there can be no assurance that such limitations will not be
encountered more frequently as the Company expands its network. Such limitations
may have a material adverse effect on the Company's future development costs and
results of operations. In addition, the current lack of compression applications
for wireless technology limits the Company's ability to increase capacity
without significant capital expenditures for additional equipment.
In order to obtain the necessary access to install its radios, antennae and
other equipment required for interconnection to the PSTN or to POPs of the
Company's capacity purchasers, the Company must acquire the necessary rights and
enter into the arrangements to deploy and operate such interconnection
equipment. There can be no assurance that the Company will succeed in obtaining
the rights necessary to deploy its interconnection equipment in its market areas
on acceptable terms, if at all, or that delays in obtaining such rights will not
have a material adverse effect on the Company's development or results of
operations.
RISK OF RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. Although the Company believes that, for the foreseeable future,
these changes will neither materially affect the continued use of its network
equipment, nor materially hinder its ability to acquire necessary technologies,
the effect of technological changes on the business of the Company, such as
changes relating to emerging wireline (including fiber optic) and wireless
(including broadband) transmission technologies, cannot be predicted. There can
be no assurance that (i) the Company's network will not be economically or
technically outmoded by technology or services now existing or developed and
implemented in the future, (ii) the Company will have sufficient resources to
develop or acquire new technologies or to introduce new
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services capable of competing with future technologies or service offerings or
(iii) the cost of the equipment used on its network will decline as rapidly as
that of competitive alternatives. The occurrence of any of the foregoing events
may have a material adverse effect on the operations of the Company and the
ability of the Company to make principal and interest payments on its
outstanding indebtedness.
REGULATION
The Company's arrangements with Incumbents contemplate that the Company's
digital network will provide largely "common carrier fixed point-to-point
microwave" telecommunications services under Part 101 of the FCC's Rules ("Part
101"), which services are subject to regulation by federal, state and local
governmental agencies. Changes in existing federal, state or local laws and
regulations, including those relating to the provision of Part 101
telecommunications services, any failure or significant delay in obtaining
necessary licenses, permits or renewals, or any expansion of the Company's
business that subjects the Company to additional regulatory requirements could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
LICENSING BY THE COMPANY AND INCUMBENTS. Many Incumbents whose existing
systems operate in the 2 GHz band of the frequency spectrum will be required to
relocate their systems and operations to the 6 GHz band or other alternate
spectrum. In most instances the Company will enter into a strategic relationship
with an Incumbent and, as part of the upgrade of such Incumbent's system, the
Company will license the upgraded network in the 6 GHz band, which will depend
on its obtaining newly issued Part 101 licenses for the use of existing
facilities and infrastructure of such relocated Incumbents.
The Company intends to establish any such arrangement so as to ensure that
there is no DE FACTO transfer of control of a FCC license from an Incumbent,
which has obtained authorization from the FCC to operate a Part 101
telecommunications system at the newly occupied 6 GHz location (a "Licensed
Incumbent"), to the Company, because such a transfer without FCC consent would
violate the FCC's rules. Because any review by the FCC of such an arrangement
would be fact specific and would involve the review of conduct that has not yet
occurred, there can be no assurance that, if such an arrangement between the
Company and a Licensed Incumbent were challenged, the FCC would not deem such as
arrangement to constitute an unauthorized transfer of control. Such a finding
could result in a restructuring of the arrangement with a Licensed Incumbent or
the loss of the FCC license.
MUTUAL EXCLUSIVITY. Pursuant to its arrangements with Incumbents, the
Company will, in most cases, apply to the FCC for new Part 101 licenses to
operate in the 6 GHz band. As each such Part 101 license is granted by the FCC
with respect to the frequencies to be used between two specific points as
designated by specific latitude and longitude coordinates, and as Incumbents
already own the infrastructure and sites that comprise each such licensed point
along the network, the Company expects to be the first and only entity to apply
for these licenses at or near the specific locations and in the frequencies to
be designated by the Company, and hence to have licensing priority under the
FCC's procedures. There can be no assurance, however, that other entities will
not seek licenses to operate in the same portion of the frequency spectrum as
the Company, in locations geographically close to those designated by the
Company.
In the event that a mutually exclusive situation were to arise, the FCC may
hold a comparative hearing to decide which applicant will be awarded the
relevant licenses, in which case there can be no assurance that the Company
would be able to obtain the desired license. In the event that numerous mutually
exclusive applications were to be filed, the FCC may decide to impose a filing
freeze with respect to additional applications, and would, in the interim,
decide on the most appropriate manner in which to resolve the mutual
exclusivity. In this vein, the FCC may decide to seek from Congress enabling
legislation that would permit the FCC to hold an auction in order to determine
which of the competing applicants would obtain the sought-after licenses, in
which case the Company could be required to pay potentially large sums in order
to obtain the necessary license, and there would be no assurance that the
Company would be able ultimately to obtain any auctioned licenses. The FCC might
also decide to impose fees on
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the use of the desired spectrum, in which case the Company would be required to
pay potentially large sums in order to obtain and use its FCC licenses.
FREQUENCY COORDINATION. Prior to applying to the FCC for authorization to
use portions of the 6 GHz band, the Company must coordinate its use of the
frequency with any existing licensees, permittees, and applicants in the same
area whose facilities could be subject to interference as a result of the
Company's proposed use of the spectrum. There can be no assurance in any
particular case that the Company will not encounter other entities and proposed
uses of the desired spectrum that would interfere with the Company's planned
use, and that the Company will be able to successfully coordinate such usage
with such entities. See "--Technical Limitations of the Network." If the Company
were unable to coordinate effectively with other users of or applicants for the
spectrum at a substantial number of proposed sites, there can be no assurance
that the Company would be able to obtain and retain the licenses necessary for
the successful operation of the Company's network.
FCC LICENSE REQUIREMENTS. As part of the requirements of obtaining a Part
101 license, the FCC will require the Company to demonstrate the site owner's
compliance with the reporting, notification and technical requirements of the
Federal Aviation Administration ("FAA") with respect to the construction,
installation, location, lighting and painting of transmitter towers and
antennae, such as those to be used by the Company in the operation of its
network. Specifically, the FCC requires compliance with the FAA's notification
requirement, and where such notification is required, a "no hazard"
determination from the FAA before granting a license with respect to a
particular facility. Any failure by the Company to comply with the FAA's
notification procedures, any finding of a hazard by the FAA with respect to a
proposed new or substantially modified facility, or any delay on the part of the
FAA in making such a finding, may have an adverse effect on the Company's
ability to obtain in a timely manner all necessary FCC licenses in accordance
with its business plan.
In addition to FAA requirements, in order to obtain the Part 101 licenses
necessary for the operation of its network, the Company, and in some cases
Licensed Incumbents, will have to file applications with the FCC for such
licenses and demonstrate compliance with routine technical and legal
qualification to be an FCC licensee. The Company must also obtain FCC
authorization before transferring control of any of its licenses or making
certain modifications to a licensed facility. Such requirements for obtaining
such Part 101 licenses and for transferring such licenses include items such as
certifying to the FCC that frequency coordination has been completed, disclosing
the identity and relationship of all entities directly or indirectly owning or
controlling the applicant, and demonstrating the applicant's legal, technical
and other qualifications to be an FCC licensee. Nevertheless, there can be no
assurance that the Company or any Licensed Incumbent will obtain all of the
licenses or approvals necessary for the operation of the Company's 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 or
approval.
CONSTRUCTION OF FACILITIES AND CHANNEL LOADING REQUIREMENTS. Under the
FCC's rules, the Company will be required to have each licensed Part 101
facility constructed and "in operation" (I.E., capable of providing service),
and to complete each authorized modification to an existing facility, within 18
months of the grant of the necessary license or approval. Failure to meet the
FCC's timetable for construction or operation or to obtain an extension of said
timetable will automatically cancel the underlying license or approval, to the
detriment of the Company's ability to execute its business plan. A license or
authorization will also lapse if, after construction and operation, the facility
is removed or altered to render it non-operational for a period of 30 days or
more. Similarly, the FCC's rules provide that, in the absence of the Company
obtaining a waiver of such rule, any authorized Part 101 station that fails to
transmit operational traffic during any 12 consecutive months after construction
is complete is considered permanently discontinued under the FCC's rules, and
its underlying license is forfeited. In addition, the FCC requires that a
certain portion of the available channels on Part 101 digital systems be loaded
with traffic within 30 months of licensing. There can be no assurance that the
Company's Part 101 licenses will not lapse because
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of failure to meet the FCC's construction or channel loading benchmarks or to
obtain an extension of such deadlines, or because of the Company's failure to
comply with the FCC's requirements with respect to operational traffic.
FCC LICENSE RENEWAL. The Part 101 licenses obtained by the Company or a
Licensed Incumbent will be issued for a term of 10 years, after which such
licenses will have to be renewed by the filing of applications with the FCC.
Although such renewals are typically granted routinely, there can be no
assurance that necessary license renewals will be granted by the FCC.
PROVISION OF COMMON AND PRIVATE CARRIER SERVICES. The Company's and
Licensed Incumbents' Part 101 licenses will allow the Company to sell excess
capacity on its network to the customers targeted under the Company's business
plan. Although the Part 101 licenses that the Company and Licensed Incumbents
will hold are designated for "common carriers," under the FCC's rules, a Part
101 licensee may provide both common carriage and private carriage over Part 101
facilities. The Company is currently offering, and expects to offer in the
future, its services on a private carrier basis. The Company's private carrier
services will be essentially unregulated, while any common carrier offerings
would be subject to additional regulations and reporting requirements including
payment of additional fees and compliance with additional rules and regulations
including that any such services must be offered pursuant to filed tariffs and
non-discriminatory terms, rates and practices. There can be no assurance that
the FCC will not find that some or all of the private carrier services offered
by the Company are in fact common carrier services, and thus subject to such
additional regulations and reporting requirements including the
non-discrimination and tariff filing requirements imposed on common carriers, in
which case the Company may be required to pay additional fees or adjust, modify
or cease provision of certain of its services in order to comply with any such
regulations, including offering such services on the same terms and conditions
to all of those seeking such services, and pursuant to rates made public in
tariff filings at the FCC.
FOREIGN OWNERSHIP. As the licensee of facilities designated for common
carriage, the Company is subject to Section 310(b)(4) of the Communications Act,
which by its terms restricts the holding company of an FCC common carrier
licensee (the Company is such a holding company, because it expects to hold all
FCC licenses indirectly, through subsidiaries) to a maximum of 25% foreign
ownership and/or voting control. The FCC has determined that it will allow a
higher level (up to 100%) on a blanket basis with respect to all common carrier
licensees, but only for foreign ownership by citizens of, or companies organized
under the laws of, World Trade Organization ("WTO") member countries. The FCC
continues to apply the 25% foreign ownership limitation with respect to citizens
or corporations of non-WTO nations.
Although the Company is presently within the 25% foreign ownership
limitation, there can be no assurance that, as a result of future financings,
the Company will not exceed this limitation, in which case the Company would
have to analyze its foreign ownership with respect to the WTO status of the
nations with which the Company's foreign owners are associated. In addition, if
any Incumbent elects to be a Licensed Incumbent on the portion of the Company's
network relating to its system, such Licensed Incumbent would also be subject to
such foreign ownership restrictions. If such analysis showed that the Company or
any Licensed Incumbent had more than 25% foreign ownership from non-WTO member
nations, the Company or such Licensed Incumbent, as the case may be, would have
to seek a further ruling from the FCC and/or reduce its non-WTO foreign
ownership. In the event that a Licensed Incumbent were to choose to hold the
relevant Part 101 license itself, and not through a holding company, that
Licensed Incumbent would be subject to Section 310(b)(3) of the Communications
Act, which limits direct foreign ownership of FCC licenses to 20%. The FCC does
not have discretion to waive this limitation, and there can be no assurance than
such a Licensed Incumbent would not exceed the 20% limitation, in which case the
Licensed Incumbent would be required to reduce its foreign ownership in order to
obtain or retain its Part 101 license.
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STATE AND LOCAL REGULATION. Although the Company expects to provide most of
its services on an interstate basis, in those instances where the Company
provides service on an intrastate basis, the Company may be required to obtain a
certification to operate from state utility commissions in certain of the states
where such interstate services are provided, and may be required to file tariffs
covering such intrastate services. In addition, the Company may be required to
obtain authorizations from or notify such states with respect to certain
transfers or issuances of capital stock of the Company. The Company does not
expect any such state or local requirements to be burdensome; however, there can
be no assurance that the Company will obtain all of the necessary state and
local approvals and consents or that the failure to obtain such approvals and
consents will not have a material adverse affect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that Incumbents will be able to obtain all necessary authorizations or
permits from state or local authorities, or that state or local authorities will
not impose burdensome taxes, requirements or conditions on the Incumbent or the
Company.
RADIO FREQUENCY EMISSION CONCERNS
The use of wireless equipment may pose health risks to humans due to radio
frequency ("RF") emissions from the radios and antennae. Any allegations of
health risks, if proven, could result in liability on the part of the Company.
The FCC recently adopted new guidelines and methods for evaluating the
environmental effects of RF emissions from FCC regulated transmitters, including
wireless antennae which are more stringent than those previously in effect. The
FCC also incorporated into its rules provisions of the Communications Act which
preempt state or local government regulation of wireless service facilities
based on environmental effects, to the extent such facilities comply with the
FCC's rules concerning such RF emissions. The Company cannot predict whether
more stringent laws or regulations will be enacted in the future. Compliance
with more stringent laws or regulations regarding RF emissions could in the
future require material expenditures by the Company which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CONTROL BY EXISTING STOCKHOLDERS
The Company's principal equity investors (collectively, the "Original
Investors"), including Spectrum, NEA, Onset Enterprise Associates II, L.P.,
Toronto Dominion Capital (U.S.A.) Inc., Grotech Partners IV, L.P. and David
Schaeffer, Chairman of the Company, beneficially own % of the common stock
of the Company on a pro forma basis after giving effect to the Transactions. As
a result, the Original Investors have the ability to control the election of the
members of the Company's Board of Directors and the outcome of all corporate
actions requiring stockholder approval. The Original Investors, as stockholders
of the Company and through their ability to control the election of directors,
may authorize actions that could have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider in its best interest, including an attempt that might result in the
receipt of a premium over the market price for the shares held by such
stockholder. See "Security Ownership of Certain Beneficial Owners and
Management."
INVESTMENT COMPANY ACT CONSIDERATIONS
After the consummation of the Transactions, the Company will have
substantial cash, cash equivalents and short-term investments. The Company
intends to invest the proceeds of its financing activities so as to preserve
capital by investing in short-term instruments consistent with prudent cash
management and not primarily for the purpose of achieving investment returns.
Investment in securities primarily for the purpose of achieving investment
returns could result in the Company being treated as an "investment company"
under the Investment Company Act of 1940 (the "1940 Act"). The 1940 Act requires
the registration of, and imposes various substantive restrictions on, investment
companies that are, or hold themselves out as being, engaged primarily, or
propose to engage primarily in, the business of investing,
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reinvesting or trading in securities, or that fail certain statistical tests
regarding the composition of assets and sources of income and are not primarily
engaged in businesses other than investing, reinvesting, owning, holding or
trading securities.
The Company believes that it is primarily engaged in a business other than
investing, reinvesting, owning, holding or trading securities and, therefore, is
not an investment company within the meaning of the 1940 Act. If the Company
were required to register as an investment company under the 1940 Act, it would
become subject to substantial regulation with respect to its capital structure,
management, operations, transactions with affiliated persons (as defined in the
1940 Act) and other matters. Application of the provisions of the 1940 Act to
the Company would have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK OF DETERMINATION OF A FRAUDULENT CONVEYANCE
If the court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy or the Company as a
debtor-in-possession, were to find under relevant federal or state fraudulent
conveyance statutes that the Company did not receive fair consideration or
reasonably equivalent value for certain of the indebtedness, including the
Notes, incurred by the Company, and that, at the time of such incurrence, the
Company (i) was insolvent, (ii) was rendered insolvent by reason of such
incurrence or grant, (iii) was engaged in a business or transaction for which
the assets remaining with the Company constituted unreasonably small capital or
(iv) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court, subject to applicable
statutes of limitation, could void the Company's obligations under the Notes,
subordinate the Notes to other indebtedness of the Company or take other action
detrimental to the holders of the Notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than the fair value of all of that company's property, or if the present
fair salable value of that company's assets is less than the amount that will be
required to pay its probable liability on its existing debts as they become
absolute and matured. Moreover, regardless of solvency, a court could void an
incurrence of indebtedness, including the Notes, if it determined that such
transaction was made with intent to hinder, delay or defraud creditors, or a
court could subordinate the indebtedness, including the Notes, to the claims of
all existing and future creditors on similar grounds. There can be no assurance
as to what standard a court would apply in order to determine whether the
Company was "insolvent" in connection with the sale of Existing Notes or the
issuance of New Notes pursuant to this Exchange Offer.
ABSENCE OF PUBLIC MARKET
There is no public trading market for the New Notes, and the Company does
not intend to apply for listing of New Notes, on any national securities
exchange or for quotation of the New Notes on any automated dealer quotation
system. No assurance can be given as to the liquidity of the trading market for
the New Notes or that an active public market for the New Notes will develop. If
an active trading market for the New Notes does not develop, the market price
and liquidity of the New Notes may be adversely affected. If the New Notes are
traded, they may trade at a discount from their initial offering price,
depending on prevailing interest rates, the market for similar securities, the
performance of the Company and certain other factors.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Existing Notes who do not exchange their Existing Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to
exemptions from,
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or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Existing
Notes may not be offered or sold unless registered under the Securities Act and
applicable state laws, or pursuant to an exemption therefrom. The Company does
not intend to register the Existing Notes under the Securities Act, other than
in the limited circumstances contemplated by the Registration Rights Agreement.
In addition, any holder of Existing Notes who tenders in the Exchange Offer for
the purpose of participating in a distribution of the New Notes may be deemed to
have received restricted securities and, if so, will be required to comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. To the extent that Existing Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
or tendered but unaccepted Existing Notes could be adversely affected. See "The
Exchange Offer--Consequences of Failure to Exchange; Resales of New Notes."
NECESSITY TO COMPLY WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer, and to avoid the restrictions on
transfer of the Existing Notes, holders of Existing Notes must transmit a
properly completed Letter of Transmittal, including all other documents required
by such Letter of Transmittal, to the Exchange Agent at one of the addresses set
forth below under "The Exchange Offer--Exchange Agent" on or prior to the
Expiration Date. In addition, either (i) certificates for such Existing Notes
must be received by the Exchange Agent along with the Letter of Transmittal or
(ii) a timely confirmation of a book-entry transfer described in this
Prospectus, must be received by the Exchange Agent on or prior to the Expiration
Date or (iii) the holder must comply with the guaranteed delivery procedures
described in this Prospectus. See "The Exchange Offer."
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THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $350.0 million
aggregate principal amount of New Notes for a like aggregate principal amount of
Existing Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Existing Notes. The total
aggregate principal amount of Existing Notes and New Notes will in no event
exceed $350.0 million.
As of the date of this Prospectus, $350.0 million aggregate principal amount
of the Existing Notes are outstanding. This Prospectus, together with the Letter
of Transmittal, is first being sent on or about , 1998, to all holders
of Existing Notes known to the Company. The Company's obligation to accept
Existing Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under "--Conditions to the Exchange Offer" below.
PURPOSE OF THE EXCHANGE OFFER
The Existing Notes were issued by the Company on April 8, 1998 in a
transaction exempt from the registration requirements of the Securities Act.
Accordingly, the Existing Notes may not be reoffered, resold, or otherwise
transferred in the United States unless so registered or unless an applicable
exemption from the registration and prospectus delivery requirements of the
Securities Act is available.
In connection with the issuance and sale of the Existing Notes, the Company
entered into the Registration Rights Agreement, which requires the Company to
file on or before June 7, 1998 (60 days after the date of issuance of the
Existing Notes) a registration statement relating to the Exchange Offer (or use
its best efforts to file a shelf registration statement relating to resales of
the Existing Notes) and to use its best efforts to cause the registration
statement relating to the Exchange Offer or the shelf registration statement to
become effective on or before September 5, 1998 (150 days after the date of
issuance of the Existing Notes). The Exchange Offer is being made by the Company
to satisfy certain of their obligations with respect to the Registration Rights
Agreement.
Based on certain no-action letters issued by the staff of the Commission to
third parties in unrelated transactions, the Company believes that the New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any such holder that is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) any broker-dealer that purchases New Notes from the
Company to resell pursuant to Rule 144A or any other available exemption)
without compliance with the registration and prospectus delivery requirements of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with any person to participate in the distribution of such New
Notes and are not participating in, and do not intend to participate in, the
distribution of such New Notes. The Company has not sought, and does not intend
to seek, its own no-action letter with regard to the Exchange Offer.
Accordingly, there can be no assurance that the staff of the Commission would
make a similar determination with respect to the Exchange Offer. Any holder of
Existing Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the New Notes may be deemed to have received
restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Thus, any New Notes acquired by
such holders will not be freely transferable except in compliance with the
Securities Act. A secondary resale transaction in the United States by a holder
using the Exchange Offer to participate in a distribution of Existing Notes must
be covered by an effective registration statement containing the selling
security holder information required by Item 507 of Regulation S-K under the
Securities Act. See "--Consequences of Failure to Exchange; Resale of New
Notes."
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EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, has extended the
period of time for which the Exchange Offer is open (such date, as it may be
extended, is referred to herein as the "Expiration Date"). The Expiration Date
will be at least 20 business days after the commencement of the Exchange Offer
in accordance with Rule 14e-1(a) under the Exchange Act. In addition, the
Company has agreed in the Registration Rights Agreement to keep the Exchange
Offer open for not less than 20 business days after the date that notice thereof
is first mailed to the holders of the Existing Notes. The Company expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the Exchange Offer is open, and thereby delay acceptance for
exchange of any Existing Notes, by giving oral notice (promptly confirmed in
writing) or written notice to the Exchange Agent and by giving written notice of
such extension to the holders thereof or by press release or other public
announcement communicated, unless otherwise required by applicable law or
regulation, in each case, no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. During any
such extension, all Existing Notes previously tendered will remain subject to
the Exchange Offer unless properly withdrawn.
In addition, the Company expressly reserves the right to terminate or amend
the Exchange Offer and not to accept for exchange any Existing Notes not
theretofore accepted for exchange upon the occurrence of any of the events
specified below under "--Conditions to the Exchange Offer." If any such
termination or amendment occurs, the Company will notify the Exchange Agent and
will either issue a press release or give oral or written notice to the holders
of the Existing Notes as promptly as practicable.
For purposes of the Exchange Offer, the term "business day" has the meaning
set forth in Rule 14d-1(c)(6) under the Exchange Act.
PROCEDURES FOR TENDERING EXISTING NOTES
The tender to the Company of Existing Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Existing Notes may tender the same by (i) properly completing
and signing the Letter of Transmittal or a facsimile thereof (all references in
this Prospectus to the Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates representing the Existing Notes being tendered and any required
signature guarantees, to the Exchange Agent at its address set forth below on or
prior to the Expiration Date (or complying with the procedure for book-entry
transfer described below) or (ii) complying with the guaranteed delivery
procedures described below. A tender will not be deemed to have been timely
received if the tendering holder's properly completed and duly signed Letter of
Transmittal accompanied by the Existing Notes is mailed prior to the Expiration
Date but is received by the Exchange Agent after the Expiration Date.
THE METHOD OF DELIVERY OF EXISTING NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO INSURE TIMELY DELIVERY. NO EXISTING NOTES OR LETTERS OF TRANSMITTAL
SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Existing Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Existing Notes
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
amount of an
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Eligible Institution (as defined herein). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered U.S. national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Existing Notes are registered in the name of a person other
than a signer of the Letter of Transmittal, the Existing Notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder with the
signature thereon guaranteed by an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the
Existing Notes at the book-entry transfer facility, The Depository Trust
Company, for the purpose of facilitating the Exchange Offer, and subject to the
establishment thereof, any financial institution that is a participant in the
book-entry transfer facility's system may make book-entry delivery of Existing
Notes by causing such book-entry transfer facility to transfer such Existing
Notes into the Exchange Agent's account with respect to the Existing Notes in
accordance with the book-entry transfer facility's procedures for such transfer.
Although delivery of Existing Notes may be effected through book-entry transfer
into the Exchange Agent's account at the book-entry transfer facility, an
appropriate Letter of Transmittal with any required signature guarantee and all
other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Existing Note to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below on or prior to the Expiration Date a letter,
telegram or facsimile transmission from an Eligible Institution setting forth
the name and address of the tendering holder, the names in which the Existing
Notes are registered and, if possible, the certificate numbers of the Existing
Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange ("NYSE") trading days
after the Expiration Date the Existing Notes in proper form for transfer (or a
confirmation of book-entry transfer of such Existing Notes into the Exchange
Agent's account at the book-entry transfer facility), will be delivered by such
Eligible Institution together with a properly completed and duly executed Letter
of Transmittal (and any other required documents). Unless Existing Notes being
tendered by the above-described method are deposited with the Exchange Agent
within the time period set forth above (accompanied or preceded by a properly
completed Letter of Transmittal and any other required documents), the Company
may, at its option, reject the tender. Copies of a Notice of Guaranteed Delivery
which may be used by Eligible Institutions for the purposes described in this
paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Existing Notes (or a confirmation of book-entry transfer of
such Existing Notes into the Exchange Agent's account at the book-entry transfer
facility) is received by the Exchange Agent, or (ii) a Notice of Guaranteed
Delivery or letter, telegram or facsimile transmission to similar effect (as
provided above) from an Eligible Institution is received by the Exchange Agent.
Issuances of New Notes in exchange for Existing Notes tendered pursuant to a
Notice of Guaranteed Delivery or letter, telegram or facsimile transmission to
similar effect (as provided above) by an Eligible Institution will be made only
against deposit of the Letter of Transmittal (and any other required documents)
and the tendered Existing Notes.
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All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Existing Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Existing Notes not timely or properly tendered or to
not accept any particular Existing Notes which acceptance might, in the judgment
of the Company or its counsel, be unlawful. The Company also reserves the
absolute right to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Existing Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Existing Notes in the Exchange Offer). The interpretation of
the terms and conditions of the Exchange Offer as to any particular Existing
Notes either before or after the Expiration Date (including the Letter of
Transmittal and the instructions thereto) by the Company shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Existing Notes for exchange must be cured within such
reasonable period of time as the Company shall determine. Neither the Company,
the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of
Existing Notes for exchange, nor shall any of them incur any liability for
failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Existing Notes, such Existing Notes must be
endorsed or accompanied by appropriate powers of attorney, in either case signed
exactly as the name or names of the registered holder or holders appear on the
Existing Notes.
If the Letter of Transmittal or any Existing Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by the
Company, proper evidence satisfaction to the Company of their authority to so
act must be submitted.
By tendering, each holder will represent to the Company in the Letter of
Transmittal that, among other things, the New Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
person receiving such New Notes, whether or not such person is the holder, that
neither the holder nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such New Notes, that
neither the holder nor any such other person is participating in or intends to
participate in the distribution of such New Notes and that neither the holder
nor any such other person is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company.
Each broker-dealer that receives New Notes for its own account in exchange
for Existing Notes, where such Existing Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, may be deemed to be an "underwriter" within the meaning of the
Securities Act and must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such New
Notes. See "Plan of Distribution."
WITHDRAWAL RIGHTS
Tender of Existing Notes may be withdrawn at any time prior to the close of
business, New York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent prior to the Expiration Date at its address
set forth below. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Existing Notes to be withdrawn (the "Depositor"),
(ii) identify the Existing Notes to be withdrawn (including the certificate
number or numbers and principal amount of such Existing Notes), (iii) be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal by which such Existing Notes were tendered or as otherwise described
above (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee
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under the Indenture register the transfer of such Existing Notes into the name
of the person withdrawing the tender and (iv) specify the name in which any such
Existing Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company in its sole
discretion, which determination will be final and binding on all parties. Any
Existing Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Existing Notes which have been
tendered for exchange and which are properly withdrawn will be returned to the
holder thereof without cost to such holder as soon as practicable after such
withdrawal. Properly withdrawn Existing Notes may be retendered by following one
of the procedures described under "--Procedures for Tendering Existing Notes"
above at any time on or prior to the Expiration Date.
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Existing Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Existing Notes. See "--Conditions to the Exchange Offer" below. For purposes of
the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Existing Notes for exchange when, as and if the Company has given oral
or written notice thereof to the Exchange Agent.
For each Existing Note accepted for exchange, the holder of such Existing
Note will receive a New Note having a principal amount equal to that of the
surrendered Existing Note.
In all cases, issuance of New Notes for Existing Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Existing Notes or a timely
book-entry confirmation of such Existing Notes into the Exchange Agent's account
at the book-entry transfer facility, a properly completed and duly executed
Letter of Transmittal and all other required documents. If any tendered Existing
Notes are not accepted for any reason set forth in the terms and conditions of
the Exchange Offer or if Existing Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged
Existing Notes will be returned without expense to the tendering holder thereof
(or, in the case of Existing Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described below, such non-exchanged Existing
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility) as promptly as practicable after the expiration of the Exchange Offer.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Existing Notes and may terminate or amend the Exchange Offer if at any time
on or after the date of this Prospectus and prior to the Expiration Date any of
the following events shall occur:
(i) any action or proceeding shall have been instituted or threatened in any
court or before any governmental agency or body that in the Company's
judgment would reasonably be expected to prohibit, prevent or otherwise
impair the ability of the Company to proceed with the Exchange Offer;
(ii) there shall occur a change in the current interpretation of the staff of
the Commission which current interpretation permits the New Notes issued
pursuant to the Exchange Offer in exchange for the Existing Notes to be
offered for resale, resold or otherwise transferred by holders thereof
(other than (i) a broker-dealer who purchases such New Notes directly from
the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person that is an affiliate
of the Company within the meaning of Rule 405 under the Securities Act),
without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such
30
<PAGE>
New Notes are acquired in the ordinary course of such holders' business
and such holders have no arrangement with any person to participate in the
distribution of the New Notes;
(iii) a law, statute, rule or regulation shall have been adopted or enacted
which, in the Company's judgment, would reasonably be expected to impair
the ability of the Company to proceed with the Exchange Offer;
(iv) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement or the qualification of the Indenture under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"), or proceedings shall
have been initiated or, to the knowledge of the Company, threatened for
that purpose, or any governmental approval has not been obtained, which
approval the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby; or
(v) any change, or any development involving a prospective change, in the
business or financial affairs of the Company has occurred which, in the
sole judgment of the Company, might materially impair the ability of the
Company to proceed with the Exchange Offer.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company, in whole or in part, at any time from
time to time, if it determines in its reasonable discretion that any of the
foregoing events or conditions has occurred or exists or has not been satisfied,
subject to applicable law. The failure by the Company at any time to exercise
any of the foregoing rights shall not be deemed a waiver of any such right and
each such right shall be deemed an ongoing right which may be asserted at any
time and from time to time.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Existing Notes and return
any Existing Notes that have been tendered to the holders thereof, (ii) extend
the Exchange Offer and retain all Existing Notes tendered prior to the
Expiration Date, subject to the rights of such holders of tendered Existing
Notes to withdraw their tendered Existing Notes, or (iii) waive such termination
event with respect to the Exchange Offer and accept all properly tendered
Existing Notes that have not been withdrawn or otherwise amend the terms of the
Exchange Offer in any respect. If such waiver or amendment constitutes a
material change in the Exchange Offer, the Company will disclose such change by
means of a post-effective amendment to the Registration Statement of which this
Prospectus is a part and will distribute an amended or supplemented Prospectus
to each registered holder of Existing Notes, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the waiver or amendment and the manner of disclosure to the
registered holders of the Existing Notes, if the Exchange Offer would otherwise
expire during such period.
The Exchange Offer is not conditioned upon any minimum principal amount of
Existing Notes being tendered for exchange.
31
<PAGE>
EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND, OVERNIGHT COURIER OR
BY MAIL (INSURED OR REGISTERED
RECOMMENDED): BY FACSIMILE:
The Bank of New York (212) 815-
Reorganization Section Confirm by Telephone
Corporate Trust Operations (212) 815-
101 Barclay Street (7 East)
New York, NY 10286
</TABLE>
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notice of Guaranteed
Delivery should be directed to the Exchange Agent at the address and telephone
number set forth in the Letter of Transmittal.
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES
NOT CONSTITUTE A VALID DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The cash
expenses to be incurred by the Company in connection with the Exchange Offer
will be paid by the Company.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company.
Neither the delivery of this Prospectus nor any exchange made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the respective dates as of which
information is given herein. The Exchange Offer is not being made to (nor will
tenders be accepted from or on behalf of) holders of Existing Notes in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Existing Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Existing Notes not tendered or accepted for exchange
are to be delivered to, or are to be registered or issued in the name of, any
person other than the registered holder of the Existing Notes tendered, or if
tendered Existing Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Existing Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
32
<PAGE>
ACCOUNTING TREATMENT
The New Notes will be recorded at the carrying value of the Existing Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of New Notes for Existing Notes. Expenses incurred in
connection with the issuance of the New Notes will be amortized over the
remaining term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES
Holders of Existing Notes who do not exchange their Existing Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws.
Existing Notes not exchanged pursuant to the Exchange Offer will continue to
remain outstanding in accordance with their terms. In general, the Existing
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Existing Notes under the
Securities Act. However, if (i) because of any change in law or in currently
applicable interpretations of the Commission, the Company determines that it is
not permitted to effect the Exchange Offer, (ii) the registration statement
relating to the Exchange Offer is not declared effective within 10 days after
the date of issuance of the Existing Notes or the Exchange Offer is not
consummated within 180 days after the date of issuance of the Existing Notes,
(iii) any holder of Existing Notes other than the initial purchasers of the
Existing Notes from the Company notifies the Company that it is not eligible to
participate in the Exchange Offer, elects to participate in the Exchange Offer
but does not receive fully tradeable New Notes pursuant to the Exchange Offer,
then the Company is obligated, as promptly as practicable, to file a shelf
registration statement (a "Shelf Registration Statement") on the appropriate
form under the Securities Act relating to the then outstanding Existing Notes.
Based on certain no-action letters issued by the staff of the Commission to
third parties in unrelated transactions, the Company believes that the New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any such holder that is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) any broker-dealer that purchases New Notes from the
Company to resell pursuant to Rule 144A or any other available exemption)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with any person to participate in the distribution of such New
Notes and are not participating in, and do not intend to participate in, the
distribution of such New Notes. The Company has not sought, and does not intend
to seek, its own no-action letter with regard to the Exchange Offer.
Accordingly, there can be no assurance that the staff of the Commission would
make a similar determination with respect to the Exchange Offer. If any holder
has any arrangement or understanding with respect to the distribution of the New
Notes to be acquired pursuant to the Exchange Offer, such holder (i) could not
rely on the applicable interpretations of the staff of the Commission and (ii)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. A
broker-dealer who holds Existing Notes that were acquired for its own account as
a result of market making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of New Notes. Each such broker-dealer that receives
New Notes for its own account in exchange for Existing Notes, where such
Existing Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, may be deemed to be an "underwriter"
within the meaning of the Securities Act and must
33
<PAGE>
acknowledge in the Letter of Transmittal that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such New Notes. A secondary resale transaction in the United States by a holder
using the Exchange Offer to participate in a distribution of Existing Notes must
be covered by an effective registration statement containing the selling
security holder information required by Item 507 of Regulation S-K under the
Securities Act. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the New Notes for offer or
sale under the securities or blue sky laws of such jurisdiction as any holder of
the Existing Notes reasonably requests in writing.
Participation in the Exchange Offer is voluntary, and holders of Existing
Notes should carefully consider whether to participate. Holders of the Existing
Notes are urged to consult their financial and tax advisors in making their own
decision on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Existing Notes pursuant to the terms of, this Exchange Offer,
the Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Existing Notes who do not tender their Existing Notes in
the Exchange Offer will continue to hold such Existing Notes and will be
entitled to all the rights, and limitations applicable thereto, under the
Indenture, except for any such rights under the Registration Rights Agreement
that by their terms terminate or cease to have further effectiveness as a result
of the making of this Exchange Offer. See "Description of the Notes." All
untendered Existing Notes will continue to be subject to the restrictions on
transfer set forth in the Indenture. To the extent that Existing Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
Existing Notes could be adversely affected.
The Company may in the future seek to acquire untendered Existing Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The terms of any such purchases or offers may differ from
the terms of the Exchange Offer.
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of the New Notes
for Existing Notes pursuant to the Exchange Offer. The Exchange Offer is
intended solely to satisfy certain of the Company's obligations under the
Registration Rights Agreement. Upon the closing of the Debt Offering, the
Company used $81.1 million of the net proceeds to purchase Pledged Securities
(in such amount as will be sufficient to provide for payment in full of the
first four interest payments due on the Notes) that are pledged as security for
repayment of the Notes. The Company intends to use the remaining proceeds from
the Debt Offering, together with the proceeds of the other Transactions, for
capital expenditures, working capital and other general corporate purposes,
including the funding of operating losses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Company currently intends to allocate substantial proceeds to
each of the foregoing uses; however, the precise allocation of funds among these
uses will depend on future technological, regulatory and other developments in
or affecting the Company's business, the competitive climate in which it
operates and the emergence of future opportunities.
34
<PAGE>
CAPITALIZATION
The following table sets forth the cash, Pledged Securities and
capitalization of the Company, as of March 31, 1998, (i) on an actual unaudited
basis; (ii) on a pro forma basis as adjusted to give effect to the Debt Offering
and the 1998 Private Equity Investment; (iii) on a pro forma basis as further
adjusted to give effect to the Initial Public Offering assuming an initial
public offering price of $ per share (the midpoint of the range set forth in
the registration statement relating to the Initial Public Offering) and the
Preferred Stock Conversion, in each case as if the same occurred on March 31,
1998. This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
------------------------------------
PRO FORMA PRO FORMA
AS AS FURTHER
ACTUAL ADJUSTED(1) ADJUSTED(2)
---------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents (excluding restricted
cash)(3).......................................... $4,856,610 $282,547,857 $
---------- ----------- -----------
---------- ----------- -----------
Pledged Securities(4)............................... $ -- $81,128,751 $81,128,751
---------- ----------- -----------
---------- ----------- -----------
Total debt:
Notes(5).......................................... $ -- $345,905,000 $345,905,000
---------- ----------- -----------
Convertible preferred stock:
Series A convertible preferred stock, par value
$0.01 per share, 1,000,000 shares authorized;
1,000,000 shares issued and outstanding, actual
and pro forma as adjusted; none issued or
outstanding, pro forma as further adjusted...... 1,000,000 1,000,000 --
Series B convertible preferred stock, par value
$0.01 per share, 1,651,046 shares authorized;
1,651,046 shares issued and outstanding, actual
and pro forma as adjusted; none issued or
outstanding, pro forma as further adjusted...... 5,008,367 5,008,367 --
Series C convertible preferred stock, par value
$0.01 per share, 2,819,549 shares authorized;
939,850 shares issued and outstanding actual;
2,819,549 shares issued and outstanding pro
forma as adjusted; none issued or outstanding,
pro forma as further adjusted................... 9,961,274 29,961,272 --
---------- ----------- -----------
Total convertible preferred stock............. 15,969,641 35,969,639 --
---------- ----------- -----------
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share,
10,200,000 shares authorized; 5,004,065 shares
issued and outstanding pro forma as adjusted;
shares authorized and shares
issued and outstanding, pro forma as further
adjusted(6)..................................... 50,041 50,041
Additional paid in capital........................ 382,030 4,477,030
Deficit accumulated during development stage...... (8,872,702) (8,872,702) (8,872,702)
---------- ----------- -----------
Total stockholders' equity (deficit).......... (8,440,631) (4,345,631)
---------- ----------- -----------
Total capitalization........................ $7,529,010 $377,529,008 $
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
FOOTNOTES ON FOLLOWING PAGE
35
<PAGE>
- ------------------------------
(1) Gives pro forma effect to the Debt Offering and the 1998 Private Equity
Investment as if each occurred on March 31, 1998.
(2) Gives pro forma effect to the transactions described in footnote (1) above,
the Initial Public Offering and the Preferred Stock Conversion.
(3) Cash and cash equivalents excludes approximately $289,000 of restricted cash
held in escrow to secure the Company's obligations under its FPM Agreement
with Texaco Pipeline, Inc. Cash and cash equivalents on a pro forma basis as
further adjusted includes the net cash proceeds of the Initial Public
Offering.
(4) The Company used $81.1 million of the net proceeds from the Debt Offering to
purchase the Pledged Securities.
(5) Of the $350.0 million gross proceeds of the Debt Offering, approximately
$345.9 million and $4.1 million were allocated to the Notes and the
Warrants, respectively. No assurance can be given that the value allocated
to the Warrants will be indicative of the prices at which the Warrants may
actually trade.
(6) Common Stock excludes (i) 4,258,530 shares of Common Stock issuable upon
exercise of outstanding options and (ii) 1,925,000 shares of Common Stock
issuable upon exercise of the Warrants. See "Management--1995 Stock Option
Plan," "--1997 Stock Incentive Plan" and "Description of Certain
Indebtedness."
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following balance sheet data of the Company as of December 31, 1996 and
1997 and statement of operations data for the periods from inception to December
31, 1995, the twelve months ended December 31, 1996 and 1997 and the period from
August 25, 1997 (date of inception) to December 31, 1997, have been derived from
the Company's financial statements and the notes thereto, included elsewhere in
this Prospectus, which have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as stated in their report included herein. Such summary
statement of operations and balance sheet data should be read in conjunction
with such audited financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
following balance sheet data of the Company as of December 31, 1995 have been
derived from the Company's audited financial statements which are not included
in this Prospectus, which have been audited by Coopers & Lybrand L.L.P. The
following balance sheet data as of March 31, 1998 and statement of operations
data for the three months ended March 31, 1997 and 1998 and the period from
August 25, 1995 (date of inception) to March 31, 1998 have been derived from
unaudited consolidated financial statements of the Company included elsewhere in
this Prospectus. In the opinion of management, the unaudited financial
statements of the Company have been prepared on the same basis as the audited
financial statements and include all adjustments necessary for the fair
presentation of financial position and results of operations at these dates and
for these periods, which adjustments are only of a normal recurring nature. The
results of the three months ended March 31, 1998, as reported, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
AUGUST 25, 1995 AUGUST 25, 1995
(DATE OF YEAR ENDED (DATE OF
INCEPTION) TO DECEMBER 31, INCEPTION) TO
DECEMBER 31, -------------------------- DECEMBER 31,
1995 1996 1997 1997
--------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................... $ -- $ 1,000 $ 162,500 $ 163,500
--------------- ----------- ----------- ---------------
Expenses:
Cost of revenue............. -- -- -- --
General and administrative.. 290,318 913,646 3,537,926 4,741,890
Research and development.... 19,038 226,021 -- 245,059
Legal and consulting........ 120,083 202,651 755,817 1,078,551
--------------- ----------- ----------- ---------------
Total expenses.............. 429,439 1,342,318 4,293,743 6,065,500
--------------- ----------- ----------- ---------------
Net operating loss............ (429,439) (1,341,318) (4,131,243) (5,902,000)
Interest expense(a)........... -- (415,357) -- (415,357)
Interest and other income,
net......................... 2,613 13,040 153,843 169,496
--------------- ----------- ----------- ---------------
Net loss.................... $(426,826) $(1,743,635) $(3,977,400) $(6,147,861)
--------------- ----------- ----------- ---------------
--------------- ----------- ----------- ---------------
Basic and diluted loss per
common share................ $ (0.09) $ (0.35) $ (0.80) $ (1.23)
--------------- ----------- ----------- ---------------
--------------- ----------- ----------- ---------------
Weighted average number of
common shares outstanding... 5,000,000 5,000,000 5,000,000 5,000,000
--------------- ----------- ----------- ---------------
--------------- ----------- ----------- ---------------
BALANCE SHEET DATA (AT PERIOD
END):
Cash and cash equivalents..... $ 82,973 $ 2,318,037 $ 7,831,384
Property and equipment, net... 8,551 46,180 7,207,094
Total assets.................. 91,524 2,365,912 16,097,688
Total liabilities............. 17,350 145,016 5,892,918
Convertible preferred stock... 500,000 4,008,367 15,969,641
Stockholders' equity
(deficit)................... $(425,826) $(1,787,471) $(5,764,871)
OTHER FINANCIAL DATA:
Ratio of Earnings to Fixed
Charges..................... (b) (b) (b) (b)
<CAPTION>
PERIOD FROM
AUGUST 25, 1995
THREE MONTHS ENDED (DATE OF
MARCH 31, INCEPTION) TO
-------------------------- MARCH 31,
1997 1998 1998
----------- ----------- ---------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................... $ 10,000 $ 100,000 $ 263,500
----------- ----------- ---------------
Expenses:
Cost of revenue............. -- 714,740 714,740
General and administrative.. 486,630 1,922,217 6,664,107
Research and development.... -- -- 245,059
Legal and consulting........ 71,324 225,813 1,304,364
----------- ----------- ---------------
Total expenses.............. 557,954 2,862,770 8,928,270
----------- ----------- ---------------
Net operating loss............ (547,954) (2,762,770) (8,664,770)
Interest expense(a)........... -- -- (415,357)
Interest and other income,
net......................... 17,107 77,929 247,425
----------- ----------- ---------------
Net loss.................... $ (530,847) $(2,684,841) $(8,832,702)
----------- ----------- ---------------
----------- ----------- ---------------
Basic and diluted loss per
common share................ $ (0.11) $ (0.54) $ (1.77)
----------- ----------- ---------------
----------- ----------- ---------------
Weighted average number of
common shares outstanding... 5,000,000 5,001,762 5,000,167
----------- ----------- ---------------
----------- ----------- ---------------
BALANCE SHEET DATA (AT PERIOD
END):
Cash and cash equivalents..... $ 1,688,533 $ 4,856,610
Property and equipment, net... 77,453 9,964,580
Total assets.................. 1,767,681 15,266,642
Total liabilities............. 77,633 7,737,632
Convertible preferred stock... 4,008,367 15,969,641
Stockholders' equity
(deficit)................... $(1,690,048) $(8,440,631)
OTHER FINANCIAL DATA:
Ratio of Earnings to Fixed
Charges..................... (b) (b) (b)
</TABLE>
- ------------------------
(a) Relates to a beneficial conversion feature of a bridge loan. See Note 5 to
the financial statements included elsewhere in this Prospectus.
(b) 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 and 1997, the period August 25,
1995 (date of inception) to December 31, 1997, the three months ended March
31, 1997 and 1998, and the period August 25, 1995 (date of inception) to
March 31, 1998 were not adequate to cover fixed charges by $426,813,
$1,326,812, $3,939,176, $528,710, $5,692,801, $2,654,831 and $8,347,632,
respectively.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL
STATEMENTS AND THE NOTES THERETO AND THE OTHER FINANCIAL DATA APPEARING
ELSEWHERE IN THIS PROSPECTUS. CERTAIN STATEMENTS UNDER THIS CAPTION CONSTITUTE
FORWARDING-LOOKING STATEMENTS. SEE "FORWARD-LOOKING STATEMENTS."
OVERVIEW
The Company intends to capitalize on the growing demand for high quality,
low cost, long haul telecommunications capacity and the capacity constrained
long haul infrastructure that currently serves second and third tier markets
throughout the United States. The Company's core strategy for deploying its
network is to form strategic relationships with Incumbents and other owners of
telecommunications assets that will enable the Company to leverage these assets
and thereby reduce the Company's time to market and capital costs. The Company
intends to offer high quality, low cost, long haul telecommunications capacity
to Telecom Service Providers as a 'carrier's carrier.' The Company believes its
strategy of developing a high quality, low cost digital network in smaller
markets will enable the Company to take advantage of (i) the limited capacity
currently available or expected to be constructed in smaller markets, (ii)
higher prices generally available in those markets and (iii) technological and
cost advantages of the Company's deployment strategy.
The Company's business commenced on August 25, 1995 and has been funded
primarily through equity investments by the Company's stockholders and the Debt
Offering in April 1998. A substantial portion of the Company's activities to
date has involved developing strategic relationships with Incumbents. The
Company has identified Incumbents currently holding or operating large private
networks in the United States that in the aggregate cover approximately 465,000
route miles. To date, the Company has entered into seven binding agreements, six
of which are long-term FPM Agreements and the seventh of which is a binding term
sheet with ATC. The Company is currently pursuing long-term relationships with
25 Incumbents that control approximately 63,000 route miles of network and is in
varying stages of evaluation, system design and business and contract
negotiations. The Company has also entered into one agreement relating to the
sale of its network capacity. See "Risk Factors--Dependence on Relationship with
Incumbents; Rights of Incumbents to Certain Assets" and "Business--Commercial
Roll-Out." Due to Pathnet's focus on developing strategic relationships with
Incumbents, the Company's historical revenues only reflect certain consulting
services in connection with the design, development and construction of digital
microwave infrastructure. The Company has also been engaged in the acquisition
of equipment, the development of operating systems, the design and construction
of a NOC, capital raising and the hiring of management and other key personnel.
In addition to deploying its network by forming long-term relationships with
Incumbents, the Company may pursue other strategic opportunities that may arise
to acquire or deploy complementary telecommunications assets.
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. See
"Risk Factors-- Limited History of Operations; Operating Losses and Negative
Cash Flow." Upon completion of the construction of digital microwave paths, the
Company intends to sell capacity to Telecom Service Providers. The opportunity
to begin offering service on a route specific basis will enable the Company to
generate revenue and positive operating cash flow on a particular route as soon
as sufficient capacity can be sold. The Company expects to be able to produce
positive operating cash flow results on an individual route basis prior to
achieving overall profitability due to (i) low marginal costs associated with
the operation of each individual route, (ii) low fixed costs due to the
anticipated responsibility of Incumbents to pay for a majority of the
maintenance, utilities, upkeep and taxes associated with the network
infrastructure and (iii) demand-driven capital expenditures, which are expected
to enable the Company to delay a substantial portion of its capital outlays
until receipt of customer orders. While individual networks
38
<PAGE>
may produce positive operating cash flow relatively quickly after start-up, the
Company's ability to achieve positive operating cash flow as a whole is not
expected to be achieved until 2000 at the earliest due to the costs associated
with the operation of the Company's sales, marketing, network operation and
management activities. As the Company's network approaches completion, the
Company expects that it will produce net income and positive free cash flow as a
result of declining capital outlays associated with network development and
construction. See "Risk Factors--Significant Capital Requirements; Uncertainty
of Additional Financing," "--Risks of Completing the Company's Network; Market
Acceptance" and "--Liquidity and Capital Resources."
FACTORS AFFECTING FUTURE OPERATIONS
ADDRESSABLE MARKET. The Company commissioned the Yankee Group, a leading
telecommunications research firm, to study the Company's addressable market. The
Yankee Group study estimated the potential addressable market for the Company's
services to be approximately $6 billion in 1998 and estimated that such market
will grow to approximately $17 billion by 2008, indicating a compounded annual
growth rate of approximately 11% per year. The Yankee Group attributes this
growth to (i) an expected shift in market share of interexchange services away
from established carriers, such as AT&T, MCI and Sprint, to non-facilities-based
IXCs that are more likely to rely on alternative carriers such as the Company to
transmit traffic, (ii) the development of the Internet, (iii) growth in data
traffic, including WANs, extranets, CAD/CAM and other applications which require
substantial amounts of bandwidth and (iv) continued growth in voice traffic. See
"Risk Factors--Risks of Completing the Company's Network; Market Acceptance."
TARGET MARKET PENETRATION. The Company intends to position itself primarily
as a 'carrier's carrier' providing high quality, low cost, long haul
telecommunications capacity to Telecom Service Providers. The Company believes
that Telecom Service Providers will choose the Company's network for long haul
capacity serving second and third tier markets as a result of its (i)
availability in markets which currently have insufficient or limited high
capacity facilities, (ii) lower prices compared to those currently offered by
existing carriers, (iii) ubiquity due to the projected reach of the Company's
network, as well as a greater number of access and termination points compared
to most other long haul networks, which reduces or eliminates the need to
utilize multiple carriers to transmit traffic to second and third tier markets,
(iv) greater product flexibility as a result of the ability to sell capacity in
increments as small as DS-1s and as large as OC-24s, (v) non-competitive
marketing position as primarily a 'carrier's carrier,' (vi) comparable or
greater reliability due to the SONET architecture of the Company's network and
(vii) ability to provide network redundancy and enhanced reliability by offering
alternative capacity to the ILEC or other facilities-based carriers. See "Risk
Factors--Risks of Completing the Company's Network; Market Acceptance" and
"--Competition; Pricing Pressures."
SERVICE OFFERING. Pathnet intends to derive a majority of its revenues
through the sale of dedicated, high capacity long haul circuits. As compared
with a network comprised solely of fiber optic cable, the Company's network
provides more frequent access and termination points and an ability to deliver
traffic by digital microwave anywhere within an approximate 25-mile line of
sight surrounding any transmission tower on its network for interconnection to
other Telecom Service Providers. This will allow Pathnet in many cases to bypass
existing local infrastructure and deliver traffic directly to an access tandem,
local serving office, mobile switching office, ISP POP or large end-user. The
flexibility of the Pathnet network, combined with its projected ubiquity, should
enable the Company to provide comprehensive capacity arrangements for Telecom
Service Providers. Specifically, Pathnet expects to be able to provide dedicated
circuit capacity from most IXC POPs to access tandems or local serving offices
throughout the Pathnet network, thereby enabling Telecom Service Providers to
bypass ILECs for a substantial portion of their transport requirements.
39
<PAGE>
PRICING. Pathnet's pricing structures will vary according to bandwidth
requirements and the demand characteristics of specific routes. Dedicated
capacity is expected to be sold on a monthly basis based on DS-0 circuit
capacity multiplied by the circuit length. Pathnet charges customers for this
capacity regardless of the actual usage of the dedicated circuits. The Company
is selling dedicated capacity in increments as small as DS-1s and as large as
OC-24s and may offer volume discounts for larger volumes and multiple routes.
See "Risk Factors--Competition; Pricing Pressures."
CUSTOMER TURNOVER. Unlike telecommunications service providers who have a
preponderance of end-user customers, Pathnet is positioning itself as a
'carrier's carrier' providing long haul capacity to Telecom Service Providers.
The Company believes that similar companies which provide long haul dedicated
capacity have experienced levels of customer turnover which are lower than those
experienced by end-user service providers. The Company also believes that
Pathnet will encounter generally low levels of customer turnover as a result of
(i) the scarcity and expense of provisioning new circuits on other networks,
(ii) the lower prices which the Company expects to charge for capacity on its
network as compared with competing ILEC rates, and (iii) the network reliability
advantages of the Company's digital, SONET-based architecture.
NETWORK-RELATED COSTS
The limited incremental cost of operating and maintaining Pathnet's network,
as well as the financial support of Incumbents who will be responsible for a
significant portion of such operating and maintenance costs, are expected to
enable the Company to enjoy significant operating leverage. The Company's
primary network operating costs are expected to be the costs of maintenance,
provisioning of new circuits, interconnection and operation of the NOC.
MAINTENANCE COSTS. The vast majority of the Company's network nodes are
expected to be located on sites currently owned and operated by Incumbents. Each
Incumbent will be required to maintain the physical assets at each site along
its route. The Company intends to enter into agreements with Incumbents whereby
Incumbents' existing maintenance staff will maintain the upgraded network
equipment. These agreements are expected to provide the Company with an
established workforce to maintain and install new capacity on the network. This
arrangement allows Incumbents to retain oversight of their allocated circuits on
the Company's network and to receive maintenance revenue from the Company. The
Company intends to maintain network nodes which are not located on an Incumbent
site through Incumbents' staff deployed nearby or through third party
maintenance suppliers. In addition, the Company expects to provide an inventory
of spare parts for maintenance of its network. See "Business--Agreements with
Incumbents and Other Owners of Telecommunications Assets" and "--Equipment
Supply Agreements."
PROVISIONING COSTS. A substantial majority of the Company's network circuit
capacity will be provisioned remotely at the Company's NOC. There will be
occasions, however, when the physical configuration of portions of the network
must be modified through the installation of additional network components.
While much of this work is expected to be performed by Incumbents' staff, the
Company will also require a number of network engineers and technicians to
perform network modifications in certain areas or facilities not covered by an
Incumbent's staff.
INTERCONNECTION COSTS. Because it intends to be a 'carrier's carrier,' the
Company's network will originate and terminate at facilities owned and operated
by other Telecom Service Providers. These facilities may be IXC, ISP, or CLEC
POPs, an ILEC's access tandem, central office, or local serving office or at an
end-user. The Company will require a secure location at these facilities to
house its equipment and may be required to construct the housing for such
equipment. In addition, the Company may interconnect portions of its network via
fiber optic cable or other media.
NETWORK OPERATIONS CENTER COSTS. The Company has constructed a
state-of-the-art NOC located in Washington, D.C., which currently monitors its
network operations during business hours. The Company is
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currently increasing its NOC staff and expects to monitor its network operations
24 hours per day, seven days per week in 1999. For the period before the NOC
becomes operational on a 24 hour per day basis, the Company has engaged TCI
Wireline, Inc. ("WTCI") to assist in monitoring its network. As this function is
relocated to the Company's NOC, the Company will begin to incur NOC operating
costs similar to those of other facilities-based telecommunications companies,
including the cost of additional personnel to monitor the network, plan and
provision circuits, and manage and monitor maintenance operations. Additional
costs associated with the NOC include software licensing and maintenance fees
and the costs of transmitting network data to and from the NOC.
COST OF OPERATIONS
Pathnet will incur costs common to all telecommunications providers,
including customer service and technical support, information systems, billing
and collections, general management and overhead expenses. As a facilities-based
'carrier's carrier,' the Company will differ from non-facilities-based Telecom
Service Providers in the scope and complexity of systems supporting its business
and network. The Company anticipates that the vast majority of its customers
will be Telecom Service Providers purchasing bulk private line transport
capacity across multiple portions of the Company's network. Consequently, the
Company's customer base is expected to be comprised of a relatively limited
number of companies that are generally sophisticated and knowledgeable regarding
telecommunications. The relatively small number of customers and the limited
additional support and servicing of customers beyond initial provisioning should
enable the Company to maintain a relatively low ratio of overhead expenses to
revenues compared to other Telecom Service Providers.
SALES AND MARKETING COSTS. The Company is building a national accounts
sales force that will pursue a consultative approach designed to provide a
systematic review of a large carrier's network requirements in smaller markets
and to offer solutions to reduce the carrier's network costs and improve its
network reliability. The Company also intends to build a regional sales force
which will market the Company's network capacity to smaller carriers and to
selected large end-users. The Company is assembling a centralized marketing
organization to focus on product development, market analysis and pricing
strategies, as well as customer communications, public relations, and branding.
ADMINISTRATION COSTS. The Company's general and administrative costs will
include expenses typical of other telecommunications service providers,
including infrastructure costs, customer care, billing, corporate
administration, and human resources. The Company expects that these costs will
grow significantly as it expands operations.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the straight-line
method, generally over three to ten years, based upon estimated useful lives.
Leasehold improvements are amortized over the lesser of the useful lives of the
assets or the term of the lease. Network construction costs incurred during
development are capitalized. Amortization of network construction costs begins
when the network equipment is ready for its intended use and will be amortized
over a ten-year period.
CAPITAL EXPENDITURES
The Company's principal capital requirements include installation of digital
equipment and, to a lesser extent, site preparation work. The Company's goal is
to leverage the assets of Incumbents to (i) reduce the capital costs associated
with developing long haul, digital network capacity, (ii) lower the future
operating costs of a digital wireless network by relying on Incumbents to pay
for the costs of facilities maintenance, local taxes and utilities for Incumbent
sites and (iii) improve the Company's speed to market due to the elimination of
site preparation activities, including local permitting, power connection,
securing road access and rights of way and tower construction.
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<PAGE>
The Company believes that utilizing the Incumbent's infrastructure will also
enable the Company to reduce significantly its cost of constructing an initial
network path. For markets requiring OC-24 capacity or less, the Company believes
this deployment strategy will result in the Company having the lowest capital
costs per circuit mile in comparison to fiber or "green field" digital wireless
networks. In addition, because more than half of all of the Company's capital
expenditures are expected to be related to incremental capacity built to meet
customer demand, the network will have substantially less capital at risk than
comparable fiber-based networks, which require that a substantial majority of
all capital expenditures be spent prior to serving any customers. See "Risk
Factors -- Significant Capital Requirements; Uncertainty of Additional
Financing."
NETWORK CONFIGURATION. The Company's network is expected to be made up
predominantly of digital wireless equipment designed to provide high quality,
low cost, long haul transmission capacity. The Company expects the typical trunk
route will be approximately 400 miles. Based upon an average length of 25 miles
per wireless path, the Company expects to upgrade the digital wireless
electronics on an average of 16 trunk paths per network route. In order to
connect Pathnet's network to the PSTN, the Company also expects to construct one
interconnection path for every three trunk paths. These interconnection paths,
which the Company estimates will average 20 miles in length, will typically
originate at an Incumbent tower site and terminate at a Telecom Service Provider
facility. Most of these facilities are designed and equipped to handle wireless
traffic. In other instances, the network will connect to the PSTN from an
Incumbent facility by fiber optic cable or alternate media. These Incumbent
facilities could include office buildings or tower sites with access to the
PSTN.
The primary capital costs of deploying the Company's network include the
costs of tower enhancement, site preparation work, base digital wireless
equipment and incremental digital wireless equipment. Based on its limited
experience to date, the Company expects that Incumbents will be primarily
responsible for site development costs and Pathnet will be responsible for the
costs of base and incremental digital wireless equipment. The actual allocation
of costs between the Company and each Incumbent is expected to vary, perhaps
significantly, on a case-by-case basis.
The Company currently has no plans to purchase switching equipment to
provide switched minutes of capacity on a wholesale or end-user basis. Virtually
all of the Company's capacity will be utilized for dedicated private line
capacity, which does not require such switching equipment.
NETWORK ECONOMICS. The following tables compare the estimated cost and
economics of the Pathnet program versus construction of a "green field" digital
microwave network. The tables show the estimated average costs (i) on a path by
path basis, (ii) for a 500 route mile network consisting of 16 trunk paths and
five additional interconnection paths of 20 miles each, and (iii) per circuit
mile. The following tables are based on information and estimates available as
of the date of this Prospectus, reflect only the Company's limited experience in
the construction of its network to date and are for illustrative purposes only.
Although the Company believes that these estimates are reasonable, there can be
no assurance that the Company's actual cost of building its network will not
vary significantly from the estimates set forth below, that Incumbents will
share costs as shown or that the actual cost of a "green field" construction
would not be lower. See "Risk Factors--Risks of Completing the Company's
Network; Market Acceptance" and "--Dependence on Relationships with Incumbents;
Rights of Incumbents to Certain Assets."
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<PAGE>
ESTIMATED PATH COSTS
<TABLE>
<CAPTION>
PATHNET PROGRAM
----------------------- GREEN PATHNET VS.
PATHNET INCUMBENT FIELD(7) GREEN FIELD
---------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
Site Development Costs(1)....................................... $ 25,000 $ 75,000 $ 250,000
Base Digital Wireless Equipment(2).............................. 215,000 -- 215,000
---------- ----------- ----------
Base Path Cost.............................................. 240,000 75,000 465,000 (48%)
Incremental Digital Wireless Equipment(3)....................... 320,000 -- 320,000
---------- ----------- ----------
Maximum Capacity Path Cost(4)............................... $ 560,000 N/A $ 785,000 (29%)
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
500 MILE INCUMBENT SEGMENT INCLUDING INTERCONNECTIONS CAPITAL COSTS(4)
<TABLE>
<CAPTION>
GREEN PATHNET VS.
PATHNET FIELD(7) GREEN FIELD
------------- ------------- ---------------
<S> <C> <C> <C>
Upgrade 16 Trunk Paths................................................ $ 3,840,000 $ 7,440,000
Install Five Interconnection Paths.................................... 1,200,000 1,200,000
------------- -------------
Total Base Segment................................................ 5,040,000 8,640,000 (42%)
Incremental Capacity.................................................. 6,720,000 6,720,000
------------- -------------
Maximum Capacity.................................................. $ 11,760,000 $ 15,360,000 (23%)
------------- -------------
------------- -------------
</TABLE>
ANALYSIS OF ESTIMATED COSTS PER CIRCUIT MILE
<TABLE>
<CAPTION>
GREEN PATHNET VS.
PATHNET FIELD(7) GREEN FIELD
---------- ---------- ------------
<S> <C> <C> <C>
Total Mileage (trunk plus interconnection paths)........................... 500 500
Base Circuit Capacity in DS-3s(5).......................................... 5 6
Maximum Circuit Capacity in DS-3s(5)....................................... 23 24
Base DS-0 Circuit Mile Capacity(5)(6)...................................... 1,680,000 2,016,000
Maximum DS-0 Circuit Mile Capacity(5)(6)................................... 7,728,000 8,064,000
Capital Cost Per Circuit Mile:
Base Capacity.......................................................... $3.00 $4.29 (30%)
Maximum Capacity....................................................... $1.55 $1.90 (19%)
</TABLE>
- ------------------------
(1) Includes site acquisition, site preparation, tower strengthening or
replacement, road and utility access and miscellaneous related costs.
(2) Based on OC-6 installation.
(3) Represents the cost to upgrade an Incumbent path to OC-24 of capacity.
(4) Assumes 16 trunk paths of 25 miles and an additional five interconnection
paths of 20 miles each (100 miles total).
(5) Assumes in the Pathnet case that one DS-3 of capacity is allocated to the
Incumbent.
(6) Factors which likely will decrease the actual measurement of the capacity
available for sale include the provisioning of protection circuits and the
variance between geographic route miles versus direct miles.
(7) Company estimate based on "green field" construction by the Company and
Incumbents.
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<PAGE>
BUSINESS DEVELOPMENT, CAPITAL EXPENDITURES AND ACQUISITIONS
From inception through March 31, 1998, expenditures for property, plant and
equipment, including construction in progress, totaled $10.1 million. In
addition, the Company incurred significant other costs and expenses in the
development of its business and has recorded cumulative losses from inception
through March 31, 1998 of $8.8 million. See "Risk Factors--Limited History of
Operations; Operating Losses and Negative Cash Flow."
RESULTS OF OPERATIONS
The Company's principal activity from inception through the third quarter of
1996 involved introducing its business plan to over 300 Incumbents with
significant private networks through face to face meetings. As the Company began
to enter into formal relationships with Incumbents in 1996, additional
engineering, legal, and financial personnel were recruited to support the
increased workflow and to negotiate Incumbent contracts. By the first quarter of
1997, the Company initiated construction on the first segment of the network,
and additional engineering and management personnel were recruited, including
Mr. Jalkut. The Company has also begun marketing and sales efforts, and hired
Mr. Bennis to develop and execute its marketing plan.
REVENUE. In establishing relationships with Incumbents, the Company has
acted as a provider of services for transitioning the Incumbents from their old
network system onto the Company's network. The services provided by the Company
to Incumbents, including analysis of existing facilities and system performance,
advisory services relating to PCS relocation matters, and turnkey network
construction management, provided substantially all of the Company's historical
revenues. The Company expects substantially all future revenue to be generated
from the sale of telecommunications services. For the three months ended March
31, 1998, the Company generated revenues of $100,000 from construction
management services. For the year ended December 31, 1997, the Company generated
revenues of $162,500, of which $100,000 was derived from construction management
services and $62,500 from PCS relocation advisory services compared with
revenues of $1,000 from PCS relocation advisory services for the year ended
December 31, 1996. The Company generated no revenue during the period from
inception (August 25, 1995) to December 31, 1995.
COSTS AND EXPENSES. For the three months ended March 31, 1998, the Company
incurred operating expenses of approximately $2.8 million. For the year ended
December 31, 1997, the Company incurred operating expenses of approximately $4.3
million compared to operating expenses of $1.3 million for the year ended
December 31, 1996 and $429,000 for the period from inception through December
31, 1995. The increase in expense was directly related to an increase in
selling, general and administrative expenses ("SG&A") as the Company expanded
its engineering, technical, legal, finance, and general management personnel in
connection with the continued signing of new Incumbent agreements and the
ongoing construction of the Company's network. The Company expects SG&A to
continue to increase in 1998 as additional staff is added in all functional
areas, particularly in sales and marketing.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to generate cash primarily from external financing and,
as its network matures, from operating activities. The Company's primary uses of
cash will be to fund capital expenditures, working capital and operating losses.
Deployment of the Company's digital network and expansion of the Company's
operations and services will require significant capital expenditures. Capital
expenditures will be used primarily for continued development and construction
of its network, implementing the Company's sales and marketing strategy and
constructing and improving the Company's NOC. The Company anticipates that, for
the twelve month periods ending June 30, 1999 and 2000, it will require
approximately $120 million and $260 million, respectively, to fund capital
expenditures, working capital and operating losses. See "Risk
Factors--Significant Capital Requirements; Uncertainty of Additional Financing."
44
<PAGE>
On April 8, 1998, the Company completed the sale of the Units (comprised of
the Notes and the Warrants) for net proceeds of $339.5 million. The Notes bear
interest at 12 1/4% per annum and principal on the Notes is due in full in 2008.
Of the net proceeds from the issuance of the Units, $81.1 million were used to
purchase the Pledged Securities which secure the repayment of the Notes and are
sufficient to provide for payment in full of interest due on the Notes through
April 15, 2000. The Indenture contains provision restricting, among other
things, the incurrence of additional indebtedness, the payment of dividends and
the making of restricted payments, the sale of assets and the creation of liens.
Also on April 8, 1998, the Company completed the 1998 Private Equity
Investment from which the Company received gross proceeds of $20 million.
In addition, the Company is currently exploring several vendor financing
alternatives. Although the Company has received commitments (subject to
definitive documentation) from certain of its vendors and prospective lenders in
connection with two such proposed vendor financing facilities, as of the date of
this Prospectus, the Company has not decided to pursue any one particular
proposed facility.
The Company expects that a majority of future capital expenditures will
result from customer orders for additional capacity. The Company believes that
the modular design of its network will enable the Company to rely on traditional
sources of financing. In addition, the Company expects to rely on other sources,
including public and private debt and equity financings and operating cash flow
to fund future growth. The Company has not finalized commitments for any
additional financing and there can be no assurance that the Company will be able
to secure financing from these sources on terms that are favorable to the
Company. In addition, the Company may require additional capital in the future
to fund operating deficits and net losses and for potential strategic alliances,
joint ventures and acquisitions. Actual capital requirements may vary based upon
the timing and success of the Company's network roll out. Although there can be
no assurance, if the network roll out were delayed from the schedule currently
anticipated by the Company or if demand for the Company's services were lower
than expected, the Company expects that it would be able to defer or reduce
portions of its capital expenditures.
Immediately following the consummation of the Initial Public Offering, the
Company expects to have $[ ] million in cash and cash equivalents (on a pro
forma basis giving effect to the Transactions as if each had occurred as of
March 31, 1998). Based on its current business plan, the Company believes that
such amounts will provide sufficient liquidity to meet the Company's capital
requirements for the next 24 months, at which time the Company expects to have
completed a 29,000 route mile network. See "Risk Factors--Significant Capital
Requirements; Uncertainty of Additional Financing." The Company intends to use
any additional available funds to accelerate its development plans.
Because the Company's cost of rolling out its network and operating its
business, as well as its revenues, will depend on a variety of factors
(including the ability of the Company to meet its roll-out schedules, its
ability to negotiate favorable prices for purchases of network equipment, the
number of customers and the services they purchase, regulatory changes and
changes in technology), actual costs and revenues will vary from expected
amounts, possibly to a material degree, and such variations are likely to affect
the Company's future capital requirements. Accordingly, there can be no
assurance that the Company's actual capital requirements will not exceed the
anticipated amounts described above. Further, the exact amount of the Company's
future capital requirements will depend upon many factors, including the cost of
the development of its network, the extent of competition and pricing of
telecommunication services in its markets, the acceptance of the Company's
services and the development of new products.
INFLATION
Management does not believe that its business is affected by inflation to a
significantly different extent than the general economy.
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<PAGE>
YEAR 2000
The Company has established processes for evaluating and managing the risks
and costs associated with Year 2000 software failures. Management is in the
process of taking steps to ensure a smooth Year 2000 transition, including
working with its software vendors to assure that by the end of the first quarter
of 1999, the Company is fully prepared for the Year 2000. The Company has
identified and analyzed both internally developed and acquired software that
utilizes date embedded codes that may experience operational problems when the
Year 2000 is reached. The Company is making and intends to complete necessary
modifications to the identified software by the end of the first quarter of
1999. The Company is also communicating with Incumbents, suppliers, financial
institutions and others with which it does business to coordinate Year 2000
compliance. Management does not anticipate that the Company will incur
significant operating expenses or be required to invest heavily in computer
systems improvements to be Year 2000 compliant, and does not anticipate that
business operations will be disrupted or that its customers will experience any
interruption of service as a result of the millenium change.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued two new standards that
became effective for reporting periods beginning after December 15, 1997:
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). Effective March 31, 1998, the Company adopted SFAS 130 and SFAS 131. The
adoption of these standards has no material affect on the Company's financial
statements.
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<PAGE>
BUSINESS
THE COMPANY
Pathnet intends to become a leading provider of high quality, low cost, long
haul telecommunications capacity to second and third tier markets throughout the
United States primarily by upgrading existing wireless infrastructure to develop
a state-of-the-art, digital SONET network. The Company is positioning itself
primarily as a 'carrier's carrier,' providing a high capacity, dedicated network
to IXCs, LECs, ISPs, RBOCs and other Telecom Service Providers. The Company
plans to deploy its digital network by upgrading, integrating and leveraging
existing telecommunications assets, sites and rights of way, including those
utilized by Incumbents. By integrating the existing networks of Incumbents, the
Company expects to obtain the equivalent of a nationwide spectrum license at
minimal licensing cost.
The Company's goal is to deploy a network covering 29,000 route miles within
two years and ultimately to deploy a network encompassing more than 100,000
route miles. Based on market research prepared for the Company by the Yankee
Group, a leading telecommunications research firm, the estimated addressable
market for the Company's services is expected to grow from approximately $6
billion in 1998 to approximately $17 billion by 2008. The Company believes its
strategy of developing a high quality, low cost, digital network primarily in
smaller markets will enable the Company to take advantage of (i) the limited
capacity currently available or expected to be constructed in smaller markets,
(ii) higher prices generally available in those markets and (iii) technological
and cost advantages of the Company's deployment strategy. The Company is
currently in various stages of designing, constructing, testing and
commissioning its digital network, which will initially serve markets in 34
states. The Company has completed over 800 route miles of its network, is
currently constructing approximately 2,100 additional route miles and has
entered into one agreement relating to the sale of capacity on its network.
The Company's core strategy for deploying its network is to form strategic
relationships with Incumbents and other owners of telecommunications assets that
will enable the Company to leverage these existing assets and thereby reduce the
Company's time to market and capital costs. The Company believes that Incumbents
will find a strategic relationship with the Company to be attractive due to the
opportunity for the Incumbents to (i) reduce the costs of upgrading internal
network infrastructure, (ii) receive incremental capacity which has greater
reliability characteristics than most of the Incumbents' existing systems and
(iii) leverage under-utilized assets and receive a share of the incremental
revenues generated by Pathnet. The Company has identified Incumbents currently
holding or operating private networks in the United States that in the aggregate
cover approximately 465,000 route miles. Through its sales staff and other
engineering, financial and legal professionals, the Company has held meetings
with over 300 of these Incumbents. To date, 47 of these entities, which together
control approximately 89,000 route miles, have authorized the Company in writing
to prepare preliminary engineering evaluations of their networks for the
intended purpose of entering into a long-term strategic relationship with the
Company. Of these 47 entities, seven, which collectively control approximately
11,000 route miles, have entered into binding agreements relating to the initial
design and construction of approximately 7,000 route miles of network. Six of
these binding agreements are long-term FPM Agreements with Enron, Idaho Power
Company, KN Energy, Northeast Missouri Electric Cooperative, NIPSCO and Texaco
or their affiliates. The seventh agreement is a binding term sheet with ATC,
which controls certain telecommunications assets including certain assets
divested by CSX Railroad, ARCO Pipeline and MCI. In addition, the Company is
currently pursuing long-term strategic relationships with 25 out of the 47
entities which control approximately 63,000 additional route miles of network.
These potential relationships are in varying stages of evaluation, system design
and business and contract negotiations. In addition to deploying its network by
forming long-term relationships with Incumbents, the Company may enter into
alternative markets or acquire or deploy complementary telecommunications assets
or technologies.
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<PAGE>
The Company's network is being designed for maximum reliability and security
and will be capable of carrying a full array of voice, data and video
communications. Bellcore, an independent telecommunications technical consultant
has evaluated the Company's system design and existing network and has confirmed
that the Company's network will be built using proven, off-the-shelf components
and will meet or exceed prevailing industry standards for reliability and error
free operation. The Company's network will employ various design features that
enhance its reliability, including SONET architecture.
Pathnet was founded in August 1995, and its initial investors include a
group of financial sponsors led by Spectrum and NEA. The Company's current
investors also include Dennis R. Patrick, former Chairman of the FCC. The
Company's Chairman, David Schaeffer, has more than 20 years of business and
entrepreneurial experience, including building and operating wireless networks.
Richard A. Jalkut, the Company's President and Chief Executive Officer, has over
30 years of telecommunications experience, including as President of NYNEX
Telecommunications, an operating subsidiary of NYNEX Corporation with more than
$12.0 billion in annual revenues and 60,000 employees. Kevin J. Bennis, formerly
President of Frontier Communications, is Executive Vice President of the Company
serving as President of the Company's Communications Services Division. Prior to
working at Frontier Communications, Mr. Bennis served in various positions for
21 years at MCI, including as Senior Vice President of Marketing. Michael L.
Brooks, the Company's Vice President of Network Development, directed the
initial construction of the 3,500-mile digital microwave network at Qwest
Microwave Communications, a predecessor of Qwest, as its Vice President of
Engineering.
MARKET OPPORTUNITY
The Company believes there is a substantial market opportunity to provide
high quality, low cost, long haul telecommunications capacity for second and
third tier markets throughout the United States. The Company commissioned the
Yankee Group to study the Company's addressable market. The Yankee Group study
estimated the potential addressable market for the Company's services to be
approximately $6 billion in 1998 and estimated that such market will grow to
approximately $17 billion by 2008, indicating a compounded annual growth rate of
approximately 11% per year. The Yankee Group attributes this growth to (i) an
expected shift in market share of interexchange services away from established
carriers, such as AT&T, MCI and Sprint, to non-facilities-based IXCs that are
more likely to rely on alternative carriers such as the Company to transmit
traffic, (ii) the development of the Internet, (iii) growth in data traffic,
including WANs, extranets, CAD/CAM and other applications which require
substantial amounts of bandwidth and (iv) continued growth in voice traffic. The
Yankee Group determined this addressable market size by estimating the amount of
off-network traffic in the Company's targeted geographic markets for long
distance and other services. The Yankee Group estimates indicate that
approximately 16% of the $108 billion long distance, special access, and
intra-LATA market in the United States is carried off-network by carriers that
lease capacity from other providers such as ILECs or the Company. Of that 16%
carried off-network, the Yankee Group believes that Pathnet will be positioned
to address 35% of that market based upon the geographic and market profile of
the Company's business plan.
Based on FCC data and other publicly available information, the Company
estimates that most existing or planned facilities-based long distance
providers' networks are designed to connect primarily the top 120 MSAs in the
United States. Facilities-based IXCs and other telecommunications providers must
rely, directly or indirectly, on facilities provided primarily by ILECs to
transmit calls beyond their existing owned or leased facilities. Current
facilities-based providers serve the second and third tier markets primarily
utilizing a combination of copper, fiber and microwave transport facilities. The
Company believes that many Telecom Service Providers will choose the Company's
network for long haul capacity serving second and third tier markets as a result
of its (i) availability in markets where there are currently insufficient or
limited high capacity facilities, (ii) lower prices compared to those currently
offered by ILECs, (iii) ubiquity in these markets compared to many other long
haul carriers due to the projected reach of the Company's network, as well as an
increased number of access and termination points
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compared to most other long haul networks, (iv) greater product flexibility as a
result of the ability to sell capacity in increments as small as DS-1s and as
large as OC-24s, (v) non-competitive marketing position as primarily a
'carrier's carrier', (vi) comparable or greater reliability due to the digital
SONET architecture of the Company's network, and (vii) ability to provide
network redundancy and enhanced reliability by offering an alternative to the
existing network.
COMPETITIVE ADVANTAGES
The Company believes that it will enjoy the following competitive
advantages:
UBIQUITOUS COVERAGE. The Company's goal is to deploy a network covering
29,000 route miles within 24 months and ultimately to deploy a network
encompassing more than 100,000 route miles. The extensive scope of such existing
networks, combined with the attractive characteristics of Pathnet's network
architecture, should enable the Company to provide greater ubiquity than many
other long haul carriers. Pathnet's network architecture enables the Company to
provide access and termination points approximately every 25 miles, which is not
economically feasible for most fiber optic networks. This architecture increases
the number of cities that can be served cost effectively on each route. In
addition, the Company expects that its tower rights will enable it to
interconnect with Telecom Service Providers by digital microwave anywhere within
an approximate 25-mile line of sight surrounding any transmission tower on its
network. This will allow Pathnet in many cases to bypass existing local
infrastructure and deliver traffic directly to an access tandem, local serving
office, mobile switching office, ISP POP or large end-user.
LOWER NETWORK COST. By leveraging the resources of Incumbents and other
owners of telecommunications assets and by utilizing lower-cost wireless
technology, the Company believes it will gain a significant competitive
advantage over carriers seeking to deploy newly constructed digital networks to
serve the Company's target markets. The Company intends to reduce its initial
costs by utilizing the assets, including towers and rights of way, of Incumbents
and other owners of existing telecommunications assets. In addition, the Company
will be able to utilize many of the requisite local permits and local regulatory
approvals already in place. Based upon publicly available information, the
Company believes that, for capacity of OC-24, the Company's average capital cost
per DS-0 circuit mile will be approximately $1.55 versus approximately $1.90 for
newly constructed digital microwave capacity, approximately $3.00 for newly
constructed aerial fiber and approximately $4.10 for newly constructed fiber
buried in conduit.
SUCCESS-BASED CAPITAL EXPENDITURE. The Company's network is designed to
reduce the risk of capital investment by deploying a substantial portion of its
network on a demand-driven basis. After an Initial System is deployed, the
Company's additional capital expenditures will relate primarily to deploying
incremental equipment to provide additional capacity in response to specific
customer demand. As a result, the Company believes that a majority of its
capital expenditures will be success-based. The modular design of its network
should allow the Company to expand rapidly in response to increased customer
demand or to delay the deployment of network equipment until justified by
specific customer demand. In addition, the Company will be able to mitigate its
capital expenditures by redeploying network equipment to respond to shifting
customer demand.
BARRIERS TO ENTRY. The Company's strategy of entering into long-term
relationships with Incumbents is designed to enable the Company to minimize the
significant costs and obstacles associated with the development of long haul
telecommunications capacity. Leveraging the existing assets of Incumbents will
enable the Company to avoid certain capital expenditures related to real estate
and right-of-way acquisition, permits and zoning requirements, and generally is
expected to shift to Incumbents certain costs of shelter development, tower
upgrades and enhancement of utility service. The Company's relationships with
Incumbents also are expected to mitigate maintenance and ongoing administrative
costs by using Incumbents' existing technicians to perform facility and
equipment maintenance and on-site circuit provisioning and by leaving ongoing
utility, real estate taxes and other infrastructure costs with Incumbents. The
Company believes that fiber networks, the primary alternative source of
bandwidth, may be too expensive
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to install in the smaller markets targeted by the Company. The greater capacity
offered by fiber networks may not be cost effective in smaller markets due to
the higher costs per bit of capacity sold to low volume markets.
HIGH QUALITY, TECHNOLOGICALLY ADVANCED NETWORK. The Company's network is
being deployed using a high capacity digital SONET platform, which will provide
high quality voice, data and video transmission comparable to or exceeding that
of most fiber optic networks. The Company expects to deliver 99.999% network
reliability on any individual path with a bit error rate of no greater than
10(-13). The capacity created by Pathnet is expected to meet the highest
industry standards, including those of AT&T and MCI, and Bellcore specifications
for reliability. The Company will continuously monitor and maintain high quality
control of its network on a 24 hours per day, seven days per week basis through
its NOC.
EXPERIENCED MANAGEMENT. Pathnet's management team includes its Chief
Executive Officer, Richard A. Jalkut, the former President of NYNEX
Telecommunications, and Kevin J. Bennis, who is Executive Vice President serving
as President of the Company's Communications Services Division and was formerly
President of Frontier Communications and Senior Vice President of Marketing at
MCI. The Company has commenced development of its network under the direction of
Michael L. Brooks, who was responsible, as Vice President of Engineering of
Qwest Microwave Communications, a predecessor of Qwest, for the initial
construction of Qwest's 3,500-mile digital microwave network. This team has
significant and proven operational, technical, financial and regulatory
experience in the telecommunications industry.
BUSINESS STRATEGY
Key components of the Company's business and operating strategies are
described below:
FOCUS ON SMALLER, CAPACITY CONSTRAINED MARKETS. The Company intends to
focus on smaller markets that typically have limited access to transmission
capacity and that currently are served by ILECs and few other competitors.
Private line rates in second and third tier markets are believed by the Company
to be significantly higher than rates between larger markets because there are
few suppliers. Smaller markets are often unattractive to new entrants because
their relatively limited traffic does not normally economically justify new
network construction. Focusing on smaller markets should enable the Company to
take advantage of its low cost, flexible network, which is capable of servicing
markets requiring small increments of capacity.
POSITION THE COMPANY AS A 'CARRIER'S CARRIER.' The Company intends to sell
the majority of its capacity to Telecom Service Providers. The Company believes
there are substantial benefits to a 'carrier's carrier' strategy, including (i)
lower sales, marketing and servicing costs, (ii) elimination of significant
capital outlays to provide switching services to end-users, (iii) the ability to
carry most of its customer traffic on its own network, thereby increasing
operating margins, and (iv) increased attractiveness to Telecom Service
Providers, who will not view the Company as a potential competitor.
ESTABLISH STRATEGIC RELATIONSHIPS WITH INCUMBENTS AND OTHER OWNERS OF
TELECOMMUNICATIONS ASSETS. The Company's core strategy for deploying its network
is to form strategic relationships with Incumbents and other owners of
telecommunications assets that will enable the Company to utilize existing
infrastructure, permits and other regulatory approvals in order to reduce the
Company's time to market and construction costs. The Company believes that
Incumbents will find a strategic relationship with the Company to be attractive
due to the opportunity for Incumbents to (i) reduce the costs of upgrading the
Incumbent's infrastructure, (ii) receive incremental capacity which has greater
reliability characteristics than most of the Incumbents' existing systems, and
(iii) leverage under-utilized assets and receive a share of the incremental
revenues generated by Pathnet. See "Risk Factors--Dependence on Relationships
with Incumbents; Rights of Incumbents to Certain Assets."
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BUILD EFFECTIVE SALES FORCE AND PROVIDE SUPERIOR CUSTOMER SERVICE. The
Company is building a national accounts sales force that will use a consultative
approach designed to provide a systematic review of a large carrier's network
requirements in smaller markets and to offer solutions to reduce the carrier's
network costs and improve its reliability. The Company will also build a
regional sales force that will market the Company's network capacity to smaller
carriers and to selected large end-users. The Company expects to offer high
reliability and superior customer service, including maintaining a centralized
NOC to initiate new services and monitor existing circuit capacity more easily.
In addition, pursuant to the FPM Agreements, the Company utilizes Incumbents as
an alternative sales channel to sell to large end-users who reside in the cities
near Incumbents' facilities.
SALES AND MARKETING STRATEGY
CUSTOMERS
The Company primarily targets Telecom Service Providers as well as smaller
carriers and large end-users. The Company's marketing focus is to (i) offer
capacity to fill gaps in its customers' networks; (ii) provide alternative
capacity to ILECs, and (iii) capture demand, as a lower cost provider, from
incremental growth in the Company's addressable market. The Company markets its
network to major IXCs such as AT&T, MCI, Sprint and WorldCom to satisfy their
expanded requirements for feeder and gathering networks. The Company expects
that it will be well positioned to provide capacity to meet spot shortages in
isolated geographic areas and to provide economic transport facilities that will
complement existing IXC networks. The Company plans to exploit its network
flexibility in providing access and termination capabilities and in providing
capacity to small IXCs that need both a feeder network and backbone transport.
The Company also intends to market capacity to ISPs by providing additional POPs
for local dial-up connectivity, rather than toll-free service, to the ISPs'
customer base, thereby eliminating the ISPs' dependence on IXCs for capacity.
The Company believes there will be significant opportunities to market its
capacity to the RBOCs when they commence long distance service outside of their
current service areas. The Company also plans to market the Company's network to
RBOCs for use within their own service areas. The Company believes RBOCs will be
attracted to the Company's ability to provide supplemental capacity on a leased
basis, permitting them to conserve capital and providing a low-cost redundancy
alternative. The Company believes its network will allow RBOCs to focus on
larger cities while providing small communities within their service areas with
broadband connectivity.
The Company expects that mobile wireless operators (both PCS and cellular)
will be attracted to the Company's ability to provide the backhaul capacity
needed to interconnect its mobile switches with backbone transport capacity. The
Company also intends to market its capacity to competitive access providers and
CLECs who can utilize the Company's network to interconnect various service
areas on an intra-LATA and inter-LATA basis. Lastly, the Company also
anticipates offering capacity to providers of switched video services, as the
Company's 1.2 gigabyte per second OC-24 network is expected to be capable of
providing up to 150 digital video channels on demand as advances in digital
switching continue.
PRODUCTS AND SERVICES
The Company is offering dedicated private line access for voice, data and
video transmission in DS-1, DS-3 and OC-3 increments that are well suited to
second and third tier markets. The Company expects that its state-of-the-art
network architecture will enable it to provide access and termination points as
frequently as every 25 miles, thereby providing a more flexible routing capacity
than networks comprised solely of fiber optic cable. This architecture is
expected to increase the number of cities that can be cost effectively served on
each route. In addition, the Company expects this architecture to enable it to
deliver traffic anywhere within an approximate 25-mile line of sight surrounding
any Incumbent tower, allowing it in many cases to bypass existing local
infrastructure and deliver traffic directly to the access tandem, local
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serving office, mobile switching office, ISP POP or to large end-users. This
flexibility plus the ubiquity of the Company's network is expected to appeal to
a broad variety of customers.
The Company also is offering provisioning services and other customer
service features. The Company's network architecture is designed to allow it to
deploy incremental equipment rapidly in response to customer needs. The Company
will employ a state-of-the-art operating support system that will be capable of
supporting on-line order entry and remote circuit provisioning. The Company also
employs information systems that permit customers to monitor network quality
using benchmarks such as network uptime, mean time to repair, installation
intervals, timeliness of billing and NOC responsiveness. The Company expects
that its state-of-the-art NOC will permit pro-active service monitoring and
system management on a 24 hours per day, seven days per week basis. The Company
expects to combine network management, billing and customer care on an
integrated platform to offer its customers a single point of contact.
The Company expects that it will locate network nodes near LEC and IXC
service offices and expects to be able to interconnect with customers using
multiple technologies, including both fiber optic and microwave transmission
media. The diagram below illustrates the portion of a telecommunications circuit
for which the Company intends to provide service:
[Artwork: Diagram showing a typical telecommunications circuit and the portion
served by the Company.]
PRICING
Private line rates in second and third tier markets are believed by the
Company to be significantly higher than rates between larger markets because
there are fewer suppliers serving such markets. Although the Company intends to
take advantage of its lower network costs to offer competitive pricing, it
believes that demand for capacity in second and third tier markets will
nonetheless permit higher profit margins than those obtainable in larger
markets. Moreover, the Company believes that services currently available in
second and third tier markets do not offer the flexibility and route diversity
that the Company's network is expected to offer. The Company believes that
customers may be willing to pay premium prices for use of the Company's flexible
and diverse routes.
Pathnet's pricing structures will vary according to bandwidth requirements
and the demand characteristics of specific routes. Dedicated capacity is
expected to be sold on a monthly basis based on DS-0 circuit capacity multiplied
by the circuit length. Pathnet charges customers for this capacity regardless of
the actual usage of the dedicated circuits. The Company sells dedicated capacity
in increments as small as DS-1s and as large as OC-24s and expects to offer
volume discounts for larger volumes and multiple routes.
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SALES AND MARKETING RESOURCES
The Company is building a sales force designed to focus on large carriers
and small carriers. A national accounts sales force will pursue a consultative
approach to provide a systematic review of a large carrier's network
requirements in smaller markets and to offer solutions to reduce the carrier's
network costs and improve its network reliability. A regional sales force will
market the Company's network capacity to smaller carriers and to selected large
end-users. The Company will deploy its sales force in regional offices
throughout the United States. The Company is recruiting an experienced and well
trained sales force and retaining its sales and marketing team with a
compensation package that includes salary, quarterly performance bonuses and
stock option incentives. In addition, the Company utilizes Incumbents as an
alternate sales channel to sell to large end-users who reside in the cities near
Incumbents' facilities in return for a referral fee.
The Company is also assembling a centralized marketing organization to focus
on product development, market analysis and pricing strategies as well as
responsibility for customer communications, public relations and branding.
Pathnet intends to develop its brand name and its service mark, "A Network of
Opportunities" through advertising in carrier trade publications and quarterly
newsletters to update network development, service statistics and Company
highlights.
COMMERCIAL ROLL-OUT
The Company is currently deploying its network on a modular basis. In its
efforts to attract Incumbents, the Company is capitalizing on the fact that many
Incumbents currently operate on outmoded analog platforms which provide
low-quality transmission and little room for network expansion. In addition,
many Incumbents currently use a portion of the spectrum recently reallocated by
the FCC to PCS providers and other emerging technology licensees. Pursuant to
the FCC's rules and regulations, an Incumbent must relocate its operations to
another portion of the spectrum whenever the 2 GHz frequencies used by such
Incumbent are needed to implement PCS or another emerging technology. The FCC's
rules provide for a voluntary negotiation period during which the Incumbent and
PCS licensee may, but are not required to, negotiate the Incumbent's relocation.
After the expiration of such period, a mandatory negotiation period commences,
during which time the Incumbent and PCS licensee must negotiate in good faith.
The starting dates and durations of these negotiation periods vary depending on
the PCS spectrum block in which the Incumbent operates and whether the Incumbent
operates a public safety service (I.E., fire, police or emergency medical
service). Mandatory negotiation periods for all Incumbents expired or, will
expire, as follows: (i) April 1998 and April 2000, for non-public safety and
public safety Incumbents, respectively, in the PCS A and B blocks; (ii) May 1998
and May 2001, for non-public safety and public safety Incumbents, respectively,
in the PCS C block; and (iii) January 1999 and January 2002, for non-public
safety and public safety Incumbents, respectively, in the PCS D, E and F blocks.
Should any Incumbent and PCS licensee fail to agree on a relocation plan by the
end of their respective mandatory negotiation periods, the PCS licensee can
request that the Incumbent be involuntarily relocated; the FCC's rules do,
however, provide incentives for parties to agree to relocation plans on their
own.
As part of developing a long-term relationship with an Incumbent, the
Company generally will offer to assist the Incumbent in the relocation of its
system to the 6 GHz portion of the spectrum and, in certain cases, assist the
Incumbent in negotiating legally mandated reimbursement for the cost of such
relocation from the new PCS entrant. Any funds received from such PCS entrants
are generally applied to the cost of the relocation and an upgrade of the
Incumbent's network and, as such, benefit both the Incumbent and the Company.
Based on Pathnet's experience, it may take between six and 18 months from
the initial contact to complete a long-term contract with an Incumbent and 12
months thereafter to complete a commercially available system utilizing the
Incumbent's assets. After a long-term agreement is signed, and throughout
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the installation and construction of a system, the Company provides a project
manager for each Incumbent to provide a single point of contact for
installations across many sites and the upgrade of the Incumbent's
telecommunications system. The system replacement and upgrade is planned in two
stages. During the first stage, the Company's engineering department visits the
Incumbent to evaluate the existing system and to recommend an optimum route for
the system. The Company's engineering department develops a detailed system
design to satisfy the Incumbent's build out and routing requirements. Once
approved by the Incumbent, the Company begins the construction and build-out of
the new system.
In the second stage, the Company oversees and manages the construction,
installation, testing and cutover of the new system within a mutually agreed
upon timetable. The Incumbent is invited to observe and participate in
acceptance testing. Once the Incumbent has accepted the new system the cutover
plan can proceed with the commissioning of circuits on the new equipment. The
Company coordinates with the Incumbent cutover of the new system to minimize
system downtime and service interruption. Once installed, the new system is
expected to deliver 99.999% network reliability on any individual path with a
bit error rate not greater than 10(-13). The capacity created by Pathnet is
expected to meet the highest industry standards, including those of AT&T and
MCI, and Bellcore specifications for reliability. See "Risk Factors--Risks of
Completing the Company's Network; Market Acceptance."
AGREEMENTS WITH INCUMBENTS AND OTHER OWNERS OF TELECOMMUNICATIONS ASSETS
FIXED POINT MICROWAVE SERVICES AGREEMENTS
As of the date of this Prospectus, the Company has entered into six
long-term FPM Agreements with Enron, Idaho Power Company, KN Energy, Northeast
Missouri Electric Power Cooperative, NIPSCO and Texaco or their affiliates.
Under the terms of the FPM Agreements, the Company typically leases from the
Incumbent an interest in the Incumbent's sites and facilities on which to build
and operate its network. The Company's FPM Agreements typically provide that the
Company will, in consideration of such lease, allocate to the Incumbent, solely
for its own use, a certain portion of the circuits on the upgraded system and
pay the Incumbent a portion of the revenue derived from sales capacity by the
Company of excess telecommunications on such Incumbent's system. The portion of
such revenues and the amount of such circuits typically depends on the relative
contributions of the Company and of the Incumbent to the system upgrade. The
Company expects that this portion will typically be approximately 10% of such
revenue, although the exact portion negotiated with each Incumbent is expected
to vary (possibly significantly) on a case-by-case basis. Under the FPM
Agreements signed to date, the Incumbents share between zero and approximately
50% of the revenue generated from the sale of excess capacity, with such revenue
sharing commencing one to four years after the commissioning of the Initial
System or any capacity expansion, and receive circuits ranging from 672 to 1,200
DS-0s for their internal communications needs. Generally, the Incumbent is also
entitled to purchase a certain amount of capacity in excess of its allocated
amount along its own system. The Company expects that FPM Agreements will
generally permit the Incumbent to purchase this additional capacity at the
Company's lowest market rate for such route. The Incumbent is usually required
to make certain capital investments up to a predetermined amount to upgrade its
system infrastructure to make it suitable for installation of the Company's
network system which, in most cases, includes significant modifications to
structures, towers, battery plants and equipment shelters. Certain Incumbents
who have executed FPM Agreements, however, have elected not to contribute any
capital toward the upgrade of their system and accordingly have agreed not to
participate in the revenue generated by the system. The Company is generally
responsible for capital investments relating to the Incumbent's facilities that
exceed such predetermined amount, as well as the installation cost of certain
other equipment, including new digital radios and antenna systems.
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Pursuant to an FPM Agreement, the Incumbent grants to the Company an
exclusive right to market and sell excess telecommunications capacity created by
the Incumbent's system. The Company sets the selling price of such excess
capacity to maximize revenue on Pathnet's entire network rather than that
portion of the network covered by the Incumbent's system. The FPM Agreements
typically prohibit Incumbents from operating parallel microwave
telecommunications facilities for the purpose of selling digital circuits.
Moreover, the FPM Agreements usually provide that Incumbents will refer network
customers to the Company, and, in certain cases, the Incumbent will earn a fee
for a referral that results in a sale of capacity.
The FPM Agreements generally provide for a 25-year term consisting of an
initial term and two extension terms. The initial term generally includes a
design and installation period and an additional five years commencing upon the
commissioning of the system. The FPM Agreements executed to date provide that
the Company will be granted a first extension term for an additional ten years
if it sells 10% or more of the excess capacity available for sale during the
initial term, and a second extension term for an additional ten years if it
sells 10% or more of the excess capacity available for sale during the first
extension term. After commissioning the upgraded system and so long as the
Company satisfies such excess capacity sale requirements, the FPM Agreements are
typically non-terminable by either party. After the 25-year period, the FPM
Agreements typically provide for automatic one-year extensions which may be
terminated at the election of either the Company or the Incumbent. Upon
expiration of an FPM Agreement, the Company is typically obligated to transfer
the Initial System to the Incumbent and may remove from the Incumbent's
facilities all of its equipment utilized for capacity expansion above the
Initial System.
The FPM Agreements typically require the Company to grant the Incumbent a
security interest in the equipment required to operate the Initial System, which
includes the first radio, the protection radio and the other assets and
equipment required to operate such radios.
In the case of the Company's FPM Agreement with Idaho Power Company, in
addition to granting the Incumbent a security interest in the equipment required
to operate the Initial System, the Company contributed such equipment to a
special purpose subsidiary in which Idaho Power Company holds a majority
interest. The Company has veto rights with regard to the taking of certain
extraordinary actions by the subsidiary. Should it enter into similar FPM
Agreements in the future, the Company expects that it will own all or a majority
of the interests in the related special purpose subsidiary and that (in cases
where such subsidiary is majority owned) the Incumbent will have veto rights
with respect to the taking of certain extraordinary actions.
AMERICAN TOWER TERM SHEET
Under the Binding Term Sheet executed by the Company and ATC, ATC has
granted the Company the right to perform due diligence on approximately 4,200
route miles of linear network comprised of two Incumbent systems in 26 states.
Upon completion of a six-month due diligence process that commenced on May 1,
1998, the Company has the unilateral right to reserve each of the tower assets
on which the Company would like to install its network. The contract then
provides that the Company will have up to 14 months to commence construction of
its digital system. Upon completion of network construction, the Company will
enter into a license agreement with ATC that will grant to the Company a 25-year
license to use the tower assets and other facilities of ATC in exchange for
three to five percent of all revenue collected from the sale of excess capacity.
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NETWORK MAINTENANCE AND PROVISIONING OF CIRCUITS
The Company expects to enter into maintenance and provisioning services
agreements (each, a "Maintenance and Provisioning Agreement") with each
Incumbent with whom it enters into an FPM Agreement. To date, the Company has
entered into agreements with KN Energy, NIPSCO and Northern Border relating to
the maintenance of Pathnet's network. The Incumbent will be required to maintain
the physical assets at each site along its route. The Company anticipates
entering additional Maintenance and Provisioning Agreements as its network is
developed. The Maintenance and Provisioning Agreements generally require an
Incumbent to provide all services necessary for the maintenance and operation of
the Company's network, including regularly scheduled maintenance and inspections
and 24 hours per day, seven days per week emergency repair services. The
Company's Maintenance and Provisioning Agreements also typically provide for
certification of the Incumbent's maintenance employees and establish service
standards that the Incumbent must meet. The Incumbent receives a monthly fee per
site serviced, subject to cost of living adjustments and adjustments for changes
in the scope of the services provided. The Incumbent is also reimbursed for
certain out-of-pocket expenses, subject to certain limitations. Maintenance and
Provisioning Agreements typically have a one-year term and renew automatically
unless either party gives notice of its intention not to renew. A Maintenance
and Provisioning Agreement may be terminated sooner if an Incumbent breaches its
obligations thereunder or if the Company fails to pay charges due thereunder. An
Incumbent's performance is evaluated annually in connection with the renewal of
the related Maintenance and Provisioning Agreement.
The Company intends to expand the scope of the Maintenance and Provisioning
Agreements it has entered into that relate only to maintenance and intends to
execute additional agreements with additional Incumbents relating to the
provisioning of circuits. To the extent the Company requires manpower in the
field to provision circuits or install incremental radios, the Company plans to
utilize the Incumbents' existing maintenance staff to provide such services for
an additional fee. If the Company were unable or unwilling to establish or renew
Maintenance and Provisioning Agreements with Incumbents, or if the Company
should utilize telecommunications assets from entities other than Incumbents,
the Company may be required to hire its own staff or third parties to provide
such services. Although the Company believes that its maintenance and
provisioning support arrangements will ensure the quality and reliability of its
network, there can be no assurance that Incumbents or third-party service
providers will adequately maintain the Company's network. See "Risk
Factors--Dependence on Relationship with Incumbents; Rights of Incumbents to
Certain Assets."
EQUIPMENT SUPPLY AGREEMENTS
Pursuant to a Master Agreement entered into by the Company and NEC on August
8, 1997, the Company agreed to purchase from NEC 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. In addition, pursuant to a Purchase Agreement
between Andrew and the Company, the Company agreed exclusively to recommend to
the Incumbents certain products manufactured by Andrew and Andrew agreed to sell
such products to Incumbents and the Company for a three-year period, renewable
for two additional one-year periods at the option of the Company. The Company's
agreement with Andrew generally provides for discounted pricing based on
projected order volume.
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RELIABILITY OF NETWORK
Bellcore states that generally accepted industry standards for reliability
are 99.98% error free seconds for overall network reliability, 99.999% for any
individual path in the network, and bit error rate less than 10(-13). Bellcore's
analysis of the Company's system design indicates that the Company's network
consists of available, off-the-shelf components that meet or exceed the
standards listed above.
The Company has constructed a state-of-the-art NOC located in Washington,
D.C. which currently provides real-time end-to-end monitoring of Pathnet's
network operations during business hours. The Company is currently increasing
its NOC staff and expects to monitor its network operations 24 hours per day,
seven days per week in 1999. For the period before the NOC becomes operational
on a 24 hour per day basis, the Company has engaged WTCI to assist in monitoring
its network. The NOC ensures the efficient and reliable performance of the
network by enabling the Company to identify, and often prevent, potential
network disruptions, and to respond immediately to actual disruptions. In
addition, the NOC enables the Company to schedule and conduct maintenance of
Pathnet's network while minimizing interference with the use of the network.
Specific features provided by the NOC include traffic management and
forecasting, line performance reporting and alarm monitoring, remote link
restoration and coordination, and provisioning of network services.
COMPETITION
The telecommunications industry is highly competitive. In particular, price
competition in the 'carrier's carrier' market has generally been intense and is
expected to increase. The Company competes and expects to compete with numerous
competitors who have substantially greater financial and technical resources,
long-standing relationships with their customers and potential to subsidize
competitive services from less competitive service revenues and from federal
universal service subsidies. Such competitors may be operators of existing or
newly deployed wireline or wireless telecommunications networks. The Company
will also face intense competition due to an increased supply of
telecommunications capacity, the effects of deregulation and the development of
new technologies, including technologies that will increase the capacity of
existing networks.
The Company anticipates that prices for its 'carrier's carrier' services
will continue to decline over the next several years. The Company is aware that
certain long distance carriers are expanding their capacity and believes that
other long distance carriers, as well as potential new entrants to the industry,
are constructing new microwave, fiber optic and other long distance transmission
networks in the United States. If industry capacity expansion results in
capacity that exceeds overall demand along the Company's routes, severe
additional pricing pressure could develop. As a result, within a few years, the
Company could face dramatic and substantial price reductions. Such pricing
pressure could have a material adverse effect on the business, financial
condition and results of operations of the Company.
While the Company generally will not compete with Telecom Service Providers
for end-user customers, the Company may compete, on certain routes, as a
'carrier's carrier' with long-distance carriers such as AT&T, MCI, Sprint and
WorldCom and operators of nationwide fiber optic systems such as IXC
Communications, Inc., Qwest and Level 3 Communications, Inc., who would
otherwise be the Company's customers in second and third tier markets. The
Company will also face competition increasingly in the long haul market from
local exchange carriers, regional network providers, resellers and satellite
carriers and may eventually compete with public utilities and cable companies.
In particular, RBOCs are now allowed to provide inter-LATA long distance
services outside their home regions, as well as inter-LATA mobile services
within their regions. RBOCs will be allowed to provide inter-LATA long distance
services within their regions after meeting certain regulatory requirements
intended to foster opportunities for local telephone competition. Certain RBOCs
have requested regulatory approval to provide inter-LATA data services within
their rights. The RBOCs already have extensive fiber optic cable, switching, and
other network facilities in their respective regions that can be used for long
distance services after a waiting
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period. In addition, other new competitors may build additional fiber capacity
in the geographic areas served and to be served by the Company.
The Company may also face competitors seeking to deploy a digital wireless
network in the same manner as the Company by leveraging the assets of Incumbents
or other owners of telecommunications assets or from Incumbents leveraging their
own assets. Although the Company believes its strategy will provide it with a
cost advantage, there can be no assurance that technological developments will
not result in competitors achieving even greater cost efficiency and therefore a
competitive advantage. See "Risk Factors--Risk of Rapid Technological Changes."
A continuing trend toward business combinations and strategic alliances in
the telecommunications industry may create stronger competitors to the Company,
as the resulting firms and alliances are likely to have significant
technological, marketing and financing resources which will, in many cases, be
greater than those available to the Company. See "Risk Factors--Competition;
Pricing Pressures."
REGULATION
OVERVIEW
The Company's current arrangements with its Incumbents contemplate that the
Company's digital network will be largely Part 101 telecommunications services
which are subject to regulation by federal, state and local governmental
agencies. At the federal level, the Communications Act grants the FCC exclusive
jurisdiction to set rules and policies regarding interstate telecommunications
services (I.E., services that originate in one state and terminate in another
state) and use of the electromagnetic spectrum (I.E., wireless services). The
Company or its affiliates, or in certain cases Licensed Incumbents, must obtain
licenses described below from the FCC in order to construct and operate the
communications network necessary to support the Company's business, although the
Company may commence construction of proposed facilities prior to applying for
or obtaining authorization from the FCC, and may, upon satisfaction of certain
basic requirements, begin operations over constructed facilities prior to
obtaining a final license.
The FCC is also responsible for, among other matters, granting renewals of
the Company's Part 101 licenses, granting pro forma authorizations for transfers
of such licenses, imposing regulatory fees in connection with the granting of
such licenses, performing inspections of licensed facilities, adjudicating
disputes between the Company and other telecommunications carriers, and taking
disciplinary actions against the Company for any violation of the FCC's rules or
policies.
State regulatory commissions have jurisdiction over intrastate
communications (I.E., those that originate and terminate in the same state), and
may impose certain regulatory requirements and restrictions on the Company with
respect to such services. As a result of the Company's offerings of intrastate
service to date, the Company has registered with the Montana Public Service
Commission to provide telecommunications services within the State of Montana.
In addition, municipalities and other local jurisdictions may regulate limited
aspects of the Company's business by, for example, imposing zoning and franchise
requirements and requiring installation permits, particularly with respect to
the construction of new or modified towers necessary to the Company's business.
The Company also is subject to varying taxation at the federal, state and local
levels.
The Company expects to obtain Part 101 authorizations and approvals as
necessary and appropriate to conduct its currently planned operations, and
believes that it is in compliance with all laws, rules and regulations
applicable to its business. Nevertheless, changes in existing laws and
regulations, including those relating to the provision of Part 101
telecommunications services in the 6 GHz band and the relocation of Incumbents
from the 2 GHz to the 6 GHz band, could have a material effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Regulation-- Licensing by the Company and Incumbents."
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As a result of the nature of the Company's business and recent regulatory
streamlining actions taken by the FCC, the Company, as compared to most other
wireless carriers, traditional IXCs and LECs, is subject to a substantially
lesser degree of FCC regulation, and is required to deal with far fewer federal
and state regulatory hurdles in the implementation of its business plan. In
connection with its 1998 biennial regulatory review, the FCC has initiated a
rulemaking proceeding that would further revise and streamline the rules
governing application procedures for the services currently planned to be
offered by the Company and make licensing procedures for such services faster,
less burdensome, and more consistent. The Company expects that these simplified
licensing procedures, if adopted by the FCC, will make it easier to obtain and
maintain the licenses required for its business.
Other regulatory hurdles that are normally encountered by traditional IXCs
and LECs will have no material bearing on the Company's current business. For
example, while IXCs have to pay access charges to LECs in order to access local
networks, the Company will sell capacity to IXCs but will not itself provide
switched traffic, thus eliminating the need to encounter the regulatory issues
surrounding such access. Similarly, while competitive LECs must interconnect
with the facilities of incumbent LECs in order to provide local service, and
must therefore deal with such regulatory issues as interconnection, number
portability, dialing parity, and unbundled network access, the Company does not
now plan to offer local switched service and therefore need not address these
issues. Finally, because the Company's business plan will rely heavily on
existing towers and facilities of Incumbents, the likelihood of encountering
burdensome state or local zoning or tower siting issues is substantially
reduced. The Company expects that its streamlined regulatory status will serve
as an asset and a competitive advantage as it pursues its business plan.
For a discussion of the risks associated with the regulation of the
Company's business, see "Risk Factors--Regulation."
FEDERAL REGULATION
LICENSING BY THE COMPANY. Because of the development and deployment of
emerging technologies such as PCS, many Incumbents operating private
telecommunications systems in the 2 GHz band of the frequency spectrum are or
will be required to relocate their systems and operations to the 6 GHz band or
alternate spectrum. At the same time, technology has made obsolete the analog
microwave systems typically operated by Incumbents. The transition to the 6 GHz
band provides these Incumbents with an opportunity to convert to more advanced,
more spectrum-efficient digital microwave systems. These two developments--one
regulatory, one technological--form the backdrop for the Company's efforts to
aggregate and deploy a digital Part 101 telecommunications network in the 6 GHz
band.
Working closely with relocated Incumbents, the Company expects in most cases
to obtain and aggregate (through wholly owned subsidiaries) Part 101 licenses
from the FCC to conduct operations in the 6 GHz frequency band and from the same
locations as each such relocated Incumbent. Generally, the Company will then
upgrade each relocated Incumbent's telecommunications system from analog to high
capacity digital, provide each Incumbent with the capacity needed by the
Incumbent for its own business, interconnect all of the digital systems to form
an extensive network, and sell excess capacity on the aggregated network to
customers of the Company.
LICENSING BY INCUMBENTS. In a limited number of instances, a relocated
Incumbent may itself obtain authorization from the FCC to operate a Part 101
telecommunications system at the newly occupied 6 GHz location, and may, as part
of its strategic relationship with the Company, construct and operate a digital
system to operate in that band of the frequency spectrum. In those instances,
the Company and the Licensed Incumbent will enter into contractual arrangements
that will allow the Licensed Incumbent to retain a limited amount of capacity on
the relocated network for its own purposes, and will allow the Company to market
and sell the excess capacity on the network and collect the revenue generated
from such sales (a portion of which may be distributed to the Licensed Incumbent
also as part of such
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relationship). The Company intends to establish any such arrangement so as to
ensure that there is no DE FACTO transfer of control of the FCC license from the
Licensed Incumbent to the Company, because such a transfer without FCC consent
would violate the FCC's rules.
MUTUAL EXCLUSIVITY. Pursuant to its arrangements with Incumbents, the
Company will, in most cases, apply to the FCC for new Part 101 licenses to
operate in the 6 GHz band. As each such Part 101 license is granted by the FCC
with respect to the frequencies to be used between two specific points as
designated by specific latitude and longitude coordinates, and as Incumbents
already own the infrastructure and sites that comprise each such licensed point
along the network, the Company expects to be the first and only entity to apply
for these licenses at or near the specific locations and in the frequencies to
be designated by the Company, and hence to have licensing priority under the
FCC's procedures. There can be no assurance that other entities will not seek
licenses to operate in the same portion of the frequency spectrum as the
Company, in locations geographically close to those designated by the Company.
The Company believes, however, that such situations are not likely to create
mutual exclusivity for FCC purposes between the Company and any such other
entity, because (i) the FCC's current licensing is on a "first come, first
served" basis, (ii) it will be difficult for any such other entity to obtain
tower site locations in close enough geographical proximity to the Company's
proposed tower sites (on land typically controlled by the Incumbent) so as to
cause a mutually exclusive situation to arise and (iii) the FCC imposes
construction and channel loading requirements with respect to each frequency so
licensed to prevent warehousing of spectrum which would force any such potential
mutual exclusive licensee to invest significant capital in the form of sites,
equipment and actual traffic using such licensed frequencies in order to
maintain its license.
FREQUENCY COORDINATION. Prior to applying to the FCC for authorization to
use portions of the 6 GHz band, the Company must coordinate its use of the
frequency with any existing licensees, permittees, and applicants in the same
area whose facilities could be subject to interference as a result of the
Company's proposed use of the spectrum; in applying for a license the applicant
must certify that such coordination has taken place. The Company must circulate
coordination notifications and allow 30 days for a response from other potential
applicants or licensees expressing concerns about interference; in the event of
such a response, the parties must take all reasonable steps to resolve the
potential interference. If there are no responses to the notification, the
desired frequency will effectively be "reserved" for the Company's use, and the
Company will be required to file an application for a license to use the
frequency within six months of the notification, or to file a renewal
notification. As a Part 101 licensee, the Company may itself receive
coordination notifications from would-be applicants, and would be required to
take reasonable steps to solve any interference problems.
FCC LICENSE REQUIREMENTS. As part of the requirements of obtaining a Part
101 license, the FCC will require the Company to demonstrate the site owner's
compliance with the FAA reporting and notification requirements with respect to
the construction, installation, location, lighting and painting of transmitter
towers and antennas, such as those to be used by the Company in the operation of
its network. In certain instances, the Company may be required to notify the FAA
of proposed construction of facilities (E.G., more than 200 feet above ground
level), so as to allow the FAA to determine whether the proposed construction
poses a hazard to aviation safety. The FCC requires compliance with the FAA's
notification requirement; where such FAA notification is required, the FCC
requires a "no hazard" determination from the FAA before granting a license with
respect to a particular facility. The FAA has a substantial backlog of requests
for "no hazard" determinations, and this may affect in certain situations the
timing of the FCC's issuance of a license to the Company. If the FAA finds that
a particular structure will pose a hazard, the Company will have to reduce its
size or location, or take other steps to bring the structure into compliance
with the FAA's guidelines.
In addition, in order to obtain the Part 101 licenses necessary for the
operation of its network, the Company, and in some cases Licensed Incumbents,
will have to file applications with the FCC for such licenses and demonstrate
technical and legal qualification to be an FCC licensee. The licensing
procedures
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for Part 101 applicants have recently been streamlined by the FCC. For example,
Part 101 applicants may begin and complete the construction of facilities to be
licensed, at their own risk, even before filing applications. An applicant is
also allowed to operate such facilities at the time of filing an application or
while its formal license application is being processed, provided the applicant
certifies that, among other things: (i) it has successfully completed the
frequency coordination process; (ii) the operations will have no significant
environmental impact; (iii) no rule waiver is being requested; and (iv) no FAA
or FCC notification is required.
The Company or a Licensed Incumbent must obtain prior FCC authorization in
order to make significant modifications to existing microwave facilities
(although certain modifications can be made without prior approval or
notification). Additionally, the Company or a Licensed Incumbent is required to
provide notice to the FCC before transferring control of an FCC license to a
third party.
Under the rules of the FCC, the Company will be required to have each
licensed Part 101 facility constructed and "in operation" (I.E., capable of
providing service), and to complete each authorized modification to an existing
facility, within 18 months of the grant of the necessary license or approval.
Each license also contains a separate deadline for the completion of
construction of the underlying facility. A licensee may obtain a six-month
extension of these periods upon a showing of good cause, and such extensions are
routinely granted. In addition, the FCC has eliminated the requirement that Part
101 licensees certify to the FCC the completion of construction of licensed
facilities. The FCC also requires that a certain portion of the available
channels on Part 101 digital systems be loaded with traffic within 30 months of
licensing.
Failure to meet the FCC's timetable for construction or operation, or to
obtain an extension of said timetable, will automatically cancel the underlying
license or approval, to the detriment of the Company's ability to execute its
business plan. A license or authorization will also lapse if, after construction
and operation, the facility is removed or altered to render it non-operational
for a period of 30 days or more. Any authorized Part 101 station that fails to
transmit operational traffic during any twelve consecutive months after
construction is complete is considered permanently discontinued under the FCC's
files, and its underlying license is forfeited. A Part 101 license may also
lapse for failure to comply with the FCC's channel loading requirements.
There are several additional regulatory requirements with which the Company
will have to comply as a Part 101 licensee. For example, the Company must allow
the FCC, upon its request, to gain access to the licensed facilities in order to
conduct inspections. Additionally, licensees are required to give priority on
their systems to the transmission of public safety messages. Licensees are also
required to notify the FCC of any disruptions in the service offered over the
licensed facilities.
FCC LICENSE RENEWAL. Part 101 licenses obtained by the Company or an
Incumbent will be issued for a term of ten years, after which such licenses will
have to be renewed by the filing of applications with the FCC. Renewals of such
licenses are generally routinely granted for companies that have complied with
all material aspects of the FCC's rules and regulations.
PROVISION OF COMMON AND PRIVATE CARRIER SERVICES. The Company's and
Licensed Incumbents' Part 101 licenses will allow the Company to sell the excess
capacity on its network to the customers targeted under the Company's business
plan. Although the Part 101 licenses that the Company and Licensed Incumbents
will hold are designated for "common carriers," under the FCC's rules, a Part
101 licensee may provide both common carriage and private carriage over Part 101
facilities.
The Company's services will be offered on a private carrier basis, I.E., to
selected companies on an individualized basis, subject to separately negotiated
contracts. For example, the capacity to be provided to Incumbents for their own
use will be provided on a private carrier basis. Similarly, the Company will
offer services to common carriers on an individualized basis as a 'carrier's
carrier.' The Company's private carrier services will be specifically tailored
to meet the unique requirements of each customer, and will not
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subject the Company to common carrier regulation, such as tariff filing
requirements, with respect to those private carriage offerings.
Although the Company does not currently plan on providing services on a
common carrier basis the Company may, in the future, provide services on such
basis, I.E., the services would be offered indiscriminately to the public, thus
making the Company a common carrier with respect to those services. Being a
common carrier with respect to the services would subject the Company to certain
regulatory requirements and restrictions. For example, with respect to the
Company's common carrier offerings, the Company would be required to offer them
to the public indiscriminately, without unreasonable discrimination in its
charges, practices, classifications, regulations, facilities, or services. In
addition, the Company would be required to file tariffs with the FCC with
respect to the rates and terms of its common carrier interexchange offerings;
this tariffing requirement may be modified or eliminated in the future. The
tariffing requirement is non-burdensome; the FCC has adopted streamlined
tariffing procedures for nondominant common carriers, allowing tariffs to become
effective within one day of filing, and presuming such tariffs to be just and
reasonable unless otherwise demonstrated.
FOREIGN OWNERSHIP. As the licensee of facilities designated for common
carriage, the Company will be subject to Section 310(b)(4) of the Communications
Act, which by its terms restricts the holding company of an FCC common carrier
licensee (the Company is such a holding company, because it expects to hold all
FCC licensees indirectly, through subsidiaries) to a maximum of 25% foreign
ownership and/or voting control. In addition, if any Incumbent elects to be an
Incumbent Licensee on the portion of the Company's network relating to its
system, such Incumbent Licensee would also be subject to such foreign ownership
restrictions. The FCC has determined that it will allow a higher level (up to
100%) on a blanket basis with respect to all common carrier licensees, but only
for foreign ownership by citizens of, or companies organized under the laws of,
WTO member countries.
The FCC continues to apply the 25% foreign ownership limitation with respect
to citizens or corporations of non-WTO nations. Although the Company is
presently within the 25% foreign ownership limitation, future financings may
cause the Company to exceed this limitation, in which case the Company would
have to analyze its foreign ownership with respect to the WTO status of the
nations with which the Company's foreign owners are associated. Also, in the
event that a Licensed Incumbent were to choose to hold the relevant Part 101
licenses itself, and not through a holding company, that Licensed Incumbent
would be subject to Section 310(b)(3) of the Communications Act, which limits
direct foreign ownership of FCC licenses to 20%. The FCC does not have
discretion to waive this limitation.
UNIVERSAL SERVICE. The FCC's universal service rules require certain
providers of interstate telecommunications services to make contributions to a
fund based on their telecommunications revenues from end-users. Revenues
received by a provider from carriers that are reasonably expected to make
contributions to the fund based on their own end-user revenues need not be
included in such provider's contribution base. The proceeds in the universal
service fund are to be distributed among eligible schools and libraries, certain
carriers delivering telecommunications services to low-income consumers,
communication carriers in high cost-of-service areas and other entities
designated as eligible by a state commission.
Because the vast majority of the Company's telecommunications services will
be sold to other carriers that will themselves be contributors to the fund, the
Company does not expect to be assessed fund contributions with respect to most
of the telecommunications revenues that it receives. Such contributions will be
assessed solely with respect to revenues received by the Company from its
limited number of actual end-users, such as Incumbents, ISPs and other
non-carrier end-users, and from other carriers that are not required to
contribute to the fund because they fall under one of the contribution
exemptions established by the FCC (E.G., non-profit schools and government
agencies, and carriers whose total annual contribution would be less than
$10,000). The Company expects that, to the extent it is required to contribute
to the fund, it will be able to recover the amounts contributed through
appropriate charges to end-users and others.
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To the extent that the Company provides capacity to carriers and other
entities eligible for universal service fund support, the Company may be able to
obtain, either directly or indirectly, some funding from the universal service
fund. The Company has no present intention to rely on any such funding, and has
not included any such funding in its financial projections.
STATE AND LOCAL REGULATION
State and local governments have regulatory authority over the provision of
intrastate communication services, including the approval of those seeking to
provide certain intrastate services. Such state and local regulatory
requirements may also include registering with regulatory authorities, paying
fees, acquiring permits, filing tariffs and notifying or obtaining approval from
regulatory authorities with respect to certain transfers or issuances of the
Company's capital stock. The Company expects that most of its services will be
provided on an interstate basis; however, in those instances where the Company
will provide intrastate services, it does not expect state regulatory
requirements to be burdensome.
The siting and construction of telecommunications equipment may be subject
to state and local zoning, land use, and other regulations. The types and timing
of approvals required to install transmitter towers, antennae and other
equipment and to conduct other aspects of the Company's business will likely
vary among local governments. Under its arrangements with Incumbents, it will be
the primary responsibility of Incumbents to obtain all necessary state and local
authorizations with respect to towers and other equipment for the Company's
network. Because the Company intends to rely heavily on existing towers and
facilities, however, the Company does not expect that Incumbents or other owners
of telecommunications assets will generally encounter burdensome state zoning or
tower siting issues.
INTELLECTUAL PROPERTY
The Company uses the name "Pathnet" as its primary business name and service
mark and has registered that name with the United States Patent and Trademark
Office. On February 26, 1998, the Company filed an application to register its
service mark "A NETWORK OF OPPORTUNITIES" in the United States Patent and
Trademark Office for communications services, namely establishing and operating
a network through the use of fiber optic and high capacity digital radio
equipment. First action upon the application is expected in the third quarter of
1998. The Company reasonably believes that the application will mature to
registration, but there can be no assurance that such registration will actually
be issued.
The Company relies upon a combination of licenses, confidentiality
agreements and other contractual covenants, to establish and protect its
technology and other intellectual property rights. The Company currently has no
patents or patent applications pending. There can be no assurance that the steps
taken by the Company will be adequate to prevent misappropriation of its
technology or other intellectual property. In addition, the Company depends on
the use of intellectual property of others, including the hardware and software
used to construct, operate and maintain its network. Although the Company
believes that its business as currently conducted does not infringe on the valid
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims against the Company or that, in the event of an
unfavorable ruling on such claim, a license or similar agreement to utilize
technology relied upon by the Company in the conduct of its business will be
available to the Company on reasonable terms. The Company's equipment supply
contracts with NEC and Andrew provide for indemnification by the supplier to the
Company for intellectual property infringement claims regarding the suppliers'
equipment. In the case of the agreement with Andrew, however, such
indemnification is limited to the purchase price paid for the particular
equipment.
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FACILITIES, REAL PROPERTY AND LEASES
As part of its network, the Company holds leasehold interests or licenses in
the land, towers, shelters and other facilities located at each Incumbent's
sites and will have leasehold and other real estate interests pursuant to its
agreements with independent tower companies and other owners of
telecommunications assets. See "--Agreements with Incumbents and Other Owners of
Telecommunications Assets--Fixed Point Microwave Services Agreements" and
"--American Tower Term Sheet." The Company expects to lease additional
facilities from Incumbents and other owners of telecommunications assets in
connection with the planned expansion of its digital network.
The Company leases its corporate headquarters space in Washington, D.C. from
6715 Kenilworth Avenue General Partnership, a general partnership of which David
Schaeffer, Chairman of the Company, is General Partner (the "Kenilworth
Partnership"), pursuant to a Lease Agreement between the Company and the
Kenilworth Partnership, dated as of August 9, 1997 (the "Headquarters Lease").
The Headquarters Lease expires on August 31, 1998 and can be renewed at the
option of the Company for two additional one-year periods on the same terms and
conditions. See "Certain Relationships and Related Transactions--Lease from the
Kenilworth Partnership." The Company also leases office space in Richardson,
Texas; Lewiston, Texas; and Independence, Kansas pursuant to leases that expire
in 2000, 2001 and 2000, respectively.
The Company believes that all of its properties are well maintained.
EMPLOYEES
As of May 4, 1998, the Company had 83 full time employees, none of whom was
represented by a union or covered by a collective bargaining agreement. The
Company believes that its relationship with its employees is good. In connection
with the construction and maintenance of its network and the conduct of its
other operations, the Company uses third party contractors, some of whose
employees may be represented by unions or covered by collective bargaining
agreements.
LEGAL PROCEEDINGS
Other than licensing and other regulatory proceedings described under "Risk
Factors--Regulation" and "--Regulation," the Company is not currently a party to
any legal proceedings, which, individually or in the aggregate, the Company
believes will have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information concerning the directors and
executive officers of the Company. Directors of the Company are elected at the
annual meeting of stockholders. Executive officers of the Company generally are
appointed at the Board of Directors' first meeting after each annual meeting of
stockholders.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
David Schaeffer (1).................................. 42 Chairman of the Board, Treasurer and Director
Richard A. Jalkut (1)................................ 53 President, Chief Executive Officer and Director
Kevin J. Bennis...................................... 44 Executive Vice President, and President,
Communications Services Division
William R. Smedberg, V............................... 37 Vice President, Finance and Corporate Development
Michael A. Lubin..................................... 49 Vice President, General Counsel and Secretary
Michael L. Brooks.................................... 54 Vice President, Network Development
Peter J. Barris (2).................................. 46 Director
Kevin J. Maroni (2)(3)............................... 35 Director
Patrick J. Kerins (3)................................ 42 Director
Richard K. Prins (2)(3).............................. 40 Director
Stephen A. Reinstadtler.............................. 31 Director
</TABLE>
- ------------------------
(1) Member of Contract Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
Set forth below is the background of each of the Company's executive
officers and directors.
DAVID SCHAEFFER founded the Company in August 1995, has served as Chairman
of the Board, Treasurer and director of the Company since August 1997, and
served as President and Chief Executive Officer of the Company from 1995 until
August 1997. From 1986 to the present, Mr. Schaeffer has also served as
President and Chief Executive Officer of Empire Leasing, Inc., a specialized
mobile radio licensee and operator. In addition, Mr. Schaeffer founded and,
since 1992, has served as President and Chief Executive Officer of Mercury
Message Paging, Inc., a paging company which operates networks in Washington,
D.C., Baltimore and Philadelphia.
RICHARD A. JALKUT has served as President and Chief Executive Officer of the
Company since August 1997. 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. Prior to that, Mr. Jalkut served as President and Chief Executive
Officer of New York Telephone Co. Inc., the predecessor company to NYNEX
Telecommunications Group, from 1991 until 1995. Mr. Jalkut currently serves as a
member of the Board of Directors of Marine Midland Bank, a commercial bank, Ikon
Office Solutions, Inc., a company engaged in wholesale and retail office
equipment, and Home Wireless Networks, a start-up company developing a wireless
product for home and business premises.
KEVIN J. BENNIS has served as Executive Vice President, serving as President
of the Company's Communications Services Division since February 1998. From 1996
until he joined the Company, Mr. Bennis served as President of Frontier
Communications, a long-distance communications company, where he was responsible
for the sales, marketing and customer service activities of 3,500 employees.
Prior
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to that, Mr. Bennis served in various positions for 21 years at MCI, including
as President of MCI's Integrated Client Services Division from 1995 to 1996, as
President and Chief Operating Officer of Avantel Telecommunications, MCI's joint
venture with Banamex in Mexico, from 1994 to 1995, and as Senior Vice President
of Marketing from 1992 to 1994.
WILLIAM R. SMEDBERG, V joined the Company initially as a consultant in 1996,
and has assumed the position of Vice President, Finance and Corporate
Development since January 1997. Prior to joining the Company, Mr. Smedberg
served in various financial and planning positions at the James River
Corporation of Virginia, Inc. ("James River") 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. Prior to 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 the Company since its inception in August 1995. Prior to joining the Company,
Mr. Lubin was an attorney-at-law at Michael A. Lubin, P.C., a law firm which he
founded in 1985. Mr. Lubin has experience in telecommunications matters,
copyright and intellectual property matters, corporate and commercial law,
construction claims adjudication and trial work. Earlier he served as a Federal
prosecutor with the Fraud Section, Criminal Division, United States Department
of Justice.
MICHAEL L. BROOKS has served as Vice President, Network Development of the
Company since June 1996. Mr. Brooks has extensive experience in voice and data
communications. From 1992 through May 1996, Mr. Brooks served as Vice President,
Engineering for Ikelyn, Inc. Ikelyn provided system design and technical support
for telecommunication systems and support facilities. From 1982 to 1992, Mr.
Brooks worked for Qwest Microwave Communications, a predecessor of Qwest, where
he directed the initial construction of a 3,500-mile digital network.
PETER J. BARRIS has been a director of the Company since August 1995. Since
1992, Mr. Barris has been a partner, and, in 1994, was appointed as General
Partner, of New Enterprise Associates Venture Capital, a firm that manages
venture capital investments.
KEVIN J. MARONI has been a director of the Company since August 1995. Since
1994, Mr. Maroni has been a principal, and, in 1995, was appointed as a General
Partner of Spectrum Equity Investors, L.P., which manages private equity funds
focused on growth capital for telecommunications companies. From 1992 to 1994,
he served as Manager, Finance and Development at Time Warner Telecommunications,
where he was involved in corporate development projects. Mr. Maroni also served
as a consultant at Harvard Management Company from 1990 to 1992, where he worked
in the private equity group.
PATRICK J. KERINS has been a director of the Company since July 1997. Mr.
Kerins has served as Managing Director of Grotech Capital Group, which is
engaged in venture capital and other private equity investments, since March
1997. 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 also a member of the Board of Directors
of CDnow, Inc., an online retailer of compact discs and other music-related
products which is quoted on the Nasdaq National Market.
RICHARD K. PRINS has been a director of the Company since 1995. Since 1996,
Mr. Prins has served as Senior Vice President of Ferris Baker Watts
Incorporated, where he heads the technology and communication practice in the
investment banking division. From 1988 to 1996, he was Senior Vice President and
Managing Director in the investment banking division of Crestar Financial
Corporation. Mr. Prins is currently a director of Startec Global Communications
Corporation, a communications company which is quoted on the Nasdaq National
Market.
STEPHEN A. REINSTADTLER has been a director of the Company since October
1997. Mr. Reinstadtler has served as Vice President and Director at Toronto
Dominion Capital (U.S.A.) Inc., where he has been
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involved in private equity and mezzanine debt investments, since August 1995.
From April 1994 to July 1995, he served as 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.
BOARD OF DIRECTORS
The Company's Board of Directors consists of seven directors. Subject to the
restrictions set forth in the Company's Certificate of Incorporation and the
Bylaws, directors and executive officers of the Company are elected to serve
until they resign or are removed, or are otherwise disqualified to serve, or
until their successors are elected and qualified. The Certificate of
Incorporation and the Bylaws provide for the Board of Directors to be divided
into three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year.
COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors currently has
three committees, the Audit Committee, the Compensation Committee and the
Contract Committee. The Audit Committee has been established to, among other
things, make recommendations to the Board of Directors with respect to the
engagement or discharge of independent auditors, review with the independent
auditors the plan and results of the auditing engagement, and review the
Company's system of internal accounting controls. The current members of the
Audit Committee are Messrs. Maroni, Kerins and Prins.
The Compensation Committee has been established to, among other things,
administer the Company'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 the Company and any
executive officer of the Company. The current members of the Compensation
Committee are Messrs. Maroni, Prins and Barris.
The Contract Committee reviews and evaluates each FPM Agreement that the
Company proposes to enter into and has the authority to authorize the Company to
execute and deliver any FPM Agreement so long as the terms and conditions of
such FPM Agreement do not differ substantially from the FPM Agreements
previously authorized and approved by the full Board of Directors. The current
members of the Contract Committee are Messrs. Schaeffer and Jalkut.
DIRECTOR COMPENSATION. Mr. Prins, a director of the Company, was granted
options to purchase 121,950 shares of Common Stock under the Company's 1995 Plan
(as defined herein) in 1995. See "Security Ownership of Certain Beneficial
Owners and Management." Directors of the Company are currently not reimbursed
for their out-of-pocket expenses incurred in connection with attendance at
meetings of, and other activities relating to serving on, the Board of Directors
and any committees thereof. The Company may consider additional compensation
arrangements for its directors from time to time.
LIMITATION OF LIABILITY AND INDEMNIFICATION. The Restated Certificate of
Incorporation of the Company limits, to the fullest extent permitted by law, the
liability of directors to the Company and its stockholders for monetary damages
for breach of directors' fiduciary duty. This provision is intended to afford
the Company's directors benefit of the Delaware General Corporation Law (the
"DGCL"), which provides that directors of Delaware corporations may be relieved
of monetary liability for breach of their fiduciary duty of care, except under
certain circumstances, including any breach of a director's duty of loyalty,
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, or any transaction from which the director derived any
improper personal benefit. In addition, the Certificate of Incorporation of the
Company provides that the Company will indemnify its directors and officers to
the fullest extent authorized or permitted by law.
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COMPENSATION COMMITTEE AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Messrs. Maroni, Prins and
Barris, none of whom is currently an employee of the Company. During the fiscal
year ended December 31, 1997, no executive officer of the Company served as a
member of a compensation committee or as a director of any entity of which any
of the Company's directors serves as an executive officer.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the cash and
non-cash compensation during the fiscal year ended December 31, 1997 earned by
or awarded to the Chief Executive Officer and the five other most highly
compensated executive officers of the Company whose combined salary and bonus
exceeded $100,000 during the fiscal year ended December 31, 1997 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------------
--------------------- SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS GRANTED COMPENSATION
- ----------------------------------------------- ---------- --------- ------------------- -------------
<S> <C> <C> <C> <C>
Richard A. Jalkut.............................. $ 166,154(1) $ -- 1,480,610 $ 9,857(2)
President and Chief Executive Officer
David Schaeffer................................ 216,923(3) -- 742,090 --
Chairman of the Board and Treasurer
Michael A. Lubin............................... 136,115 -- -- --
Vice President, General Counsel and Secretary
David J. Daigle................................ 103,077 -- -- --
Vice President, Sales and Marketing
Michael L. Brooks.............................. 103,077 -- -- --
Vice President, Network Operations
William R. Smedberg, V......................... 103,385 -- -- --
Vice President, Finance and Corporate
Development
</TABLE>
- ------------------------
(1) Mr. Jalkut commenced employment with the Company in August 1997, and is
compensated at a rate of $400,000 per annum.
(2) Includes amounts reimbursed by the Company pursuant to the Jalkut Employment
Agreement (as defined herein) for expenses, including certain travel
expenses.
(3) Mr. Schaeffer's salary increased to $300,000 per annum from $150,000 per
annum in August 1997.
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<PAGE>
OPTION GRANTS AND EXERCISES
The following table sets forth the aggregate number of stock options granted
to each of the Named Executive Officers during the fiscal year ended December
31, 1997. Stock options are exercisable for Common Stock of the Company. As of
December 31, 1997, no stock options had been exercised by any Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATE OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE THE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% 10%
- -------------------------------------- ----------- --------------- ----------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Jalkut..................... 1,480,610(2) 66.6% $ 0.66 Aug. 4, 2007 $ -- $ --
David Schaeffer....................... 742,090(3) 33.4 2.13 Oct. 31, 2007 -- --
Michael A. Lubin...................... -- -- -- -- -- --
David J. Daigle....................... -- -- -- -- -- --
Michael L. Brooks..................... -- -- -- -- -- --
William R. Smedberg, V................ -- -- -- -- -- --
</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 was $0.02 per share as of December 31, 1997
(calculated on a book value basis) and increases at the rate indicated,
effective as of December 31 of each subsequent year during the option term.
See Note 6 to the financial statements included elsewhere in this
Prospectus.
(2) On August 4, 1997, the Company granted stock options to purchase an
aggregate of 1,480,610 shares of Common Stock to Mr. Jalkut. Such stock
options will vest and become exercisable upon the consummation of the
Initial Public Offering.
(3) On October 31, 1997, the Company granted stock options to purchase an
aggregate of 742,090 shares of Common Stock to Mr. Schaeffer. Such stock
options will vest and become exercisable upon the consummation of the
Initial Public Offering.
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<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
None of the Named Executive Officers have exercised any of their options
during the fiscal year ended December 31, 1997. The following table sets forth
the aggregate number of options held by each of the Named Executive Officers and
the fiscal year-end value of the unexercised options.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
DECEMBER 31, 1997 OPTIONS AT DECEMBER 31, 1997 (1)
--------------------------- ----------------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ------------ ------------- ---------------- ----------------
Richard A. Jalkut......................... -- 1,480,610 $ -- $ --
David Schaeffer........................... -- 742,090 -- --
Michael A. Lubin.......................... 203,250 40,655 -- --
David J. Daigle........................... 304,880 60,975 -- --
Michael L. Brooks......................... -- -- -- --
William R. Smedberg, V.................... -- -- -- --
</TABLE>
- ------------------------
(1) The information disclosed assumes, solely for purposes of demonstrating
potential value of the stock options, that the fair market value per share
of Common Stock was $0.02 per share as of December 31, 1997 (calculated on a
book value basis). See Note 6 to financial statements included elsewhere in
this prospectus.
1995 STOCK OPTION PLAN
The Company has adopted the Pathnet, Inc. 1995 Stock Option Plan (the "1995
Plan") which originally authorized the grant of stock options (including
incentive stock options and nonqualified stock options) to participants with
respect to a maximum of 2,100,945 shares of Common Stock ("Shares"). The 1995
Plan has been frozen so that no further awards will be made under the 1995 Plan
in the future. The following is a summary of the material features of the 1995
Plan. As of the date hereof, options to acquire an aggregate of 853,655 Shares
have been authorized and are outstanding under the 1995 Plan, subject to
adjustment as described below.
PURPOSES
The purposes of the 1995 Plan are to encourage and enable employees of the
Company and its subsidiaries to acquire an interest in the Company through the
granting of stock options and to encourage such individuals to acquire or
increase their ownership of Common Stock in order 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.
ADMINISTRATION/ELIGIBLE PARTICIPANTS
The 1995 Plan is administered by the Board of Directors of the Company,
acting through the Compensation Committee; PROVIDED that the Board is empowered
to appoint from its members a committee of two or more persons to exercise the
powers of the Board in granting stock options and taking any other action under
the 1995 Plan (the Board, or such committee, as applicable being referred to as
the "1995 Plan Committee"). Any actions taken by the 1995 Plan Committee are
final and conclusive for purposes of the 1995 Plan.
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<PAGE>
Stock options may be awarded under the 1995 Plan to any employees of the
Company or its subsidiaries and any non-employee directors of the Company,
consultants to the Company and to such other persons as the Board may select
from time to time.
NUMBER OF SHARES AUTHORIZED UNDER THE 1995 PLAN
As of the date hereof, the 1995 Plan authorizes the grant of awards to
participants with respect to a maximum of 853,655 Shares, subject to adjustment
to avoid dilution or enlargement of intended benefits in the event of certain
significant corporate events, which awards may be made in the form of (i)
nonqualified stock options and (ii) stock options intended to qualify as
incentive stock options under section 422 of the Internal Revenue Code of 1986,
as amended. As described above, the 1995 Plan has been frozen so that no further
awards will be made under the 1995 Plan in the future.
TERMS AND CONDITIONS OF OPTIONS UNDER THE 1995 PLAN
Option grants made under the 1995 Plan are subject to such terms, including
exercise price and conditions and timing of exercise, to the extent applicable,
as may be determined by the 1995 Plan Committee and specified in the applicable
award agreement or thereafter; PROVIDED that stock options intended to qualify
as incentive stock options will be subject to terms and conditions that comply
with such rules as may be prescribed by section 422 of the Code.
TRANSFERABILITY
Options granted under the 1995 Plan will not be transferable by an optionee,
other than by will or laws of descent and distribution, and are exercisable
during the optionee's lifetime only by the optionee.
AMENDMENT TO 1995 PLAN
The Board may discontinue the 1995 Plan or amend the 1995 Plan at any time,
subject to any required regulatory approval and the limitation that no amendment
shall be effective unless approved by the stockholders of the Company. Any such
termination or amendment must be made 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, if such amendment will (i)
increase the number of Shares as to which options may be granted under the 1995
Plan, (ii) change in substance the participants who are eligible to participate
in the 1995 Plan or (iii) otherwise materially increase the benefits accruing to
participants under the 1995 Plan. No option granted under the 1995 Plan may be
altered or impaired by any amendment to the 1995 Plan, except with the consent
of the optionee.
1997 STOCK INCENTIVE PLAN
The Company has adopted the Pathnet, Inc. 1997 Stock Incentive Plan (the
"1997 Plan") which authorizes the grant of awards to participants with respect
to a maximum of 5,768,335 Shares, subject to adjustment as described below. As
of May 4, 1998, options to acquire an aggregate of 3,404,875 Shares have been
granted under the 1997 Plan.
PURPOSES
The purposes of the 1997 Plan are to promote the interests of the Company
and its stockholders by (i) attracting and retaining exceptional officers and
other key employees, consultants and directors of the Company and its
subsidiaries; (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.
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<PAGE>
ADMINISTRATION/ELIGIBLE PARTICIPANTS
The 1997 Plan is administered by a committee (the "1997 Plan Committee")
which shall either be the Board or a committee of two or more members of the
Board designated by the Board to administer the 1997 Plan. Each such director is
expected, but not required, to be a "Non-Employee Director" (within the meaning
of Rule 16b-3 promulgated under the Exchange Act) and an "outside director"
(within the meaning of Internal Revenue Code section 162(m)) to the extent that
Rule 16b-3 and section 162(m), respectively, are applicable to the Company and
the Plan. If a 1997 Plan Committee member shall fail to qualify as a
Non-Employee Director or outside director, such failure will not invalidate any
otherwise valid award made under the 1997 Plan.
Any officer or other employee, director or consultant to the Company of any
of its subsidiaries shall be eligible to be designated as a participant under
the 1997 Plan.
The 1997 Plan Committee has the authority to determine the participants to
whom awards shall be granted under the 1997 Plan. Such 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 section
162(m) of the Code.
NUMBER OF SHARES AUTHORIZED UNDER THE 1997 PLAN
The 1997 Plan authorizes the grant of awards to participants with respect to
a maximum of 5,768,335 Shares, subject to adjustment to avoid dilution or
enlargement of intended benefits in the event of certain significant corporate
events. Such awards may be made in the form of (i) nonqualified stock options;
(ii) stock options intended to qualify as incentive stock options under section
422 of the Internal Revenue Code of 1986, as amended; (iii) stock appreciation
rights; (iv) restricted stock and/or restricted stock units; (v) performance
awards; and (vi) other stock based awards; PROVIDED that the maximum number of
Shares with respect to which stock options and stock appreciation rights may be
granted to any participant in the 1997 Plan in any calendar year may not exceed
2,000,000 and the maximum number of Shares which may be paid to a participant in
the 1997 Plan in connection with the settlement of any award(s) designated as a
performance compensation award under the 1997 Plan in respect of a single
performance period shall be 2,000,000 or, in the event such performance
compensation award is paid in cash, the equivalent cash value thereof. If, after
the effective date of the 1997 Plan, any Shares covered by an award granted
under the 1997 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 vesting), then the Shares covered by such award
shall again be, or shall become, Shares with respect to which awards may be
granted under the 1997 Plan.
SUBSTITUTE AWARDS
Awards may be made under the 1997 Plan in assumption of, or in substitution
for, outstanding awards previously granted by the Company or its affiliates or a
company acquired by the Company or with which the Company combines. The number
of Shares underlying any such assumed or substitute awards shall be counted
against the aggregate number of Shares which are available for grant under
awards made under the 1997 Plan.
TERMS AND CONDITIONS OF AWARDS UNDER THE 1997 PLAN
Awards made under the plan shall be subject to such terms, including
exercise price and a conditions and timing of exercise, to the extent
applicable, as may be determined by the 1997 Plan Committee and specified in the
applicable award agreement or thereafter; PROVIDED that stock options that are
intended to qualify as incentive stock options will be subject to terms and
conditions that comply with such rules as may be prescribed by section 422 of
the Code. Payment in respect of the exercise of an option granted under the 1997
Plan may be made in cash, or its equivalent, or (i) by exchanging Shares owned
by the optionee
72
<PAGE>
(which are not the subject of any pledge or other security interest and which
have been owned by such optionee for at least six months) or (ii) subject to
such rules as may be established by the 1997 Plan Committee, through delivery of
irrevocable instructions to a broker to sell the shares being acquired upon
exercise of the option and to deliver promptly to the Company an amount equal to
the aggregate exercise price, or by a combination of the foregoing, PROVIDED
that the combined value of all cash and cash equivalents and the fair market
value of such Shares so tendered to the Company as of the date of such tender is
at least equal to the aggregate exercise price of the option.
In addition to the foregoing, the 1997 Plan Committee shall have the
discretion to designate any award as a performance compensation award. While
awards in the form of stock options and stock appreciation rights are intended
to qualify as "performance-based compensation" under section 162(m) of the Code
provided that the exercise price or grant price, as the case may be, is
established by the Committee to be equal to the fair market value per Share as
of the date of grant, this form of award enables the 1997 Plan Committee to
treat certain other awards under the 1997 Plan as "performance-based
compensation" and thus preserve deductibility by the Company for Federal income
tax purposes of such awards which are made to individuals who are "covered
employees" as defined in section 162(m).
Each performance compensation award shall be payable only upon achievement
over a specified performance period of a duration of at least one year of a
pre-established objective performance goal established by the 1997 Plan
Committee for such period. The 1997 Plan Committee may designate one or more
performance criteria for purposes of establishing a performance goal with
respect to Performance Compensation Awards made under the 1997 Plan. The
performance criteria that will be used to establish such performance goals will
be based on attainment of specific levels of performance of the Company (or
subsidiary, affiliate, division or operational unit of the Company) and will be
limited to the following: 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.
With regard to a particular performance period, the 1997 Plan Committee
shall have the discretion, subject to the 1997 Plan's terms, to select the
length of the performance period, the type(s) of performance compensation
award(s) to be issued, the performance goals that will be used to measure
performance for the period and the performance formula that will be used to
determine what portion, if any, of the performance compensation award has been
earned for the period. Such discretion shall be exercised by the 1997 Plan
Committee in writing no later than 90 days after the commencement of the
performance period and performance for the period shall be measured and
certified by the 1997 Plan Committee upon the period's close. In determining
entitlement to payment in respect of a performance compensation award, the 1997
Plan Committee may through use of negative discretion reduce or eliminate such
award, provided such discretion is permitted under section 162(m) of the Code.
TRANSFERABILITY
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 guardian or legal representative. Except as
otherwise provided in an applicable award agreement, 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. Notwithstanding the foregoing, the 1997 Plan Committee has the
discretion under the 1997 Plan to provide that options granted under the 1997
Plan that are not intended to qualify as incentive stock options may be
transferred without consideration to certain family members or trusts,
partnerships or limited liability companies whose only beneficiaries or partners
are the original grantee and/or such family members.
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<PAGE>
CHANGE OF CONTROL
In the event of a "Change of Control" (as defined in the 1997 Plan) and upon
the termination of an optionee's employment thereafter by the Company without
"Cause" or due to the optionee's resignation due to "Constructive Termination"
(each as defined in the 1997 Plan), that portion, if any, of any outstanding
awards then held by a participant which are unexercisable or otherwise unvested
and which would otherwise have become exercisable or vested within one year
following the date of such termination, will be deemed automatically exercisable
or otherwise vested, as the case may be, immediately prior to termination of
such optionee's employment.
AMENDMENT TO 1997 PLAN
The Board may amend the 1997 Plan or any portion thereof at any time;
PROVIDED that no such amendment, alteration, suspension, discontinuation or
termination shall be made without stockholder approval if such approval is
necessary to comply with any tax or regulatory requirement applicable to the
1997 Plan and no such action that would adversely affect the rights of any
participant with respect to awards previously granted under the 1997 Plan shall
not that extent be effective without the participant's consent.
JALKUT EMPLOYMENT AGREEMENT
The Employment Agreement among the Company and Richard Jalkut (the "Jalkut
Employment Agreement") took effect on August 4, 1997 and expires on August 4,
2000. The Jalkut Employment Agreement shall renew automatically for one year
terms unless terminated by either party. Under the Jalkut Employment Agreement,
Mr. Jalkut is entitled to an annual base salary of $400,000, subject to increase
at the discretion of the Company. In addition, Mr. Jalkut is entitled to
participate in the Company's benefit plans on the same basis as other salaried
employees of the Company and on the same basis as other senior executives of the
Company and is entitled to reimbursement up to a total of $50,000 per year for
certain expenses.
In addition, pursuant to the Jalkut Employment Agreement, on August 4, 1997,
Mr. Jalkut received nonqualified stock options on 1,480,610 shares of Common
Stock at an exercise price of $0.66 per share. Such options will vest upon
completion of the Initial Public Offering. Under the Jalkut Employment
Agreement, under certain circumstances, upon the election of Mr. Jalkut within
10 business days after the date of termination of Mr. Jalkut's employment with
the Company, the Company will be required to pay, subject to the terms of the
Indenture, to Mr. Jalkut the aggregate Fair Value (as defined in the Jalkut
Option Agreement) of the options then vested or held by Mr. Jalkut on the date
of such termination of employment with the Company.
The Jalkut Employment Agreement (other than certain restrictive covenants of
Mr. Jalkut and certain severance obligations of the Company) may be terminated
(i) by the Company (a) without cause by giving 60 days' prior written notice or
(b) for cause upon the Board of Directors' confirmation that Mr. Jalkut has
failed to cure the grounds for termination within 30 days of notice thereof and
(ii) by Mr. Jalkut (a) without cause by giving 180 days' prior written notice
and (b) immediately upon a Constructive Termination (as defined in the Jalkut
Employment Agreement) without Mr. Jalkut's consent. The Jalkut Employment
Agreement prohibits disclosure by Mr. Jalkut of any of the Company's
confidential information at any time. In addition, while he is employed by the
Company and for two years thereafter, Mr. Jalkut is prohibited from engaging or
significantly investing in competing business activities and from soliciting any
Company employee to be employed elsewhere. The Company has granted Mr. Jalkut
registration rights with respect to the shares he will receive upon exercise of
his options.
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OTHER AGREEMENTS
Messrs. Schaeffer, Lubin, Daigle, Brooks and Smedberg have entered into
Employee Agreements Regarding Non-Disclosure, Assignment of Inventions and
Non-Competition with the Company in which such officers agreed (i) not to
disclose any of the Company's confidential and proprietary information to third
parties, (ii) to assign all work products to the Company as "works for hire,"
and (iii) not to compete against the Company for a two-year period following the
termination of the respective officer's employment with the Company.
In exchange for a non-compete covenant and a restriction on soliciting any
employee of the Company to be employed elsewhere, the Company has agreed to pay
Mr. Bennis a severance payment in the aggregate amount of $275,000 paid over one
year if his employment with the Company is terminated.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES A PURCHASE AGREEMENT
Pursuant to an Investment and Stockholders' Agreement, dated as of August
28, 1995 (the "Series A Purchase Agreement"), by and among the Company and
Spectrum Equity Investors, L.P., New Enterprise Associates VI, Limited
Partnership, Onset Enterprise Associates II, L.P., IAI Investment Funds VIII,
Inc., Thomas Domencich, Dennis R. Patrick and the Corman Foundation
Incorporated, (together, the "Series A Purchasers") and David Schaeffer, the
Series A Purchasers made their initial investments in the Company. The Series A
Purchasers (i) agreed, subject to the satisfaction of certain conditions, to
purchase in the aggregate 1,000,000 shares of Series A Preferred Stock for an
aggregate purchase price of $1.0 million, (ii) purchased 500,000 shares of such
1,000,000 shares of Series A Preferred Stock for an aggregate purchase price of
$500,000 and (iii) agreed to make available to the Company, under certain
circumstances, bridge loans in an aggregate principal amount of $500,000.
Pursuant to Amendment No. 1 to the Investment and Stockholders' Agreement, dated
as of February 8, 1996, the Series A Purchasers purchased the remaining 500,000
shares of Series A Preferred Stock for an aggregate purchase price of $500,000.
Pursuant to Amendment No. 2 to the Investment and Stockholders' Agreement dated
as of August 2, 1996, the Series A Purchasers, among other things, increased the
amount of their bridge loan commitments to the Company to an aggregate principal
amount of $700,000 and advanced such amount to the Company, such loans being
evidenced by bridge loan notes (collectively, the "Bridge Loan Notes"). In
addition, the Series A Purchasers agreed to make available to the Company, upon
the occurrence of certain events, additional bridge loans in an aggregate
principal amount of $300,000 (the "Additional Bridge Loan Commitment.")
SERIES B PURCHASE AGREEMENT
The Company, each of the Series A Purchasers and several additional
purchasers (together, the "Series B Purchasers") and Mr. Schaeffer entered into
an Investment and Stockholders' Agreement, dated as of December 23, 1996 (the
"Series B Purchase Agreement"), pursuant to which, among other things, the
Series B Purchasers agreed to acquire in the aggregate 1,651,046 shares of
Series B Preferred Stock for an aggregate purchase price of $5.0 million. As
part of the purchase of such shares of Series B Preferred Stock and pursuant to
the Series B Purchase Agreement, the Series A Purchasers acquired that number of
shares of Series B Preferred Stock equal to the Additional Bridge Loan
Commitment divided by the purchase price of $2.3944 per share of Series B
Preferred Stock. The Series B Purchasers purchased 1,041,290 shares of Series B
Preferred Stock for $3.0 million on December 23, 1996, and purchased 609,756
shares of Series B Preferred Stock for $2.0 million on June 18, 1997.
SERIES C PURCHASE AGREEMENT
The Company, the Series A Purchasers, the Series B Purchasers and one
additional purchaser (together the "Series C Purchasers") and Mr. Schaeffer
entered into the Investment and Stockholders'
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Agreement, dated October 31, 1997, as amended (the "Investment and Stockholders'
Agreement"), pursuant to which, among other things, the Series C Purchasers
agreed to acquire 2,819,549 shares of Series C Preferred Stock for an aggregate
purchase price of $30.0 million. The Series C Purchasers purchased 939,850
shares of Series C Preferred Stock for an aggregate purchase price of $10.0
million on October 31, 1997, and purchased an additional 1,879,699 shares of
Series C Preferred Stock for an aggregate purchase price of $20.0 million
simultaneously with the closing of the Debt Offering. In connection with the
Investment and Stockholders' Agreement, the Company, the holders of Preferred
Stock (the "Investors") and Mr. Schaeffer agreed to amend and restate, in part,
the Series A Purchase Agreement, Amendment No. 1 to the Series A Purchase
Agreement, Amendment No. 2 to the Series A Purchase Agreement, Amendment No. 3
to the Series A Purchase Agreement and the Series B Purchase Agreement. See
"--Investment and Stockholders' Agreement."
INVESTMENT AND STOCKHOLDERS' AGREEMENT
Pursuant to the terms of the Investment and Stockholders' Agreement, the
Investors acquired certain registration rights with respect to securities of the
Company. On any three occasions, the holders of a majority of the Registrable
Securities (as defined in the Investment and Stockholders' Agreement) may
require the Company to effect a registration under the Securities Act of their
Registrable Securities, subject to the Company's right to defer such
registration for a period of up to 60 days. In addition, if the Company proposes
to register securities under the Securities Act (other than a registration
relating either to the sale of securities to employees pursuant to a stock
option, stock purchase or similar plan or a transaction under Rule 145 of the
Securities Act), then any of the Investors have the right (subject to certain
standard cut-back limitations) to request that the Company register such
Investor's Registrable Securities. All registration expenses of the Investors
(exclusive of underwriting discount and commissions) up to $60,000 per offering
will be borne by the Company. The Company has agreed to indemnify the Investors
against certain liabilities in connection with any registration effected
pursuant to the foregoing registration rights agreement, including liabilities
arising under the Securities Act.
LEASE FROM THE KENILWORTH PARTNERSHIP
The Company has entered into the Headquarters Lease for approximately 15,000
square feet of office space from the Kenilworth Partnership, a general
partnership of which David Schaeffer, Chairman of the Company, is General
Partner. The rental rate is approximately $20 per square foot, plus fees to
cover the Company's proportional share of real estate taxes and insurance
premiums relating to the building. The Headquarters Lease expires on August 31,
1998 and may be renewed at the option of the Company for two additional one-year
periods on the same terms and conditions. Management believes that the terms and
conditions of the Headquarters Lease are at least as favorable to the Company as
those which the Company could have received from an unaffiliated third party.
PAYMENT OF ADVISORY FEE
In connection with the placement of the Company's Series A Preferred Stock,
Crestar Securities Corporation, a subsidiary of Crestar Financial Corporation of
which Mr. Prins served as Senior Vice President and Managing Director at the
time, received an advisory fee of $60,000 from the Company in 1995.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning beneficial
ownership of the capital stock of the Company, as of May 4, 1998 on a pro forma
basis after giving effect to the Transactions, by (i) each person known by the
Company to be the beneficial owner of more than five percent of the outstanding
capital stock of the Company, (ii) each director of the Company, (iii) the Named
Executive Officers and (iv) all directors and executive officers of the Company
as a group. Unless otherwise indicated, each of the stockholders listed below
has sole voting and investment power with respect to the shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
OF COMMON STOCK
AFTER THE TRANSACTIONS(1)
-----------------------------
TOTAL SHARES PERCENTAGE(2)
------------ ---------------
<S> <C> <C>
Spectrum Equity Investors, L.P.(3)................................................... 6,506,175 %
Spectrum Equity Investors II, L.P.(3)................................................ 2,350,700
New Enterprise Associates VI, Limited Partnership(4)................................. 4,450,115
Onset Enterprise Associates II, L.P.(5).............................................. 3,109,740
Onset Enterprise Associates III, L.P.(5)............................................. 469,920
Corman Foundation Incorporated(6).................................................... 314,815
IAI Investment Funds VIII, Inc. (IAI Value Fund)(7).................................. 715,765
Thomas Domencich(8).................................................................. 357,885
FBR Technology Venture Partners L.P.(9).............................................. 469,925
Toronto Dominion Capital (U.S.A.) Inc.(10)........................................... 3,259,735
Grotech Partners IV, L.P.(11)........................................................ 3,259,735
Utech Climate Challenge Fund, L.P.(12)............................................... 997,160
Utility Competitive Advantage Fund, L.L.C.(12)....................................... 632,725
David Schaeffer...................................................................... 5,742,090
Richard A. Jalkut.................................................................... 1,480,610
Kevin J. Maroni (13)................................................................. 6,506,175
Peter J. Barris (14)................................................................. 4,450,115
Richard K. Prins..................................................................... 121,950
Patrick J. Kerins (15)............................................................... 3,259,735
Stephen A. Reinstadtler (16)......................................................... 3,259,735
Michael A. Lubin..................................................................... 203,250
David J. Daigle...................................................................... 304,880
Michael L. Brooks.................................................................... 30,490
William R. Smedberg, V............................................................... 36,585
All Directors and Officers as a Group(13)(14)(15)(16)................................ 25,395,615
</TABLE>
FOOTNOTES ON FOLLOWING PAGE
77
<PAGE>
- ------------------------
(1) Includes shares of Common Stock issuable upon the exercise or conversion of
options, warrants and convertible securities, if exercisable or convertible
within 60 days.
(2) The percentages of beneficial ownership as to each person, entity or group
assume the exercise or conversions of all outstanding options, warrants and
convertible securities held by such person, entity or group which are
exercisable or convertible within 60 days, but not the exercise or
conversion of options, warrants and convertible securities held by others
shown in the table.
(3) The address for Spectrum is One International Place, Boston, MA 02110.
(4) The address for NEA is 1119 Saint Paul Street, Baltimore, MD 21202.
(5) The address for Onset Enterprise Associates II, L.P. and Onset Enterprise
Associates III, L.P. is 8911 Capital of Texas Highway, Austin, TX 78759.
(6) The address for Corman Foundation Incorporated is 100 Brookwood Road,
Atmore, AL 36502.
(7) The address for IAI Investment Funds VIII, Inc. (IAI Value Fund) is 3700
First Bank Place, Minneapolis, MN 55440.
(8) The address for Thomas Domencich is 104 Benevolent Street, Providence, RI
02906.
(9) The address for FBR Technology Venture Partners L.P. is 1001 19th Street
North, Arlington, VA 22209.
(10) The address for Toronto Dominion Capital (U.S.A.) Inc. is 31 West 52nd
Street, New York, NY 10019.
(11) The address for Grotech Partners IV, L.P. is 9690 Deereco Road, Timonium,
MD 21093.
(12) The address for Utech Climate Challenge Fund, L.P. and Utility Competitive
Advantage Fund, L.L.C. is c/o Arete Ventures, Two Wisconsin Circle, Chevy
Chase, MD 20815.
(13) Includes 6,506,175 shares owned by Spectrum Equity Investors, L.P. 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.
(14) Includes 4,450,115 shares owned by New Enterprise Associates VI, Limited
Partnership. 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.
(15) Includes 3,259,735 shares owned by Grotech Partners IV, L.P. Mr. Kerins,
Managing Director of the general partner of Grotech Partners IV, L.P.,
disclaims beneficial ownership of the shares owned by Grotech Partners IV,
L.P.
(16) Includes 3,259,735 shares owned by Toronto Dominion Capital (U.S.A.) Inc.
Mr. Reinstadtler, Vice President and Director of Toronto Dominion Capital
(U.S.A.) Inc., disclaims beneficial ownership of the shares owned by Toronto
Dominion Capital (U.S.A.) Inc.
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<PAGE>
DESCRIPTION OF THE NOTES
Except as otherwise indicated, the following description relates both to the
Existing Notes and the New Notes to be issued in exchange for Existing Notes in
connection with the Exchange Offer. The form and terms of the New Notes are the
same as the form and terms of the Existing Notes, except that the New Notes have
been registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof.
The Existing Notes were, and the New Notes will be, issued pursuant to the
Indenture, between the Company and The Bank of New York, trustee (the
"Trustee"). Upon the issuance of the New Notes, the Indenture will be subject to
and governed by the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The following summary of material provisions of the Indenture
and the Notes does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the provisions of the Notes and the
Indenture, including the definitions of certain terms contained therein 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. A copy of the Indenture has been
filed as an exhibit to the Registration Statement of which the Prospectus is a
part. Capitalized terms used herein but not otherwise defined have the meanings
attributed 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.
GENERAL
The Notes will mature on 2008, will be limited to $350.0 million aggregate
principal amount and, except for the pledge by the Company of the Pledged
Securities under the Pledge Agreement, are general unsecured obligations of the
Company. The Existing Notes are, and the New Notes will be, issued only in fully
registered form, without coupons, in denominations of $1,000 principal amount
and any integral multiple thereof. Payments in respect of the Notes will be
made, and the Notes will be exchangeable and transferable, at the office or
agency of the Company in The City of New York maintained for such purposes
(which initially is the office of the Trustee located at 101 Barclay Street,
Floor 21 West, New York, New York 10286). See "Book-Entry; Delivery and Form."
No service charge will be 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 in connection therewith. (Sections 202
and 305)
INTEREST
Each New Note will bear interest at the rate of 12 1/4% per annum, payable
semiannually in arrears on April 15 and October 15 of each year to holders of
record of New Notes at the close of business on the April 1 or October 1
immediately preceding such interest payment date. For each Existing Note
accepted for exchange, the holder of such Existing Note will receive a New Note
having a principal amount equal to that of the surrendered Existing Note. The
New Notes will bear interest from the most recent date to which interest has
been paid on the Existing Notes or, if no interest has been paid on the Existing
Notes, from April 8, 1998. Accordingly, if the relevant record date for interest
payment occurs after the consummation of the Exchange Offer registered holders
of New Notes on such record date will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid,
from April 8, 1998. If, however, the relevant record date for interest payment
occurs prior to the consummation of the Exchange Offer registered holders of
Existing Notes on such record date will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid,
from April 8, 1998. Existing Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer, except
as set forth in the immediately preceding sentence. Holders of Existing Notes
whose Existing Notes are accepted for exchange will not receive any payment in
respect of interest on such Existing Notes otherwise payable on any interest
payment date the record date for which occurs on or after the consummation of
the Exchange Offer. Interest is computed on the basis of
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<PAGE>
a 360-day year comprised of twelve 30-day months. If the Company 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 301, 307 and 310)
RANKING
The Notes are general unsecured obligations of the Company, except for the
pledge by the Company of the Pledged Securities under the Pledge Agreement. The
Indebtedness evidenced by the Notes rank equally in right of payment with all
other existing and future unsubordinated senior obligations of the Company and
senior in right of payment to all existing and future obligations of the Company
expressly subordinated in right of payment to the Notes. The Notes, however, are
effectively subordinated to secured senior obligations of the Company with
respect to the assets of the Company securing such obligations, including
Telecommunications Indebtedness, which is or may be secured by substantially all
of the assets of the Company. As of March 31, 1998, on a pro forma basis after
giving effect to the Transactions, the Company had no Indebtedness outstanding
other than the Notes and approximately $ million of other liabilities. Subject
to certain limitations, the Company and its Restricted Subsidiaries may incur
additional Indebtedness in the future, including secured Indebtedness. See "Risk
Factors -- Substantial Leverage; Ability to Service Indebtedness; Restrictive
Covenants" and "-- Holding Company Structure; Priority of Secured Debt."
The Company will be a holding company with no direct operations and no
significant assets other than the stock of its Subsidiaries. The Company will be
dependent on the cash flow of its Subsidiaries to meet its obligations,
including the payment of principal of and interest (other than the first four
payments of interest, with respect to which the Company's obligations will be
secured by the Pledged Securities) on the Notes. The Company's Subsidiaries will
be separate legal entities that have no obligations to pay any amounts due
pursuant to the Notes or to make any funds available therefor, whether by
dividends, loans or other payments. Because the Company's Subsidiaries do not
guarantee the payment of the principal of, premium, if any, or interest on the
Notes, any right of the Company to receive assets of its Subsidiaries upon their
liquidation or reorganization (and the consequent right of holders of the Notes
to participate in any distribution or realize proceeds from those assets) are
effectively subordinated to the claims of the creditors of such Subsidiaries
(including trade creditors and holders of Indebtedness of such Subsidiaries),
except if and to the extent that the Company is itself a creditor of such
Subsidiaries with recognized claims, in which case such claims of the Company
would still be effectively subordinated to any security interest in the assets
of such Subsidiaries held by other creditors. On the date of this Prospectus,
the Company's subsidiary held no assets and had no liabilities. For a discussion
of certain adverse consequences of the Company being a holding company and of
the terms and certain existing and potential future Indebtedness of the Company
and its Subsidiaries, see "Risk Factors -- Holding Company Structure; Priority
of Secured Debt."
SINKING FUND
The Notes are not be entitled to the benefit of any sinking fund.
REDEMPTION
The Notes are redeemable at the option of the Company, as a whole or from
time to time in part, at any time on or after April 15, 2003 on not less than 30
nor more than 60 days prior notice at the redemption prices (expressed as
percentages of principal amount) set forth below, together with accrued and
unpaid interest, if any, to the date of redemption, if redeemed during the
12-month period beginning
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<PAGE>
on April 15 of the years indicated below (subject to the right of holders of
record on the relevant record dates to receive interest due on an interest
payment date):
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------ ----------------
<S> <C>
2003........................................................ 106.125%
2004........................................................ 104.083
2005........................................................ 102.042
2006 and thereafter......................................... 100.000%
</TABLE>
(Sections 1101, 1102)
In addition, at any time on or prior to April 15, 2001, the Company may
redeem within 60 days of one or more Public Equity Offerings up to 35% of the
aggregate principal amount of the Notes issued on the Issue Date at a redemption
price equal to 112.25% of the principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the date of redemption with the Net Cash Proceeds
of one or more Public Equity Offerings; provided that at least 65% of the
principal amount of the Notes issued on the Issue Date remain outstanding.
(Section 1102)
If less than all the Notes are to be redeemed, the Trustee will select the
particular Notes to be redeemed not more than 60 days prior to the redemption
date by such method as the Trustee deems fair and appropriate; PROVIDED that no
such 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 to be redeemed at its registered address. On and after the
date of redemption, interest will cease to accrue on Notes or portions thereof
called for redemption and accepted for payment. (Sections 1103, 1104, 1106 and
1107)
SECURITY
Pursuant to the terms of the Indenture and the Pledge Agreement, the Company
purchased and pledged to the Trustee the Pledged Securities as security for the
benefit of the holders of the Notes. The Pledged Securities are sufficient in
amount, in the opinion of a nationally recognized firm of independent public
accountants selected by the Company, to provide for payment in full of the first
four scheduled interest payments due on the Notes. The Company used $81.1
million of the net proceeds from the issuance of the Units to acquire the
Pledged Securities based upon the prevailing interest rates on Government
Securities on the Issue Date. The Pledged Securities were pledged by the Company
to the Trustee for the benefit of the holders of Notes pursuant to the Pledge
Agreement and are held by the Trustee in the Escrow Account. Pursuant to the
Pledge Agreement, immediately prior to an interest payment date, the Company may
either (i) deposit with the Trustee from funds otherwise available to the
Company cash sufficient to pay the interest scheduled to be paid on such date or
(ii) direct the Trustee to release from the Escrow Account proceeds sufficient
to pay such scheduled interest amount. In the event that the Company exercises
the former option, the Company may thereafter direct the Trustee to release to
the Company a like amount of proceeds or Pledged Securities from the Escrow
Account. Any failure by the Company to pay interest on the Notes in a timely
manner through the first four scheduled interest payment dates will constitute
an immediate Event of Default under the Indenture, with no grace or cure period.
Interest earned on the Pledged Securities will be added to the Escrow
Account. In the event that the funds or Pledged Securities held in the Escrow
Account exceed the amount sufficient, in the opinion of a nationally recognized
firm of independent public accountants selected by the Company, to provide for
payment in full of the first four scheduled interest payments due on the Notes
(or, in the event an interest payment or payments have already been made, an
amount sufficient to provide for payment in full of any remaining interest
payments, up to and including the fourth scheduled interest payment), the
Trustee will be permitted to release to the Company, at the Company's request,
any such excess amount.
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<PAGE>
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 the Company has made the first four
scheduled interest payments 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. The Company will not, and will not permit any
Restricted Subsidiary to Incur any Indebtedness (including any Acquired
Indebtedness) other than Permitted Indebtedness; PROVIDED that the Company may
Incur Indebtedness if, at the time of such incurrence, 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 thereafter. For the purposes of determining compliance
with this covenant, in the event that an item of Indebtedness or any portion
thereof meets the criteria of more than one of the type of Indebtedness that the
Company and the Restricted Subsidiaries are permitted to Incur, the Company will
have the right, in its sole discretion, to classify such item of Indebtedness or
portion thereof at the time of its incurrence and will only be required to
include the amount and type of such Indebtedness or portion thereof under the
clause permitting the Indebtedness as so classified. (Section 1011)
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Restricted Subsidiary 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 the Company (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 the Company 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 the
Company that is expressly subordinated in right of payment to the Notes; or
(iv) make any Investment (other than any Permitted Investment) in any
Person;
(such payments or other actions described in (but not excluded from) clauses (i)
through (iv) are collectively referred to as "Restricted Payments"); unless at
the time of, and immediately after giving effect to, the proposed Restricted
Payment (the amount of any such Restricted Payment, if other than cash, as
determined by the Board of Directors of the Company, whose determination will be
conclusive and evidenced by a board resolution), (1) no Default or Event of
Default will have occurred and be continuing, (2) the Company 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 the Company's first
fiscal
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quarter after the date of the Indenture and ending on the last day of the
Company'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 the Company 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 the Company (including
upon the exercise of options, warrants or rights) or warrants, options or
rights to purchase shares of Qualified Capital Stock of the Company; 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 the Company 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 the Company, 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 Subsidiary, the assets of which
consist primarily of Telecommunications Assets, received by the Company 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 the Company
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 the Company and its Restricted Subsidiaries.
(b) Notwithstanding paragraph (a) above, the Company 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 thereof, 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 the Company (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 the Company; (y) that are held by former officers, employees or
directors (or their estates or beneficiaries under their estates) of the
Company 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
the Company 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 the Company that is expressly
subordinated in right of payment to the Notes
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<PAGE>
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 the Company;
(iv) the purchase of any Indebtedness of the Company 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 the Company 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;
(v) the purchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness (other than Redeemable Capital
Stock) of the Company 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 the Company 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 the Company as necessary to accomplish such refinancing,
PLUS, in either case, the amount of expenses of the Company 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 clauses (i) through (iv) and (vi) of this paragraph
(b) 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 clause (v) of this paragraph (b) 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 ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The Company will not, and will not permit any Restricted
Subsidiary to, issue or sell any Capital Stock of a Restricted Subsidiary (other
than to the Company or to a Restricted Subsidiary); PROVIDED, HOWEVER, that 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 the Company 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
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use Telecommunications Assets to the Company 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 the Company, the Fair Market Value of any such transfer, lease,
license or grant is not less than the Fair Market Value of the Capital Stock of
such Restricted Subsidiary issued and sold in respect thereof. (Section 1013)
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company 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 the Company or any
Restricted Subsidiary (other than the Company or a Restricted Subsidiary so long
as no Affiliate of the Company (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 the Company or such Restricted Subsidiary, as the
case may be, than those that could have been obtained in an arm's 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 $5.0 million, the Company 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 $10.0 million, the Company 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 the Company or that the
Company has obtained a written opinion from a nationally recognized investment
banking or public accounting firm or, if the Company 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 the Company 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 the Company and one or more of its
Restricted Subsidiaries or among its Restricted Subsidiaries, (2) the Company
from paying reasonable and customary regular compensation and fees to directors
of the Company or any Restricted Subsidiary who are not employees of the Company
or any Restricted Subsidiary, (3) the performance of the Company's obligations
under the Investment and Stockholders' Agreement, dated as of October 31, 1997,
among the Company, David Schaeffer and the Investors named therein, as amended;
the Investment and Stockholders' Agreement, dated as of August 28, 1995, by and
among the Company and the Investors named therein; the Investment and
Stockholders' Agreement, dated as of December 23, 1996, by and among the Company
and the Investors named therein; the Non-Qualified Stock Option Agreement, dated
August 4, 1997, between the Company and Richard Jalkut; and the Employment
Agreement, dated August 4, 1997, between the Company 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 the Company 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 the Company (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 the Company 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)
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 the Company and its shareholders, which
may not necessarily be the same as the interests of holders of the Notes.
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LIMITATION ON LIENS. The Company 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 the Company 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
1012)
LIMITATION ON ISSUANCES OF CERTAIN GUARANTEES BY, AND DEBT SECURITIES OF,
RESTRICTED SUBSIDIARIES. The Company 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, as 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
the Company, of all of the Company's and its Restricted Subsidiaries' Capital
Stock in such Restricted Subsidiary, (ii) the merger or consolidation of the
applicable Restricted Subsidiary with and into the Company 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 the Company 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 the
Company purchase all of such holder's Notes, 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, the Company 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 the Company 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
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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, there can be no assurance that the
Company 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 the Company 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 the Company'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, in
the event holders of the Notes elect to require the Company to purchase the
Notes and the Company 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 the Company to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company 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 the Company to purchase such Notes in the event of a highly leveraged
transaction or certain transactions with the Company's management or its
Affiliates, including a reorganization, restructuring, merger or similar
transaction involving the Company (including, in certain circumstances, an
acquisition of the Company 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 the Company's management or its Affiliates,
or a transaction involving a recapitalization of the Company, would result in a
Change of Control if it is the type of transaction specified by such definition.
The Company 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.
LIMITATION ON SALE OF ASSETS. (a) The Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, engage in any Asset Sale
unless (i) the consideration received by the Company 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 the
Company, whose determination shall be conclusive and evidenced by a resolution
thereof) and (ii) the consideration received by the Company 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 the Company or
such Restricted Subsidiary (as shown on the Company'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 the Company 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 the Company or any of its Restricted
Subsidiaries with respect to such liabilities and (ii) any securities, notes or
other obligations received by the Company or any such Restricted Subsidiary in
connection with such Asset Sale that are converted by the Company or such
Restricted Subsidiary into cash within 60 days of receipt.
(b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company may use the Net Cash Proceeds thereof, within 12 months after such
Asset Sale, to (i) permanently repay or prepay the
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Notes or any then outstanding Indebtedness of the Company 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 the Company 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 the Company or a Restricted Subsidiary, as the
case may be. If any such legally binding agreement to invest such Net Cash
Proceeds is terminated, then the Company 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 $10.0 million, the
Company 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 the Company ranking equally with the Notes
which Indebtedness contains similar provisions requiring the Company 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, the Company 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 the
Company would have available funds sufficient to pay an Excess Proceeds Offer
Price for all of the Notes that might be delivered by holders of the Notes
seeking to accept an Excess Proceeds Offer. The failure of the Company 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. The Company 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 the Company or any other Restricted Subsidiary,
(b) pay any Indebtedness owed to the Company or any other Restricted Subsidiary,
(c) make Investments in the Company or any other Restricted Subsidiary, (d)
transfer any of its property or assets to the Company or any other Restricted
Subsidiary or (e) guarantee any Indebtedness of the Company 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 the Company or any
Restricted Subsidiary, (iv) any agreement or other instrument of a Person
acquired by the Company 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
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obligation) securing Indebtedness of the Company or a Restricted Subsidiary
otherwise permitted under the Indenture, (vi) any encumbrance or restriction
with respect to a Restricted Subsidiary of the Company 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 the Company 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 the Company
determines in good faith that the terms and conditions of any such encumbrances
or restrictions, taken as a whole, are no less favorable to the Company, any
Restricted Subsidiary and the holders of the Notes than those so extended,
renewed, refinanced or replaced. (Section 1018)
PROVISION OF FINANCIAL STATEMENTS AND REPORTS. (a) The Company will file on
a timely basis with the Commission, to the extent such filings are accepted by
the Commission and whether or not the Company has a class of securities
registered under the Exchange Act, the annual reports, quarterly reports and
other documents that the Company would be required to file if it were subject to
Section 13 or 15 of the Exchange Act.
(b) The Company 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 the Company files
such reports and documents with the Commission or the date on which the Company
would be required to file such reports and documents if the Company 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 the
Company's cost copies of such reports and documents to any prospective holder
promptly upon request. (Section 1020)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company 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 the Company 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 the
Company 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) the Company will be the continuing corporation or (b) the
Person (if other than the Company) formed by such consolidation or into
which the Company 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 the Company and its
Restricted Subsidiaries on a
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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, the Company'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 the Company 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 the Company 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; and
(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), the Company (or the Surviving Entity if the Company 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. (Section 801)
In connection with any such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, the Company 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 the Company in accordance with the immediately preceding paragraphs in
which the Company 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, the Company under the Indenture with the same effect
as if such successor had been named as the Company 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 will be "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);
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(iii) (A) default in the performance, or breach, of any covenant or
agreement of the Company 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 the
Company by the Trustee or to the Company 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 the Company 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 the Company 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 the Company or any Significant
Subsidiary or their respective properties for the 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 the Company or any Significant Subsidiary; or
(vii) 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
the Company (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 the Company and the Trustee, may rescind
or annul such declaration and its consequences if (a) the Company 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
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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
the Company 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 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.
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indenture and as to any default in such performance. The Company 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
The Company may, at its option and at any time, terminate the obligations of
the Company with respect to the outstanding Notes ("defeasance"). Such
defeasance means that the Company 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) the Company'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, the Company may, at its
option and at any time, terminate the obligations of the Company 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 defeasance or covenant defeasance, (i) the
Company 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 thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
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
will 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) such defeasance or covenant defeasance will not result in
a breach or violation of, or constitute a default under any material
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agreement or instrument (other than the Indenture) to which the Company is a
party or by which it is bound; (iv) in the case of defeasance, the Company shall
have delivered to the Trustee an opinion of counsel stating that the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling, or since the date of this Offering Memorandum, 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
purposes as a result of such defeasance 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 defeasance had not occurred; (v) in the case of
covenant defeasance, the Company shall 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 such covenant defeasance 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 covenant defeasance had not occurred; and (vi) the Company
shall have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent provided for relating to
either the defeasance or the covenant defeasance, 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 the Company,
will execute proper instruments acknowledging satisfaction and discharge of the
Indenture when (i) either (A) all the Notes theretofore authenticated and
delivered (other than destroyed, lost or stolen Notes which have been replaced
or paid and Notes for whose payment money has theretofore been deposited in
trust or segregated and held in trust by the Company, or discharged) have been
delivered to the Trustee for cancellation or (B) all Notes not theretofore
delivered to the Trustee for cancellation (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 the Company, and the Company 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 theretofore 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) the Company has
paid or caused to be paid all sums payable under the Indenture by the Company;
and (iii) the Company 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
Modifications and amendments of the Indenture may be made by a supplemental
indenture entered into by the Company and the Trustee with the consent of the
holders of a majority in aggregate outstanding principal amount of the Notes;
PROVIDED, HOWEVER, that no such modification or amendment may, without the
consent of the holder of each outstanding Note affected thereby:
(i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, or reduce the principal amount thereof or premium,
if any, or the rate of interest thereon, 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, or impair the
right to institute suit for the enforcement of any such payment after the
Stated Maturity thereof (or, in the case of redemption, on or after the date
of redemption);
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(ii) amend, change or modify the obligation of the Company 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 the
obligation of the Company 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 thereto;
(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 the Company 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, the Company and the Trustee may modify or amend the Indenture:
(a) to evidence the succession of another Person to the Company or any
other obligor on the Notes, and the assumption by any such successor of the
covenants of the Company or such obligor in the Indenture and in the Notes
in accordance with "--Consolidation, Merger, Sale of Assets";
(b) to add to the covenants of the Company 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 the Company 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 the Company'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 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)
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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 1021)
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 such duties as 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 such Person's own
affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company, 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 the
Company that is, directly or indirectly, wholly owned by the Company (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 the Company 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.
"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
the Company or any Subsidiary; or (iii) any other properties or assets of the
Company 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
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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 the
Company to any Restricted Subsidiary, or of any Restricted Subsidiary to the
Company or any other Restricted Subsidiary in accordance with the terms of the
Indenture, (C) having an aggregate Fair Market Value of less than $2.0 million
in any given fiscal year, (D) by the Company or a Restricted Subsidiary to a
Person who is not an Affiliate of the Company 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 the Company 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 the Company 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 the Company or a Restricted
Subsidiary to an Accounts Receivable Subsidiary or in consideration of Fair
Market Value thereof, to Persons that are not Affiliates of the Company or any
Subsidiary of the Company 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 the Company'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, 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.
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"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 the Company 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 the Company;
(b) the Company 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, the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is
converted into or exchanged for cash, securities or other property, other
than any such transaction
(i) where the outstanding Voting Stock of the Company is not
converted or exchanged at all (except to the extent necessary to reflect
a change in the jurisdiction of incorporation of the Company) 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 the Company 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 the Company
(together with any new directors whose election to such Board of Directors,
or whose nomination for election by the stockholders of the Company, 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 the Company then in
office; or
(d) the Company 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."
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"Consolidated Adjusted Net Income" means, for any period, the
consolidated net income (or loss) of the Company 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 the
Company or a Restricted Subsidiary), including Unrestricted Subsidiaries, in
which the Company or any Restricted Subsidiary has an ownership interest,
except to the extent of the amount of dividends or other distributions
actually paid to the Company or any Restricted Subsidiary in cash dividends
or distributions during such period,
(d) the net income (or loss) of any Person combined with the Company 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 the Company 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 the Company 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 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 will 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, the Company 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 the company, 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
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day of such period; or (z) if during such two fiscal quarter period the Company
or any of its Restricted Subsidiaries shall have acquired any company, entity or
business, Consolidated Operating Cash Flow will 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 the Company 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 the Company and (vi) amortization of debt issuance costs, PLUS
(b) the interest component of Capitalized Lease Obligations of the Company 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 the Company, a fixed
or floating rate of interest, shall be computed by applying, at the option of
the Company, 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 will 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 will 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 the Company and the
Restricted Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP; (iv) amortization of the Company 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 the Company and
its Restricted Subsidiaries 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 the Company and
all Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP.
"Credit Facilities" means, with respect to the Company 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.
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"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 the Company or any of its Restricted Subsidiaries.
"Debt Securities" means any debt securities (including any Guarantee of such
securities) issued by the Company 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 that 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 the Company is
required to deliver a resolution thereof under the Indenture, a member of the
board of directors of the Company 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 the Company 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 the Company with a portion of the net proceeds
from this Offering.
"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 the Company acting
in good faith and as of the date on which such determination is made.
"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.
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"Incumbent" means any railroad, utility, governmental entity, pipeline or
other licensed owner (which ownership is determined immediately prior to any
transaction with the Company or a Restricted Subsidiary) of Telecommunications
Assets to be used in the Company'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 the Company or a
Restricted Subsidiary pursuant to such agreement).
"Incumbent Agreement" means an agreement between an Incumbent and the
Company or a Restricted Subsidiary pursuant to which, among other things, such
Incumbent receives a payment equal to a percentage of the Company'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 the Company or such
Restricted Subsidiary and upon or with respect to which the Company 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 the Company to Incur
Indebtedness on a revolving basis, the Company 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 the Company shall have so
designated to be Incurred in an Officer's Certificate delivered to the Trustee
(in which case the Company will 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);
(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
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designated as incurred and certified by an officer of the Company 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 the Company 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 the
Company, and (b) 75% of the aggregate net cash proceeds from sales of Redeemable
Capital Stock of the Company or Indebtedness of the Company convertible into
Qualified Capital Stock of the Company, 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 the
Company'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 the
Company in such Unrestricted Subsidiary at such time and the portion
(proportionate to the Company'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
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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 the Company 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
the Company or any Restricted Subsidiary) owning a beneficial interest in the
assets subject to the Asset Sale and (v) appropriate amounts to be provided by
the Company 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 the Company 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 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 the Company or any Subsidiary of the Company), 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 the Company pursuant to the Notes or of any
Restricted Subsidiary pursuant to a Guarantee of the Notes;
(b) Indebtedness of the Company or any Restricted Subsidiary outstanding
on the Issue Date;
(c) Indebtedness of the Company owing to any Restricted Subsidiary (but
only so long as such Indebtedness is held by such Restricted Subsidiary);
PROVIDED that any Indebtedness of the Company 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 the Company'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 will be deemed to be an incurrence
of Indebtedness by the Company that is not permitted by this clause (c);
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(d) Indebtedness of any Restricted Subsidiary to the Company or of any
Restricted Subsidiary to another Restricted Subsidiary;
(e) Indebtedness of the Company 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 the Company is limited to the cash securing
such letters of credit;
(f) Indebtedness of the Company under Currency Agreements and Interest
Rate Agreements entered into in the ordinary course of business; PROVIDED
that such agreements are designed to protect the Company 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 the Company 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;
(i) Indebtedness of the Company 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
the Company, 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 the Company 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 the
Company 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 the Company or a Restricted Subsidiary issued in
exchange for, or the net proceeds of which are used to refinance or refund,
then outstanding Indebtedness of the Company 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
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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 the Company 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 the Company 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:
(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 the Company or any Restricted Subsidiary;
(c) Investments by the Company 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, the Company 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 (i)
Invested Capital, (ii) the Fair Market Value of Qualified Capital Stock of
the Company, Redeemable Capital Stock of the Company, or Indebtedness of the
Company convertible into Qualified Capital Stock of the Company, in the
latter two cases upon such redemption or conversion thereof into Qualified
Capital Stock of the Company, issued by the Company or any Restricted
Subsidiary of the Company as consideration for any such Investments made
pursuant to this clause (h), and (iii) 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 the
Company to a Restricted Subsidiary of the Company), 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
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(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 the Company 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 the
Company) received by the Company or any of its Restricted Subsidiaries in
the bankruptcy or reorganization of or by such Person or any exchange 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 the
Company 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 the Company 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 the Company or any Restricted Subsidiary;
(c) Liens on any property or assets of the Company 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 the Company or any Restricted Subsidiary and
with respect to amounts not yet delinquent or being contested in good faith
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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
the Company 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;
(k) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the incurrence of such Indebtedness
by the Company or any Restricted Subsidiary; PROVIDED that such Lien does
not extend to any property or assets of the Company or any Restricted
Subsidiary other than the assets acquired in connection with the incurrence
of such Acquired Indebtedness;
(l) Liens securing obligations of the Company 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 the Company 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 the Company 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 the
Company installed on its network in favor of Persons that have licensed,
leased, transferred or granted to the Company or any Restricted Subsidiary a
right to use Telecommunications Assets or financed the purchase of
Telecommunications Assets or securing the obligations of the Company or such
Restricted Subsidiary under an
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Incumbent Agreement; PROVIDED that such Liens will (1) be created on terms
that the Company reasonably believes to be no less favorable to the Company
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 the Company 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 the Company.
"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 the Company in accordance with GAAP.
"Permitted Telecommunications Joint Venture" means a corporation,
partnership or other entity engaged in one or more Telecommunications Businesses
in which the Company owns, directly or indirectly, an equity interest.
"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 Collateral Pledge and Security Agreement, dated
as of the Issue Date, by and between the Trustee and the Company, governing the
disbursement of funds from the Escrow Account.
"Pledged Securities" means the securities purchased by the Company with a
portion of the net proceeds from this Offering, 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 the Company 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 the Company) and
resulting in Net Cash Proceeds to the Company of not less than $45.0 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
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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 the Company'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 the Company 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 the Company or a
Restricted Subsidiary) or to which any Person (other than the Company or a
Restricted Subsidiary) is a party, providing for the leasing to the Company or
to a Restricted Subsidiary of any property for an aggregate term exceeding three
years, whether owned by the Company or by any Subsidiary of the Company at the
Issue Date or later acquired, which has been or is to be sold or transferred by
the Company 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 the Company or any Restricted
Subsidiary of Telecommunications Assets to, and the leasing by the Company 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 the Company, accounted for more than 10% of the consolidated revenues of
the Company 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 the Company
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 the Company 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
the Company 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 the Company or
by one or more other Subsidiaries or by the Company 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 the Company's network, including, without limitation, any
businesses or services in which the Company 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 is held by the
Company or a Restricted Subsidiary, such other Person either is, or immediately
following the relevant transaction shall become, a Restricted Subsidiary of the
Company 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
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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 the Company.
"Telecommunications Indebtedness" means Indebtedness of the Company 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 the Company 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 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 the Company, as provided below) and (b) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors of the Company may designate any
Subsidiary (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary so long as (i) neither the Company 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 the Company 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 the Company 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 the Company, and (v) neither the
Company 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 the Company shall be evidenced to the
Trustee by filing a board resolution with the Trustee giving effect to such
designation. The Board of Directors of the Company 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 the Company 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 the Company, 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 the
Company, 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 the Company, the Finance Subsidiary and each of
the financial institutions party thereto.
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"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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BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one or more registered New Notes in global form without coupons (each a
"Global Note"). Each Global Note will be deposited on the date of the closing of
the exchange of the New Notes for the Existing Notes (the "Exchange Offer
Closing Date") with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of Cede & Co., as nominee of DTC, or will remain in the
custody of the Trustee.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations, including
Euroclear and Cedel. Access to DTC's system is also available to other entities
that clear through or maintain a direct or indirect, custodial relationship with
a Direct Participant (collectively, the "Indirect Participants"). DTC may hold
securities beneficially owned by other persons only through the Direct
Participants or Indirect Participants and such other persons' ownership interest
and transfer of ownership interest will be recorded only on the records of the
Direct Participant and/or Indirect Participant, and not on the records
maintained by DTC.
DTC has also advised the Company that, pursuant to DTC's procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants with an interest in the Global Notes, and (ii) DTC will maintain
records of the ownership interests of such Direct Participants in the Global
Notes and the transfer of ownership interests by and between Direct
Participants. DTC will not maintain records of the ownership interests of, or
the transfer of ownership interests by and between, Indirect Participants or
other owners of beneficial interests in the Global Notes. Direct Participants
and Indirect Participants must maintain their own records of the ownership
interests of, and the transfer of ownership interests by and between, Indirect
Participants and other owners of beneficial interests in the Global Notes.
Investors in the Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations that are Direct Participants in DTC.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form, of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Note to such
persons. Because DTC can act only on behalf of Direct Participants, which in
turn act on behalf of Indirect Participants and others, the ability of a person
having a beneficial interest in a Global Note to pledge such interest to persons
or entities that are not Direct Participants in DTC, or to otherwise take
actions in respect of such interests, may be affected by the lack of physical
certificates evidencing such interests.
Under the terms of the Indenture, the Company and the Trustee will treat the
persons in whose names the Notes are registered (including Notes represented by
Global Notes) as the owners thereof for the purpose of receiving payments and
for any and all other purposes whatsoever. Payments in respect of the principal,
premium, Liquidated Damages, if any, and interest on Global Notes registered in
the name of DTC or its nominee will be payable by the Trustee to DTC or its
nominee as the registered Holder under the Indenture. Consequently, neither the
Company, the Trustee nor any agent of the Company, or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Direct Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Notes or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
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Payments with respect to the principal of, premium, if any, and interest on,
any New Notes represented by a Global Note registered in the name of DTC or its
nominee on the applicable record date will be payable by the Trustee to or at
the direction of DTC or its nominee in its capacity as the registered holder of
the Global Note representing such New Notes under the Indenture. Under the terms
of the Indenture, the Company and the Trustee may treat the persons in whose
names the New Notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payment and for any and all other
purposes whatsoever. Consequently, neither the Company nor the Trustee has or
will have any responsibility or liability for the payment of such amounts to
beneficial owners of interest in the Global Note (including principal, premium,
if any, and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Note as shown
on the records of DTC. Payments by the Participants and the Indirect
Participants to the beneficial owners of interests in the Global Note will be
governed by standing instructions and customary practice and will be the
responsibility of the Participants or the Indirect Participants and DTC.
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and the Company is unable to locate a
qualified successor within 90 days, (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of New Notes in
definitive form under the Indenture or (iii) upon the occurrence of certain
other events, then, upon surrender by DTC of its Global Notes, Certificated
Securities will be issued to each person that DTC identifies as the beneficial
owner of the New Notes represented by the Global Notes. Upon any such issuance,
the Trustee is required to register such Certificated Securities in the name of
such person or persons (or the nominee of any thereof), and cease the same to be
delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related New Notes and each such person may conclusively rely on, and shall
be protected in relying on, instructions from DTC for all purposes (including
with respect to the registration and delivery, and the respective principal
amounts, of the New Notes to be issued).
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain United States Federal income tax
consequences applicable under current law to holders of Existing Notes who
exchange such notes for New Notes pursuant to the Exchange Offer is for general
information only and is not intended as a substitute for careful tax planning.
This summary is based on current provisions of the U.S. Internal Revenue Code of
1986, as amended (the "Code"), applicable final, temporary and proposed Treasury
Regulations ("Treasury Regulations"), judicial authority, and current
administrative rulings and pronouncements of the Internal Revenue Service (the
"Service") and upon the facts concerning the Company as of the date hereof.
There can be no assurance that the Service will not take a contrary view, and no
ruling from the Service has been or will be sought by the Company. Legislative,
judicial, or administrative changes or interpretations may be forthcoming that
could alter or modify the statements and conclusions set forth herein. Any such
changes or interpretations may or may not be retroactive and could affect the
tax consequences to holders.
This summary does not purport to deal with all aspects of taxation that may
be relevant to particular holders of the Notes in light of their personal
investment or tax circumstances, or to certain types of investors (including
individual retirement accounts and other tax deferred accounts, insurance
companies, financial institutions, broker-dealers or tax-exempt organizations)
subject to special treatment under the U.S. federal income tax laws. This
discussion does not deal with special tax situations, such as the holding of the
Notes as part of a straddle with other investments, or situations in which the
functional currency of a holder is not the U.S. dollar, and does not address the
tax consequences of the law of any state, locality or foreign jurisdiction. In
addition, this discussion deals only with Notes held by initial purchasers that
hold such Notes as capital assets within the meaning of Section 1221 of the
Code.
For purposes of this discussion, the term "U.S. Holder" means a beneficial
owner of Notes, who or that is, a citizen or resident of the U.S., a
corporation, limited liability company or partnership created or organized in
the U.S. or under the law of the U.S. or any political subdivision thereof
(including the District of Columbia), an estate the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, a trust if a court within the U.S. is able to exercise primary
supervision over the administration of the trust and one or more U.S.
fiduciaries have the authority to control all substantial decisions of the trust
(or, under certain circumstances, a trust the income of which is includible in
gross income for U.S. federal income tax purposes regardless of its source) or
is otherwise subject to U.S. federal income tax on a net income basis in respect
of the Notes. The term "Non-U.S. Holder" means any person other than a U.S.
Holder.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. THE TAX TREATMENT
MAY VARY DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF
PURCHASING, HOLDING AND DISPOSING OF THE NOTES, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
TAXATION OF HOLDERS ON EXCHANGE
The exchange of an Existing Note for a New Note will not be a taxable event
to the holder of an Existing Note, and a holder will not recognize any taxable
gain or loss or any interest income as a result of such an exchange.
Accordingly, a holder will have the same adjusted basis and holding period in a
New Note as it had in an Existing Note immediately before the exchange. Further,
the tax consequences of ownership and disposition of any New Note should be the
same as the tax consequences of ownership and disposition of an Existing Note.
THE NOTES
Under applicable authorities, the Notes should be treated as indebtedness
for U.S. federal income tax purposes. In the unlikely event the Notes are
treated as equity, the amount of any actual or constructive
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distributions on any such Note would first be taxable to the holder as dividend
income to the extent of the issuer's current and accumulated earnings and
profits as determined for U.S. Federal income tax purposes, and next would be
treated as a return of capital to the extent of the holder's tax basis in the
Note, with any remaining amount treated as gain from the sale of a Note.
Further, payments on the Notes treated as equity to Non-U.S. Holders would not
be eligible for the portfolio interest exception from U.S. withholding tax, and
dividends thereon would be subject to United States withholding tax at a flat
rate of 30% (or lower applicable treaty rate) and gain from their sale or other
taxable disposition might also be subject to U.S. tax. See "--Non-U.S. Holders."
In addition, in the event of equity treatment, the Company would not be entitled
to deduct interest on the Notes for U.S. federal income tax purposes. The
remainder of this discussion assumes that the Notes will constitute indebtedness
of the Company for such tax purposes.
ORIGINAL ISSUE DISCOUNT
The Existing Notes were issued with original issue discount ("OID"). The New
Notes will continue to have the same amount of OID as the Existing Notes. At the
time of the issuance of the Units, the Company's allocation of the Unit issue
price to the Existing Notes resulted in an amount of OID that, if the allocation
is respected by the Service, will cause the Notes to be treated as issued with a
"DE MINIMIS amount" of OID and consequently the amount of OID on the Notes
should be treated as zero. Such DE MINIMIS OID would be included in income of
the holder as stated principal payments are made, and generally would be treated
as capital gains recognized on retirement of the Note. Gain attributable to DE
MINIMIS OID that is recognized on the sale or exchange of a Note will be capital
gain. Holders may elect to accrue DE MINIMIS OID on a constant-yield basis as
described below. If the Company's allocation is not respected by the Service,
then a Holder may be required to include OID in income under the general OID
rules.
MARKET DISCOUNT. If a Note is acquired by a subsequent purchaser at a
"market discount," some or all of any gain realized upon a disposition
(including a sale or a taxable exchange) or payment at maturity of such Note may
be treated as ordinary income. "Market discount" with respect to a security is,
subject to a DE MINIMIS exception, the excess of (1) the stated redemption price
of the security at maturity over (2) such holder's initial tax basis in the
security. The amount of market discount treated as having accrued will be
determined either on a ratable basis, or, if the holder so elects, on a constant
interest method. Upon any subsequent disposition (including a gift or payment at
maturity) of such Note (other than in connection with certain nonrecognition
transactions), the lesser of any gain on such disposition (or appreciation, in
the case of a gift) or the portion of the market discount that accrued while the
Note was held by such holder will be treated as ordinary interest income at the
time of the disposition. In lieu of including accrued market discount in income
at the time of disposition, a holder may elect to include market discount in
income currently. Unless a Note holder so elects, such holder may be required to
defer a portion of any interest expense that may otherwise be deductible on any
indebtedness incurred or maintained to purchase or carry such Note until the
holder disposes of the Note. The election to include market discount in income
currently, once made, applies to all market discount obligations acquired on or
after the first day of the first taxable year to which the election applies and
may not be revoked without the consent of the IRS.
SALE OR OTHER DISPOSITION. In general, upon the sale, exchange, redemption,
or other disposition of a Note, a U.S. Holder will recognize taxable gain or
loss equal to the difference between (i) the amount of cash proceeds and the
fair market value of any property received on the disposition (not including any
amount attributable to accrued but unpaid interest) and (ii) the U.S. Holder's
adjusted tax basis in the Note. A U.S. Holder's adjusted tax basis in a Note
generally will be equal to the issue price of such Note, increased by the amount
of any market discount taken into income by the U.S. Holder and reduced by the
amount of any principal received by the U.S. Holder.
Subject to the discussion of market discount above, gain or loss realized on
the sale, exchange or redemption of a Note will be capital gain or loss and will
be long-term capital gain or loss if the holder has held such Note (or is
treated as having held such Note) for longer than one year. For individuals,
such gain
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will be taxed at rates that vary depending upon whether the Note was held for
one year or less, more than one year but not more than 18 months, or more than
18 months.
NON-U.S. HOLDERS
In general, subject to the discussion below concerning backup withholding:
(a) payments of principal or interest on the Notes by the Company or any
paying agent to a beneficial owner of a Note that is a Non-U.S. Holder will not
be subject to U.S. withholding tax, provided that, in the case of interest, (i)
such Non-U.S. Holder does not own, actually or constructively, 10% or more of
the total combined voting power of all classes of stock of the Company entitled
to vote, within the meaning of Section 871(h)(3) of the Code, (ii) such Non-U.S.
Holder is not a "controlled foreign corporation" (within the meaning of the
Code) that is related, directly or indirectly, to the Company through stock
ownership, (iii) such Non-U.S. Holder is not a bank receiving interest described
in Section 881(c)(3)(A) of the Code, and (iv) the certification requirements
under Section 871(h) or Section 881(c) of the Code and Treasury Regulations
thereunder (summarized below) are satisfied;
(b) a Non-U.S. Holder of a Note will not be subject to U.S. income tax on
gains realized on the sale, exchange or other disposition of such Note, unless
(i) such Non-U.S. Holder is an individual who is present in the U.S. for 183
days or more in the taxable year of sale, exchange or other disposition, and
certain other conditions are met, (ii) such gain is effectively connected with
the conduct by the Non-U.S. Holder of a trade or business in the U.S. and, if
certain tax treaties apply, is attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder, or (iii) the Non-U.S. Holder is subject to
Code provisions applicable to certain U.S. expatriates; and
(c) a Note held by an individual who is not a citizen or resident of the
U.S. at the time of his death will not be subject to U.S. estate tax as a result
of such individual's death, provided that, at the time of such individual's
death, the individual does not own, actually or constructively, 10% or more of
the total combined voting power of all classes of stock of the Company entitled
to vote and payments with respect to such Note would not have been effectively
connected with the conduct by such individual of a trade or business in the U.S.
To satisfy the certification requirements referred to in (a) (iv) above,
Sections 871(h) and 881(c) of the Code and currently effective Treasury
Regulations thereunder require that either (i) the beneficial owner of a Note
must certify, under penalties of perjury, to the Company or its paying agent, as
the case may be, that such owner is a Non-U.S. Holder and must provide such
owner's name and address, and U.S. taxpayer identification number ("TIN"), if
any, or (ii) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business (a "Financial Institution") and holds the Note on the behalf of the
beneficial owner thereof must certify, under penalties of perjury, to the
Company or its paying agent, as the case may be, that a certificate described in
(i) above has been received from the beneficial owner and must furnish the payor
with a copy thereof. A certificate described in this paragraph is effective only
with respect to payments of interest made to the certifying Non-U.S. Holder
after delivery of the certificate in the calendar year of its delivery and the
two immediately succeeding calendar years. Under temporary Treasury Regulations,
such requirement will be fulfilled if the beneficial owner of a Note certifies
on IRS Form W-8, under penalties of perjury, that it is a Non-U.S. Holder and
provides its name and address, and any Financial Institution holding the Note on
behalf of the beneficial owner files a statement with the withholding agent to
the effect that it has received such a statement from the beneficial owner (and
furnishes the withholding agent with a copy thereof).
Treasury Regulations released on October 6, 1997 (the "New Regulations") and
effective for payments made after December 31, 1999, subject to certain
transition rules, provide alternative methods for satisfying the certification
requirements described above. The New Regulations require, in the case of Notes
held by a foreign partnership, that (i) the certification be provided by the
partners rather than by the
116
<PAGE>
foreign partnership and (ii) the partnership provide certain information,
including a U.S. taxpayer identification number. A lookthrough rule would apply
in the case of tiered partnerships.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the U.S.
and if interest on the Note, or gain realized on the sale, exchange or other
disposition of the Note, is effectively connected with the conduct of such trade
or business and, if certain tax treaties apply, is attributable to a U.S.
permanent establishment maintained by the Non-U.S. Holder in the U.S., the
Non-U.S. Holder, although exempt from U.S. withholding tax (provided that the
certification requirements discussed in the next sentence are met), will
generally be subject to regular U.S. income tax on such interest or gain in the
same manner as if it were a U.S. Holder. In lieu of the certificate described
above, such a Non-U.S. Holder will be required, under currently effective
Treasury Regulations, to provide the Company with a properly executed IRS Form
4224 in order to claim an exemption from withholding tax. In addition, if such
Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits
tax equal to 30% (or such lower rate provided by an applicable treaty) of its
effectively connected earnings and profits for the taxable year, subject to
certain adjustments. For purposes of the branch profits tax, interest on a Note
and any gain recognized on the sale, exchange or other disposition of a Note
will generally be included in the earnings and profits of such Non-U.S. Holder
if such interest or gain is effectively connected with the conduct by a Non-U.S.
Holder of a trade or business in the U.S. The New Regulations alter certain of
the withholding reporting and certification requirements described above,
effective for payments made after December 31, 1999, subject to certain
transition rules. In general, for payments made after December 31, 1999, a
Non-U.S. Holder with effectively connected income must provide to the Company,
either directly or through an intermediary, a valid IRS Form W-8 to claim an
exemption from withholding.
In the unlikely event the Notes were treated as equity, the periodic
distributions received by a Non-U.S. Holder on the Notes would not qualify for
the portfolio interest exemption from United States federal income tax and would
instead be treated as dividends which would generally be subject to a 30% United
States federal withholding tax, subject to reduction for Non-U.S. Holders that
are eligible for the benefits of certain income tax treaties, or that qualify as
being engaged in a trade or business in the U.S. and if any dividends received
are effectively connected with such trade or business.
Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of U.S. federal income tax at a rate of 31% may apply to
payments made in respect of a Note to a holder that is not an "exempt recipient"
and that fails to provide certain identifying information (such as the holder's
TIN) in the manner required. Generally, individuals are not exempt recipients,
whereas corporations and certain other entities are exempt recipients. Payments
made in respect of a Note must be reported to the Service, unless the holder is
an exempt recipient or otherwise establishes an exemption.
In the case of payments of interest on a Note to a Non-U.S. Holder, Treasury
Regulations provide that backup withholding and information reporting will not
apply to payments with respect to which either requisite certification has been
received or an exemption has otherwise been established (provided that neither
the Company nor a paying agent has actual knowledge that the holder is a U.S.
Holder or that the conditions of any other exemption are not in fact satisfied).
Payments of the proceeds of the sale of a Note through a foreign office of a
broker that is a U.S. person, a "controlled foreign corporation" (within the
meaning of Section 957(a) of the Code), or a foreign person, 50% or more of
whose gross income from all sources for the three-year period ending with the
close of its taxable year preceding the payment was effectively connected with
the conduct of a trade or business within the U.S., or (pursuant to the New
Regulations, for payments made after December 31, 1999) a foreign partnership
with certain U.S. connections, are subject to certain information reporting
117
<PAGE>
requirements, unless the payee is an exempt recipient or such broker has
evidence in its records that the payee is a Non-U.S. Holder and has no actual
knowledge that such evidence is false and certain other conditions are met.
Temporary Treasury Regulations indicate that such payments are not currently
subject to backup withholding. Under current Treasury Regulations, payments of
the proceeds of a sale of a Note to or through the U.S. office of a broker will
be subject to information reporting and backup withholding unless the payee
certifies under penalties of perjury as to his or her status as a Non-U.S.
Holder and satisfies certain other qualifications (and no agent or broker who is
responsible for receiving or reviewing such statement has actual knowledge that
it is incorrect) or the payee otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder of a Note generally will be allowed as a refund or credit against such
holder's U.S. federal income tax, provided that the required information is
timely furnished to the Service.
In general, the New Regulations do not significantly alter the current
substantive withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the New
Regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. A holder of a Note should consult with its tax
advisor regarding the application of the back-up withholding rules to its
particular situation, the availability of an exemption therefrom, the procedure
for obtaining such an exemption, if available, and the impact of the New
Regulations on payments made with respect to Notes after December 31, 1999.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES IN LIGHT OF
ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE HOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM
OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS
OF CHANGES IN UNITED STATES OR OTHER TAX LAWS.
118
<PAGE>
PLAN OF DISTRIBUTION
Prior to the Exchange Offer, there has been no market for any of the New
Notes. The Existing Notes are eligible for trading in the Private Offerings,
Resales and Trading through Automatic Linkages ("PORTAL") market. The New Notes
will not be eligible for PORTAL trading. There can be no assurance that an
active trading market will develop for, or as to the liquidity of, any of the
New Notes.
With respect to resales of New Notes, based on an interpretation by the
staff of the Commission set forth in no-action letters issued to third parties,
the Company believes that any holder or beneficial owner (other than a person
that is an affiliate of the Company within the meaning of Rule 405 under the
Securities Act or a "broker" or "dealer" registered under the Exchange Act) who
exchanges Existing Notes for New Notes in the ordinary course of business and
who is not participating, does not intend to participate, and has no arrangement
or understanding with any person to participate, in the distribution of the New
Notes, will be allowed to resell the New Notes to the public without further
registration under the Securities Act and without delivering to the purchasers
of the New Notes a prospectus that satisfies the requirements of Section 10
thereof. However, if any holder or beneficial owner acquires New Notes in the
Exchange Offer for the purpose of distributing or participating in a
distribution of the New Notes, such holder or beneficial owner cannot rely on
the position of the staff of the Commission enunciated in EXXON CAPITAL HOLDINGS
CORPORATION (available May 13, 1988) or similar no-action letters or any similar
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available.
As contemplated by the above no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the New Notes to be acquired
by the holder and any beneficial owners of Existing Notes in connection with the
Exchange Offer are being acquired in the ordinary course of business of the
holder and any beneficial owners, (ii) that at the time of the consummation of
the Exchange Offer the holder and each beneficial owner are not engaging, do not
intend to engage and have no arrangements or understanding with any person to
participate in the distribution of the New Notes in violation of the provisions
of the Securities Act, (iii) the holder and each beneficial owner acknowledge
and agree that any person participating in the Exchange Offer for the purpose of
distributing the New Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction of the New Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in no-action letters that
are discussed herein above, (iv) the holder and each beneficial owner understand
that a secondary resale transaction described in clause (iii) above should be
covered by an effective registration statement containing the selling
securityholder information required by Item 507 or 508, as applicable, of
Regulation S-K of the Commission, and (v) neither the holder nor any beneficial
owner(s) is an "affiliate," as defined under Rule 456 of the Securities Act, of
the Company except as otherwise disclosed to the Company in writing.
Any broker or dealer registered under the Exchange Act (each a
"Broker-Dealer") who holds Existing Notes that were acquired for its own account
as a result of market-making activities or other trading activities (other than
Existing Notes acquired directly from the Company or any affiliate of the
Company) may exchange such Existing Notes for New Notes pursuant to the Exchange
Offer, however, such Broker-Dealer may be deemed an underwriter within the
meaning of the Securities Act and, therefore, must deliver a prospectus meeting
the requirements of the Securities Act in connection with any resales of the New
Notes received by it in the Exchange Offer, which prospectus delivery
requirement may be satisfied by the delivery by such Broker-Dealer of this
Prospectus. Any Broker-Dealer participating in the Exchange Offer will be
required to acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of New Notes
received by it in the Exchange Offer. However, only Broker-Dealers who exchange
Existing Notes that were acquired for their own account as a result of
market-making activities or other trading activities (other than Existing Notes
acquired directly from the
119
<PAGE>
Company or any affiliate of the Company) may use this Prospectus to satisfy the
prospectus delivery requirements of the Securities Act. The delivery by a
Broker-Dealer of a prospectus in connection with resales of New Notes shall not
be deemed to be an admission by such Broker-Dealer that it is an underwriter
within the meaning of the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the New Notes and certain tax matters
are being passed upon on behalf of the Company by Paul, Weiss, Rifkind, Wharton
& Garrison, New York, New York.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Company included in this
Prospectus as of December 31, 1997 and 1996 and for the period from August 25,
1995 (date of inception) to December 31, 1995, the years ended December 31, 1996
and 1997 and for the period from August 25, 1995 (date of inception) to December
31, 1997 have been audited by Coopers & Lybrand L.L.P., independent accountants,
as stated in their report included herein. Such financial statements and
selected financial data are included in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
120
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets, as of December 31, 1996 and 1997 and March 31, 1998
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the period August 25, 1995 (date of
inception) to December 31, 1995, the years ended December 31, 1996 and 1997, the
period
August 25, 1995 (date of inception) to December 31, 1997, the three months ended
March 31, 1997 (unaudited) and 1998 (unaudited) and the period August 25, 1995 (date
of inception) to March 31, 1998 (unaudited)......................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the period August 25,
1995 (date of inception) to December 31, 1995, the years ended December 31, 1996 and
1997, the period August 25, 1995 (date of inception) to December 31, 1997 and the
three months ended March 31, 1998 (unaudited)....................................... F-5
Consolidated Statements of Cash Flows for the period August 25, 1995 (date of
inception) to December 31, 1995, the years ended December 31, 1996 and 1997, the
period
August 25, 1995 (date of inception) to December 31, 1997, the three months ended
March 31, 1997 (unaudited) and 1998 (unaudited) and the period August 25, 1995 (date
of inception) to March 31, 1998 (unaudited)......................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Pathnet, Inc.
We have audited the accompanying consolidated balance sheets of Pathnet,
Inc. and its subsidiary (the Company) (A Development Stage Enterprise) as of
December 31, 1996 and 1997, and the related statements of operations, changes in
stockholders' equity (deficit) and cash flows for the period August 25, 1995
(date of inception) to December 31, 1995, the years ended December 31, 1996 and
1997, and for the period August 25, 1995 (date of inception) to December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996 and 1997, and the results of their operations and their
cash flows for the period August 25, 1995 (date of inception) to December 31,
1995, the years ended December 31, 1996 and 1997, and the period August 25, 1995
(date of inception) to December 31, 1997, in conformity with generally accepted
accounting principles.
McLean, Virginia
February 20, 1998, except for the information in Note 9, for which the dates are
April 8, 1998 and May 4, 1998, respectively.
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed by Coopers & Lybrand
L.L.P., upon consummation of the matters, on or before the effective date of the
Registration Statement on Form S-1 regarding the Company's initial public
offering of equity securities, as described in Note 9 to the financial
statements and assuming that from the date hereof to the effective date of such
Registration Statement no other events shall have occurred that would affect the
accompanying financial statements.
May 8, 1998
F-2
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
---------
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, DECEMBER 31, 1998
1996 1997 (UNAUDITED)
------------- ------------- -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 2,318,037 $ 7,831,384 $ 4,856,610
Prepaid expenses and other current assets......................... 1,695 48,571 156,716
------------- ------------- -------------
Total current assets.......................................... 2,319,732 7,879,955 5,013,326
Property and equipment, net......................................... 46,180 7,207,094 9,964,580
Deferred financing costs............................................ -- 250,428 --
Restricted cash..................................................... -- 760,211 288,736
------------- ------------- -------------
Total assets.................................................. $ 2,365,912 $ 16,097,688 $ 15,266,642
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................. $ 114,799 $ 5,592,918 $ 7,280,298
Accrued expenses.................................................. 30,217 -- 257,334
Deferred revenue.................................................. -- 300,000 200,000
------------- ------------- -------------
Total current liabilities..................................... 145,016 5,892,918 7,737,632
------------- ------------- -------------
Series A convertible preferred stock, $0.01 par value 1,000,000
shares authorized, issued and outstanding at December 31, 1996 and
1997, and March 31, 1998, respectively (liquidation preference
$1,000,000)....................................................... 1,000,000 1,000,000 1,000,000
Series B convertible preferred stock, $0.01 par value, 1,651,046
shares authorized; 1,041,290, 1,651,046 and 1,651,046 shares
issued and outstanding at December 31, 1996 and 1997 and March 31,
1998, respectively (liquidation preference $5,033,367)............ 3,008,367 5,008,367 5,008,367
Series C convertible preferred stock, $0.01 par value, 2,819,549
shares authorized; 939,850 shares issued and outstanding at
December 31, 1997 and March 31, 1998, respectively (liquidation
preference $10,000,054)........................................... -- 9,961,274 9,961,274
------------- ------------- -------------
Total convertible preferred stock............................. 4,008,367 15,969,641 15,969,641
------------- ------------- -------------
Commitments and contingencies
Stockholders' equity (deficit):
Voting common stock, $0.01 par value, 7,500,000 shares authorized
at December 31, 1996 and 1997 and 10,200,000 shares authorized
at March 31, 1998; 5,000,000 shares issued and outstanding at
December 31, 1996 and 1997 and 5,004,065 issued and outstanding
at March 31, 1998............................................... 50,000 50,000 50,041
Note receivable from stockholder.................................. (9,000) (9,000) --
Additional paid-in capital........................................ 381,990 381,990 382,030
Deficit accumulated during the development stage.................. (2,210,461) (6,187,861) (8,872,702)
------------- ------------- -------------
Total stockholders' equity (deficit).......................... (1,787,471) (5,764,871) (8,440,631)
------------- ------------- -------------
Total liabilities and stockholders' equity (deficit).......... $ 2,365,912 $ 16,097,688 $ 15,266,642
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE PERIOD
PERIOD PERIOD AUGUST 25,
AUGUST 25, AUGUST 25, 1995
1995 1995 (DATE OF
(DATE OF (DATE OF FOR THE THREE MONTHS INCEPTION)
INCEPTION) FOR THE YEAR FOR THE YEAR INCEPTION) ENDED MARCH 31, TO
TO ENDED ENDED TO ------------------------ MARCH 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1998 1998
1995 1996 1997 1997 (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............................ $ -- $ 1,000 $ 162,500 $ 163,500 $ 10,000 $ 100,000 $ 263,500
------------ ------------ ------------ ------------ ----------- ----------- ------------
Expenses:
Cost of revenue.................. -- -- -- -- -- 714,740 714,740
General and administrative....... 290,318 913,646 3,537,926 4,741,890 486,630 1,922,217 6,664,107
Research and development......... 19,038 226,021 -- 245,059 -- -- 245,059
Legal and consulting............. 120,083 202,651 755,817 1,078,551 71,324 225,813 1,304,364
------------ ------------ ------------ ------------ ----------- ----------- ------------
Total expenses................. 429,439 1,342,318 4,293,743 6,065,500 557,954 2,862,770 8,928,270
------------ ------------ ------------ ------------ ----------- ----------- ------------
Net operating loss................. (429,439) (1,341,318) (4,131,243) (5,902,000) (547,954) (2,762,770) (8,664,770)
------------ ------------ ------------ ------------ ----------- ----------- ------------
Interest expense................... -- (415,357) -- (415,357) -- -- (415,357)
Interest and other income, net..... 2,613 13,040 153,843 169,496 17,107 77,929 247,425
------------ ------------ ------------ ------------ ----------- ----------- ------------
Net loss................... $ (426,826) $(1,743,635) $(3,977,400) $(6,147,861) $(530,847) ($2,684,841) $(8,832,702)
------------ ------------ ------------ ------------ ----------- ----------- ------------
------------ ------------ ------------ ------------ ----------- ----------- ------------
Basic and diluted loss per
common share............. $ (0.09) $ (0.35) $ (0.80) $ (1.23) $ (0.11) $ (0.54) $ (1.77)
------------ ------------ ------------ ------------ ----------- ----------- ------------
------------ ------------ ------------ ------------ ----------- ----------- ------------
Weighted average number of
common shares
outstanding.............. 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,001,762 5,000,167
------------ ------------ ------------ ------------ ----------- ----------- ------------
------------ ------------ ------------ ------------ ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
NOTE ACCUMULATED
COMMON STOCK RECEIVABLE ADDITIONAL DURING THE
----------------------- FROM PAID-IN DEVELOPMENT
SHARES AMOUNT STOCKHOLDER CAPITAL STAGE TOTAL
----------- ---------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 25, 1995............... -- $ -- $ -- $ -- $ -- $ --
Issuance of voting common stock........ 2,500,000 25,000 (4,500) -- (20,000) 500
Issuance of non-voting common stock.... 2,500,000 25,000 (4,500) -- (20,000) 500
Net loss............................... -- -- -- -- (426,826) (426,826)
----------- ---------- ------------ ------------ ------------- -------------
Balance, December 31, 1995............. 5,000,000 50,000 (9,000) -- (466,826) (425,826)
Cancellation of non-voting common
stock................................ (2,500,000) (25,000) -- -- -- (25,000)
Issuance of voting common stock........ 2,500,000 25,000 -- -- -- 25,000
Interest expense for beneficial
conversion feature of bridge loan.... -- -- -- 381,990 -- 381,990
Net loss............................... -- -- -- -- (1,743,635) (1,743,635)
----------- ---------- ------------ ------------ ------------- -------------
Balance, December 31, 1996............. 5,000,000 50,000 (9,000) 381,990 (2,210,461) (1,787,471)
Net loss............................... -- -- -- -- (3,977,400) (3,977,400)
----------- ---------- ------------ ------------ ------------- -------------
Balance, December 31, 1997............. 5,000,000 50,000 (9,000) 381,990 (6,187,861) (5,764,871)
Exercise of stock options
(unaudited).......................... 4,065 41 -- 40 -- 81
Repayment of note receivable
(unaudited).......................... -- -- 9,000 -- -- 9,000
Net loss (unaudited)................... -- -- -- -- (2,684,841) (2,684,841)
----------- ---------- ------------ ------------ ------------- -------------
Balance, March 31, 1998 (unaudited).... 5,004,065 $ 50,041 $ -- $ 382,030 $ (8,872,702) $ (8,440,631)
----------- ---------- ------------ ------------ ------------- -------------
----------- ---------- ------------ ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FOR THE
AUGUST 25, PERIOD
1995 AUGUST 25, FOR THE THREE MONTHS
(DATE OF FOR THE YEAR FOR THE YEAR 1995 (DATE OF ENDED MARCH 31,
INCEPTION) TO ENDED ENDED INCEPTION) TO ------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1998
1995 1996 1997 1997 (UNAUDITED) (UNAUDITED)
------------- ------------ ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash from operating activities:
Net loss............................ $ (426,826) $(1,743,635) $(3,977,400) $(6,147,861) $(530,847) ($2,684,841)
Adjustment to reconcile net loss to
net cash used in operating
activities:
Depreciation expense.............. 352 9,024 46,642 56,018 6,112 37,223
Loss on disposal of asset......... -- -- 5,500 5,500 -- --
Write-off of deferred financing
costs........................... -- -- -- -- -- 337,910
Interest expense for beneficial
conversion feature of bridge
loan............................ -- 381,990 -- 381,990 -- --
Accrued interest satisfied by
conversion of bridge loan to
Series B preferred stock........ -- 33,367 -- 33,367 -- --
Changes in assets and liabilities:
Prepaid expenses and other
current assets................ -- (1,695) (46,876) (48,571) -- (108,145)
Deferred revenue................ -- -- 300,000 300,000 -- (100,000)
Accounts payable................ 4,705 110,094 386,106 500,905 (63,259) 1,687,380
Accrued expenses................ 12,645 17,572 (30,217) -- (4,125) 257,334
------------- ------------ ------------ ------------- ----------- -----------
Net cash used in operating
activities.................. (409,124) (1,193,283) (3,316,245) (4,918,652) (592,119) (573,139)
------------- ------------ ------------ ------------- ----------- -----------
Cash flows from investing activities:
Expenditures for property and
equipment......................... (8,903) (46,653) (381,261) (436,817) (37,385) (710,337)
Expenditures for network
construction in progress.......... -- -- (1,739,782) (1,739,782) -- (2,084,372)
Restricted cash..................... -- -- (760,211) (760,211) -- 471,475
Repayment of note receivable........ -- -- -- -- -- 9,000
------------- ------------ ------------ ------------- ----------- -----------
Net cash used in investing
activities.................. (8,903) (46,653) (2,881,254) (2,936,810) (37,385) (2,314,234)
------------- ------------ ------------ ------------- ----------- -----------
Cash flows from financing activities:
Issuance of voting and non-voting
common stock...................... 1,000 -- -- 1,000 -- --
Proceeds from sale of Series A
preferred stock................... 500,000 500,000 -- 1,000,000 -- --
Proceeds from sale of Series B
preferred stock................... -- 2,000,000 2,000,000 4,000,000 -- --
Proceeds from sale of Series B
preferred stock representing the
conversion of committed but
undrawn portion of bridge loan to
Series B preferred stock.......... -- 300,000 -- 300,000 -- --
Proceeds from sale of Series C
preferred stock................... -- -- 10,000,054 10,000,054 -- --
Exercise of stock option............ -- -- -- -- -- 81
Issuance costs...................... -- (25,000) (38,780) (63,780) -- --
Financing costs..................... -- -- (250,428) (250,428) -- (87,482)
Proceeds from bridge loan........... -- 700,000 -- 700,000 -- --
------------- ------------ ------------ ------------- ----------- -----------
Net cash provided by (used in)
financing activities........ 501,000 3,475,000 11,710,846 15,686,846 -- (87,401)
------------- ------------ ------------ ------------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents...................... 82,973 2,235,064 5,513,347 7,831,384 (629,504) (2,974,774)
Cash and cash equivalents at the
beginning of period................... -- 82,973 2,318,037 -- 2,318,037 7,831,384
------------- ------------ ------------ ------------- ----------- -----------
Cash and cash equivalents at the end
of period............................. $ 82,973 $2,318,037 $7,831,384 $ 7,831,384 $1,688,533 $4,856,610
------------- ------------ ------------ ------------- ----------- -----------
------------- ------------ ------------ ------------- ----------- -----------
Supplemental disclosure:
Noncash transactions:
Conversion of bridge loan plus
accrued interest to Series B
preferred stock................. $ -- $ 733,367 $ -- $ 733,367 $ -- $ --
------------- ------------ ------------ ------------- ----------- -----------
------------- ------------ ------------ ------------- ----------- -----------
Conversion of non-voting common
stock to voting common stock.... $ -- $ 25,000 $ -- $ 25,000 $ -- $ --
------------- ------------ ------------ ------------- ----------- -----------
------------- ------------ ------------ ------------- ----------- -----------
Issuance of voting and non-voting
common stock.................... 9,000 $ -- $ -- $ 9,000 $ -- $ --
------------- ------------ ------------ ------------- ----------- -----------
------------- ------------ ------------ ------------- ----------- -----------
Acquisition of network equipment
included in accounts payable.... $ -- $ -- $5,092,013 $ 5,092,013 $ -- $ --
------------- ------------ ------------ ------------- ----------- -----------
------------- ------------ ------------ ------------- ----------- -----------
<CAPTION>
FOR THE
PERIOD
AUGUST 25,
1995
(DATE OF
INCEPTION) TO
MARCH 31,
1998
(UNAUDITED)
-------------
<S> <C>
Cash from operating activities:
Net loss............................ $(8,832,702)
Adjustment to reconcile net loss to
net cash used in operating
activities:
Depreciation expense.............. 93,241
Loss on disposal of asset......... 5,500
Write-off of deferred financing
costs........................... 337,910
Interest expense for beneficial
conversion feature of bridge
loan............................ 381,990
Accrued interest satisfied by
conversion of bridge loan to
Series B preferred stock........ 33,367
Changes in assets and liabilities:
Prepaid expenses and other
current assets................ (156,716)
Deferred revenue................ 200,000
Accounts payable................ 2,188,285
Accrued expenses................ 257,334
-------------
Net cash used in operating
activities.................. (5,491,791)
-------------
Cash flows from investing activities:
Expenditures for property and
equipment......................... (904,478)
Expenditures for network
construction in progress.......... (4,066,830)
Restricted cash..................... (288,736)
Repayment of note receivable........ 9,000
-------------
Net cash used in investing
activities.................. (5,251,044)
-------------
Cash flows from financing activities:
Issuance of voting and non-voting
common stock...................... 1,000
Proceeds from sale of Series A
preferred stock................... 1,000,000
Proceeds from sale of Series B
preferred stock................... 4,000,000
Proceeds from sale of Series B
preferred stock representing the
conversion of committed but
undrawn portion of bridge loan to
Series B preferred stock.......... 300,000
Proceeds from sale of Series C
preferred stock................... 10,000,054
Exercise of stock option............ 81
Issuance costs...................... (63,780)
Financing costs..................... (337,910)
Proceeds from bridge loan........... 700,000
-------------
Net cash provided by (used in)
financing activities........ 15,599,445
-------------
Net increase (decrease) in cash and
cash equivalents...................... 4,856,610
Cash and cash equivalents at the
beginning of period................... --
-------------
Cash and cash equivalents at the end
of period............................. $ 4,856,610
-------------
-------------
Supplemental disclosure:
Noncash transactions:
Conversion of bridge loan plus
accrued interest to Series B
preferred stock................. $ 733,367
-------------
-------------
Conversion of non-voting common
stock to voting common stock.... $ 25,000
-------------
-------------
Issuance of voting and non-voting
common stock.................... $ 9,000
-------------
-------------
Acquisition of network equipment
included in accounts payable.... $ 5,092,013
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND FINANCING
Pathnet, Inc. (the Company) was incorporated in the State of Delaware on
August 25, 1995. On August 28, 1995, Path Tel, Inc. (Path Tel), a shell company
with no operations, was merged with and into the Company, with the Company being
the surviving corporation. The sole owner of Path Tel was the founder (Founder)
of the Company. The business of the Company is to aggregate and build a digital
microwave network through strategic alliances with enterprises operating private
microwave networks (Incumbents) not currently connected to the public switched
telephone network.
The Company plans to deploy its digital network by upgrading, integrating
and leveraging existing telecommunications assets, sites and rights of way,
including those utilized by railroads, utilities, state and local governments
and pipelines. By integrating the existing networks of Incumbents, the Company
expects to obtain the equivalent of a nationwide spectrum license at minimal
licensing costs. In return for providing equipment, designing systems and
managing the construction of Incumbent networks, the Company will receive the
exclusive contractual right to market excess capacity created and aggregated on
Incumbent networks. The revenue generated from this activity may be shared with
the Incumbents.
The Company has in place several contracts requiring it to upgrade existing
telecommunication systems. In addition, the Company is currently in the process
of negotiating with several national long distance carriers who will likely be
purchasers of the excess capacity created. Management believes the first network
upgrade has been completed and capacity is available for commercial sale.
However, the outcome is uncertain and depends on a variety of factors, some of
which are beyond the Company's control. The Company is dependent upon the
network upgrades to achieve its objective. Management's plans to fund operations
and the transitioning services will potentially include public and private
sources and strategic corporate alliances.
The Company has incurred an accumulated deficit of $6,147,861 for the period
August 25, 1995 (date of inception) to December 31, 1997. Management believes
that as of December 31, 1997, the Company has received funding from the
preferred stock offerings consummated during 1997 (Note 3) to fund operations
through the first quarter of 1999. The Company will need to achieve positive
operational cash flow or complete additional equity or debt financings to fund
operations beyond the first quarter of 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Company's activities to date principally have been securing contractual
alliances with Incumbents, designing and constructing network segments,
obtaining capital and planning its proposed service. Accordingly, the Company's
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 preferred stock 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 subsidiary, Pathnet Finance I, LLC. All material
intercompany accounts and transactions have been eliminated in consolidation.
F-7
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of March 31, 1998, the unaudited
consolidated statements of operations, changes in stockholders' equity and cash
flows for the three months ended March 31, 1997 and 1998 and the unaudited
consolidated statements of operations and cash flows for the period August 25,
1995 (date of inception) through March 31, 1998, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of only
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of results that may be expected for the year ending
December 31, 1998.
LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128), effective December 31, 1997. Basic earnings
(loss) per share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding. Diluted earnings (loss)
per share is computed by dividing net income (loss) by the weighted average
common and potentially dilutive common equivalent shares outstanding. The
computation of diluted loss per share was antidilutive in each of the years
presented; therefore, basic and diluted loss per share are the same.
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.
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. Therefore, actual amounts
could differ from these estimates.
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 and
restricted cash. 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
F-8
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fund. The Company's restricted cash is maintained in an escrow account (see Note
4) at a major bank. The Company has not experienced any losses on its cash and
cash equivalents and restricted cash.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of office and computer equipment,
furniture and fixtures, leasehold improvements and network construction costs,
is stated at cost. 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. Network construction costs
incurred during development are capitalized. Depreciation of the network
construction costs begins when the network equipment is ready for its intended
use and will be amortized over its estimated useful life. 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 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. No impairment losses were recognized during the
period August 25, 1995 (date of inception) to December 31, 1995 and the years
ended December 31, 1996 and 1997.
DEFERRED INCOME TAXES
Deferred income taxes are recognized for tax consequences in future years of
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.
STOCK-BASED COMPENSATION
The Statement of Financial Accounting Standards No. 123, (SFAS 123),
"Accounting for Stock-Based Compensation," allows companies to account for
employee stock-based compensation either under the provisions of SFAS 123 or
under the provisions of Accounting Principles Board Opinion No. 25, (APB 25),
"Accounting for Stock Issued to Employees", but requires pro forma disclosure in
the footnotes to the financial statements as if the measurement provisions of
SFAS 123 had been adopted. The Company has continued to account for its stock
based compensation in accordance with the provisions of APB 25.
F-9
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE
The Company earns revenue for project management and consulting services.
The Company defers revenue when contractual payments are received in advance of
the performance of services. Revenue is recognized over the related project
period as milestones are achieved. All of the Company's revenue to date has been
earned from four customers.
DEFERRED FINANCING COSTS
The Company has incurred costs related to obtaining future debt financing
arrangements. When the financing is obtained, the costs will be amortized over
the term of the financing arrangement. If the financing is not obtained, the
costs will be expensed.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued two new standards that
became effective for reporting periods beginning after December 15, 1997,
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). Effective March 31, 1998, the Company adopted SFAS 130 and SFAS 131. The
adoption of these standards has no material affect on the Company's consolidated
financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of the following at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Network construction in progress................................. $ -- $6,831,795
Office and computer equipment.................................... 31,006 248,880
Furniture and fixtures........................................... 24,550 120,093
Leasehold improvements........................................... -- 62,344
------------ ------------
55,556 7,263,112
Less accumulated depreciation.................................... (9,376) (56,018)
------------ ------------
Property and equipment, net...................................... $ 46,180 $7,207,094
------------ ------------
------------ ------------
</TABLE>
Network construction costs include all direct material and labor costs
necessary to construct components of a high capacity digital microwave network
which is owned and maintained by the Company. Network construction in progress
includes approximately $5,100,000 of telecommunications equipment obtained from
NEC Industries, Inc. (NEC). As the Company has not yet paid for this equipment,
a corresponding amount is included in accounts payable at December 31, 1997.
4. RESTRICTED CASH
On June 3, 1997, the Company signed the Agreement to Create and Manage a
High Capacity Telecommunications System (the Agreement) with Texaco Pipeline,
Inc. (Texaco). To assure performance
F-10
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RESTRICTED CASH (CONTINUED)
of the installation services to be provided by the Company under the Agreement,
Texaco and the Company entered into an Escrow Agreement which required the
Company to make an initial cash deposit of $750,000 with a financial
institution. Interest earned on these funds remains in the escrow. Upon
providing documentation to Texaco showing expenses related to the installation,
the Company obtains approval from Texaco to draw down a corresponding amount
from the escrow balance to fund the network construction in progress. This
balance is wholly restricted and may not be used for any other purpose.
5. CAPITAL STOCK TRANSACTIONS
COMMON STOCK
The initial capitalization of the Company on August 28, 1995 occurred
through the issuance of 2,500,000 shares of voting common stock and 2,500,000
shares of non-voting common stock. The shares of both the voting and non-voting
common stock are owned by the Founder of the Company. In February 1996, the
Founder returned 2,500,000 shares of non-voting common stock in exchange for
2,500,000 shares of voting common stock.
CONVERTIBLE PREFERRED STOCK
As part of its initial capitalization on August 25, 1995, the Company
initiated a private offering of 1,000,000 shares of Series A convertible
preferred stock for $1,000,000. Pursuant to the terms of the 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
$1,000,000. The bridge loan carries an interest rate of 12% per annum and is 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 is convertible into Series B preferred stock at 73% of the price
of the preferred stock issued in an 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 of 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 $2,000,000 less issuance
costs of $25,000. 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, the Company received an
additional $2,000,000 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, the Company consummated a private offering of 939,850
shares of Series C convertible preferred stock for $10,000,054 less issuance
costs of $38,780. The Company will receive an
F-11
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STOCK TRANSACTIONS (CONTINUED)
additional $19,999,998 in a second closing in exchange for 1,879,699 shares of
Series C convertible preferred stock upon the occurrence of all of the
following: (1)(a) the Company has executed definitive agreements, having terms
and conditions which are approved by a majority of the directors designated by
the holders of the preferred stock, with NEC or certain financial institutions,
relating to credit facilities between the Company, and NEC or such financial
institutions, respectively or (b) the Company closes a private offering of high
yield debt, having terms and conditions which are approved by a majority of the
directors designated by the holders of the preferred stock, (2) the Company has
executed Fixed Point Microwave Services Agreements or Agreements to Create and
Manage a Telecommunications Network with at least four Incumbents, (3) if
neither the Company nor the Founder are then in breach of any material terms of
the Series A, Series B or Series C Investor and Stockholder Agreements and (4)
all conditions of purchase set forth in the Series C convertible preferred stock
Investors and Stockholders' Agreement have been fulfilled. As of December 31,
1997, the Company had executed Fixed Point Microwave Services Agreements or
Agreements to Create and Manage a Telecommunications Network with four
Incumbents in satisfaction of item (2) above. None of the other events have
occurred.
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 convertible.
The holders of the 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 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.
The liquidation preferences of the outstanding shares of Series A, Series B
and Series C convertible preferred stock are $1,000,000, $5,033,367, and
$10,000,054, respectively, as of December 31, 1997. 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 $0.20, $0.66 or $2.13 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: (i) the Company is valued on a
pre-money basis at greater than $50,000,000, (ii) the gross proceeds received by
the Company exceed $20,000,000, and (iii) the Company
F-12
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STOCK TRANSACTIONS (CONTINUED)
uses a nationally recognized underwriter approved by holders of a majority
interest of the convertible preferred stock.
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 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.
6. 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 may
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, determines the number of options granted, the vesting period and the
exercise price. The 1995 Plan will terminate August 28, 2005 unless terminated
earlier by the Board of Directors.
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, 1997, a total of
F-13
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
134,145 non-qualified stock options and 731,710 incentive stock options were
issued at an exercise price of $0.02 per share, an amount estimated to equal or
exceed the per share fair value of the common stock at the time of any such
grant.
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. The Compensation Committee, which administers
the 1997 Plan, determines the number of options granted, the vesting period and
the exercise price. The 1997 Plan will terminate July 31, 2007 unless terminated
earlier by the Board of Directors.
Options granted under the 1997 Plan generally vest over a three to seven
year period and expire after: (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, (4)
the date of the participant's termination with cause or (5) the date of any
material breach of any confidentiality or non-competition covenant or agreement
entered into between the participant and the Company.
As of December 31, 1997, a total of 2,222,700 non-qualified options were
issued, 1,480,610 at $0.66 and 742,090 at $2.13. Management estimates that the
exercise price of the options issued in 1997 is greater than the estimated per
share value of the common stock. The options issued at $2.13 vest on October 31,
2004 provided, however (i) if the Company has met 80% of its revenue and
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) budget
for the calendar year ending 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, (ii) 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 (iii) 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
(i) 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.
The options issued at $0.66 vest over three consecutive years subject to
certain acceleration provisions set forth in an employment agreement. Under
certain circumstances, 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.
F-14
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
Stock option activity for the period from the August 25, 1995 (date of
inception) to December 31, 1997 was as follows:
<TABLE>
<CAPTION>
1995 PLAN 1997 PLAN
------------------------------- -------------------------
NON- NON- WEIGHTED
INCENTIVE QUALIFIED QUALIFIED AVERAGE
STOCK STOCK STOCK EXERCISE
OPTIONS OPTIONS PRICE OPTIONS PRICE PRICE
--------- --------- --------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, August 25, 1995......... -- -- -- -- -- --
Granted...................................... 707,320 121,950 $ 0.02 -- -- $ 0.02
Exercised.................................... -- -- -- -- -- --
Canceled..................................... -- -- -- -- -- --
--------- --------- ----------
Options outstanding, December 31, 1995....... 707,320 121,950 $ 0.02 -- -- $ 0.02
Granted...................................... 24,390 12,195 $ 0.02 -- -- $ 0.02
Exercised.................................... -- -- -- -- -- --
Canceled..................................... -- -- -- -- -- --
--------- --------- ----------
Options outstanding, December 31, 1996....... 731,710 134,145 $ 0.02 -- -- $ 0.02
Granted...................................... -- -- -- 2,222,700 $ 0.66-$2.13 $ 1.15
Exercised.................................... -- -- -- -- -- --
Canceled..................................... -- -- -- -- -- --
--------- --------- ----------
Options outstanding, December 31, 1997....... 731,710 134,145 $ 0.02 2,222,700 $ 0.66-$2.13 $ 0.87
--------- --------- ----------
--------- --------- ----------
</TABLE>
At December 31, 1995, 1996 and 1997, 0, 560,975 and 707,315 options,
respectively, were exercisable. The weighted-average fair value of options
granted during the years ended December 3, 1995, 1996 and 1997, was $0.004,
$0.006 and $0.00, respectively.
The Company accounts for the fair value of its grants in accordance with APB
25. No compensation cost has been recognized for the stock options as all
options have been granted at the estimated per share fair value of the stock to
employees or directors of the Company. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant date for
awards under the plan consistent with the method of SFAS 123, the Company's net
loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss as reported................................ $ 426,826 $ 1,743,635 $ 3,977,400
Pro forma net loss.................................. $ 427,793 $ 1,747,570 $ 3,978,164
Basic and diluted net loss per share as reported.... $ (0.09) $ (0.35) $ (0.80)
Pro forma basic and diluted net loss per share...... $ (0.09) $ (0.35) $ (0.80)
</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 year ended
F-15
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
December 31, 1995, 1996 and 1997, respectively: dividend yield of 0%, expected
volatility of 0%, risk-free interest rate of 6.0190, 6.35% and 6.55% and
expected terms of 4.6, 5.8 and 5.0 years.
As of December 31, 1997, the weighted average remaining contractual life of
the options is 9.21 years.
As of December 31, 1997 and 1996, the pro forma tax effects would include an
increase to the deferred tax asset and the valuation allowance of $298 and
$1,535, respectively; therefore, there is no pro forma tax effect related to
SFAS 123.
7. 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 the Founder of the Company. The lease expires on August 31, 1998,
and is renewable by the Company for two additional years. Rent paid to this
related party during the year ended December 31, 1997, was approximately
$60,980. The Company has no amounts due to the related party as of December 31,
1997.
The Company's future minimum rental payments under noncancellable operating
leases are as follows: $215,222 in 1998, $79,491 in 1999, $58,155 in 2000, and
$1,354 in 2001. Rent expense for the years ended December 31, 1997 and 1996 and
the period August 25, 1995 (date of inception) to December 31, 1995, was
$114,673, $4,399 and $40, respectively.
In exchange for a non-compete agreement, the Company will pay an employee a
severance payment of $275,000 if such employee's employment with the Company is
terminated.
8. INCOME TAXES
The tax effect of temporary differences that give rise to significant
portions of the deferred tax asset at December 31, 1996 and 1997, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------- -------------
<S> <C> <C>
Deferred revenue................................................ $ -- $ 117,000
Capitalized start-up costs...................................... 661,000 1,271,227
Capitalized research and development costs...................... -- 79,333
Net operating loss carryforward................................. 14,000 754,458
------------- -------------
675,000 2,222,018
Less valuation allowance.................................. (675,000) (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 will be
amortized over sixty months once business operations commence.
F-16
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company determined that certain
financing agreements being pursued may not be obtained resulting in the
immediate expensing of deferred financing costs recorded as an asset as of
December 31, 1997.
On April 8, 1998, the Company completed the issuance and sale of 350,000
units, each consisting of a $1,000 principal amount of 12 1/4% Senior Notes due
2008 (the "Notes") and a warrant to purchase 5.5 shares of common stock or
1,925,000 shares in total (the "Warrants") at an exercise price of $0.01 per
share for total gross proceeds of $350,000,000. Issuance costs of approximately
$11,200,000 have been paid. Approximately $345,900,000 of the proceeds have been
allocated to the Notes and approximately $4,100,000 have been allocated to the
Warrants based upon estimated fair values. Interest on the Notes will accrue 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. The Company used
$81,128,751 of proceeds to purchase U.S. Government debt securities which are
pledged as collateral for repayment of all interest through April 15, 2000 with
the balance deposited in cash accounts. The 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 (i) April 15,
2003; 106% of the principal amount, (ii) April 15, 2004; 104% of the principal
amount, (iii) April 15, 2005; 102% of the principal amount and (iv) April 15,
2006; 100% of the principal amount. In addition, at any time on or prior to
April 15, 2001, the Company may redeem within sixty days, from the proceeds of
one or more public equity offerings, up to 35% of the aggregate principal at a
redemption price equal to 112.25% of the principal amount plus accrued and
unpaid interest, provided that at least 65% of the principal amount of the Notes
remain outstanding. Upon a change in control, as defined, each holder of the
Notes may require the Company to repurchase all or a portion of such holder's
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 Notes contain certain covenants which restrict the activities of
including limitations of indebtedness, restricted payments, issuances and sales
of capital stock, affiliate transactions, liens, guarantees, sale of assets and
dividends.
The Warrants expire on April 15, 2008 and are not separately transferrable
until the earlier of (i) October 15, 1998, (ii) a registered exchange offer for
the Notes, (iii) the occurrence of an exercise event as defined, (iv) an event
of default as defined, and (v) a date determined by the lead initial purchaser.
On April 8, 1998, the Company completed the sale of 1,879,699 shares of
Series C convertible preferred stock for an aggregate purchase price of
approximately $20,000,000. There were no issuance costs associated with the
sale.
The Company intends to file a Registration Statement with the Securities and
Exchange Commission for an initial public offering (the Offering). On May 4,
1998, the Company's Board of Directors approved a 5-for-1 stock split, subject
to shareholder approval. The stock split will occur upon the effective date of
the aforementioned Registration Statement. All share and per share information
in this report has been changed to give effect to this stock split.
F-17
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
access charges................ The fees paid by long distances carriers for LECs for
originating and terminating long distance calls on the LECs'
local networks.
access tandem................. An interconnection point on an ILEC local network where
calls from central offices are aggregated for transmission
to other central offices and IXC facilities.
Andrew........................ Andrew Corporation.
AT&T.......................... AT&T Corporation.
ATC........................... American Tower Company.
ATM (Asynchronous Transfer
Mode)....................... An information transfer standard that is one of a general
class of packet technologies that relay traffic by way of an
address contained within the first five bytes of a standard
fifty-three-byte-long packet or cell. The ATM format can be
used by many different information systems, including area
networks, to deliver traffic at varying rates, permitting a
mix of voice data and video (multimedia).
bandwidth..................... The width of a communications channel.
Bellcore...................... Bell Communications Research.
bit error rate................ The number of received bits in error compared to the total
number of bits received.
CAD/CAM....................... Software for computer aided design and computer aided
manufacturing.
carrier....................... A provider of communications transmission services.
central office................ The switching center or central switching facility of an
ILEC.
CLEC (Competitive Local
Exchange Carrier)........... A company that competes with ILECs in local services
markets.
digital....................... Describes a method of storing, processing and transmitting
information through the use of distinct electronic or
optical pulses that represent the binary digits 0 and 1.
Digital transmission/ switching technologies employ a
sequence of discrete, distinct pulses to represent
information, as opposed to the continuously variable analog
signal.
DS-0, DS-1, DS-3.............. Standard North American telecommunication 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 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 44.736 megabits per second. A DS-0
can transmit a single uncompressed voice conversation.
DS-0 circuit mile............. Industry measurement of bandwidth capacity. The measurement
equals the product of route miles and the number of DS-0s.
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
extranet...................... The private networks of information service providers which
operate on the same principles and make use of the same
network technologies as the Internet, but are not part of
the Internet.
FAA........................... Federal Aviation Administration.
FCC........................... Federal Communication Commission.
ILEC (Incumbent Local Exchange
Carrier).................... The incumbent carrier providing local exchange services,
typically an RBOC created by the divestiture of AT&T.
Incumbents.................... Railroads, utilities, state and local governments and
pipelines who own existing telecommunications assets.
Initial System................ The initial system with a 1 x 1 configuration which is
comprised of non-protect radio and protect radio and all
radio components, antennae, waveguides, multiplexers,
software and other equipment and parts necessary for the
operation thereof.
interconnect.................. Connection of a telecommunications device or services to the
public switched telephone network ("PSTN").
interconnection............... Connection of a telecommunications device or services to the
public switched telephone network.
ISP (Internet Service
Provider)................... A company that provides businesses and consumers with access
to the Internet.
IXC........................... Inter Exchange Carrier.
LATAs (Local Access and
Transport Areas)............ The approximately 160 geographic areas that define the areas
between which the RBOCs currently are prohibited from
providing long distance services.
LEC (local exchange
carrier).................... A company providing local switched services, including ILECs
and CLECs.
long-haul circuit............. A dedicated telecommunications circuit generally between
locations in different LATAs.
MCI........................... MCI Communications, Inc.
NEA........................... New Enterprises Associates.
NEC........................... NEC Corporation together with its affiliates, including NEC
America, Inc. and NEC Industries, Inc.
NIPSCO........................ Northern Indiana Public Service Company.
NOC........................... Network Operations Center.
OC-24, OC-48.................. OC, or Optical Carrier, is a measure of a SONET transmission
optical carrier level. The number following the OC
designation is equal to the corresponding number of DS-3s
(e.g., OC-48 is equal to 48 DS-3s).
Part 101...................... Part 101 of the FCC's Rules.
path.......................... The physical spatial separation between point-to-point
towers.
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
POPs (Points of Presence)..... Locations where a Telecom Service Provider has installed
transmission equipment in a service area that serves as, or
relays calls to, a network switching center of that long
distance carrier.
PSTN.......................... Public switched telephone network.
Qwest......................... Qwest Communications International Inc.
RBOCs (Regional Bell Operating
Companies).................. The five remaining local telephone companies (formerly part
of AT&T) established as a result of the AT&T Divestiture
Decree.
reseller...................... A carrier that does not own transmission facilities, but
obtains communications services from another carrier for
resale to the public.
RF............................ Radio frequency.
route miles................... The number of miles of the telecommunications path along
which a transmission is directed as it would appear on a
network map.
SONET (Synchronous Optical
Network Technology)......... An electronics and network architecture for
variable-bandwidth products which enables transmission of
voice, data and video (multimedia) at very high speeds.
Sprint........................ Sprint Corporation.
switch........................ A device that selects the paths or circuits to be used for
transmission of information and a connection. Switching is
the process of interconnecting circuits to form a
transmission path between users and it also captures
information for billing purposes.
Telecom Service Providers..... IXCs, LECs, ISPs, RBOCs, other carrier's carriers, cellular
operators and resellers.
WAN........................... Wide area network.
WorldCom...................... WorldCom, Inc.
WTO........................... World Trade Organization.
</TABLE>
A-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.......................... iii
Forward-Looking Statements..................... iii
Summary........................................ 1
Risk Factors................................... 12
Use of Proceeds................................ 34
Capitalization................................. 35
Selected Financial Data........................ 37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 38
Business....................................... 47
Management..................................... 65
Certain Relationships and Related
Transactions................................. 75
Security Ownership of Certain Beneficial Owners
and Management............................... 77
Description of the Notes....................... 79
Book-Entry; Delivery and Form.................. 112
Certain United States Federal Income Tax
Considerations............................... 114
Plan of Distribution........................... 119
Legal Matters.................................. 120
Independent Accountants........................ 120
Index to Financial Statements.................. F-1
Glossary....................................... A-1
</TABLE>
[LOGO]
OFFER TO EXCHANGE ITS
12 1/4% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF
1933, AS AMENDED, FOR ANY AND
ALL OF ITS OUTSTANDING
12 1/4% SENIOR NOTES DUE 2008
------------
PROSPECTUS
------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law ("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. The Amended and
Restated Certificate of Incorporation of the Company (the "Restated Certificate
of Incorporation") of Pathnet, Inc. (the "Company"), eliminates the personal
liability of directors to the fullest extent permitted by Delaware law.
Section 145 of the DGCL ("Section 145"), 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 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
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.
The Restated Certificate of Incorporation and the Amended and Restated
Bylaws of the Company (the "Restated Bylaws"), provide for the indemnification
of officers and directors and certain other parties (the "Indemnitees") of the
Company to the fullest extent permitted by law.
The U.S. Purchase Agreement relating to the Company's initial public
offering (the "U.S. Purchase Agreement") by and among the Company, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated
and Bear, Stearns & Co. Inc. (collectively, the "U.S. Underwriters") will
provide for indemnification by the U.S. Underwriters of the Company, its
directors and officers, and persons who control the Company within the meaning
of Section 15 of the Securities Act of 1933 (the "Securities Act") for certain
liabilities, including liabilities under the Securities Act.
The International Purchase Agreement relating to the Company's initial
public offering (the "International Purchase Agreement") by and among the
Company, certain underwriters outside the United States and Canada (the
"International Managers"), with Merrill Lynch International, Morgan Stanley &
Co. International Limited and Bear, Stearns International Limited acting as lead
managers (the "Lead Managers") will provide for indemnification by the
International Managers of the Company, its directors and officers, and persons
who control the Company within the meaning of Section 15 of the Securities Act
for certain liabilities, including liabilities under the Securities Act.
II-1
<PAGE>
The Purchase Agreement by and among Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., TD Securities and
Salomon Brothers Inc (together, the "Initial Purchasers") and the Company, dated
as of April 1, 1998 (the "Unit Purchase Agreement"), provides for
indemnification of the Company and persons who control the Company within the
meaning of Section 15 of the Securities Act or Section 20 of the Securities
Exchange Act of 1934 (the "Exchange Act") for certain liabilities, including
liabilities under the Securities Act.
The Notes Registration Rights Agreement by and among the Company and the
Initial Purchasers, dated as of April 8, 1998 (the "Notes Registration Rights
Agreement"), provides for indemnification of the Company, its directors and
officers, and persons who control the Company 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.
The Warrant Registration Rights Agreement by and among the Company, the
Initial Purchasers and certain other persons, dated as of April 8, 1998 (the
"Warrant Registration Rights Agreement"), provides for indemnification of the
Company, its directors and officers, and persons who control the Company 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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
3.1(1) Form of Amended and Restated Certificate of Incorporation of the Company.
3.2(1) Form of Amended and Restated Bylaws of the Company.
4.1+ Indenture between the Company and The Bank of New York, as trustee, dated April 8, 1998 (the
"Indenture").
4.2++ Pledge Agreement by and among the Company, The Bank of New York, as trustee, and The Bank of New
York, as securities intermediary, dated April 8, 1998.
4.3(1) Form of New Note.
4.4+ Form of Existing Note (included in Exhibit 4.1).
5.1(1) Opinion of Paul, Weiss, Rifkind, Wharton & Garrison, regarding legality of securities.
8.1(1) Opinion of Paul, Weiss, Rifkind, Wharton & Garrison, regarding certain tax matters.
10.1(2)* Fixed Point Microwave Services Agreement by and between the Company and Northern Border Pipeline
Company, dated October 17, 1997.
10.2(2)* Fixed Point Microwave Services Agreement by and between the Company and Northern Indiana Public
Service Company, dated January 30, 1998.
10.3(2)* Fixed Point Microwave Services Agreement by and between the Company and Northeast Missouri Electric
Power Cooperative, dated December 1, 1997.
10.4(2)* Fixed Point Microwave Services Agreement by and between the Company and KN Energy, Inc., dated
September 8, 1997.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.5(2)* Fixed Point Microwave Services Agreement by and between the Company and Pathnet/ Idaho Power
Equipment, LLC, dated April 17, 1998.
10.6(2)* Agreement to Create and Manage a High Capacity Telecommunications System by and between the Company
and Texaco Pipeline, Inc., dated June 3, 1997.
10.7* Binding Term Sheet, by and between the Company and American Tower Corporation, dated February 17,
1998, as amended by Amendment No. 1, dated February 25, 1998, and Amendment No. 2, dated April 8,
1998.
10.8* Maintenance Services Agreement by and between the Company and KN Energy, Inc., dated October 11,
1997.
10.9* Maintenance Services Agreement by and between the Company and Northern Indiana Public Service
Company, dated January 30, 1998.
10.10* Maintenance and Provisioning Services Agreement by and between the Company and Northern Border
Pipeline Company, dated April 29, 1998.
10.11* Master Agreement by and between the Company and NEC America, Inc., dated August 8, 1997, as amended
by Amendment No. 1, dated November 9, 1997 and Amendment No. 2, dated April 2, 1998.
10.12* Letter Agreement, by and between the Company and TCI Wireline, Inc., dated December 16, 1997.
10.13(3)* Non-Qualified Stock Option Agreement by and between the Company and Richard A. Jalkut, dated August
4, 1997.
10.14(3)* Non-Qualified Stock Option Agreement by and between the Company and David Schaeffer, dated October
31, 1997.
10.15* Employment Agreement by and between the Company and Richard A. Jalkut, dated August 4, 1997, as
amended by Amendment to Employment Agreement, dated April 6, 1998.
10.16(3)* Non-Disclosure, Assignment of Inventions and Non-Competition Agreement by and between the Company and
Kevin Bennis, dated February 2, 1998.
10.17(3)* Pathnet, Inc. 1995 Stock Option Plan.
10.18(3)* Pathnet, Inc. 1997 Stock Incentive Plan, as amended by Amendment No. 1 to 1997 Stock Incentive Plan.
10.19 [intentionally omitted]
10.20 [intentionally omitted]
10.21* Notes Registration Rights Agreement by and among the Company and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., TD Securities (USA) Inc. and Salomon
Brothers Inc (collectively, the "Initial Purchasers"), dated April 8, 1998.
10.22* Warrant Agreement by and between the Company and The Bank of New York, as warrant agent, dated April
8, 1998.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.23* Warrant Registration Rights Agreement by and among the Company, 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, dated April 8, 1998.
10.24(1) Amended and Restated Investment and Stockholders' Agreement by and among the Company and certain
stockholders of the Company set forth on the signature pages.
10.25* Purchase Agreement by and between Andrew Corporation and Path Tel, Inc., dated July 1, 1995, as
amended by Amendment One, dated September 16, 1996, and Amendment Two, dated July 1, 1997.
10.26* Lease Agreement, by and between 6715 Kenilworth Avenue General Partnership and the Company, dated
August 9, 1997, as amended by Amendment to Lease, dated March 5, 1998.
12.1 Statements regarding computation of ratios.
21.1* Subsidiaries of the Company.
23.1 Consent of Coopers and Lybrand, L.L.P.
23.2(1) Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibits 5.1 and 8.1).
24.1 Power of Attorney (included on signature pages).
25.1 Statement of eligibility of The Bank of New York as trustee on Form T-1.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal to be used in the Exchange Offer.
99.2 Form of Notice of Guaranteed Delivery to be used in the Exchange Offer.
99.3(1) Form of Exchange Agency Agreement.
</TABLE>
- ------------------------
+ Incorporated by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (Registration No. 333-52247) filed by the Company with
the Securities and Exchange Commission on May 8, 1998.
++ Incorporated by reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 (Registration No. 333-52247) filed by the Company with
the Securities and Exchange Commission on May 8, 1998.
* Incorporated by reference to the corresponding exhibit to Company's
Registration Statement on Form S-1 (Registration No. 333-52247) filed by the
Company with the Securities and Exchange Commission on May 8, 1998.
(1) To be filed by amendment.
(2) Certain portions of this exhibit have been omitted based on a request for
confidential treatment filed separately with the Securities and Exchange
Commission.
(3) Constitutes management contract or compensatory arrangement.
II-4
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
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 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the Restated Certificate of Incorporation, the Restated
Bylaws, the U.S. Purchase Agreement, the International Purchase Agreement, the
Unit Purchase Agreement, the Notes Registration Rights Agreement and the Warrant
Registration Rights Agreement or otherwise, the Company 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 Company of expenses incurred or paid
by a director, officer or controlling person of the Company 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
Company 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.
(b) The Company hereby undertakes that:
(1) 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.
(2) 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.
(c) The undersigned Company hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
(d) The undersigned Company hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the District of Columbia on this 22nd
day of May, 1998.
PATHNET, INC.
By: /s/ RICHARD A. JALKUT
-----------------------------------------
Name: Richard A. Jalkut
Title: CHIEF EXECUTIVE OFFICER
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David Schaeffer, Richard A. Jalkut and Michael A.
Lubin and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities (until revoked in writing), to sign
any and all amendments, including post-effective amendments to this Registration
Statement, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or his or their substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act, 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/ DAVID SCHAEFFER
- ------------------------------ Chairman of the Board and May 22, 1998
David Schaeffer Director
/s/ RICHARD A. JALKUT
- ------------------------------ Chief Executive Officer and May 22, 1998
Richard A. Jalkut Director
/s/ WILLIAM R. SMEDBERG, V Vice-President, Finance
- ------------------------------ (principal accounting and May 22, 1998
William R. Smedberg, V financial officer)
/s/ PETER J. BARRIS
- ------------------------------ Director May 22, 1998
Peter J. Barris
/s/ KEVIN J. MARONI
- ------------------------------ Director May 22, 1998
Kevin J. Maroni
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
/s/ PATRICK J. KERINS
- ------------------------------ Director May 22, 1998
Patrick J. Kerins
/s/ RICHARD K. PRINS
- ------------------------------ Director May 22, 1998
Richard K. Prins
/s/ STEPHEN A. REINSTADTLER
- ------------------------------ Director May 22, 1998
Stephen A. Reinstadtler
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
3.1(1) Form of Amended and Restated Certificate of Incorporation of the Company.
3.2(1) Form of Amended and Restated Bylaws of the Company.
4.1+ Indenture between the Company and The Bank of New York, as trustee, dated April 8, 1998 (the
"Indenture").
4.2++ Pledge Agreement by and among the Company, The Bank of New York, as trustee, and The Bank of
New York, as securities intermediary, dated April 8, 1998.
4.3(1) Form of New Note.
4.4 Form of Existing Note (included in Exhibit 4.1).
5.1(1) Opinion of Paul, Weiss, Rifkind, Wharton & Garrison, regarding legality of securities.
8.1(1) Opinion of Paul, Weiss, Rifkind, Wharton & Garrison, regarding certain tax matters.
10.1(2)* Fixed Point Microwave Services Agreement by and between the Company and Northern Border
Pipeline Company, dated October 17, 1997.
10.2(2)* Fixed Point Microwave Services Agreement by and between the Company and Northern Indiana
Public Service Company, dated January 30, 1998.
10.3(2)* Fixed Point Microwave Services Agreement by and between the Company and Northeast Missouri
Electric Power Cooperative, dated December 1, 1997.
10.4(2)* Fixed Point Microwave Services Agreement by and between the Company and KN Energy, Inc., dated
September 8, 1997.
10.5(2)* Fixed Point Microwave Services Agreement by and between the Company and Pathnet/Idaho Power
Equipment, LLC, dated April 17, 1998.
10.6(2)* Agreement to Create and Manage a High Capacity Telecommunications System by and between the
Company and Texaco Pipeline, Inc., dated June 3, 1997.
10.7* Binding Term Sheet, by and between the Company and American Tower Corporation, dated February
17, 1998, as amended by Amendment No. 1, dated February 25, 1998, and Amendment No. 2, dated
April 8, 1998.
10.8* Maintenance Services Agreement by and between the Company and KN Energy, Inc., dated October
11, 1997.
10.9* Maintenance Services Agreement by and between the Company and Northern Indiana Public Service
Company, dated January 30, 1998.
10.10* Maintenance and Provisioning Services Agreement by and between the Company and Northern Border
Pipeline Company, dated April 29, 1998.
10.11* Master Agreement by and between the Company and NEC America, Inc., dated August 8, 1997, as
amended by Amendment No. 1, dated November 9, 1997 and Amendment No. 2, dated April 2, 1998.
10.12* Letter Agreement, by and between the Company and TCI Wireline, Inc., dated December 16, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
10.13(3)* Non-Qualified Stock Option Agreement by and between the Company and Richard A. Jalkut, dated
August 4, 1997.
10.14(3)* Non-Qualified Stock Option Agreement by and between the Company and David Schaeffer, dated
October 31, 1997.
10.15* Employment Agreement by and between the Company and Richard A. Jalkut, dated August 4, 1997,
as amended by Amendment to Employment Agreement, dated April 6, 1998.
10.16(3)* Non-Disclosure, Assignment of Inventions and Non-Competition Agreement by and between the
Company and Kevin Bennis, dated February 2, 1998.
10.17(3)* Pathnet, Inc. 1995 Stock Option Plan.
10.18(3)* Pathnet, Inc. 1997 Stock Incentive Plan, as amended by Amendment No. 1 to 1997 Stock Incentive
Plan.
10.19 [intentionally omitted] Indenture by and between the Company and The Bank of New York, as
trustee, dated April 8, 1998.
10.20 [intentionally omitted]
10.21* Notes Registration Rights Agreement by and among the Company and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., TD Securities (USA) Inc.
and Salomon Brothers Inc (collectively, the "Initial Purchasers"), dated April 8, 1998.
10.22* Warrant Agreement by and between the Company and The Bank of New York, as warrant agent, dated
April 8, 1998.
10.23* Warrant Registration Rights Agreement by and among the Company, 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, dated April
8, 1998.
10.24(1) Amended and Restated Investment and Stockholders' Agreement by and among the Company and
certain stockholders of the Company set forth on the signature pages.
10.25* Purchase Agreement by and between Andrew Corporation and Path Tel, Inc., dated July 1, 1995,
as amended by Amendment One, dated September 16, 1996, and Amendment Two, dated July 1, 1997.
10.26* Lease Agreement, by and between 6715 Kenilworth Avenue General Partnership and the Company,
dated August 9, 1997, as amended by Amendment to Lease, dated March 5, 1998.
12.1 Statements regarding computation of ratios.
21.1* Subsidiaries of the Company.
23.1 Consent of Coopers and Lybrand, L.L.P.
23.2 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibits 5.1 and 8.1).
24.1 Power of Attorney (included on signature pages).
25.1 Statement of eligibility of The Bank of New York as trustee on Form T-1.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal to be used in the Exchange Offer.
99.2 Form of Notice of Guaranteed Delivery to be used in the Exchange Offer.
99.3(1) Form of Exchange Agency Agreement.
</TABLE>
- ------------------------
+ Incorporated by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (Registration No. 333-52247) filed by the Company with
the Commission on May 8, 1998.
++ Incorporated by reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 (Registration No. 333-52247) filed by the Company with
the Commission on May 8, 1998.
* Incorporated by reference to the corresponding exhibit to Company's
Registration Statement on Form S-1 (Registration No. 333-52247) filed by the
Company with the Commission on May 8, 1998.
(1) To be filed by amendment.
(2) Certain portions of this exhibit have been omitted based on a request for
confidential treatment filed separately with the Securities and Exchange
Commission.
(3) Constitutes management contract or compensatory arrangement.
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
THE PERIOD THE PERIOD THE PERIOD
AUGUST 25, AUGUST 25, AUGUST 25,
1995 (DATE 1995 (DATE 1995 (DATE
OF OF OF
THREE MONTHS ENDED INCEPTION) INCEPTION) INCEPTION)
MARCH 31, TO YEAR ENDED DECEMBER 31, TO TO
--------------------- MARCH 31, ------------------------ DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1995 1997
---------- --------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss before
income taxes..... $(2,684,841) $(530,847) $(8,832,702) $(3,977,400) $(1,743,635) $ (426,826) $(6,147,861)
Fixed charges:
Interests........ -- -- 415,357 -- 415,357 -- 415,357
Interest factor
or rent
expense........ 30,010 2,137 69,713 38,224 1,466 13 39,703
---------- --------- ------------ ---------- ------------ ------------ ------------
Total fixed
charges.......... 30,010 2,137 485,070 38,224 416,823 13 455,060
---------- --------- ------------ ---------- ------------ ------------ ------------
Earnings (loss)
before fixed
charges.......... $(2,654,831) $(528,710) $(8,347,632) $(3,939,176) $(1,326,812) $ (426,813) $(5,692,801)
---------- --------- ------------ ---------- ------------ ------------ ------------
---------- --------- ------------ ---------- ------------ ------------ ------------
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, 1998 and 1997, the period August 25,
1995 (date of inception) to December 31, 1997, the three months ended March
31, 1997 and 1998, and the period August 25, 1995 (date of inception) to
March 31, 1998 were not adequate to cover fixed charges by $426,813,
$1,326,812, $3,939,176, $528,710, $5,692,801, $2,654,831 and $8,347,832,
respectively.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of this registration statement on From S-4 (File No.
333- ) of our report dated February 20, 1998, except for information presented
in Note 9 to the financial statements for which the dates are April 8, 1998 and
May 4, 1998, on our audits of the consolidated financial statements of Pathnet,
Inc. and its subsidiary as of December 31, 1996 and 1997, and the period August
25, 1995 (date of inception) to December 31, 1997. We also consent to the
references to our firm under the captions "Independent Accountants" and
"Selected Consolidated Financial Data."
/s/ Coopers & Lybrand
McLean, VA
May 22, 1998
<PAGE>
Exhibit 25.1
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE
901(d) OF REGULATION S-T
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
--------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
--------------------
PATHNET, INC.
(Exact name of obligor as specified in its charter)
Delaware 52-1941838
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1015 31st Street, N.W.
Washington, D.C. 20007
(Address of principal executive offices) (Zip code)
--------------------
12-1/4% Senior Notes due 2008
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
1. General information. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission,
are incorporated herein by reference as an exhibit hereto, pursuant to
Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
2
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 13th day of May, 1998.
THE BANK OF NEW YORK
By: /s/ WALTER N. GITLIN
------------------------
Name: WALTER N. GITLIN
Title: VICE PRESIDENT
4
<PAGE>
- -------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries.
a member of the Federal Reserve System, at the close of business December 31,
1997, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
ASSETS Dollar Amounts
--------------
(in Thousands)
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin........... $ 5,742,986
Interest-bearing balances.................................... 1,342,769
Securities:
Held-to-maturity securities.................................. 1,099,736
Available-for-sale securities................................ 3,882,636
Federal funds sold and Securities purchased under agreements
to resell.................................................... 2,568,530
Loans and lease financing receivables:
Loans and leases, net of unearned income..................... 35,019,608
LESS: Allowance for loan and lease losses.................... 627,350
LESS: Allocated transfer risk reserve........................ 0
Loans and leases, net of unearned income, allowance and
reserve.................................................... 34,392,258
Assets held in trading accounts................................ 2,521,451
Premises and fixed assets (including capitalized leases)....... 659,209
Other real estate owned........................................ 11,992
Investments in unconsolidated subsidiaries and associated
companies.................................................... 226,263
Customers liability to this bank on acceptances outstanding.... 1,187,449
Intangible assets.............................................. 781,684
Other assets................................................... 1,736,574
--------------
Total assets................................................... $ 55,153,587
--------------
--------------
LIABILITIES
Deposits:
In domestic offices.......................................... $ 27,031,362
Noninterest-bearing.......................................... 11,899,507
Interest-bearing............................................. 15,131,855
In foreign offices. Page and Agreement subsidiaries and IEFs. 13,794,449
Noninterest-bearing.......................................... 590,999
Interest bearing............................................. 13,203,450
Federal funds purchased and Securities sold under agreements
to repurchase................................................ 2,338,851
Demand notes issued to the U.S. Treasury....................... 173,351
Trading liabilities............................................ 1,695,216
Other borrowed money
With remaining maturity of one year or less.................. 1,905,330
With remaining maturity of more than one year through
three years................................................ 0
With remaining maturity of more than three years............. 25,664
Bank's liability on acceptances executed and outstanding....... 1,195,922
Subordinated notes and debentures.............................. 1,012,940
Other liabilities.............................................. 2,018,940
--------------
Total liabilities.............................................. 51,192,576
--------------
EQUITY CAPITAL
Common stock................................................... 1,135,284
Surplus........................................................ 731,319
Undivided profits and capital reserves......................... 3,093,726
Net unrealized holding gains (losses) on available-for-sale
securities................................................... 36,866
Cumulative foreign currency transaction adjustments............ (36,184)
--------------
Total equity capital........................................... 4,951,011
--------------
Total liabilities and equity capital........................... $ 55,153,587
--------------
--------------
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of
Governors of the Federal Reserve System and is true to the best of my
knowledge and level.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true
and correct.
Thomas A. Renyl )
Alan R. Gattlin ) Directors
J. Carter Bacot )
- -------------------------------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Company's balance sheets as of December 31, 1997 and March 31, 1998 and the
Statements of Operations for the year ended December 31, 1997 and the three
months ended March 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 7,831 4,857
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,880 5,004
<PP&E> 7,263 10,058
<DEPRECIATION> 56 93
<TOTAL-ASSETS> 16,098 15,258
<CURRENT-LIABILITIES> 5,893 7,738
<BONDS> 0 0
15,970 15,970
0 0
<COMMON> 50 50
<OTHER-SE> (5,806) (8,491)
<TOTAL-LIABILITY-AND-EQUITY> 16,098 15,258
<SALES> 163 100
<TOTAL-REVENUES> 163 100
<CGS> 0 715
<TOTAL-COSTS> 4,294 2,863
<OTHER-EXPENSES> (154) (78)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (3,977) (2,685)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,977) (2,685)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,977) (2,685)
<EPS-PRIMARY> (0.80) (0.54)
<EPS-DILUTED> (0.80) (0.54)
</TABLE>
<PAGE>
Exhibit 99.1
LETTER OF TRANSMITTAL
PATHNET, INC.
Offer to Exchange 12 1/4%
Senior Notes Due 2008, which have been
registered under the Securities Act of
1933, as amended,
for any and all outstanding 12 1/4% Senior Notes Due 2008,
pursuant to the Prospectus, dated [ ], 1998
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON [ ],
1998, UNLESS EXTENDED (THE "EXPIRATION DATE"), TENDERS MAY BE WITHDRAWN PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
Delivery to: The Bank of New York, Exchange Agent
By Mail, Overnight Courier or Hand: By Facsimile in New York :
The Bank of New York (for eligible institutions only)
101 Barclay Street
New York, New York 10286
Attention: Corporate Trust Operation Confirm by Telephone:
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received and reviewed the
Prospectus, dated , 1998 (the "Prospectus"), of Pathnet, Inc., a corporation
organized under the laws of the State of Delaware (the "Company"), and this
Letter of Transmittal (the "Letter"), which together constitute the Company's
offer (the "Exchange Offer") to exchange an aggregate principal amount of up to
$350,000,000 of its 12 1/4% Senior Notes due 2008 which have been registered
under the Securities Act of 1933, as amended (the "New Notes"), for a like
principal amount of the issued and outstanding 12 1/4% Senior Notes Due 2008
(the "Existing Notes"), of the Company from the holders thereof.
For each Existing Note accepted for exchange, the holder of such Existing
Note will receive a New Note having a principal amount equal to that of the
surrendered Existing Note. The New Notes will bear interest from the most recent
date to which interest has been paid on the Existing Notes or, if no interest
has been paid on the Existing Notes, from April 8, 1998. Accordingly, if the
relevant record date for interest payment occurs after the consummation of the
Exchange Offer, registered holders of New Notes on such record date will receive
interest accruing from the most recent date to which interest has been paid or,
if no interest has been paid, from April 8, 1998. If, however, the relevant
record date for interest payment occurs prior to the consummation of the
Exchange Offer registered holders of Existing Notes on such record date will
receive interest accruing from the most recent date to which interest has been
paid or, if no interest has been paid, from April 8, 1998. Existing Notes
accepted for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer, except as set forth in the immediately
preceding sentence. Holders of Existing Notes whose Existing Notes are accepted
for exchange will not receive any payment in respect of interest on such
Existing Notes otherwise payable on any interest payment date the record date
for which occurs on or after the consummation of the Exchange Offer.
This Letter is to be completed by a holder of Existing Notes if
certificates of Existing Notes are to be forwarded herewith. If a tender of
certificates for Existing Notes is to be made by book-entry transfer to an
account maintained by the Exchange Agent at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedure set forth in "The
Exchange Offer--Procedures for Tendering Existing Notes" section of the
Prospectus, an Agent's Message (as defined herein) shall be delivered. Holders
of Existing Notes whose certificates are not immediately available, or who are
unable to deliver their certificates or confirmation of the book-entry tender of
their Existing Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility (a "Book-Entry Confirmation") and all other documents required
by this Letter to the Exchange Agent on or prior to the Expiration
<PAGE>
2
Date, must tender their Existing Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--Procedures for Tendering Existing
Notes" section of the Prospectus. See Instruction 1. Delivery of documents to
the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
List below the Existing Notes to which this Letter relates. If the space
provided below is inadequate, the certificate numbers and principal amount of
Existing Note should be listed on a separate signed schedule affixed hereto.
PLEASE READ THIS LETTER OF TRANSMITTAL CAREFULLY AND IN ITS ENTIRETY BEFORE
COMPLETING ANY BOX BELOW.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
DESCRIPTION OF EXISTING NOTES 1 2 3
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate
Principal
Amount of Principal
Name(s) and Address(es) of Registered Holder(s) Certificate Existing Amount
(Please fill in, if blank) Number(s)* Note(s) Tendered**
- -------------------------------------------------------------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
Total
- -------------------------------------------------------------------------------------------
</TABLE>
* Need not be complete if Existing Notes are being tendered by book-entry
transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have
tendered ALL of the Existing Notes represented by the Existing Notes
indicated in column 2. See Instruction 2. Existing Notes tendered hereby
must be in denominations of principal amount of $1,000 and any integral
multiple thereof. See Instruction 1.
- --------------------------------------------------------------------------------
/ / CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
---------------------------------------------------
Account Number Transaction Code Number
------------------------ ------------------
By crediting Existing Notes to the Exchange Agent's Account at the
Book-Entry Transfer Facility in accordance with the Book-Entry Transfer
Facility's Automated Tender Offer Program ("ATOP") and by complying with
applicable ATOP procedures with respect to the Exchange Offer, including
transmitting an Agent's Message to the Exchange Agent in which the Holder of
Existing Notes acknowledges and agrees to be bound by the terms of this Letter,
the participant in ATOP confirms on behalf of itself and the beneficial owners
of such Existing Notes all provisions of this Letter applicable to it and such
beneficial owners as if it had completed the information required herein and
executed and transmitted this Letter to the Exchange Agent.
<PAGE>
3
/ / CHECK HERE AND COMPLETE THE FOLLOWING IF TENDERED EXISTING NOTES ARE BEING
DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO
THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s)
------------------------------------------
Widow Ticket Number (if any)
------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
-----------------------
Name of Institution which Guaranteed Delivery
----------------------------
If Delivered by Book-Entry Transfer, Complete the Following:
Account Number Transaction Code Number
---------------------- -------------------
/ / CHECK HERE AND COMPLETE THE FOLLOWING IF YOU ARE A BROKER-DEALER AND WISH
TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO.
Name:
---------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
------------------------------------------------------------------------
If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of the New Notes. If the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Existing Notes, it
represents that the Existing Notes to be exchanged for New Notes were acquired
by it as a result of market-making or other trading activities and acknowledges
that it will deliver a prospectus meeting the requirements of the Securities Act
of 1933, as amended, in connection with any resale of such New Notes; however,
by so acknowledging and by delivering a prospectus, the undersigned will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act of 1933, as amended.
<PAGE>
4
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of
Existing Notes indicated above. Subject to, and effective upon the acceptance
for exchange of the Existing Notes tendered hereby, the undersigned hereby
sells, assigns and transfers to, or upon the order of, the Company all right,
title and interest in and to such Existing Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Existing Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Existing Notes tendered hereby will have been acquired in the ordinary
course of business of the person receiving such New Notes, whether or not such
person is the undersigned, that neither the holder of such Existing Notes nor
any such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes and that neither the holder of
such Existing Notes nor any such other person is an "affiliate," as defined in
Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"), of
the Company.
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on interpretations by the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties, that the New Notes issued in exchange for the Existing Notes pursuant
to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than (i) any such holder that is an
"affiliate" of the Company within the meaning of the Rule 405 under the
Securities Act or (ii) any broker-dealer that purchases Notes from the Company
to resell pursuant to Rule 144A under the Securities Act ("Rule 144A") or any
other available exemptions), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such New Notes and are not participating in, and do not intend to participate
in, the distribution of such New Notes. The undersigned acknowledges that the
Company does not intend to request the SEC to consider, and the SEC has not
considered the Exchange Offer in the context of a no-action letter and there can
be no assurance that the staff of the SEC would make a similar determination
with respect to the Exchange Offer as in other circumstances. If any holder is
an affiliate of the Company, or is engaged in or intends to engage in or has any
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, such holder (i) could not rely on
the applicable interpretations of the staff of the SEC and (ii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. If the undersigned is not a
broker-dealer, the undersigned represents that it is not engaged in, and does
not intend to engage in, a distribution of New Notes and has no arrangement or
understanding to participate in a distribution of New Notes. If the undersigned
is a broker-dealer that will receive New Notes for its own account in exchange
for Existing Notes, it represents that the Existing Notes to be exchanged for
the New Notes were acquired by it as a result of market-making or other trading
activities and acknowledges that it will deliver a prospectus in connection with
any resale of such New Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Existing Notes tendered hereby. All
authority conferred or agreed to be conferred in this Letter and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representative of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer--Withdrawal Rights" section of the Prospectus.
<PAGE>
5
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Existing Notes for any Existing Notes not
exchanged) in the name of the undersigned or, in the case of a book-entry
delivery of Existing Notes, please credit the account indicated above maintained
at the Book Entry Transfer Facility. Similarly, unless otherwise indicated under
the box entitled "Special Delivery Instructions" below, please send the New
Notes (and, if applicable, substitute certificates representing Existing Notes
for any Existing Notes not exchanged) to the undersigned at the address shown
above in the box entitled "Description of Existing Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF EXISTING
NOTES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE
EXISTING NOTES AS SET FORTH IN SUCH BOX ABOVE.
<PAGE>
6
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9 on reverse side)
x
--------------------------------------- ------------------------------, 1998
x
--------------------------------------- ------------------------------, 1998
Signature(s) of Owner Date
Area Code and Telephone Number
----------------------------------------
If a holder is tendering any Existing Notes, this Letter must be
signed by the registered holder(s) as the name(s) appear(s) on the
certificate(s) for the Existing Notes or by any person(s) authorized to become
registered holder(s) by endorsements and documents transmitted herewith. If
signature is by a trustee, executor, administrator, guardian, officer or other
person acting in a fiduciary or representative capacity, please set forth full
title. See Instruction 3.
Name(s):
-----------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Type or Print)
Capacity:
-----------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Including Zip Code)
SIGNATURE GUARANTEED
(If required by Instruction 3)
Signature(s) Guaranteed by
an Eligible Institution: ----------------------------------------------------
(Authorized Signature)
- --------------------------------------------------------------------------------
(Title)
- --------------------------------------------------------------------------------
(Name and Firm)
Dated: -----------------------------------------------------------------, 1998
- --------------------------------------------------------------------------------
<PAGE>
7
- --------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 3 and 4)
To be completed ONLY if certificates for Existing
Notes not exchanged and/or New Notes are to be
issued in the name of and sent to someone other than
the person or persons whose signature(s) appear(s)
on this Letter above, or if Existing Notes delivered
by book-entry transfer which are not accepted for
exchange are to be returned by credit to an account
maintained at the Book-Entry Transfer Facility other
than the account indicated above.
Issue: New Notes and/or Existing Notes to:
Name(s)
- --------------------------------------------------------------------------------
(Please Type or Print)
- --------------------------------------------------------------------------------
(Please Type or Print)
Address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Zip Code)
(Complete Substitute Form W-9)
/ / Credit unexchanged Existing Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility account set forth below.
- --------------------------------------------------------------------------------
(Book-Entry Transfer Facility)
- --------------------------------------------------------------------------------
(Account Number, if applicable)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 3 and 4)
To be completed ONLY if certificates for Existing
Notes not exchanged and/or New Notes are to be sent
to someone other than the person or persons whose
signature(s) appear(s) on this Letter above or to such
person or persons at an address other than shown in
the box entitled "Description of Existing Notes" on
this Letter above.
Mail: New Notes and/or Existing Notes to:
Name(s)
- --------------------------------------------------------------------------------
(Please Type or Print)
- --------------------------------------------------------------------------------
(Please Type or Print)
Address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Zip Code)
- --------------------------------------------------------------------------------
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF OR AN AGENT'S MESSAGE IN LIEU
HEREOF (TOGETHER WITH THE CERTIFICATES FOR EXISTING NOTES OR A BOOK-ENTRY
CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED
DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE.
<PAGE>
8
INSTRUCTIONS
Forming Part of the Terms and
Conditions of the Offer to Exchange 12 1/4% Senior
Notes Due 2008 which have been registered under the
Securities Act of 1933, as amended,
for any and all outstanding 12 1/4% Senior Notes Due 2008 of Pathnet, Inc.
1. Delivery of this Letter and Notes; Guaranteed Delivery Procedures.
This Letter is to be completed by noteholders if certificates are to be
forwarded herewith. If tenders are to be made pursuant to the procedures for
delivery by book-entry transfer set forth in "The Exchange Offer--Procedures for
Tendering Existing Notes" section of the Prospectus, an Agent's Message shall be
delivered. Certificates for all physically tendered Existing Notes, or
Book-Entry Confirmation, as the case may be, as well as a properly completed and
duly executed Letter (or manually signed facsimile hereof) and any other
documents required by this Letter, must be received by the Exchange Agent at the
address set forth herein on or prior to the Expiration Date, or the tendering
holder must comply with the guaranteed delivery procedures set forth below.
Existing Notes tendered hereby must be in denominations of principal amount of
$1,000 and any integral multiple thereof. The term "Agent's Message" means a
message, transmitted to the Book-Entry Transfer Facility and received by the
Exchange Agent and forming a part of the Book-Entry Confirmation, which states
that the Book- Entry Transfer Facility has received an express acknowledgment
from the tendering Participant that such Participant has received and agrees to
be bound by this Letter and that the Company may enforce this Letter against
such Participant.
Noteholders whose certificates for Existing Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Existing Notes pursuant to the guaranteed delivery procedures set
forth in "The Exchange Offer--Procedures for Tendering Existing Notes" section
of the Prospectus. Pursuant to such procedures, (i) such tender must be made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent must receive from such Eligible Institution (defined below) a properly
completed and duly executed Letter (or a facsimile thereof or an Agent's Message
in lieu hereof) and Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by telegram, telex, facsimile transmission, mail or
hand delivery), setting forth the name and address of the holder of Existing
Notes and the amount of Existing Notes tendered, stating that the tender is
being made thereby and guaranteeing that within three New York Stock Exchange
("NYSE") trading days after the Expiration Date, the certificates for all
physically tendered Existing Notes, or a Book-Entry Confirmation, and any other
documents required by the Letter will be deposited by the Eligible Institution
with the Exchange Agent, and (iii) the certificates for all physically tendered
Existing Notes, in proper form for transfer, or Book-Entry Confirmation, as the
case may be, and all other documents required by this Letter, are received by
the Exchange Agent within three NYSE trading days after the Expiration Date.
The method of delivery of this Letter, the Existing Notes and all other
required documents is at the election and risk of the tendering holders, but the
delivery will be deemed made only when actually received or confirmed by the
Exchange Agent. If Existing Notes are sent by mail, it is suggested that the
mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
See "The Exchange Offer" section of the Prospectus.
2. Partial Tenders (not applicable to noteholders who tender by book-entry
transfer).
If less than all of the Existing Notes evidenced by a submitted certificate
are to be tendered, the tendering holder(s) should fill in the aggregate
principal amount of Existing Notes to be tendered in the box above entitled
"Description of Existing Notes--Principal Amount Tendered." A reissued
certificate representing the balance of the Existing Notes not tendered will be
sent to such tendering holder, unless otherwise provided in the appropriate
<PAGE>
9
box on this Letter, promptly after the Expiration Date. All of the Existing
Notes delivered to the Exchange Agent will be deemed to have been tendered
unless otherwise indicated.
3. Signatures on this Letter, Bond Powers and Endorsements; Guarantee of
Signatures.
If this Letter is signed by the registered holder of the Existing Notes
tendered hereby, the signature must correspond exactly with the name as written
on the face of the certificates without any change whatsoever.
If any tendered Existing Notes are owned of record by two or more joint
owners, all of such owners must sign this Letter.
If any tendered Existing Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of certificates.
When this Letter is signed by the registered holder or holders of the
Existing Notes specified herein and tendered hereby, no endorsements of
certificates or separate bond powers are required. If, however, the New Notes
are to be issued, or any Existing Notes not tendered are to be reissued, to a
person other than the registered holder, then endorsements of any certificates
transmitted hereby or separate bond powers are required. Signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder or
holders of any certificate(s) specified herein, such certificate(s) must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name or names of the registered holder or holders appear(s) on
the certificate(s) and signatures on such certificate(s) must be guaranteed by
an Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
Endorsements on certificates for Existing Notes or signatures on bond
powers required by this Instruction 3 must be guaranteed by a firm which is a
member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (an "Eligible
Institution").
Signatures on this Letter need not be guaranteed by an Eligible
Institution, provided the Existing Notes are tendered: (i) by a registered
holder of Existing Notes (which term, for purposes of the Exchange Offer,
includes any participant in the Book-Entry Transfer Facility system whose name
appears on a security position listing as the holders of such Existing Notes)
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on this Letter, or (ii) for the account of an
Eligible Institution.
4. Special Issuance and Delivery Instructions.
Tendering holders of Existing Notes should indicate in the applicable box
the name and address to which New Notes issued pursuant to the Exchange Offer
and/or substitute certificates evidencing Existing Notes not exchanged are to be
issued or sent, if different from the name or address of the person signing this
Letter. In the case of issuance in a different name, the employer identification
or social security number of the person named must also be indicated. Holders
tendering Existing Notes by book-entry transfer may request that Existing Notes
not exchanged be credited to such account maintained at the Book-Entry Transfer
Facility as such noteholder may designate hereon. If no such instructions are
given, such Existing Notes not exchanged will be returned to the name or address
of the person signing this Letter.
<PAGE>
10
5. Tax Identification Number.
Federal income tax law generally requires that a tendering holder whose
Existing Notes are accepted for exchange must provide the Company (as payor)
with such holder's correct Taxpayer Identification Number ("TIN") on Substitute
Form W-9 below, which in the case of a tendering holder who is an individual, is
his or her social security number. If the Company is not provided with the
current TIN or an adequate basis for an exemption, such tendering holder may be
subject to a $50 penalty imposed by the Internal Revenue Service ("IRS"). In
addition, delivery to such tendering holder of New Notes may be subject to
backup withholding in an amount equal to 31% of all reportable payments made
after the exchange. If withholding results in an overpayment of taxes, a refund
may be obtained from the IRS.
Exempt holders of Existing Notes (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number of Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Existing Notes must
provide its correct TIN by completing the Substitute Form W-9 set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, or (ii) the
holder has not been notified by the Internal Revenue Service that such holder is
subject to backup withholding as a result of a failure to report all interest or
dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Existing Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Certificate
of Foreign Status. These forms may be obtained from the Exchange Agent. If the
Existing Notes are in more than one name or are not in the name of the actual
owner, such holder should consult the W-9 Guidelines for information on which
TIN to report. If such holder does not have a TIN, such holder should consult
the W-9 Guidelines for instructions on applying for a TIN, check the box in Part
2 of the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note:
Checking this box and writing "applied for" on the form means that such holder
has already applied for a TIN or that such holder intends to apply for one in
the near future. If such holder does not provide its TIN to the Company by the
time of the exchange, backup withholding will begin and continue until such
holder furnishes its TIN to the Company.
6. Transfer Taxes.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Existing Notes to it or its order pursuant to the Exchange Offer. If,
however, New Notes and/or substitute Existing Notes not exchanged are to be
delivered to, or are to be registered or issued in the name of, any person other
than the registered holder of the Existing Notes tendered hereby, or if tendered
Existing Notes are registered in the name of any person other than the person
signing this Letter, or if a transfer tax is imposed for any reason other than
the transfer of Existing Notes to the Company or its order pursuant to the
Exchange Offer, the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted herewith, the amount of such transfer taxes will be billed directly to
such tendering holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Existing Notes specified in this
Letter.
7. Waiver of Conditions.
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
<PAGE>
11
8. No Conditional Tenders.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Existing Notes, by execution of this Letter,
shall waive any right to receive notice of the acceptance of their Existing
Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of
Existing Notes nor shall any of them incur any liability for failure to give any
such notice.
9. Mutilated, Lost, Stolen or Destroyed Existing Notes.
Any holder whose Existing Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
10. Requests for Assistance or Additional Copies.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
11. Incorporation of Letter of Transmittal.
This Letter shall be deemed to be incorporated in and acknowledged and
accepted by any tender through the Book-Entry Transfer Facility's ATOP
procedures by any Participant on behalf of itself and the beneficial owners of
any Existing Notes so tendered.
<PAGE>
12
TO BE COMPLETED BY ALL TENDERING HOLDERS
(See Instruction 5)
BANK OF NEW YORK
- --------------------------------------------------------------------------------
SUBSTITUTE
Form W-9
Department of Treasury
Internal Revenue Service
Payor's Request for
Taxpayer Identification
Number ("TIN") and
Certification
Part 1 - PLEASE PROVIDE YOUR
TIN IN THE BOX AT RIGHT AND
CERTIFY BY SIGNING AND
DATING BELOW.
TIN:
------------------------
Social Security Number or
Employer Identification
Number
Part 2 - TIN Applied For / /
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I
CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer Identification Number
(or I am waiting for a number to be issued to me).
(2) I am not subject to backup withholding either because; (a) I am exempt from
backup withholding, or (b) I have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup withholding as a result of
a failure to report all interest or dividends, or (c) the IRS has notified
me that I am no longer subject to backup withholding, and
(3) any other information provided on this form is true and correct.
SIGNATURE DATE
------------------------------ ----------------
- --------------------------------------------------------------------------------
You must cross out item (2) of the above certification if you have been notified
by the IRS that you are subject to backup withholding because of underreporting
of interest or dividends on your tax return and you have not been notified by
the IRS that you are no longer subject to backup withholding.
- --------------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of the exchange, 31 percent
of all reportable payments made to me thereafter will be withheld until I
provide a number.
- --------------------------------------------- ----------------------------
(Signature) (Date)
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY
PATHNET, INC.
OFFER TO EXCHANGE ITS 12 1/4% SENIOR NOTES DUE 2008,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL ITS OUTSTANDING 12 1/4% SENIOR NOTES DUE 2008
This form or one substantially equivalent hereto must be used to accept
the Exchange Offer of Pathnet, Inc. (the "Company") made pursuant to the
Prospectus dated , 1998 (the "Prospectus"), if certificates for the
outstanding 12 1/4% Senior Notes Due 2008 of the Company (the "Existing
Notes") are not immediately available or if the procedure for book-entry
transfer cannot be completed on a timely basis or time will not permit all
required documents to reach the Company prior to 5:00 p.m., New York City
time, on the Expiration Date of the Exchange Offer. Such form may be
delivered or transmitted by telegram, telex, facsimile transmission, mail or
hand delivery to The Bank of New York (the "Exchange Agent") as set forth
below. In addition, in order to utilize the guaranteed delivery Letter of
Transmittal (or facsimile thereof) must also be received by the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
Capitalized terms not defined herein are defined in the Prospectus.
Delivery to:
The Bank of New York
Exchange Agent
By Mail, Overnight Courier or Hand: By Facsimile:
The Bank of New York (for eligible institutions only)
101 Barclay Street
New York, New York 10286 Confirm by Telephone:
Attn: Corporate Trust Operations
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Existing Notes set forth below, pursuant to the
guaranteed delivery procedure described in "The Exchange Offer--Procedures for
Tendering Existing Notes" section of the Prospectus.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Principal Amount of Existing Notes
Tendered(*)
$
--------------------------------------
Certificate Nos. (if available):
--------------------------------------
If Existing Notes will be delivered by book-entry
Total Principal Amount Represented by transfer to The Depository Trust Company, provide
Existing Notes Certificate(s): account number.
$ Account Number
-------------------------------------- --------------------
</TABLE>
- --------------------------------------------------------------------------------
ANY AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE
DEATH OR INCAPACITY OF THE UNDERSIGNED AND EVERY OBLIGATION OF THE UNDERSIGNED
HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS
AND ASSIGNS OF THE UNDERSIGNED.
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
X
------------------------------------- ------------------
X
------------------------------------- ------------------
Signature(s) of Owner(s) or Authorized Signatory Date
Area Code and Telephone Number:
--------------
Must be signed by the holder(s) of Existing Notes as their name(s)
appear(s) on certificate(s) for Existing Notes or on a security position
listing, or by person(s) authorized to become registered holder(s) by
endorsement and documents transmitted with this Notice of Guaranteed Delivery.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title below.
Please print name(s) and address(es)
Name(s):
---------------------------------------------------------------------
---------------------------------------------------------------------
Capacity:
---------------------------------------------------------------------
Address(es):
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
- ------------
(*) Must be in denominations of principal amount of $1,000 and any integral
multiple thereof.
2
<PAGE>
GUARANTEE
The undersigned, a member of a registered national securities exchange, or
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States, hereby guarantees that the certificates representing the principal
amount of Existing Notes tendered hereby in proper form for transfer, or timely
confirmation of the book-entry transfer of such Existing Notes into the Exchange
Agent's account at The Depository Trust Company pursuant to the procedures set
forth in "The Exchange Offer--Procedures for Tendering Existing Notes" section
of the Prospectus, together with a properly completed and duly executed Letter
of Transmittal (or a manually signed facsimile thereof) with any required
signature guarantee and any other documents required by the Letter of
Transmittal, will be received by the Exchange Agent at the address set forth
above, no later than three New York Stock Exchange trading days after the date
of execution hereof.
- --------------------------------- ---------------------------------
Name of Firm Authorized Signature
- --------------------------------- ---------------------------------
Address Title
Name:
- --------------------------------- ---------------------------------
Zip Code (Please Type or Print)
Area Code and Tel. No. Dated:
------------ ---------------------------
NOTE: DO NOT SEND CERTIFICATES FOR EXISTING NOTES WITH THIS FORM. CERTIFICATES
FOR EXISTING NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
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