UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 333-53467
Pathnet, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1941838
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1015 31st Street, N.W.
Washington, DC 20007
(Address of principal executive offices) (Zip Code)
(202) 625-7284
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of March 12, 1999 there were 2,903,324 shares of the Issuer's common stock,
par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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PART I
Item 1 Business 3
Item 2 Properties 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6 Selected Consolidated Financial Data 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A Quantitative and Qualitative Disclosures about Market Risk 31
Item 8 Financial Statements and Supplementary Data 31
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
PART III
Item 10 Directors and Executive Officers of the Registrant 32
Item 11 Executive Compensation 35
Item 12 Security Ownership of Certain Beneficial Owners and
Management 39
Item 13 Certain Relationships and Related Transactions 41
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
Signatures 48
Index to Financial Statements F-1
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2
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Certain statements in this Report, in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases
and in oral statements made by or with the approval of an authorized executive
officer of the Company constitute forward-looking statements, including
statements which can be identified by the use of forward-looking terminology
such as "believes," "anticipates," "expects," "may," "will," or "should" or
the negative of such terminology or other variations on such terminology or
comparable terminology, or by discussions of strategies that involve risks and
uncertainties. All statements other than statements of historical facts in
this Report, including, without limitation, such statements under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," regarding the Company or any of the transactions described in
this Report or the timing, financing, strategies and effects of such
transaction, are forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. Important factors that could cause actual results to differ
materially from expectations include, without limitation, those described in
conjunction with the forward-looking statements in this Report, as well as the
amount of capital needed to deploy the Company's network; the Company's
substantial leverage and its need to service its indebtedness; the
restrictions imposed by the Company's current and possible future financing
arrangements; the ability of the Company to successfully manage the
cost-effective and timely completion of its network and its ability to attract
and retain customers for its products and services; the ability of the Company
to implement its newly expanded business plan; the ability of the Company to
retain and attract relationships with the incumbent owners of the
telecommunications assets with which the Company expects to build its network;
the ability of the Company to obtain and maintain rights-of-way for the
deployment of its network; the Company's ability to retain and attract key
management and other personnel as well as the Company's ability to manage the
rapid expansion of its business and operations; the Company's ability to
compete in the highly competitive telecommunications industry in terms of
price, service, reliability and technology; the Company's dependence on the
reliability of its network equipment, its reliance on key suppliers of network
equipment and the risk that its technology will become obsolete or otherwise
not economically viable; and the Company's ability to conduct its business in
a regulated environment. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors." The Company
does not intend to update these forward-looking statements.
PART I
ITEM 1. BUSINESS
THE COMPANY
Pathnet, Inc. ("Pathnet" or the "Company") was founded in 1995 and is a
leading "carrier's carrier" providing high-quality, low-cost, digital
telecommunications capacity to under-served and second- and third-tier U.S.
markets. The Company's strategy is to partner with owners of telecommunications
assets, including utility, pipeline and railroad companies ("Incumbents"), to
upgrade and aggregate existing infrastructure to a state-of-the-art SONET
network. The Company currently has approximately 2,000 route miles of completed
network, approximately 5,000 route miles of network under construction and
approximately 10,000 route miles of network under contract. The Company
originally focused its network development efforts on wireless
telecommunications technology.
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However, as a result of customer demand and market opportunity, the Company
expanded the scope of its existing wireless network business strategy in
February 1999 to include fiber optic technology as part of the Company's overall
digital telecommunications network. As a result, the Company is no longer
limiting the development of its strategic network relationships to incumbents
with wireless assets. The Company's expanded product line will enable it to
deliver high bandwidth services as well as dark and dim fiber to inter-exchange
carriers ("IXCs"), local exchange carriers, Internet service providers ("ISPs"),
Regional Bell Operating Companies ("RBOCs"), cellular operators and resellers
(collectively, "Telecom Service Providers"). The bandwidth and dark and dim
fiber available on selected routes resulting from deployment of Pathnet's
integrated network is intended to enable these Telecom Service Providers to (i)
deliver advanced services to areas that are currently under-served by digital
networks, (ii) aggregate traffic from cities in second- and third-tier markets
and (iii) obtain dedicated network services in such markets. In addition, upon
obtaining the requisite rights-of-way and other required permits and licenses,
the Company will be able to offer customized builds to such Telecom Service
Providers.
The Company has held meetings with over 300 potential strategic
partners who own telecommunications assets. As of December 31, 1998, nine of
these entities have entered into ten binding agreements relating to the initial
design and construction of approximately 10,000 route miles of digital network.
Eight of these binding agreements are long-term Fixed Point Microwave Services
Agreements ("FPM Agreements") with affiliates of Burlington Northern Santa Fe
Railroad, Enron, Idaho Power Company, Northeast Missouri Electric Cooperative,
Northern Indiana Public Service Company, Texaco and with two affiliates of KN
Energy. The ninth agreement is a binding term sheet with American Tower
Corporation, which controls certain telecommunications assets including certain
assets divested by CSX Railroad, ARCO Pipeline and MCI WorldCom, Inc. ("MCI") to
enable the Company to utilize tower assets and other facilities. The tenth
agreement is a tower lease agreement with Titan Towers. In addition to deploying
its wireless and fiber network to serve under-served and second- and third-tier
markets by forming long-term relationships with strategic partners, the Company
may pursue opportunities to acquire or deploy complementary telecommunications
assets or technologies and to serve other markets. See "Risk Factors -- Risks of
Completing the Company's Network; Market Acceptance."
PRODUCTS AND SERVICES
The Company offers dedicated private line access for voice, data and
video transmission in DS-1, DS-3 and OC-3 increments on the wireless portion of
its network and will offer larger increments of dedicated private line access on
the fiber portion of its network. In addition to bandwidth services, the Company
plans to offer dark and dim fiber to customers. Management believes this
flexibility together with the scope of the Company's integrated wireless and
fiber network will appeal to a broad variety of customers.
The Company also offers telecommunications project management,
provisioning services and other customer services. The Company expects to employ
a state-of-the-art operating support system capable of supporting on-line order
entry and remote circuit provisioning. The Company also expects to employ
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 network operating center ("NOC") responsiveness. The
Company expects that its state-of-the-art "NOC" will permit pro-
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4
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.
DEVELOPMENT OF THE COMPANY'S NETWORK
The Company is in various stages of evaluating and negotiating several
agreements and arrangements relating to the deployment of its network including,
but not limited to, agreements to obtain rights-of-way, co-development and other
partnering arrangements. There can be no assurance, however, that any of such
potential relationships will result in binding agreements or that any of the
transactions currently being evaluated will be consummated. See "Risk Factors--
Risks of Completing the Company's Network; Market Acceptance."
EQUIPMENT SUPPLY AGREEMENTS
Pursuant to a Master Agreement entered into by the Company and NEC
America, Inc. and it affiliates ("NEC") on August 8, 1997, as amended, the
Company agreed to purchase from NEC by December 31, 2002 a total of $200 million
worth of certain equipment, services and licensed software to be used by the
Company in its network under pricing and payment terms that the Company believes
are favorable based on the prices of comparable products in other markets.
However, in the event the Company fails to purchase all of such equipment, NEC
has reserved the right to withdraw such favorable pricing levels. NEC warrants
the equipment against defects for three years and has agreed promptly to repair
or replace defective equipment. NEC will also maintain for the Company's
benefit, 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 Corporation
("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.
Pursuant to a supply agreement entered into by the Company and Lucent
Technologies ("Lucent") on December 18, 1998, the Company agreed that Lucent
would be the Company's exclusive supplier of fiber optic cable for its
nationwide, voice and data network. The agreement is initially valued at $440
million and could grow up to $2.1 billion over the life of the seven-year
agreement. As part of the supply agreement, Lucent will provide a broad level of
support, including fiber optic equipment, network planning and design and
technical and marketing support. Certain material terms of the Company's
agreements with Lucent are currently under review by Lucent and the Company.
There can be no assurance that the transactions contemplated by this supply
agreement will be consummated or consummated on the terms and conditions
described above. Lucent has also agreed to provide equipment financing in
connection with this supply agreement. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" and "Risk Factors - Reliance on Lucent - Lucent Agreements."
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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. Registration of such service mark is expected by the end of
1999. 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. These rights are critical to
certain aspects of the design, deployment and operation of the Company's
network. 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 Lucent, 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.
CUSTOMERS AND SALES AND MARKETING STRATEGY
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, including dedicated
network through the sale of dark fiber; (ii) provide alternative capacity to
incumbent local exchange carriers ("ILECs"), and (iii) capture demand from
Telecom Service Providers for the Company's products, including bandwidth
services, as a lower cost provider. The Company markets its network to major
IXCs such as AT&T Corp. ("AT&T"), MCI and Sprint Corporation ("Sprint") to
satisfy their expanding network requirements. The Company expects that it will
be well positioned to provide capacity to meet demand in diverse geographic
areas.
The Company believes there will be significant opportunities to market
its capacity to 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 or other ILECs for use within their own service areas. The Company
believes ILECs 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 and ILECs to focus on larger cities while providing small
communities within their service areas with broadband connectivity.
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The Company expects that mobile wireless operators will be attracted to
the Company's ability to provide back haul capacity from remote network sites
that connect its mobile switches with backbone transport capacity. The Company
also intends to market its capacity to competitive access providers and
competitive local exchange carriers ("CLECs") who can utilize the Company's
network to interconnect various service areas on an intra-LATA and inter-LATA
basis. Additionally the Company will market capacity to ISPs to facilitate the
creation of additional points of presence ("POPs") for local dial-up
connectivity to the ISPs' customer base, thereby eliminating the ISPs'
dependence on IXCs for capacity.
As of December 31, 1998, the Company was providing commercial
telecommunications service to three customers with several additional customers
awaiting installation. As the Company continues to deploy its nationwide network
and expand its products and services to include dark and dim fiber as well as
high bandwidth services, the Company expects that its customer base will
materially grow. Although the Company currently derives some revenue from the
sale of bandwidth services, the majority of the Company's revenues to date have
been derived from construction management and advisory services. For a statement
of the Company's revenue and operating results for each of the three years ended
December 31, 1998, 1997 and 1996, see "Consolidated Statement of Operations."
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 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 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. See "Risk Factors
Competition; Pricing Pressures."
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 and Sprint and
operators of fiber optic systems such as IXC Communications, Inc., The Williams
Companies Inc., Qwest Communications International Inc. and Level 3
Communications Inc., who would otherwise be the Company's customers in
under-served and 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, satellite carriers, public utilities and
cable companies. In particular, certain ILECs and CLECs are allowed to provide
inter-LATA long distance
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services. Furthermore, 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
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. See "Risk Factors --Competition; Pricing
Pressures."
Furthermore, 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 greater than those available to
the Company. See "Risk Factors -- Competition; Pricing Pressures."
EMPLOYEES
As of December 31, 1998, the Company had 144 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.
ITEM 2. PROPERTIES
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 at which the Company has an agreement and will have
indefeasible rights to use, leasehold and other real estate interests pursuant
to its agreements with independent tower companies owners of rights-of-way and
other owners of telecommunications assets. The Company expects to lease, license
and obtain additional real estate rights to additional facilities from
Incumbents, owners of rights-of-way 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, a director 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, 1999 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 2003, 2001 and 2000, respectively.
The Company believes that all of its properties are well maintained.
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ITEM 3. LEGAL PROCEEDINGS
Other than licensing and other regulatory proceedings described under
"Risk Factors--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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Annual
Report on Form 10-K, the Company held a special meeting of the Stockholders on
October 20, 1998. At such meeting, the following matters were approved by
holders of the Company's common stock, par value $.01 per share (the "Common
Stock"), Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock and Series C Convertible Preferred Stock (collectively the "Stockholders")
voting together as a single class, by the votes indicated below:
(i) Approval of several agreements and arrangements made in the ordinary
course of the Company's business: For 17,115,081 Against: 0 Abstain:
1,651,992.
(ii) Approval of the hiring certain new employees: For 17,115,081 Against: 0
Abstain: 1,651,992.
On December 2, 1998, the Company held a special meeting of the
Stockholders where the following matters were approved by the Stockholders,
voting together as a single class, by the votes indicated below:
(i) Approval of a loan agreement with KN Energy: For 14,671,900, Against:
0, Abstain: 4,095,173.
(ii) Approval of a three-way transaction with KN Energy, American Tower
Corporation and the Company. For 14,671,900, Against: 0, Abstain:
4,095,173.
(iii) Approval of a Tower Lease Agreement with Titan Towers. For 11,771,900,
Against: 2,900,000, Abstain: 4,095,173.
(iv) Approval of a fleet leasing arrangement for automobile rentals. For
14,671,900, Against: 0, Abstain: 4,095,173.
(v) Approval of the grant of stock option awards to certain employees of
the Company. For 14,399,344, Against: 0, Abstain: 4,367,729.
(vi) Approval of certain amendments to the Company's Certificate of
Incorporation and Amended and Restated Bylaws of the Corporation. For
11,499,344, Against:2,900,000, Abstain: 4,367,729. See Exhibits 3.1 and
3.2 attached to this Report.
On December 7, 1998, the Company solicited written consents from the
holders of its Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock and Series C Convertible Preferred
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Stock (collectively, the "Preferred Stockholders") to (i) approve certain
authorized signatories for the transfer and withdrawal of the Company's funds
and (ii) to approve the payment of an invoice for legal services. Effective
December 7, 1998, the Company received written consents approving such proposals
from Preferred Stockholders representing 10,720,610 votes with Preferred
Stockholders representing 5,144,105 votes abstaining.
On December 18, 1998, the Company solicited written consents from the
Preferred Stockholders to approve the supply agreement between the Company and
Lucent and related Commitment Letter by and between the Company and Lucent
signed on December 14, 1998 (the "Commitment Letter") setting forth the proposed
terms of equipment financing by Lucent. See "Business -- Equipment Supply
Agreements." Effective December 18, 1998, the Company received written consents
approving such proposals from Preferred Stockholders representing 13,309,853
votes with Preferred Stockholders representing 2,554,862 votes abstaining.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has authorized 60,000,000 shares of Common Stock for which
there is no established public trading market. As of March 12, 1999, there were
3 record holders of the Company's Common Stock. As of December 31, 1998, stock
option awards to purchase 2,885,883 shares of Common Stock were outstanding.
Pathnet has not paid any cash dividends on its Common Stock in the past
and does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. Further, the terms of the Indenture by and between the
Company and The Bank of New York, dated April 8, 1998 (the "Indenture") relating
to the Company's 12 1/4% Senior Notes due 2008 restrict the ability of the
Company to pay dividends on the Common Stock, as described in Management's
Discussion and Analysis of Financial Condition and Results of Operations, as
well as in Note 11 to the Company's Financial Statements included in Item 14
elsewhere in this Annual Report on Form 10-K.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated balance sheet data as of December 31, 1997
and 1998 and statement of operations data for the twelve months ended December
31, 1996, 1997 and 1998 and the period August 25, 1995 (date of inception) to
December 31, 1998, have been derived from the Company's financial statements and
the notes thereto, included elsewhere in this Annual Report on Form 10-K, which
have been audited by PricewaterhouseCoopers LLP, 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 consolidated
balance sheet data as of December 31, 1995 and 1996 and statements of operations
data for the period August 25, 1995 (date of inception) to December 31, 1998
have been derived from the Company's audited financial statements which are not
included in this Annual Report on Form 10-K, which have been audited by
PricewaterhouseCoopers LLP.
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Period from Period from
August 25, 1995 August 25, 1995
(date of (date of
inception) to inception) to
December 31, Year Ended December 31, December 31,
1995 1996 1997 1998 1998
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Statement of Operation Data:
Revenue .................................... $ -- $ 1,000 $ 162,500 $ 1,583,539 $ 1,747,039
Operating expenses:
Cost of revenue .......................... -- -- -- 7,547,620 7,547,620
Selling, general and administrative ...... 429,087 1,333,294 4,247,101 9,615,867 15,625,349
Depreciation expense ..................... 352 9,024 46,642 732,813 788,831
----------- ------------ ------------ ------------ ------------
Total operating expenses ................... 429,439 1,342,318 4,293,743 17,896,300 23,961,800
Net operating loss ......................... (429,439) (1,341,318) (4,131,243) (16,312,761) (22,214,761
Interest expense (a) ....................... -- (415,357) -- (32,572,454) (32,987,811
Interest income ............................ 2,613 13,040 159,343 13,940,240 14,115,236
Write off of initial public offering costs . -- -- -- (1,354,534) (1,354,534)
Other income (expense), net ................ -- -- (5,500) 2,913 (2,587)
----------- ------------ ------------ ------------ ------------
Net loss ................................... $ (426,826) $ 1,743,635) $ (3,977,400) $(36,296,596) $(42,444,457)
=========== ============ ============ ============ ============
Basic and diluted loss per common share .... $ (0.15) $ (0.60) $ (1.37) $ (12.51) $ (14.63)
=========== ============ ============ ============ ============
Weighted average number of common
shares outstanding ...................... 2,900,000 2,900,000 2,900,000 2,902,029 2,900,605
=========== ============ ============ ============ ============
Balance Sheet Data:
Cash, cash equivalents and marketable
securities (excluding marketable
securities pledged as collateral) ....... $ 82,973 $ 2,318,037 $ 7,831,384 $227,117,417
Property and equipment, net ................ 8,551 46,180 7,207,094 47,971,336
Total assets ............................... 91,524 2,365,912 16,097,688 365,414,129
Total liabilities .......................... 17,350 145,016 5,892,918 366,492,370
Convertible preferred stock ................ 500,000 4,008,367 15,969,641 35,969,639
Stockholders' equity (deficit) ............. $ (425,826) $ (1,787,471) $ (5,764,871) (37,047,880)
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(a) The 1996 expense relates to the beneficial conversion feature of a loan
at December 31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading carrier's carrier providing high-quality,
low-cost, digital telecommunications capacity to under-served and second- and
third-tier U.S. markets.
The Company's business commenced on August 25, 1995 and has been funded
primarily through equity investments by the Company's stockholders and a private
placement (the "Debt Offering") in April 1998 of 350,000 units (the "Units"),
consisting of 12 1/4% Senior Notes (the "Restricted Notes") and warrants (the
"Warrants") to purchase shares of Common Stock. On October 2, 1998, the Company
completed an exchange (the "Exchange Offer") of all outstanding Restricted Notes
for $350,000,000 aggregate principal amount of 12 1/4% Senior Notes due 2008
which have been registered under the
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Securities Act of 1933, as amended (the "Registered Notes"). The Restricted
Notes and the Registered Notes are collectively referred to herein as the
"Senior Notes."
Due to Pathnet's focus to date on developing its network, the majority
of its revenues reflect certain consulting and project management services in
connection with the design, development and construction of digital microwave
infrastructure. The remaining portion of its revenues has resulted from the sale
of bandwidth services along its network. The Company has also been engaged in
the acquisition of telecommunications network equipment, the development of
operating systems, the design and construction of the NOC, capital raising and
the hiring of management and other key personnel. The Company has experienced
significant operating and net losses and negative operating cash flow to date
and expects to continue to experience operating and net losses and negative
operating cash flow until such time as it is able to generate revenue sufficient
to cover its operating expenses. See "Risk Factors - Substantial Leverage;
Ability to Service Debt; Restrictive Covenants."
NETWORK-RELATED COSTS
The limited incremental cost of operating and maintaining the wireless
portion of 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 operating leverage with
respect to the wireless portion of Pathnet's network. The Company expects to
maintain similar operating leverage with respect to the fiber portion of its
network through the use of co-development and partnering arrangements, however,
there can be no assurance that the Company will be able to achieve these
operating efficiencies through the use of these arrangements. 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. See
"Risk Factors - Risks of Completing the Company's Network; Market Acceptance;
Risks Related to Expansion in Strategy; Need to Obtain and Maintain Rights of
Way; Risks Relating to Interconnection."
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 wholesale private line transport
capacity across multiple portions of the Company's network. As such, the Company
believes that it will be able to maintain a relatively low ratio of overhead
expenses to revenues compared to other Telecom Service Providers.
Sales and Marketing Costs. To attract and retain customers for the
Company's digital network, the Company has built a sales team that includes a
direct national accounts sales force, a regional sales force and a sales force
dedicated to alternate channels. In addition, 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,
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billing, corporate administration, and human resources. The Company expects that
these costs will grow significantly as it expands operations. See "Risk Factors
- - Significant Capital Requirements; Uncertainty of Additional Financing."
DEPRECIATION AND AMORTIZATION
Depreciation of the completed communications network commences when the
network equipment is ready for its intended use and is computed using the
straight-line method with estimated useful lives of network assets ranging
between three to ten years. Depreciation of the office and computer equipment
and furniture and fixtures is computed using the straight-line method, generally
over three to five years, based upon estimated useful lives, commencing when the
assets are available for service. Leasehold improvements are amortized over the
lesser of the useful lives of the assets or the lease term. Expenditures for
maintenance and repairs are expensed as incurred.
CAPITAL EXPENDITURES
The Company's principal capital requirements for deployment of its
wireless network include the costs of tower enhancement, site preparation work,
base digital wireless equipment and incremental digital wireless equipment. 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 as compared
to so-called "green field" network expansion and (ii) 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. The actual allocation of costs between the Company and each
Incumbent has varied with each of the Company's agreements with Incumbents
executed to date and is expected to vary, perhaps significantly, in the future
on a case-by-case basis.
The primary capital costs of deploying the Company's fiber network will
include the costs of fiber, rights-of-way, installation and construction work
and optronics equipment used in regeneration facilities and to "light" the
fiber. The portion of these capital costs that will be borne by the Company or
that will be defrayed by consummating dark fiber sales of any fiber network
segment will be determined on a case-by-case basis as the Company evaluates and
enters into co-development and other partnering arrangements to deploy its
nationwide digital network.
BUSINESS DEVELOPMENT, CAPITAL EXPENDITURES AND ACQUISITIONS
From inception through December 31, 1998, expenditures for property,
plant and equipment, including construction in progress, totaled $48.8 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 December 31, 1998 of $42.4 million. See "Risk Factors--Limited History
of Operations; Operating Losses and Negative Cash Flow."
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to continue 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 operations. Deployment of the Company's digital network and
expansion of the Company's operations and services will require significant
capital expenditures. Capital
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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.
During the period from August 1995 through June 1997, the Company
raised an aggregate of $6 million through the issuance and sale of its Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock in a series
of private placements. See "Certain Relationships and Related Transactions -
Series A Purchase Transactions" and -- "Series B Purchase Agreement" and Note 9
to the Company's Consolidated Financial Statements that appear elsewhere in this
Annual Report on Form 10-K.
On October 31, 1997, the Company consummated a private offering of
939,850 shares of Series C Convertible Preferred Stock for approximately $10
million, less issuance costs of $38,780. On April 8, 1998, the Company
consummated an additional private offering of 1,879,699 shares of Series C
Convertible Preferred Stock for an aggregate purchase price of approximately
$20.0 million, bringing the total investment by the Company's private equity
investors to $36.0 million.
On April 8, 1998, the Company completed the Debt Offering resulting in
net proceeds to the Company of approximately $339.5 million, after reduction for
offering costs of approximately $10.5 million. In addition to the Senior Notes,
as part of the Debt Offering, the Company issued Warrants to purchase an
aggregate of 1,116,500 shares of Common Stock. The Company used approximately
$81.1 million of the net proceeds of the Debt Offering to purchase securities
(the "Pledged Securities") in an amount sufficient to provide for payment in
full of the interest due on the Senior Notes through April 15, 2000. The Pledged
Securities have been pledged as security for repayment of the Senior Notes. The
Company made its first interest payment of approximately $22.3 million on
October 15, 1998. The Indenture relating to the Senior Notes contains provisions
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.
On September 2, 1998, the Company commenced the Exchange Offer to
exchange all outstanding Restricted Notes for Registered Notes. The terms of the
Registered Notes are identical in all material respects to the terms of the
Restricted Notes, except that the Registered Notes have been registered under
the Securities Act of 1933 and are generally freely transferable by holders
thereof and are issued without any covenant upon the Company regarding
registration under the Securities Act of 1933. The Exchange Offer expired on
October 2, 1998 and all outstanding Restricted Notes were exchanged for
Registered Notes.
The net proceeds from the issuance of the Units (after purchasing the
Pledged Securities) and the issuance and sale of the Series C Convertible
Preferred Stock are being used for capital expenditures, working capital and
general corporate purposes, including the funding of operating losses.
On May 8, 1998, the Company filed a registration statement under the
Securities Act of 1933 with the Securities and Exchange Commission, relating to
a proposed initial public offering of the Company's Common Stock (the "Initial
Public Offering"). On August 13, 1998, the Company announced that it would
postpone the Initial Public Offering due to general weakness in the capital
markets. The timing and size of any future initial public offering of the
Company's Common Stock are dependent on market conditions and there can be no
assurance that the Initial Public Offering will be completed.
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As of December 31, 1998, the Company had capital commitments of
approximately $28 million relating to telecommunications and transmission
equipment. It is anticipated that these will be met with the current resources
of the Company.
As of December 31, 1998, the Company had approximately $227 million
available for the funding of future operations. The Company expects these
resources are sufficient to fund the implementation of the Company's business
plan into 2000. After such time, the Company is expected to be required to
procure additional financing which may include commercial bank borrowings,
additional vendor financing or the sale or issuance of equity or debt
securities. There can be no assurance the Company will be successful in raising
sufficient capital or in obtaining such financing on terms acceptable to the
Company. See "Risk Factors - Significant Capital Requirements; Uncertainty of
Additional Financing."
Pursuant to the Commitment Letter in connection with the supply
agreement between Lucent and the Company, Lucent may provide financing of up to
approximately $400 million for fiber purchases for the construction of the
Company's network and may provide or arrange financing for future phases of such
network. Under the terms of the Commitment Letter, the total amount of financing
provided by Lucent will not exceed $1.8 billion of the $2.1 billion potential
value of the supply agreement. Certain material terms of the Company's
agreements with Lucent, including the terms of the Commitment Letter, are
currently under review by Lucent and the Company. There can be no assurance that
the transactions, including the financing contemplated by Commitment Letter,
will be consummated or consummated on the terms described above. 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. See "Risk Factors Significant Capital Requirements;
Uncertainty of Additional Financing."
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, among other things, 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.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 WITH YEAR ENDED DECEMBER 31, 1997
During the twelve months ended December 31, 1998, the Company continued
to develop relationships with Incumbents, buildout its network and develop its
infrastructure, including hiring key management personnel. The Company also
began marketing and sales efforts, and hired Mr. Bennis to develop and execute
its sales efforts and marketing plan.
REVENUE
Substantially all of the Company's revenues for the year ended December
31, 1998 consisted of fees received in connection with services provided to
Incumbents, including analysis of existing facilities and system performance,
advisory services relating to PCS relocation matters, and turnkey network
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construction management services. The Company expects substantially all future
revenue to be generated from the sale of telecommunications services. For the
year ended December 31, 1998 the Company generated revenues of approximately
$1.6 million, approximately $1.4 million (89.6%) of which were attributable to
fees received in connection with the continued performance of construction
management services primarily from one customer, and approximately $165,000
(10.4%) were attributable to the sale of telecommunications capacity. For the
year ended December 31, 1997, the Company generated revenues of approximately
$162,500 derived from construction management and advisory services.
OPERATING EXPENSES
For the year ended December 31, 1998 and 1997, the Company incurred
operating expenses of approximately $17.9 million and $4.3 million,
respectively. The increase is primarily as a result of the increased activity in
the buildout of the Company's network and additional staff costs incurred as
part the development of the Company's infrastructure. The Company expects
selling, general and administrative expenses to continue to increase as
additional staff is added in all functional areas, particularly in sales and
marketing. Cost of revenue reflects direct costs associated with performance of
construction, management services and costs incurred in connection with the
provision of telecommunications services. Cost of revenue reflects direct costs
associated with performance of construction management services and costs
incurred for telecommunications services such as network operations, network
interconnections and provisioning of capacity for customers. These costs include
salaries and other employee expenses of the new employees hired during the
second quarter to staff the NOC, costs for leased telecommunications capacity
used to monitor the network, maintenance fees paid to Incumbents and other
overhead expenses.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1998 was approximately
$32.6 million. Interest expense primarily represents interest on the Senior
Notes issued in April 1998 together with financing costs associated with
obtaining debt financing arrangements and the amortization expense related to
bond issuance costs in respect of the Senior Notes. The Company did not incur an
interest expense during 1997.
INTEREST INCOME
Interest income for the year ended December 31, 1998 and 1997 was
approximately $13.9 million and $159,300, respectively. This increase primarily
represents interest earned on the proceeds of the Senior Notes issued in April
1998.
INITIAL PUBLIC OFFERING COSTS
During the third quarter of 1998, the Company recorded a one-time write
off of costs of approximately $1.3 million, associated with the postponed
Initial Public Offering of the Company's Common Stock. These costs consisted
primarily of legal and accounting fees, printing costs, and Securities and
Exchange Commission and Nasdaq Stock Market fees.
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COMPARISON OF YEAR ENDED DECEMBER 31, 1997 WITH YEAR ENDED DECEMBER 31, 1996
During the year ended December 31, 1997, the Company initiated
construction on the first segment of its network, and additional engineering and
management personnel were recruited, including Mr. Jalkut. The Company's
principal activity through the third quarter of 1996 involved the introduction
of its business plan to Incumbents. 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.
REVENUE
In establishing relationships with Incumbents, the Company acted as a
provider of services for transitioning the Incumbents from their old network
systems onto the Company's network. These services included analysis of existing
facilities and system performance, advisory services relating to PCS relocation
matters, and turnkey network construction management. Revenues for the year
ended December 31, 1997 consisted of $100,000 derived from construction
management services and $62,500 from PCS relocation advisory services as
compared with revenues for the year ended December 31, 1996 of $1,000 generated
from PCS relocation advisory services.
OPERATING EXPENSES
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. This increase was directly related
to an increase in selling, general and administrative expenses 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.
YEAR 2000
The Year 2000 issue exists because many computer systems and software
applications use two digits rather than four digits to designate an applicable
year. As a result, the systems and applications may not properly recognize the
Year 2000, or process data that includes that date, potentially causing data
miscalculations or inaccuracies or operational malfunctions or failures.
In the fourth quarter of 1998, the Company began a corporate-wide
program to ready its technology systems and non-technology systems and software
applications for the Year 2000. The Company's objective is to target Year 2000
compliance for all of its systems, including network and customer interfacing
systems. Due to the development stage status of the Company, few legacy systems
or applications exist. However, the Company is identifying all of its systems
and applications that may need to be modified or reprogrammed in order to
achieve Year 2000 compliance.
As part of its Year 2000 plan, the Company is seeking confirmation from
its communications equipment vendors and other suppliers, financial institutions
and customers that their systems will be Year 2000 compliant. There can be no
assurance that the systems of companies with which the Company does business
will be Year 2000 compliant. If the vendors important to the Company fail to
provide needed products and services, the Company's network buildout and
operations could be affected and thereby have a material adverse effect on the
Company's results of operations, liquidity and financial condition. Moreover, to
the extent that significant customers are not Year 2000 compliant and that
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affects their network needs, the Company's sales could be lower than otherwise
anticipated.
The Company does not believe its expenditures to implement its Year
2000 strategy will be material. Because its existing systems are relatively new,
it does not expect that it will have to replace any of its systems. To the
extent it would have to replace a significant portion of its technology systems,
its expenditures could have material adverse effect on the Company. The Company
has hired an outside consultant to assist it with its Year 2000 compliance, but
the Company has relied primarily on its existing employees to develop and
implement its Year 2000 compliance strategy. As a result, its expenditures to
ensure Year 2000 compliance have not been material to date. The Company expects
to continue to use existing employees for the significant part of its Year 2000
compliance efforts in the future.
The Company does not currently have a contingency plan in the event
that it or its suppliers or customers are not Year 2000 compliant. However, the
Company expects to develop a contingency plan to deal with potential Year 2000
related business interruptions.
RISK FACTORS
LIMITED HISTORY OF OPERATIONS; OPERATING LOSSES AND NEGATIVE CASH FLOW
The Company was formed in August 1995 to begin development of its
digital network. As of December 31, 1998, the Company had completed
approximately 2,000 route miles of network, an additional approximately 5,000
route miles of network are under construction and approximately 10,000 route
miles of network are under contract. In addition, the Company was only providing
commercial telecommunications service to three customers with several additional
customers awaiting installation. There can be no assurance that the Company will
enter into any additional contracts with Incumbents or other owners of
telecommunications assets to obtain rights-of-way or rights to sites, towers and
other assets for the construction of additional network or with customers for
the purchase and sale of bandwidth services or dark or dim fiber. 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 $42.4 million and cumulative net losses before interest
income (expense) and income tax benefit of $23.6 million from inception in 1995
through December 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.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS
The Company is highly leveraged. As of December 31, 1998, the Company
had $346.2 million of indebtedness outstanding. The Company will likely incur
substantial additional indebtedness (including secured indebtedness) 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
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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.
The Indenture relating to the Senior Notes and certain of the Company's
agreements with Incumbents 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.
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 Senior 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. The Company
does not currently, and there can be no assurance that the Company will be able
to, generate sufficient cash flows to meet its debt service obligations. If the
Company is unable to generate sufficient cash flows 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.
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.
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 will need to seek
additional financing to fund capital expenditures and working capital to expand
its network further. The Company may also require additional capital for
activities complementary to its currently
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planned businesses.
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 or 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 equipment
financing facilities and public and private equity and debt financing. 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.
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 products, including
bandwidth services. 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. The Company has gained experience in budgeting
and scheduling as it has completed segments of its network, and although the
Company believes that its cost estimates and buildout schedules relating to the
currently planned portions of its network are reasonable, only approximately
2,000 route miles under contract have been completed as of December 31, 1998.
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, although the Company recently began providing commercial
telecommunications service to three customers with several additional customers
awaiting installation, there can be no assurances that the Company will attract
additional purchasers of its products, including bandwidth services.
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 bandwidth
services and other products 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, (vi) obtain
necessary Federal Communication Commission ("FCC") licenses and other approvals
and (vii) obtain adequate rights-of-way and other property rights necessary to
install and operate the fiber portions of the Company's network. 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
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Company's business, financial condition and results of operations.
The development of the Company's network and the expansion of the
Company's business may involve acquisitions of other telecommunications
businesses and assets or implementation of other technologies either in lieu of
or as a supplement to the technologies contemplated by the Company's current
business plan. 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. Furthermore, the Company may
seek to serve markets which are not under-served or second- or third-tier and
which may present differing market risks (including as to pricing and
competition). If pursued, these opportunities could require additional
financing, impose additional risks (such as increased or different competition,
additional regulatory burdens and network economics different from those
described elsewhere herein) and could divert the resources and management time
of the Company. 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. 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.
RISKS RELATED TO EXPANSION IN STRATEGY.
On February 3, 1999, the Company announced it had expanded its business
strategy to include construction and deployment of digital networks using both
wireless and fiber optic technologies. The Company has limited experience in
designing and budgeting, deploying, operating and maintaining a fiber network.
In addition, the Company could encounter customers with preferences in employing
one technology over another. There can be no assurance the Company will
effectively design and budget, deploy, operate or maintain such facilities or
that it will be able to address such potential customer preferences. Further,
there can be no assurance that the fiber network deployed by the Company will
provide the expected functionality.
To the extent that the Company enters into co-development or other
partnering arrangements where the Company's partner has primary responsibility
for key network development matters such as perfecting rights-of-way or project
management, there can be no assurance that such partners will perform such tasks
adequately or that any failures in such performance will not adversely effect
the Company's financial condition, business or results of operations.
DEPENDENCE ON RELATIONSHIP WITH INCUMBENTS; RIGHTS OF INCUMBENTS TO
CERTAIN ASSETS
There can be no assurance that existing long-term relationships with
the Company's Incumbents will be maintained or that additional long-term
relationships will result on terms acceptable to the Company, or at all. If the
Company is not successful in negotiating such agreements, its ability to deploy
its network would be adversely affected.
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The Company does not typically expect to own the underlying sites and
facilities upon which the wireless portion of its network is deployed. Instead,
the Company has entered into and 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. 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
telecommunications capacity or fails to commission an initial communications
system within specified time periods. In such cases, certain equipment relating
to the initial communications system will be transferred to the Incumbent. Any
such expiration of a relationship with an Incumbent, and the resulting loss of
use of the corresponding 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 Company's debt 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 expire 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.
The Company expects to rely significantly on its Incumbents for the
maintenance and provisioning of circuits on the wireless portion of its network.
The Company has entered into maintenance agreements with six 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.
NEED TO OBTAIN AND MAINTAIN RIGHTS-OF-WAY.
The Company expects to obtain easements, rights-of-way, franchises and
licenses from various private parties, ILECs, utilities, railroads, long
distance companies, state highway authorities, local governments and transit
authorities in order to construct and maintain its fiber optic network. If the
Company were to acquire right-of-way directly from a governmental authority, it
would be directly affected by state and local law. To the extent that the
Company obtains rights-of-way from others, it would be indirectly affected by
state and local law. There is a possibility that disputes may arise with
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the licensing authority or a competitor, the result of which may favor a
competitor of the Company. Such disputes could impose legal and administrative
costs on the Company, including out-of-pocket expenses and lost market
opportunity because of delays. Further, the Company may be subject to franchise
fees imposed by state and local governments. In addition, the Company may
require pole attachment agreements with utilities and ILECs to operate existing
and future networks, and there can be no assurance that such agreements will be
obtained on reasonable terms.
There can be no assurance that the Company will be able to obtain and
maintain the additional rights and permits needed to build its fiber optic
network and otherwise implement its business plan on acceptable terms. The
failure to enter into and maintain required arrangements for the Company's
network could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that,
once obtained, the Company will continue to have access to existing
rights-of-way and franchises after the expiration of such agreements. If a
franchise, license or lease agreement were terminated and the Company were
forced to remove or abandon a significant portion of its network, such
termination could have a material adverse effect on the Company.
MANAGEMENT OF GROWTH AND RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS,
STRATEGIC ALLIANCES AND JOINT VENTURES.
The Company's expanded 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.
Furthermore, as the Company's business develops and expands, the 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 Company believes that a part of its future growth may come from the
formation of strategic alliances with other telecommunications companies
designed to assist and accelerate the building of the Company's digital network
to provide services to customers of the Company which are complementary to those
provided by the Company. The Company intends to pursue joint ventures with, or
acquisitions of, companies that have an existing network infrastructure or
customer base in order to increase the Company's penetration of its markets or
accelerate entry into new markets. Limitations under the Indenture may
significantly limit the Company's ability to make acquisitions and to incur
indebtedness in connection with acquisitions. Such transactions commonly involve
certain risks, including, among others: the difficulty of assimilating the
acquired operations and personnel; the potential disruption of the Company's
ongoing business and diversion of resources and management time; the possible
inability of management to maintain uniform standards, controls, procedures and
policies; the risks of entering
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markets in which the Company has little or no direct prior experience; and the
potential impairment of relationships with employees or customers as a result of
changes in management. There can be no assurance that any acquisition or joint
venture will be made, that the Company will be able to obtain additional
financing needed to finance such acquisitions and joint ventures and, if any
acquisitions are so made, that the acquired business will be successfully
integrated into the Company's operations or that the acquired business will
perform as expected. The Company has no definitive agreement with respect to any
acquisition, although it has had discussions with other companies and will
continue to assess opportunities on an ongoing basis.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL 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 Richard A. Jalkut, President and Chief
Executive Officer, Kevin J. Bennis, Executive Vice President serving as
President of the Company's Communications Services Division, William R. Smedberg
V, Executive Vice President, Corporate Development, and Michael L. Brooks, Vice
President of Network Development. Other than its Employment Agreement with
Richard A. 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.
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. See "Business - Competition."
RELIANCE ON EQUIPMENT SUPPLIERS FOR THE WIRELESS PORTION OF THE
COMPANY'S NETWORK
The Company currently purchases most of its telecommunications
equipment pursuant to an agreement with NEC from whom the Company has agreed to
purchase $200 million of equipment by December 31, 2002 and has entered into an
equipment purchase agreement with 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 and Northern Telecom Ltd.
are the only
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manufacturers of SONET radios that are compatible with the Company's proposed
system design and reliability standards relating to the wireless portion of its
network, although Harris Corporation and Alcatel Alsthom Compagnie Generale
d'Electricite SA are in the process of developing and testing similar and
compatible products. 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 at reasonable prices and in a timely manner could adversely affect the
Company's successful deployment of its network and results of operations.
RELIANCE ON LUCENT; LUCENT AGREEMENTS.
The Company and Lucent have entered into a supply agreement under which
Lucent will provide and will deploy personnel to assist in, among other things,
the design and marketing of the Company's network. Any failure or inability by
Lucent to perform these functions could cause delays or additional costs in
providing services to customers and building out the Company's network in
specific markets. Any such failure could materially and adversely affect the
Company's financial condition, business and results of operations.
The Company and Lucent have entered into the Commitment Letter which is
contingent upon various conditions, including the execution of a definitive
financing agreement, compliance with financial covenants, completion of due
diligence and the absence of any material adverse change in the Company. There
can be no assurance that a definitive agreement will be executed with respect to
the financing contemplated by the Commitment Letter or that the financing
contemplated by the Commitment Letter will be consummated. Any failure to
consummate the financing contemplated by the Commitment Letter could materially
and adversely effect the Company's financial condition, business and results of
operations.
TECHNICAL LIMITATIONS OF THE WIRELESS NETWORK
The Company will not be able to offer route diversity until such time
as it has completed a substantial portion of its mature network. In addition,
the wireless portion of the Company's network requires a direct line of sight
between two antennae (each such interval comprising a "path") which is 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 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.
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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 other developed sites 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 on the
wireless portion of its network without significant capital expenditures for
additional equipment.
RISKS RELATING TO INTERCONNECTION
In order to obtain the necessary access to install its radios, antennae
and other equipment required for interconnection of the Company's network to the
public switched telephone network or to POPs of the Company's customers, the
Company must acquire the necessary rights and enter into the arrangements to
secure such interconnections and deploy and operate such interconnection
equipment. There can be no assurance that the Company will succeed in obtaining
the rights necessary to secure such interconnections and to deploy its
interconnection equipment in its market areas on acceptable terms, if at all, or
that delays in or terms for obtaining such rights will not have a material
adverse effect on the Company's development or results of operations.
DEPENDENCE ON INFORMATION AND PROCESSING SYSTEMS
Sophisticated information and processing systems are vital to the
Company's growth and its ability to monitor network performance, provision
customer orders for telecommunications capacity, bill customers accurately,
provide high-quality customer service and achieve operating efficiencies. As the
Company grows, any inability to operate its billing and information and
processing systems, or to upgrade internal systems and procedures as necessary,
could have a material adverse impact on the Company's ability to reach its
objectives, or on its business, financial condition and results of operations.
RISK OF RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant
changes in technology. Although the Company has expanded its business plan to
include fiber optic technologies, which may diversify the Company's exposure to
the risk of such technological changes, their effect on the business of the
Company 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 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
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effect on the operations of the Company.
REGULATION
RISKS RELATING TO REGULATION OF WIRELESS NETWORK. The Company's
arrangements with Incumbents contemplate that the wireless portion of the
Company's digital network will provide largely "common carrier fixed
point-to-point microwave" telecommunications services under Part 101 ("Part
101") of the rules of the FCC, 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 (or complying with the terms of) 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.
FCC LICENSE REQUIREMENTS. 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 coordinate successfully such usage
with such entities. In addition, as part of the requirements of obtaining a Part
101 license, the FCC requires 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. Furthermore, in order to obtain the Part 101 licenses necessary for the
operation of its network, the Company, and in some cases Incumbents, must 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. There can be no
assurance that the Company or any Incumbent who desires to be the licensee with
respect to its portion of the Company's network 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.
RISKS RELATING TO REGULATION OF FIBER NETWORK. Pursuant to the
interconnection provisions of the Telecommunications Act of 1996 (the "1996
Telecom Act"), the FCC identified a minimum list of unbundled network elements
that ILECs must make available to other telecommunications carriers. The FCC
declined to include incumbent ILECs' dark fiber in this list, finding that it
did not have adequate information to determine whether dark fiber qualifies as a
network element. The FCC indicated that is would continue to review or revise
its rules regarding unbundled network elements as necessary. State commissions,
however, have the authority to impose additional unbundling requirements so long
as the requirements are consistent with the 1996 Telecom Act and the FCC's
requirements, which could include requiring incumbent ILECs to unbundle their
dark fiber.
In the recent Supreme Court decision regarding the FCC's
interconnection and unbundling rules,
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<PAGE>
the Supreme Court vacated the FCC's rule establishing the list of unbundled
network elements. The Supreme Court found that the FCC had not interpreted the
terms of the 1996 Telecom Act regarding an incumbent ILEC's duty to provide
network elements in a reasonable fashion. The Supreme Court found that the FCC
had given telecommunications carriers blanket access to unbundled network
elements. The statute, however, limits telecommunications carriers' access to
network elements to those that are "necessary" or to those where failure to have
access would "impair the ability of the telecommunications carrier" to provide
services it seeks to offer. The FCC plans to commence a rulemaking proceeding to
adopt new requirements regarding unbundled network elements that properly
consider the "necessary and impair" standard in the 1996 Telecom Act.
A decision by the FCC or states to require unbundling of incumbent
ILECs' dark fiber could increase the supply of dark fiber and decrease demand
for the Company's dark fiber, and thereby have an adverse effect on the Company'
business, financial condition and results of operations.
GENERAL
PROVISION OF COMMON AND PRIVATE CARRIER SERVICES. 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 are 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
of 1934, as amended (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 authorize a higher level of foreign ownership
(up to 100%) on a streamlined basis where the indirect foreign investment in the
common carrier licensee is by citizens of, or companies organized under the laws
of World Trade Organization ("WTO") member countries. Where the foreign
ownership is by citizens or corporations of non-WTO nations, FCC authorization
to exceed the 25% limitation must be obtained on a non-streamlined basis and the
licensee must meet a more demanding public interest showing. The Company is
presently within the 25% foreign ownership limitation. In connection with any
future financings, the Company will have to monitor foreign investment to ensure
that its foreign ownership does not exceed the 25% limitation. If it appeared
that foreign ownership of the Company was coming close to exceeding this
benchmark, the Company would have to obtain FCC authorization prior to exceeding
the 25% limitation. In addition, if any Incumbent elects to be the licensee on
the portion of the Company's network relating to its system, such Incumbent
would also be subject to such
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foreign ownership restrictions. If such analysis showed that such Incumbent had
more than 25% foreign ownership, the Incumbents would have to seek authorization
from the FCC to exceed the 25% limitation or it would have to reduce its foreign
ownership.
In the event that an Incumbent were to choose to hold the relevant Part
101 license itself, and not through a holding company, that 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. If an Incumbent exceeded the 20% limitation it would be
required to reduce its foreign ownership in order to obtain or retain its Part
101 license.
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 intrastate 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 state or local authorities will not impose burdensome taxes,
requirements or conditions on the Incumbent or the Company.
INVESTMENT COMPANY ACT CONSIDERATIONS
The Company has substantial cash, cash equivalents and short-term
investments. The Company has invested and intends to invest the proceeds of its
financing activities so as to preserve capital by investing primarily 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, 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and supplementary data, together
with the report of the independent accountants, are included or incorporated by
reference elsewhere herein. Reference is made to the "Index to Financial
Statements" following the signature pages hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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>
Richard A. Jalkut (1) ...................... 54 President, Chief Executive Officer and Director
Kevin J. Bennis ............................ 45 Executive Vice President, and President,
Communications Services Division
William R. Smedberg, V...................... 37 Executive Vice President, Corporate Development,
Treasurer and Assistant Secretary
Michael A. Lubin ........................... 49 Vice President, General Counsel and Secretary
Michael L. Brooks .......................... 55 Vice President, Network Development
David Schaeffer (1)......................... 42 Director
Peter J. Barris (2) ........................ 47 Director
Kevin J. Maroni (2)(3) ..................... 36 Director
Patrick J. Kerins (3) ...................... 43 Director
Richard K. Prins (2)(3) .................... 41 Director
Stephen A. Reinstadtler .................... 32 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.
RICHARD A. JALKUT has served as President, Chief Executive Officer and
director 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
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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 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, served as Vice President, Finance and Corporate Development from January
1997 to February 1999 and assumed the position of Executive Vice President,
Corporate Development in March 1999. 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.
DAVID SCHAEFFER founded the Company in August 1995 and has been a
director of the Company since its inception. Mr. Schaeffer served as Chairman of
the Board and Treasurer of the Company from August 1997 to February 1999, and
served as President, Chief Executive Officer and Treasurer of the Company from
August 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.
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 a General
Partner of New Enterprise Associates, a firm that manages venture capital
investments. Mr. Barris is also a member of the Board of Directors of Mobius
Management Systems, Inc. and pcOrder.com, Inc. each of which are quoted on the
Nasdaq National Market.
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
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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 served as a consultant at Harvard
Management Company from 1990 to 1992, where he worked in the private equity
group. Mr. Maroni is also currently on the board of directors of several private
companies and CTC Communications Corp., an integrated communications provider
that is quoted on the Nasdaq National Market.
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 that 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 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.
DIRECTOR COMPENSATION
Mr. Prins, a director of the Company, was granted options to purchase
70,131 shares of Common Stock in 1995. See "Security Ownership of Certain
Beneficial Owners and Management." Directors of the Company are currently
neither compensated nor 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
34
<PAGE>
certain circumstances. This limitation on liabilities does not extend to
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, violations of the DGCL regarding the improper payment of dividends 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.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the cash
and non-cash compensation earned by or awarded to the Chief Executive Officer
and the four other most highly compensated executive officers of the Company
(the "Named Executive Officers") for services rendered in all capacities in each
of the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Long - Term
Compensation
Securities
Annual Compensation * Other Underlying
Name And Principal Position Year Salary Bonus Compensation Options Granted
- --------------------------- ---- ------ ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Richard A. Jalkut 1998 $400,000 $ -- $ 40,289(1) --
President and Chief Executive Officer 1997 166,154(2) -- 9,857(3) 858,754
David Schaeffer 1998 300,000 -- -- --
Chairman of the Board and Treasurer 1997 216,923(4) -- -- 430,413
Kevin J. Bennis 1998 246,353(5) -- 185,602(6) 382,500
Executive Vice President and President 1997 -- -- --
Communications Services
Michael A. Lubin 1998 136,840 5,000 -- 15,000
Vice President, General Counsel and 1997 136,115 -- -- --
Secretary
Michael L. Brooks 1998 102,000 38,780 -- 85,732
Vice President, Network Operations 1997 103,077 -- --
- -----------------------------------
</TABLE>
* Except as stated herein, none of the above Named Executive Officers
received perquisites or other personal benefits in excess of the lesser
of $50,000 or 10% of such individual's salary plus annual bonus.
(1) Consists of $16,277 for club dues; $7,756 for lodging; $11,685 for
airfare; and $4,571 for other transportation.
(2) Mr. Jalkut commenced employment with the Company in August 1997, and
was compensated at a rate of $400,000 per annum in 1997.
(3) Reimbursement for travel expenses.
(4) Mr. Schaeffer's salary increased to $300,000 per annum from $150,000
per annum in August 1997.
(5) Mr. Bennis joined the Company in February 1998.
(6) Consists of $48,093 in residence settlement charges in Georgia; $99,319
in residence settlement charges in Virginia; $22,780 in other moving
expenses; and $15,410 in rent.
35
<PAGE>
STOCK 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, 1998. Stock options are exercisable to purchase Common Stock of the
Company.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of Potential Realizable Value at
Securities Total Options Assumed Annual Rate of Stock
Underlying Granted to Exercise Price Appreciation for the Option
Options Employees in Price Expiration Term
Granted Fiscal Year $/Share Date 0% 5% 10%
------- ----------- ------- ---- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Richard A. Jalkut ........ -- -- $ -- -- $ -- $ -- $ --
David Schaeffer........... -- -- -- -- -- -- --
Kevin J. Bennis........... 362,500(3) 32.74% 1.13 3/24/2008 1,475,375 2,660,841 4,479,580
20,000(3) 1.81% 5.20 12/2/2008 -- 65,405 165,749
Michael A. Lubin ......... 15,000(3) 1.35% 5.20 12/2/2008 -- 49,054 124,312
Michael L. Brooks ........ 70,732(2) 6.39% 1.13 3/24/2008 287,879 519,191 878,567
15,000(3) 1.35% 5.20 12/2/2008 -- 49,054 124,312
- ------------------------
</TABLE>
(1) The information disclosed assumes, solely for purposes of demonstrating
potential realizable value of the stock options, that the fair market
value per share of Common Stock was $5.20 per share (the fair market
value per share of Common Stock approved by the Board of Directors in
connection with stock option awards granted on December 2, 1998 and
January 26, 1999, which awards had an exercise price equal to the fair
market value per share on the date of grant) as of December 31, 1998
and increases at the rate indicated during the option term. See Note 10
to the financial statements included elsewhere in this Report.
(2) The options vest ratably over a three year period. The option may be
transferred only by will or by the laws of descent and distribution.
Upon a change of control of the Company and termination of optionee's
employment without cause, the options that would otherwise become
vested within one year will be deemed vested immediately before such
optionee's termination.
(3) The options vest ratably over a four year period. The option may be
transferred only by will or by the laws of descent and distribution.
Upon a change of control of the Company and termination of optionee's
employment without cause, the options that would otherwise become
vested within one year will be deemed vested immediately before such
optionee's termination.
Option Exercises and Fiscal Year-End Option Values
None of the Named Executive Officers exercised any options during the
fiscal year ended December 31, 1998. The following table sets forth as of
December 31, 1998, the aggregate number of options held by each of the Named
Executive Officers.
36
<PAGE>
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options at December 31, 1998 Money Options (1)
---------------------------- -----------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard A. Jalkut ......................... 286,251 572,503 $ 1,165,042 $ 2,330,087
David Schaeffer ......................... -- 430,413 (2) -- 658,532
Michael A. Lubin........................... 141,465 15,000 731,374 --
Kevin J. Bennis............................ 90,625 291,875 368,844 1,106,531
Michael L. Brooks.......................... 35,366 50,366 143,940 143,940
- ------------------------------
</TABLE>
(1) Based on an assumed market price of the Common Stock of $5.20 per share.
(2) One-half of Mr. Schaeffer's options, or 215,206, would vest on January
1, 1999, at an exercise price of $3.67 per share, in the event that
certain performance criteria related to 1998 earnings have been met. The
Board of Directors' is currently reviewing whether these criteria were
met. See Note 10 to the Company's Consolidated Financial Statements that
appear elsewhere in this Annual Report on Form 10-K.
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 will renew automatically for
successive 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 including an apartment in the
Washington D.C. area, club memberships and the expenses incurred by Mr. Jalkut
commuting between his Washington D.C. and New York residences.
In addition, pursuant to the Jalkut Employment Agreement, on August 4,
1997 Mr. Jalkut received nonqualified stock options on 858,754 shares of Common
Stock at an exercise price of $1.13 per share. Such options will vest ratably
over three years. Under the Jalkut Employment Agreement, 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 Non-qualified Option Agreement by and between the Company and Mr. Jalkut
dated August 4, 1997) 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 that are described below and an obligation of the
company to pay severance for one year following the termination of Mr. Jalkut's
employment with 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 below). The Jalkut Employment Agreement
prohibits disclosure by Mr. Jalkut of any of the Company's confidential
information at any time. In
37
<PAGE>
addition, while he is employed by the Company and for two year 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. "Constructive
Termination" is defined in the Jalkut Employment Agreement to mean the
occurrence, without Mr. Jalkut's prior written consent, of one or more of the
following events: (1) a reduction in Mr. Jalkut's then current annual base
salary or the termination or material reduction of any employee benefit or
perquisite enjoyed by him (other than as part of an across-the-board reduction
applicable to all executive officers of the Company); (2) the failure to elect
or reelect Mr. Jalkut to the position of chief executive officer or removal of
him from such position; (3) a material diminution in Mr. Jalkut's duties or the
assignment to Mr. Jalkut of duties which are materially inconsistent with his
duties of which materially impair Mr. Jalkut's ability to function as the chief
executive officer of the Company; (4) the failure to continue Mr. Jalkut's
participation in any incentive compensation plan unless a plan providing a
substantially similar opportunity is substituted, or under certain other limited
circumstances; or (5) the relocation of the Company's principal office.
OTHER AGREEMENTS
Messrs. Schaeffer, Lubin, Brooks, Bennis and Smedberg each have entered
into Employee Agreements Regarding Non-Disclosure, Assignment of Inventions and
Non-Competition with the Company in which such persons 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 person's employment with the Company.
In exchange for the 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 for any
reason.
38
<PAGE>
ITEM 12. 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 December 31, 1998
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) each of the Named Executive Officers and (iv) all
directors and Named 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>
Name and Address Series A Preferred Series B Preferred Series C Preferred
Common ------------------ ------------------ ------------------
Stock Shares(2) Percentage Shares(2) Percentage Shares(2) Percentage
----- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Spectrum Equity Investors, L.P. (6)..... -- 1,276,000 44.0% 1,134,175 23.7% 1,363,406 16.7%
Spectrum Equity Investors II, L.P. (6).. -- -- -- -- -- 1,363,406 16.7%
New Enterprise Associates VI, Limited
Partnership (7)......................... -- 522,000 18.0% 685,014 14.3% 1,374,051 16.8%
Onset Enterprise Associates II, L.P. (8) -- 522,000 18.0% 463,976 9.7% 817,672 10.0%
Onset Enterprise Associates III, L.P.
(8)..................................... -- -- -- -- -- 272,553 3.3%
Corman Foundation Incorporated (9).. -- 96,668 3.3% 85,924 1.7% -- --
IAI Investment Funds VIII, Inc. (IAI
Value Fund) (10)........................ -- 290,000 10.0% 125,143 2.6% -- --
Thomas Domencich (11)................... -- 145,000 5.0% 62,573 1.3% -- --
FBR Technology Venture Partners L.P.
(12).................................... -- -- -- -- -- 272,556 3.3%
Toronto Dominion Capital (USA) Inc. (13) -- -- -- 884,146 18.5% 1,006,500 12.3%
Grotech Partners IV, L.P. (14).......... -- -- -- 884,146 18.5% 1,006,500 12.3%
Utech Climate Challenge Fund, L.P. (15) -- -- -- 442,076 9.2% 136,276 1.7%
Utility Competitive Advantage Fund, LLC
(15).................................... -- -- -- -- -- 366,980 4.5%
David Schaeffer(16)..................... 2,900,000 -- -- -- -- -- --
Richard A. Jalkut....................... -- -- -- -- -- -- --
Kevin J. Maroni (17).................... -- -- -- -- -- -- --
Peter J. Barris (18).................... -- -- -- -- -- -- --
Patrick J. Kerins (19).................. -- -- -- -- -- -- --
Stephen A. Reinstadtler (20)............ -- -- -- -- -- -- --
Michael A. Lubin........................ -- -- -- -- -- -- --
Kevin Bennis............................ -- -- -- -- -- -- --
Michael L. Brooks....................... -- -- -- -- -- -- --
Richard K. Prins........................ -- -- -- -- -- -- --
All Directors and Named Executive
Officers as a Group ................... 2,900,000 -- -- -- -- -- --
- -------------------
</TABLE>
<TABLE>
<CAPTION>
Beneficial Ownership
Name and Address of Common Stock (1)
- ---------------- ------------------- Percentage
Total Percentage on a
Stock ----- ---------- Diluted
Options(3) Shares (4) Basis (5)
---------- ------ --- ---------
<S> <C> <C> <C> <C>
Spectrum Equity Investors, L.P. (6)..... -- 3,773,581 56.5% 19.2%
Spectrum Equity Investors II, L.P. (6).. -- 1,363,406 31.7% 6.9%
New Enterprise Associates VI, Limited
Partnership (7)......................... -- 2,581,065 47.1% 13.9%
Onset Enterprise Associates II, L.P. (8) -- 1,803,648 38.3% 9.2%
Onset Enterprise Associates III, L.P.
(8)..................................... -- 272,553 8.6% 1.4%
Corman Foundation Incorporated (9)...... -- 182,592 5.9% 0.9%
IAI Investment Funds VIII, Inc. (IAI
Value Fund) (10)........................ -- 415,143 12.5% 2.1%
Thomas Domencich (11)................... -- 207,573 6.7% 1.0%
FBR Technology Venture Partners L.P. -- 272,556 8.6% 1.4%
(12)....................................
Toronto Dominion Capital (USA) Inc. (13) -- 1,890,646 39.4% 9.6%
Grotech Partners IV, L.P. (14).......... -- 1,890,646 39.4% 9.6%
Utech Climate Challenge Fund, L.P. (15) -- 578,352 16.6% 2.9%
Utility Competitive Advantage Fund, LLC
(15).................................... -- 366,980 11.2% 1.8%
David Schaeffer(16)..................... -- 2,900,000 99.9% 14.7%
Richard A. Jalkut....................... 286,251 286,251 9.0% 1.4%
Kevin J. Maroni (17).................... -- -- -- --
Peter J. Barris (18).................... -- -- -- --
Patrick J. Kerins (19).................. -- -- -- --
Stephen A. Reinstadtler (20)............ -- -- -- --
Michael A. Lubin........................ 141,485 141,485 4.6% 0.7%
Kevin Bennis............................ -- -- -- --
Michael L. Brooks....................... 35,366 35,366 1.2% 0.2%
Richard K. Prins........................ 70,731 70,731 2.4% 0.4%
All Directors and Named Executive
Officers as a Group .................... 528,853 3,433,933 99.9% 17.4%
- -------------------
</TABLE>
39
<PAGE>
(1) Consists of the sum of the shares of Common Stock owned and shares of
Common Stock issuable upon the exercise of stock options and upon the
conversion of the Series A Convertible Preferred Stock Series, B
Convertible Preferred Stock and Series C Convertible Preferred Stock
that are exercisable or convertible within 60 days after December 31,
1998.
(2) The shares represent the product of a stock split and the numbers shown
here are rounded to the whole number in accordance with the provisions
of the Company's Certificate of Incorporation and stock option plans.
(3) Options exercisable within 60 days after December 31, 1998.
(4) The percentage 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 as of
December 31, 1998, but not the exercise or conversion of options,
warrants and convertible securities held by other holders (whether or
not exercisable or convertible within 60 days after December 31, 1998.)
(5) As a percentage of the sum of the post split and rounded Common Stock,
Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock, Series C Convertible Preferred Stock and options granted and
exercisable within 60 days after December 31, 1998. As of December 31,
1998, 915,765 options granted by the Company were exercisable.
(6) The address for Spectrum Equity Investors, L.P. and Spectrum Equity
Investors II, L.P. is One International Place, Boston, MA 02110.
(7) The address of New Enterprise Associates VI, Limited Partnership is
1119 Saint Paul Street, Baltimore, MD 21202.
(8) 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.
(9) The address for Corman Foundation Incorporation is 100 Brookwood Road,
Atmore, AL 36502.
(10) The address for IAI Investment Funds VIII, Inc. (IAI Value Fund) is
3700 First Bank Place, Minneapolis, MN 55440.
(11) The address for Thomas Domencich is 104 Benevolent Street, Providence,
RI 02906.
(12) The address for FBR Technology Venture Partners L.P. is 1001 19th
Street North, Arlington, VA 22209.
(13) The address for Toronto Dominion Capital (USA) Inc. is 31 West 52nd
Street, New York, NY 10019.
(14) The address for Grotech Partners IV, L.P. is 9690 Deereco Road,
Timonium, MD 21093.
(15) 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.
(16) One-half of Mr. Schaeffer's options, or 215,206, would vest on January
1, 1999, at an exercise price of $3.67 per share, in the event that
certain performance criteria related to 1998 earnings have been met.
The Board of Directors' is currently reviewing whether these criteria
were met. See Note 10 to the Company's Consolidated Financial
Statements that appear elsewhere in this Annual Report on Form 10-K. In
the event that the Board of Directors determines that these stock
options have vested, Mr. Schaeffer's percentage held on a diluted basis
would be 15.7%.
(17) 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.
(18) 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.
(19) Mr. Kerins, Managing Director of the general partner of Grotech
Partners IV, LP, disclaims beneficial ownership of the shares owned by
Grotech Partners IV, LP.
(20) Mr. Reinstadtler, Vice President and Director of Toronto Dominion
Capital (USA) Inc., disclaims beneficial ownership of the shares owned
by Toronto Dominion Capital (USA) Inc.
40
<PAGE>
ITEM 13. 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 Convertible 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 Convertible 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 (the "Bridge Loan Commitment"). 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
Convertible 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 the Bridge Loan Commitment 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"). The Bridge Loan Notes
carried an interest rate of 12% per annum and were due and payable in full on
the earlier to occur of the first anniversary of the issuance of the Bridge Loan
Notes or the closing date of the Company's next equity financing. The Bridge
Loan Notes were to be convertible into any future equity security issued by the
Company at 73% of the price to be paid for such security by other investors. 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 Convertible Preferred Stock for an aggregate purchase price of $5.0
million. Of these amounts, 609,756 shares of Series B Convertible Preferred
Stock were purchased on December 23, 1996, for an aggregate purchase price of
$2.0 million. In addition, the $700,000 principal amount of Bridge Loan Notes,
plus $33,367 of accrued interest, were converted into 306,242 shares of Series B
Convertible Preferred Stock. At the same time, the Series A Purchasers paid
$300,000 representing the committed but undrawn portion of the Additional Bridge
Loan Commitment to the Company for the sale of 125,292 shares of Series B
Convertible Preferred Stock. The Series B Purchasers purchased the remaining
609,756 shares of Series B Convertible Preferred Stock subject to the Series B
Purchase Agreement for $2.0 million on June 18, 1997. See Note 9 to the
financial statements included elsewhere in this Report.
41
<PAGE>
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' 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 Convertible Preferred Stock for an aggregate purchase price of $30.0
million. The Series C Purchasers purchased 939,850 shares of Series C
Convertible 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
Convertible 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 (collectively, the "Investors") and Mr. Schaeffer agreed to amend and
restate, in part, the Series A Purchase Agreement and the Series B Purchase
Agreement. These amendments restated the provisions of such agreements relating
to affirmative and negative covenants, transfer restrictions, rights to purchase
and registration rights. These sections of each of the Series A Purchase
Agreement, the amendments thereto, and the Series B Purchase Agreement were
similar in all material respects. In order to remove any doubt as to this fact,
to simplify matters and for convenience (to have in one agreement the material
provisions that survive the purchase and sale of the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock (collectively the "Series Preferred Stock") and the closing of
an initial public offering), the aforementioned sections were amended and
restated in the Investment and Stockholders' Agreement. See "--Investment and
Stockholders' Agreement."
TERMS OF THE SERIES PREFERRED STOCK
Each share of Series Preferred Stock will automatically be converted
into Common Stock immediately upon the closing of a qualified public offering of
capital stock of the Company. A qualified public offering 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
uses a nationally recognized underwriter approved by holders of a majority
interest of the Series Preferred Stock. As of December 31, 1998, the Series
Preferred Stock was convertible into an aggregate of 15,864,715 shares of Common
Stock.
Each share of Series Preferred Stock entitles its holder to a number of
votes equal to the number of shares of Common Stock into which such share of
Series Preferred Stock is convertible. With respect to the Board of Directors of
the Company, prior to the completion of a qualified public offering (i) the
holders of Series A Convertible Preferred Stock are entitled to vote separately
as a class to elect two directors of the Company (the "Series A Investor
Directors"), (ii) the holders of Series B Convertible Preferred Stock are
entitled to vote separately as a class to elect one director (the "Series B
Investor Director"), (iii) the holders of the Series C Convertible Preferred
Stock are entitled to vote separately as a class to elect one director (to
"Series C Investor Director"), (iv) the holders of the Common Stock are entitled
to vote separately as a class to elect two directors (the "Common Stock
Directors"), (v) the chief executive officer (the "CEO") of the Company is
appointed by the affirmative vote of the Common Stock Directors and the Series A
Investor Directors, Series B Investor Director and Series C Investor Director,
voting together, and (vi) the CEO will be elected to the Board of Directors of
the Company by the holders of Common Stock and Series Preferred Stock, voting
together.
42
<PAGE>
The holders of the Series 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,
winding up or deemed liquidation of the Company, whether voluntary or
involuntary, each holder of a share of Series Preferred Stock outstanding is
entitled to be paid before any payment may be made to the holders of any class
of Common Stock or any stock ranking on liquidation junior to the Series
Preferred Stock, an amount, in cash, equal to the original purchase price paid
by such holder, appropriately adjusted for stock splits, stock dividends and the
like, plus any declared but unpaid dividends.
The Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock and Series C Convertible Preferred Stock A, Series B and Series
C Preferred Stock were $1,000,000, $5,033,367, and $30,000,052, respectively, as
of December 31, 1998. In the event the assets of the Company are insufficient to
pay liquidation preference amounts, all of the assets available for distribution
shall be distributed to each holder of Series Preferred Stock pro rata in
proportion to the number of shares of Series Preferred Stock held by such
holder.
Shares of the Series Preferred Stock may be converted at any time, at
the option of the holder, into shares of Common Stock. The number of shares of
voting Common Stock to be received upon conversion is subject to adjustment in
the event of stock dividends and subdividends, certain combinations of Common
Stock, and issuances of Common Stock and of securities convertible into Common
Stock that have a dilutive effect. As of December 31, 1998, each share of Series
Preferred Stock was convertible into 2.9 shares of Common Stock.
INVESTMENT AND STOCKHOLDERS' AGREEMENT
Pursuant to the terms of the Investment and Stockholders' Agreement,
the Investors and Mr. Jalkut are entitled to certain registration rights with
respect to securities of the Company. On any three occasions at the option of
the holders, the holders of a majority of the securities registrable under the
terms of the Investment and Stockholders' Agreement ("Registrable Securities")
may require the Company to effect a registration under the Securities Act of
1933 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 of 1933 (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 holders of Registrable Securities have
the right (subject to certain cut-back limitations) to request that the Company
register such holder'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 terms, including liabilities arising under
the Securities Act.
LEASE FROM THE KENILWORTH PARTNERSHIP
The Company has entered into the Headquarters Lease for approximately
10,195 square feet of office space from the Kenilworth Partnership, a general
partnership of which David Schaeffer, a director 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
43
<PAGE>
building. The Headquarters Lease expires on August 31, 1999 and may be renewed
at the option of the Company for two additional one-year periods on the same
terms and conditions. Rent paid to the Kenilworth Partnership during the year
ended December 31, 1998, was approximately $282,000. 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.
44
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996, and for the period August 25, 1995 (date of
inception) to December 31, 1998
Consolidated Statements of Comprehensive Loss for the years ended
December 31, 1998, 1997 and 1996, and for the period August 25, 1995
(date of inception) to December 31, 1998
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996, and for the period August 25, 1995 (date of
inception) to December 31, 1998
Consolidated Statement of Stockholders' Equity (Deficit) for the years
ended December 31, 1998, 1997 and 1996, and for the period August 25,
1995 (date of inception) to December 31, 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or not
required or because the required information is incorporated herein by
reference or included in the financial statements or notes thereto
included elsewhere in this report.
(b) Reports on Form 8-K.
On October 6, 1998, the Company filed a report on Form 8-K providing
information under Items 5 and 7. The Report, dated October 6, 1998
announced the expansion of the Company's management team to include three
new additions to its national sales force.
(c) Exhibits.
The following exhibits are filed as a part of this Annual Report on Form
10-K:
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
3.1(1) Amended and Restated Certificate of Incorporation of the
Company and Certificate of Amendment to such Certificate of
Incorporation.
3.2(1) 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.
4.2++ Pledge Agreement by and among the Company, The Bank of New
York, as
45
<PAGE>
trustee, and The Bank of New York, as securities intermediary,
dated April 8, 1998.
4.3** Form of New Note.
4.4+ Form of Existing Note (included in Exhibit 4.1).
10.1* 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.
10.1.1* Amendment No. 3, dated May 4, 1998 to Master Agreement by and
between the Company and NEC America, Inc.
10.1.2* Amendment No. 4, dated July 10, 1998 to Master Agreement by
and between the Company and NEC America, Inc.
10.1.3(1) Amendment No. 5, dated November 20, 1998 to Master Agreement
by and between the Company and NEC America, Inc.
10.2(2)* EmploymentAgreement by and between the Company and Richard
A.Jalkut, dated August 4, 1997, as amended by Amendment to
Employment Agreement, dated April 6, 1998.
10.3(2)* Non-Disclosure, Assignment of Inventions and Non-Competition
Agreement by and between the Company and Kevin Bennis, dated
February 2, 1998.
10.4(2)* Pathnet, Inc. 1995 Stock Option Plan.
10.5(2)* Pathnet, Inc. 1997 Stock Incentive Plan, as amended by
Amendment No. 1 to 1997 Stock Incentive Plan.
10.6* 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.
10.7* Warrant Agreement by and between the Company and The Bank of
New York, as warrant agent, dated April 8, 1998.
10.8* 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.
10.9** Investment and Stockholders Agreement, dated as of October 31,
1997 (the "Investment and Stockholders' Agreement"), by and
among the Company and certain stockholders of the Company.
10.9.1** Consent, Waiver and Amendment, dated as of March 19, 1998,
relating to the Investment and Stockholders' Agreement.
46
<PAGE>
10.9.2** Amendment No. 1 to the Investment and Stockholders' Agreement,
dated as of April 1, 1998.
10.10* 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.
10.10.1* Second Amendment to Lease, dated June 1, 1998.
10.10.2(1) Third Amendment to Lease, dated September 1, 1998.
10.11(2)* Non-Qualified Stock Option Agreement by and between the
Company and Richard A. Jalkut, dated August 4, 1997.
10.12(2)* Non-Qualified Stock Option Agreement by and between the
Company and David Schaeffer, dated October 31, 1997.
21.1(1) Subsidiaries of the Company.
27.1(1) Financial Data Schedule for the year ended December 31, 1998.
+ 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 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, as amended by Amendment
No. 1 to such Registration Statement filed with the Securities
and Exchange Commission on July 16, 1998, as further amended
by Amendment No. 2 to such Registration Statement filed with
the Securities and Exchange Commission on July 27, 1998, and
as further amended by Amendment No. 3 to such Registration
Statement filed with the Securities and Exchange Commission on
August 10, 1998.
** Incorporated by reference to the corresponding exhibit to the
Company's Registration Statement on Form S-4 (Registration No.
333-53467) filed by the Company with the Securities and
Exchange Commission on May 22, 1998, as amended by Amendment
No. 1 to such Registration Statement.
(1) Filed herewith.
(2) Constitutes management contract or compensatory arrangement.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the District of
Columbia on this 16th day of March 1999.
PATHNET, INC.
By: /s/ Michael A. Lubin
------------------------
Name: Michael A. Lubin
Title: Vice President, General Counsel And
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Richard A. Jalkut
- ---------------------- Chief Executive Officer and
Richard A. Jalkut Director March 16, 1999
/s/ William R. Smedberg V Executive Vice-President
- ------------------------- Corporate Development
William R. Smedberg, V (Principal Accounting and
Financial Officer) March 16, 1999
- --------------- Director March , 1999
David Schaeffer
/s/ Peter J. Barris Director March 17, 1999
- -------------------
Peter J. Barris
/s/ Kevin J. Maroni Director March 11, 1999
- -------------------
Kevin J. Maroni
/s/ Patrick J. Kerins Director March 11, 1999
- ---------------------
Patrick J. Kerins
/s/ Richard K. Prins Director March 17, 1999
- --------------------
Richard K. Prins
/s/ Stephen A. Reinstadtler Director March 15, 1999
- ---------------------------
Stephen A. Reinstadtler
48
<PAGE>
F-1
PATHNET, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
Page
<CAPTION>
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996, and for the period August 25, 1995 (date of
inception) to December 31, 1998 F-4
Consolidated Statements of Comprehensive Loss for the years ended
December 31, 1998, 1997 and 1996, and for the period August 25, 1995
(date of inception) to December 31, 1998 F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996, and for the period August 25, 1995 (date of
inception) to December 31, 1998 F-6
Consolidated Statement of Stockholders' Equity (Deficit) for the years
ended December 31, 1998, 1997 and 1996, and for the period August 25,
1995 (date of inception) to December 31, 1998 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
Pathnet, Inc.
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects, the financial
position of Pathnet, Inc. and its subsidiaries (the Company) at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998 and for the period
August 25, 1995 (date of inception) to December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
McLean, VA
February 14, 1999
F-2
<PAGE>
PATHNET, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 57,321,887 $ 7,831,384
Note receivable 3,206,841 -
Interest receivable 3,848,753 -
Marketable securities available for sale, at market 97,895,773 -
Prepaid expenses and other current assets 205,505 48,571
----------- -----------
Total current assets 162,478,759 7,879,955
Property and equipment, net 47,971,336 7,207,094
Deferred financing costs, net 10,508,251 250,428
Restricted cash 10,731,353 760,211
Marketable securities available for sale, at market 71,899,757 -
Pledged marketable securities held to maturity 61,824,673 -
----------- -----------
Total assets $ 365,414,129 $ 16,097,688
=========== ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 10,708,263 $ 5,592,918
Accrued interest 8,932,294 -
Accrued expenses and other liabilities 639,688 300,000
----------- -----------
Total current liabilities 20,280,245 5,892,918
12 1/4% Senior Notes, net of unamortized bond discount of $3,787,875 346,212,125 -
----------- -----------
Total liabilities 366,492,370 5,892,918
----------- -----------
Series A convertible preferred stock, $0.01 par value, 1,000,000 shares authorized, issued and
outstanding at December 31, 1998 and 1997, respectively (liquidation preference $1,000,000) 1,000,000 1,000,000
Series B convertible preferred stock, $0.01 par value, 1,651,046 shares authorized, issued and
outstanding at December 31, 1998 and 1997, respectively (liquidation preference $5,033,367) 5,008,367 5,008,367
Series C convertible preferred stock, $0.01 par value, 2,819,549 shares authorized; 2,819,549
and 939,850 shares issued and outstanding at December 31, 1998 and 1997, respectively
(liquidation preference $30,000,052) 29,961,272 9,961,274
----------- -----------
Total mandatorily redeemable preferred stock 35,969,639 15,969,641
----------- -----------
Common stock, $0.01 par value, 60,000,000 and 7,500,000 shares authorized at
December 31, 1998 and 1997, respectively; 2,902,358 and 2,900,000 shares
issued and
outstanding at December 31, 1998 and 1997, respectively 29,024 29,000
Common stock subscription receivable - (9,000)
Deferred compensation (978,064) -
Additional paid-in capital 6,156,406 381,990
Accumulated other comprehensive income 208,211 -
Deficit accumulated during the development stage (42,463,457) (6,166,861)
----------- -----------
Total stockholders' equity (deficit) (37,047,880) (5,764,871)
----------- -----------
Total liabilities, mandatorily redeemable preferred stock and stockholders' equity (deficit) $ 365,414,129 $ 16,097,688
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 3
<PAGE>
PATHNET, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
For the period
For the year ended August 25, 1995
December 31, (date of inception)
-------------------------------------------- to December 31,
1998 1997 1996 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 1,583,539 $ 162,500 $ 1,000 $ 1,747,039
------------ ------------ ------------ ------------
Operating expenses:
Cost of revenue 7,547,620 -- -- 7,547,620
Selling, general and administrative 9,615,867 4,247,101 1,333,294 15,625,349
Research and development -- -- --
Depreciation expense 732,813 46,642 9,024 788,831
------------ ------------ ------------ ------------
Total operating expenses 17,896,300 4,293,743 1,342,318 23,961,800
------------ ------------ ------------ ------------
Net operating loss (16,312,761) (4,131,243) (1,341,318) (22,214,761)
Interest expense (32,572,454) -- (415,357) (32,987,811)
Interest income 13,940,240 159,343 13,040 14,115,236
Write-off of initial public offering costs (1,354,534) -- -- (1,354,534)
Other income (expense), net 2,913 (5,500) -- (2,587)
------------ ------------ ------------ ------------
Net loss $(36,296,596) $ (3,977,400) $ (1,743,635) $(42,444,457)
============ ============ ============ ============
Basic and diluted loss per
common share $ (12.51) $ (1.37) $ (0.60) $ (14.63)
============ ============ ============ ============
Weighted average number of
common shares outstanding 2,902,029 2,900,000 2,900,000 2,900,605
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F - 4
<PAGE>
PATHNET, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
For the period
For the year ended August 25, 1995
December 31, (date of inception)
-------------------------------------------- to December 31,
1998 1997 1996 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(36,296,596) $ (3,977,400) $ (1,743,635) $(42,444,457)
Other comprehensive income
Net unrealized gain on marketable
securities available for sale 208,211 -- -- 208,211
------------ ------------ ------------ ------------
Comprehensive loss $(36,088,385) $ (3,977,400) $ (1,743,635) $(42,236,246)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 5
<PAGE>
PATHNET, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
For the period
For the year ended August 25, 1995
December 31, (date of inception)
------------------------------------------ to December 31,
1998 1997 1996 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (36,296,596) $ (3,977,400) $ (1,743,635) $ (42,444,457)
Adjustment to reconcile net loss to net cash used in operating
activities
Depreciation expense 732,813 46,642 9,024 788,831
Amortization of deferred financing costs 842,790 -- -- 842,790
Loss on disposal of asset -- 5,500 -- 5,500
Write-off of deferred financing costs 581,334 -- -- 581,334
Interest expense resulting from amortization of discount on
the bonds payable 307,125 -- -- 307,125
Stock based compensation 701,295 -- -- 701,295
Interest expense for beneficial conversion feature of
bridge loan -- -- 381,990 381,990
Accrued interest satisfied by conversion of bridge loan to
Series B convertible preferred stock -- -- 33,367 33,367
Changes in assets and liabilities:
Interest receivable (4,846,952) -- -- (4,846,952)
Prepaid expenses and other current assets (156,935) (46,876) (1,695) (205,505)
Accounts payable 6,709 386,106 110,094 507,614
Accrued interest 8,932,294 -- -- 8,932,294
Deferred revenue -- -- -- --
Accrued expenses and other liabilities 339,688 269,783 17,572 639,687
------------- ------------- ------------- -------------
Net cash used in operating activities (28,856,435) (3,316,245) (1,193,283) (33,775,087)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Expenditures for network in progress (33,619,342) (1,739,782) -- (35,359,124)
Expenditures for property and equipment (2,769,076) (381,261) (46,653) (3,205,893)
Purchase of marketable securities available for sale (169,587,319) -- -- (169,587,319)
Purchase of marketable securities - pledged as collateral (83,097,655) -- -- (83,097,655)
Sale of marketable securities - pledged as collateral 22,271,181 -- -- 22,271,181
Restricted cash (9,971,142) (760,211) -- (10,731,353)
Issuance of note receivable to incumbent (3,206,841) -- -- (3,206,841)
Repayment of note receivable 9,000 -- -- 9,000
------------- ------------- ------------- -------------
Net cash used in investing activities (279,971,194) (2,881,254) (46,653) (282,908,004)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Issuance of voting and non-voting common stock -- -- -- 1,000
Proceeds from sale of preferred stock 19,999,998 12,000,054 2,500,000 35,000,052
Proceeds from sale of Series B convertible preferred stock
representing the conversion of committed but undrawn portion
of bridge loan to Series B convertible preferred stock -- -- 300,000 300,000
Proceeds from bond offering 350,000,000 -- -- 350,000,000
Proceeds from bridge loan -- -- 700,000 700,000
Exercise of employee common stock options 81 -- -- 81
Payment of issuance costs for preferred stock offerings -- (38,780) (25,000) (63,780)
Payment of deferred financing costs (11,681,947) (250,428) -- (11,932,375)
------------- ------------- ------------- -------------
Net cash provided by financing activities 358,318,132 11,710,846 3,475,000 374,004,978
------------- ------------- ------------- -------------
Net increase in cash and cash equivalents 49,490,503 5,513,347 2,235,064 57,321,887
Cash and cash equivalents at the beginning of period 7,831,384 2,318,037 82,973 --
------------- ------------- ------------- -------------
Cash and cash equivalents at the end of period $ 57,321,887 $ 7,831,384 $ 2,318,037 $ 57,321,887
============= ============= ============= =============
Supplemental disclosure:
Cash paid for interest $ 22,271,234 $ -- $ -- $ 22,271,234
============= ============= ============= =============
Noncash investing and financing transactions:
Conversion of bridge loan plus accrued interest to
Series B convertible preferred stock $ -- $ -- $ 733,367 $ 733,367
============= ============= ============= =============
Conversion of non-voting common stock to voting common stock $ -- $ -- $ 14,500 $ 500
============= ============= ============= =============
Issuance of voting and non-voting common stock $ -- $ -- $ -- $ 9,000
============= ============= ============= =============
Acquisition of network equipment financed by accounts payable $ 10,200,650 $ 5,092,013 $ -- $ 10,200,650
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 6
<PAGE>
PATHNET INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period from August 25, 1995 (date of inception) to December 31 1995 and
for the years ended December 31, 1996, 1997 and 1998
<TABLE>
Deficit
Note Accumulated Accumulated
Receivable Additional Other During
Common Stock From Deferred Paid-in Comprehensive Development
Shares Amount Stockholder Compensation Capital Income Stage Total
--------- --------- ---------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 25, 1995 -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of Voting common stock 1,450,000 14,500 (4,500) -- -- -- (9,500) 500
Issuance of Non-voting common stock 1,450,000 14,500 (4,500) -- -- -- (9,500) 500
Net loss -- -- -- -- -- -- (426,826) (426,826)
--------- --------- --------- --------- --------- --------- ---------- -----------
Balance at December 31, 1995 2,900,000 29,000 (9,000) -- -- -- (445,826) (425,826)
Cancellation of Non-voting common stock (1,450,000) (14,500) -- -- -- -- -- (14,500)
Issuance of Voting common stock 1,450,000 14,500 -- -- -- -- -- 14,500
Interest expense for beneficial conversion --
feature of bridge loan -- -- -- -- 381,990 -- -- 381,990
Net loss -- -- -- -- -- -- (1,743,635) (1,743,635)
--------- --------- --------- --------- --------- --------- ---------- -----------
Balance at December 31, 1996 2,900,000 29,000 (9,000) -- 381,990 -- (2,189,461) (1,787,471)
Net loss -- -- -- -- -- -- (3,977,400) (3,977,400)
--------- --------- --------- --------- --------- --------- ---------- -----------
Balance at December 31, 1997 2,900,000 29,000 (9,000) -- 381,990 -- (6,166,861) (5,764,871)
Exercise of stock options 2,358 24 -- -- 57 -- -- 81
Repayment of note receivable -- -- 9,000 -- -- -- -- 9,000
Deferred compensation expense related to
issuance of employee common stock options -- -- -- (1,679,359) 1,679,359 -- -- --
Compensation expense related to issuance of
employee common stock options -- -- -- 701,295 -- -- -- 701,295
Fair value of warrants to purchase common --
stock -- -- -- -- 4,095,000 -- -- 4,095,000
Net unrealized gain on marketable securities
available for sale -- -- -- -- -- 208,211 -- 208,211
Net loss -- -- -- -- -- -- (36,296,596) (36,296,596)
--------- --------- --------- --------- --------- --------- ---------- -----------
2,902,358 $ 29,024 $ -- $(978,064)$6,156,406 $ 208,211$(42,463,457 $(37,047,880)
========= ========= ========= ========= ========= ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 7
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Pathnet, Inc. (Company) is a leading "carrier's carrier", providing
high-quality, low-cost digital fiber and wireless communications capacity to
under-served and second- and third-tier U.S. markets. The Company's strategy is
to partner with owners of telecommunication assets, including utility, pipeline
and railroad companies (Incumbents), to upgrade and aggregate existing
infrastructure to a state-of-the-art SONET network. As of December 31, 1998, the
Company had approximately 2,000 route miles of completed network, approximately
5,000 route miles of network under construction and approximately 10,000 route
miles of network under contract. Due to demand and opportunity, Pathnet expanded
the scope of its existing business strategy to include fiber. Pathnet offers
telecommunications service to inter-exchange carriers, local exchange carriers,
internet service providers, Regional Bell Operating Companies, cellular
operators and resellers.
The Company's business has been funded primarily through equity
investments by the Company's stockholders and a private placement in April 1998
of units consisting of 12 1/4% Senior Notes due 2008 (Restricted Notes) and
warrants (Warrants) to purchase Common Stock (Debt Offering). On September 2,
1998, the Company commenced an offer to exchange (Exchange Offer) all
outstanding Restricted Notes for up to $350.0 million aggregate principal amount
of 12 1/4% Senior Notes due 2008 (Registered Notes) which have been registered
under the Securities Act of 1933, as amended (Securities Act). The terms of the
Registered Notes are identical in all material respects to the terms of the
Restricted Notes, except that the Registered Notes have been registered under
the Securities Act and are generally freely transferable by holders thereof and
are issued without any covenant upon the Company regarding registration under
the Securities Act. The Exchange Offer expired on October 2, 1998 and all
outstanding Restricted Notes were exchanged for Registered Notes. (The
Restricted Notes and the Registered Notes are collectively referred to herein as
the "Senior Notes".)
A substantial portion of the Company's activities to date has involved
developing strategic relationships with Incumbents and building its network.
Accordingly, a majority of its revenues to date reflect only certain consulting
and advisory services in connection with the design, development and
construction of digital microwave infrastructure. The remainder of its revenues
to date (approximately 10 per cent of its total revenues) was derived from the
sale of bandwidth along the Company's digital network. The Company has also been
engaged in constructing network, developing operating systems, constructing a
network operations center, raising capital and hiring management and other key
personnel. The Company has experienced significant operating and net losses and
negative operating cash flow to date and expects to continue to experience
operating and net losses and negative operating cash flow until such time as it
is able to generate revenue sufficient to cover its operating expenses.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
While the Company recently commenced providing telecommunication
services to customers and recognizing the revenue from the sale of such
telecommunication services, its principal activities to date have been securing
contractual alliances with Incumbents, designing and constructing network
F-8
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
segments, obtaining capital and planning its proposed service. Accordingly, the
Company's consolidated financial statements are presented as a development stage
enterprise, as prescribed by Statement of Financial Accounting Standards No. 7,
"Accounting and Reporting by Development Stage Enterprises." As a development
stage enterprise, the Company has been relying on the issuance of equity and
debt securities, rather than recurring revenues, for its primary sources of cash
since inception.
CONSOLIDATION
The consolidated financial statements include the accounts of Pathnet,
Inc. and its wholly-owned subsidiaries, Pathnet Finance I, LLC, Pathnet/Idaho
Power License, LLC, Pathnet Fiber Optics, LLC and Pathnet/BNSF Equipment, LLC.
All material intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. The estimates involve judgments with
respect to, among other things, various future factors which are difficult to
predict and are beyond the control of the Company. Actual amounts could differ
from these estimates.
LOSS PER SHARE
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of Common Stock outstanding
during the applicable period. Diluted earnings (loss) per share is computed by
dividing net income (loss) by the weighted average common and potentially
dilutive common equivalent shares outstanding during the applicable period. For
each of the periods presented, basic and diluted loss per share are the same.
The exercise of 2,885,833 employee Common Stock options, the exercise of
warrants to purchase 1,116,500 shares of Common Stock, and the conversion of
5,470,595 shares of Series A, B and C convertible preferred stock into
15,864,715 shares of Common Stock as of December 31, 1998, which could
potentially dilute basic earnings per share in the future were not included in
the computation of diluted loss per share for the periods presented because to
do so would have been antidilutive in each case.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of certain of its
financial instruments, which include cash equivalents and accounts payable,
approximate fair value due to the relatively short maturity of these
instruments. As of December 31, 1998, the value of the Company's 12 1/4% Senior
Notes was approximately $245 million.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
F-9
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents, marketable
securities and associated interest receivable, note receivable, and restricted
cash. Marketable securities and associated interest receivable include U.S.
Treasury securities and debt securities of U.S. Government agencies,
certificates of deposit and money market funds, and corporate debt securities.
The note receivable is guaranteed by the parent company of the note holder, a
leading utility company. The Company has invested its excess cash in a money
market fund with a commercial bank. The money market fund is collateralized by
the underlying assets of the fund. The Company's restricted cash is maintained
in an escrow account (see Note 5) at a major bank. The Company has not
experienced any losses on its cash and cash equivalents and restricted cash.
MARKETABLE SECURITIES
Management determines the appropriate classification of its investments
in marketable securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Debt securities are classified as
held to maturity when the Company has the positive intent and ability to hold
the securities to maturity. The Company has classified certain securities as
held to maturity pursuant to a pledge agreement. Held to maturity securities are
stated at amortized cost. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale,
along with any investments in equity securities. Securities are classified as
current or non-current based on the maturity date. Securities available for sale
are carried at fair value based on quoted market prices at the balance sheet
date, with unrealized gains and losses reported as part of accumulated other
comprehensive income.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and interest
are included in interest income or expense. Realized gains and losses are
included in other income (expense), net in the consolidated statements of
operations. The cost of securities sold is based on the specific identification
method. The Company's investments in debt and equity securities are diversified
among high credit quality securities in accordance with the Company's investment
policy.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of network in progress,
communications network, office and computer equipment, furniture and fixtures
and leasehold improvements, is stated at cost. Network in progress costs
incurred during development are capitalized. Depreciation of the completed
communications network commences when the network equipment is ready for its
intended use and is computed using the straight-line method with estimated
useful lives of network assets ranging between three to ten years. Depreciation
of the office and computer equipment and furniture and fixtures is computed
using the straight-line method, generally over three to five years, based upon
estimated useful lives, commencing when the assets are available for service.
Leasehold improvements are amortized over the lesser of the useful lives of the
assets or the lease term. Expenditures for maintenance and repairs are expensed
as incurred. When assets are retired or disposed, the cost and the related
F-10
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
DEFERRED INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year-end,
based on enacted laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established when necessary, to reduce net deferred tax assets to the amount
expected to be realized. The provision for income taxes consists of the
Company's current provision for federal and state income taxes and the change in
the Company's net deferred tax assets and liabilities during the period.
REVENUE RECOGNITION
The Company earns revenue from the sale of telecommunication capacity
and for project management and consulting services. Revenue from the sale of
telecommunications capacity is earned when the service is provided. Revenue for
project management and consulting services is recognized over the related
project period as milestones are achieved. The Company defers revenue when
contractual payments are received in advance of the performance of services.
During 1998, one customer accounted for 98 per cent of the Company's total
revenue.
DEFERRED FINANCING COSTS
The Company has incurred costs related to the Debt Offering together
with costs associated with obtaining future debt financing arrangements. Such
costs are amortized over the term of the debt or financing arrangement other
than when financing has not been obtained, in which case, the costs are expensed
immediately.
COMPREHENSIVE LOSS
Effective March 31, 1998, the Company adopted Statement of Statement of
Financial Accounting Standards No 130 which requires additional reporting with
respect to certain changes in assets and liabilities that previously were
reported in stockholders' equity (deficit). Accordingly, the Company has
included Consolidated Statements of Comprehensive Loss for the years ended
December 31, 1998, 1997 and 1996, and for the period August 25, 1995 (date of
inception) to December 31, 1998 in the accompanying financial statements.
F-11
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MARKETABLE SECURITIES
The Company's marketable securities are considered "available for
sale," and, as such, are stated at market value. The net unrealized gains and
losses on marketable securities are reported as part of accumulated other
comprehensive income. Realized gains or losses from the sale of marketable
securities are based on the specific identification method.
The following is a summary of the investments in marketable securities
at December 31, 1998:
<TABLE>
<CAPTION>
Gross Unrealized
----------------
Cost Gains Losses Market Value
---- ----- ------ -------------
<S> <C> <C> <C> <C>
Available for sale securities:
U.S. Treasury securities and debt securities
of U.S. Government agencies $ 20,684,791 $ 11,436 $ -- $ 20,696,227
Certificates of deposit and money market
funds 7,098,225 116 878 7,097,463
Corporate debt securities 141,804,303 225,972 28,435 142,001,840
-------------- ----------- ------------ -------------
$ 169,587,319 $ 237,524 $ 29,313 $ 169,795,530
============== =========== ============ =============
</TABLE>
Proceeds from the sales of available for sale securities and gross
realized gains and gross realized losses on sales of available for sale
securities were immaterial during the year ended December 31, 1998.
The amortized cost and estimated fair value of available for sale
securities by contractual maturity at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Cost Market Value
<S> <C> <C>
Due in one year or less $ 97,863,395 $ 97,895,773
Due after one year through two years 71,723,924 71,899,757
-------------- --------------
$ 169,587,319 $ 169,795,530
============== ==============
</TABLE>
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
In addition to marketable securities, the Company has investments in
pledged marketable securities that are pledged as collateral for repayment of
interest on the Company's Senior Notes through April 2000 (see note 8) and are
classified as non-current assets on the consolidated balance sheet. As of
December 31, 1998 pledged marketable securities consisted of U.S. Treasury
securities classified as held to maturity with an amortized cost of
approximately $60.8 million, interest receivable on the pledged marketable
securities of approximately $998,000 and cash and cash equivalents of
approximately $41,000. Approximately $40.1 million of the investments
contractually mature prior to December 31, 1999 and approximately $20.7 million
contractually mature after December 31, 1999 and prior to April 30, 2000.
F-12
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTE RECEIVABLES
Under the terms of a promissory note with an incumbent, the Company
agreed to advance up to $10 million principal for the purpose of funding the
incumbent's equipment expenditures under a Fixed Point Microwave Services
agreement. Expenses are initially incurred by the Company and are recharged at
cost to the incumbent as principal under the promissory note. The principal
amount of the promissory note is due and payable on March 31, 1999. Interest on
the promissory note accrues at the rate of 5 per cent per annum computed from
the date of commissioning of the network, which had not occurred as of December
31, 1998. Commissioning of the network occurs when the network has been
completed and is performing in accordance with agreed upon specifications.
Approximately $3.2 million was outstanding under the promissory note as of
December 31, 1998.
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of the following
at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------- ---------------
<S> <C> <C>
Network in progress $ 38,669,088 $ 6,831,795
Communications network 6,890,686 --
Office and computer equipment 2,267,647 248,880
Furniture and fixtures 766,013 120,093
Leasehold improvements 166,733 62,344
---------------- ---------------
48,760,167 7,263,112
Less: accumulated depreciation (788,831) (56,018)
----------------- ---------------
Property and equipment, net $ 47,971,336 $ 7,207,094
================== ===============
</TABLE>
Network construction costs include all direct material and labor costs
together with related allocable interest costs, necessary to construct
components of a high capacity digital network which is owned and maintained by
the Company. During 1998, a portion of network was completed and made available
for use by the Company, and was transferred from network in process to
communications network. Network construction in progress at December 31, 1998
and 1997 respectively included approximately $10.2 million and $5.1 million,
respectively, of telecommunications equipment not yet paid for by the Company.
Corresponding amounts are included in accounts payable at December 31, 1998 and
1997, respectively.
6. DEFERRED FINANCING COSTS
During 1998, the Company incurred total issuance costs of approximately
$11.3 million in connection with the Debt Offering. For the year ended December
31, 1998, amortization of the costs of approximately $843,000 was charged to
interest expense.
F-13
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1997, debt-financing costs comprised approximately
$250,000 related to costs incurred in anticipation of obtaining debt-financing
arrangements with a vendor. During the year ended December 31, 1998, these
costs, together with additional debt financing costs incurred during the year of
approximately $364,000, were charged to interest expense as the related
financing arrangements were not consummated.
7. RESTRICTED CASH
Restricted cash comprises amounts held in escrow to collateralize the
Company's obligations under certain of its Fixed Point Microwave Services (FPM)
agreements. The funds in each escrow account are available only to fund the
projects to which the escrow is related. Generally, funds are released from
escrow to pay project costs as incurred. During the year ended December 31,
1998, the Company deposited approximately $10.3 million in escrow and no funds
were released from escrow.
8. LONG-TERM DEBT
During 1998, the Company completed the Debt Offering for total gross
proceeds of $350.0 million less total issuance costs of approximately $11.3
million. Upon issuance, approximately $345.9 million of the gross proceeds were
allocated to the Senior Notes and approximately $4.1 million were allocated to
the Warrants based upon estimated fair values. The Warrants expire on April 15,
2008. The estimated value attributed to the Warrants has been recorded as a
discount on the face value of the Senior Notes and as additional paid-in
capital. This discount is amortized as an increase to interest expense and the
carrying value of the debt over the related term using the interest method. The
Company has recorded approximately $307,000 of expense for the year ended
December 31, 1998, related to the amortization of this discount. Interest on the
Senior Notes accrues at an annual rate of 12 1/4 % , payable semiannually, in
arrears, beginning October 15, 1998, with principal due in full on April 15,
2008. Interest expense, exclusive of the amortization of the discount, for the
year ended December 31, 1998 was $31.3 million. The Company used approximately
$81.1 million of the proceeds related to the Debt Offering to purchase U.S.
Government debt securities, which are restricted and pledged as collateral for
repayment of all interest due on the Senior Notes through April 15, 2000. The
Company made its first interest payment of approximately $22.3 million on
October 15, 1998. The Senior Notes are redeemable, in whole or part, at any time
on or after April 15, 2003 at the option of the Company, at the following
redemption prices plus accrued and unpaid interest (i) on or after April 15,
2003; 106% of the principal amount, (ii) on or after April 15, 2004; 104% of the
principal amount, (iii) on or after April 15, 2005; 102% of the principal amount
and (iv) on or after April 15, 2006; 100% of the principal amount. In addition,
at any time prior to April 15, 2001, the Company may redeem within sixty days,
with the net cash proceeds of one or more public equity offerings, up to 35% of
the aggregate principal amount of the Senior Notes at a redemption price equal
to 112.25% of the principal amount plus accrued and unpaid interest provided
that at least 65% of the original principal amount of the Senior Notes remain
outstanding. Upon a change in control, as defined, each holder of the Senior
Notes may require the Company to repurchase all or a portion of such holder's
Senior Notes at a purchase price of cash equal
F-14
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to 101% of the principal amount plus accrued and unpaid interest and liquidated
damages if any.
The Senior Notes contain certain covenants which restrict the
activities of the Company including limitations of indebtedness, restricted
payments, issuances and sales of capital stock, affiliate transactions, liens,
guarantees, sale of assets and dividends.
9. CAPITAL STOCK TRANSACTIONS
COMMON STOCK
The initial capitalization of the Company, on August 28, 1995, occurred
through the issuance by the Company of 1,450,000 shares of voting common stock
and 1,450,000 shares of non-voting common stock.
On May 8, 1998, the Company filed a Registration Statement with the
Securities and Exchange Commission for an initial public offering of common
stock (Initial Public Offering). See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for a discussion of the Company's decision to postpone the
Initial Public Offering. In relation to the postponement of the Initial Public
Offering, the Company wrote off approximately $1.4 million in expenses,
consisting primarily of legal and accounting fees, printing costs, and
Securities and Exchange Commission and Nasdaq Stock Market fees. On July 24,
1998, the Company's stockholders approved a 2.9-for-1 stock split which was
effected on August 3, 1998, the record date. All share information has been
adjusted for this stock split for all periods presented.
PREFERRED STOCK
As part of its initial capitalization on August 25, 1995, the Company
initiated a private offering of 1,000,000 shares of Series A convertible
preferred stock for $1,000,000. Pursuant to the terms of the Investment and
Stockholders' Agreement by and among the Company and certain stockholders of the
Company (Investment and Stockholders' Agreement), the offering closed in two
phases of $500,000 each. As of the signing of the Investment and Stockholders'
Agreement, the Company received $500,000, representing the first closing on this
offering in 1995. In addition, the offering provided for a convertible bridge
loan in the amount of $1,000,000. The bridge loan carried an interest rate of
12% per annum and was due and payable in full on the earlier to occur of the
anniversary date of the bridge loan issuance or the closing date of the
Company's next equity financing. The bridge loan was converted into Series B
preferred stock at 73% of the price of the Series B convertible preferred stock
issued in the next equity financing.
In February 1996, the Company issued 500,000 shares of Series A
convertible preferred stock to the original investors in exchange for $500,000,
representing the second closing under the Investment and Stockholders'
Agreement. In August 1996, the Company drew $700,000 on a bridge loan with the
original investors.
On December 23, 1996, the Company consummated a private offering of
609,756 shares of Series B convertible preferred stock for $2,000,000 less
issuance costs of $25,000 pursuant to the Investment and Stockholders'
Agreement. In addition, simultaneously, the $700,000 bridge loan plus
F-15
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$33,367 of accrued interest was converted into 306,242 shares of Series B
convertible preferred stock. The Company recognized $271,107 of interest expense
to account for the beneficial conversion feature of the bridge loan. In
addition, $300,000 representing the committed but undrawn portion of the bridge
loan, was paid to the Company for the sale of 125,292 shares of Series B
convertible preferred stock at a discounted rate. The Company recognized
$110,883 of interest expense to account for the beneficial conversion feature of
the committed but undrawn bridge loan. On June 18, 1997, pursuant to the
Investment and Stockholders' Agreement, the Company received an additional
$2,000,000 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, pursuant to the Investment and Stockholders'
Agreement, the Company consummated a private offering of 939,850 shares of
Series C convertible preferred stock for approximately $10 million, less
issuance costs of $38,780. On April 8, 1998, pursuant to the Investment and
Stockholders' Agreement, the Company consummated a second closing of 1,879,699
shares of Series C convertible preferred stock for an aggregate purchase price
of approximately $20.0 million. There were no issuance costs associated with the
second closing.
Each share of Series A, Series B and Series C convertible preferred
stock entitles each holder to a number of votes per share equal to the number of
shares of Common Stock into which each share of Series A, Series B and Series C
convertible preferred stock is currently convertible.
The holders of the Series A, Series B and Series C convertible
preferred stock are entitled to receive dividends in preference to and at the
same rate as dividends are paid with respect to the common stock. In the event
of any liquidation, dissolution or winding up of the Company, whether voluntary
or involuntary, holders of each share of Series A, Series B and Series C
convertible preferred stock outstanding are entitled to be paid before any
payment shall be made to the holders of any class of common stock or any stock
ranking on liquidation junior to the convertible preferred stock, an amount, in
cash, equal to the original purchase price paid by such holder plus any declared
but unpaid dividends.
In the event the assets of the Company are insufficient to pay
liquidation preference amounts, then all of the assets available for
distribution shall be distributed pro rata so that each holder receives that
portion of the assets available for distribution as the number of shares of
convertible preferred stock held by such holder bears to the total number of
shares of convertible preferred stock then outstanding.
Shares of the Series A, Series B, and Series C convertible preferred
stock may be converted at any time, at the option of the holder, into voting
common stock. The number of shares of voting common stock entitled upon
conversion is the quotient obtained by dividing the face value of the Series A,
Series B and Series C convertible preferred stock by the Applicable Conversion
Rate, defined as the Applicable Conversion Value of $0.34, $1.13 or $3.67 per
share, respectively.
Each share of convertible preferred stock shall automatically be
converted into the number of shares of voting common stock which such shares are
convertible upon application of the Applicable Conversion Rate immediately upon
the closing of a qualified underwritten public offering covering the offer and
sale of capital stock which is defined as: (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)
F-16
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company uses a nationally recognized underwriter approved by holders of a
majority interest of the Series A, Series B and Series C convertible preferred
stock voting together.
If the Company issues any additional shares of common stock of any
class at a price less than the Applicable Conversion Value, in effect for the
Series A, Series B or Series C convertible preferred stock immediately prior to
such issuance or sale, then the Applicable Conversion Value shall be adjusted
accordingly.
In the event a qualified public offering has not occurred prior to
December 23, 2000, the holder of shares of Series A or Series B preferred stock
can require the Company to redeem the shares of Series A and Series B
convertible preferred stock. After receipt from any one holder of an election to
have any shares redeemed, the Company is required to send a notice to the Series
A and Series B preferred stockholders on December 24, 2000 of the redemption
price. If after sending the redemption notice to Series A and Series B preferred
stockholders, the Company receives requests for redemption on or prior to
January 11, 2001, from the holders of at least 67% of the Series A and Series B
convertible preferred stock taken together, the Company must redeem all shares
of Series A and Series B convertible preferred stock. Payment of the redemption
price is due on January 23, 2001, for a cash price equal to the original
purchase price paid by such holders for each share of Series A and Series B
convertible preferred stock as adjusted for any stock split, stock distribution
or stock dividends with respect to such shares. The successful completion of a
qualified public offering is not within the control of the Company. Therefore,
the Company does not present the Series A and Series B preferred stock as a
component of stockholders' equity.
In the event that a qualified public offering has not occurred prior to
November 3, 2001, the holder of shares of Series C preferred stock can require
the Company to redeem the shares of Series C convertible preferred stock. After
receipt from any one holder of an election to have any shares redeemed, the
Company is required to send a notice to the Series C preferred stockholders on
November 4, 2001 of the redemption price. If after sending the redemption notice
to Series C preferred stockholders, the Company receives requests for redemption
on or prior to November 21, 2001, from the holders of at least 67% of the Series
C convertible preferred stock, the Company must redeem all shares of Series C
convertible preferred stock. Payment of the redemption price is due on December
3, 2001 for a cash price equal to the original purchase price paid by such
holders for each share of Series C convertible preferred stock as adjusted for
any stock split, stock distribution or stock dividends with respect to such
shares. The successful completion of a qualified public offering is not within
the control of the Company. Therefore, the Company does not present the Series C
preferred stock as a component of stockholders' equity.
Notwithstanding the provisions for optional redemption described above,
pursuant to a Consent Waiver and Amendment effective March 24, 1998 among the
Company and certain stockholders of the Company, the holders of the Series A,
Series B and Series C convertible preferred stock agreed that no optional
redemption of the Series A, Series B or Series C convertible preferred stock may
be made by the Company prior to 90 days after (i) the final maturity dated of
the Senior Notes (ii) or such earlier date (after the redemption date specified
for such preferred stock) as the Senior Notes shall be paid in full.
F-17
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTIONS
On August 28, 1995, the Company adopted the 1995 Stock Option Plan
(1995 Plan), under which incentive stock options and non-qualified stock options
could be granted to the Company's employees and certain other persons and
entities in accordance with law. The Compensation Committee, which administers
the 1995 Plan, determined the number of options granted, the vesting period and
the exercise price of each award made under the 1995 Plan. The 1995 Plan will
terminate August 28, 2005 unless terminated earlier by the Board of Directors.
During 1998, the Compensation Committee determined that no further awards would
be granted under the 1995 Plan.
Options granted to date under the 1995 Plan generally vest over a three
period and expire either 30 days after termination of employment or 10 years
after date of grant. As of December 31, 1998, a total of 70,731 non-qualified
stock options and 424,393 incentive stock options were issued at an exercise
price of $0.03 per share, an amount estimated to equal or exceed the per share
fair value of the common stock at the time of grant. As of December 31, 1998,
the options issued at an exercise price of $0.03 had a weighted average
contractual life of 6.68 years. As of December 31, 1998, 490,410 of the options
issued at an exercise price of $0.03 were exercisable.
On August 1, 1997, the Company adopted the 1997 Stock Incentive Plan
(1997 Plan), under which incentive stock options, non-qualified stock options,
stock appreciation rights, restricted stock, performance awards and certain
other types of awards may be granted to the Company's employees and certain
other persons and entities in accordance with the law. To date, only
non-qualified stock options have been granted under the 1997 Plan. The
Compensation Committee, which administers the 1997 Plan, determines the number
of options granted, the vesting period and the exercise price of each award
granted under the 1997 Plan. The 1997 Plan will terminate July 31, 2007 unless
earlier terminated by the Board of Directors.
Options granted under the 1997 Plan generally vest over a three to
seven year period and expire: (1) ten years after the date of grant, (2) two
years after the date of the participant's termination without cause, disability
or death, (3) three months after the date of the participant's resignation, (4)
on the date of the participant's termination with cause or (5) on the date of
any material breach of any confidentiality or non-competition covenant or
agreement entered into between the participant and the Company.
The options issued on October 31, 1997, at $3.67, vest on October 31,
2004 provided, however (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
F-18
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
revenue and EBITDA budget for the year ending December 31, 1999, which budget is
approved by the Board of Directors of the Company, in an amount at least equal
to the deficiency that occurred in the year ending December 31, 1998, 100% of
the shares covered by the options shall vest and become exercisable on January
1, 2000. Unvested and uncancelled options issued at $3.67 immediately become
fully vested and exercisable upon a change of control or a qualified public
offering, as defined in the option agreement.
The options issued at $1.13 vest ratably over three or four consecutive
years subject to certain acceleration provisions set forth in an employment
agreement such as the immediate vesting upon a change in control or a qualified
initial public offering. Under certain circumstances and subject to the terms of
the Senior Notes, upon the election of the employee upon termination of
employment, the Company will be required to pay the employee the fair value of
the vested options held on the date of such termination.
As of December 31, 1998, a total of 2,390,707 non-qualified options
were issued and outstanding, 1,523,323 at an exercise price of $1.13 per share,
520,134 at an exercise price of $3.67 per share and 347,250 at an exercise price
of $5.20 per share. Of the options issued at $1.13, 425,790 shares were
exercisable at December 31, 1998. None of the options issued at $3.67 or $5.20
were exercisable at December 31, 1998. As of December 31, 1998, the weighted
average contractual life of the options issued at $1.13, $3.67 and $5.20 was 8.9
and 8.9 and 9.9 years, respectively.
During the year ended December 31, 1998, 667,373 and 89,721 options
were issued at an exercise price of $1.13 and $3.67 per share, respectively. The
estimated fair value of the Company's underlying common stock in each case was
determined to be $1.99 per share and $16.00, respectively. Accordingly, the
Company calculated deferred compensation expense of approximately $1.7 million
related to the options granted during the year and recognized compensation
expense of approximately $701,000. The Company will recognize the balance of the
compensation expense over the remainder of the vesting period of the options.
F-19
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity was as follows:
<TABLE>
<CAPTION>
1995 Plan 1997 Plan
----------------------------------- --------------------
Non- Non- Weighted
Incentive Qualified Qualified Average
Stock Stock Stock Exercise
Options Options Price Options Price Price
------- ------- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, December 31, 1995 410,248 70,731 $ 0.034 -- -- $ 0.034
Granted 14,147 7,074 $ 0.034 -- -- $ 0.034
Exercised -- -- -- -- -- --
Canceled -- -- -- -- -- --
-------
Options outstanding, December 31, 1996 424,395 77,805 $ 0.034 -- -- $ 0.034
Granted -- -- -- 1,289,167 $1.13-$3.67 $ 1.980
Exercised -- -- -- -- -- --
Canceled -- -- -- -- -- --
--------- ------- ---------
Options outstanding, December 31, 1997 424,395 77,805 $0.034 1,289,167 $1.13-$3.67 $ 1.430
Options granted -- -- -- 1,107,094 $1.13-$5.20 $ 2.622
Options exercised -- (2,358) $0.034 -- -- --
Options cancelled -- (4,716) $0.034 (5,554) $1.13-$5.20 $ 3.145
--------- ------- ---------
Options outstanding at December 31, 1998 424,395 70,731 $0.034 2,390,707 $1.13-$5.20 $ 1.888
========= ======= =========
</TABLE>
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method and provides pro forma disclosures
of net loss as if the fair value method had been applied in measuring
compensation expense. Under the intrinsic value method of accounting for
stock-based compensation, when the exercise price of options granted to
employees is less than the fair value of the underlying stock on the date of
grant, compensation expense is to be recognized over the applicable vesting
period.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss as reported $36,296,596 $3,977,400 $1,743,635
Pro forma net loss $36,859,594 $3,978,164 $1,747,570
Basic and diluted net loss per
share as reported. $(12.51) $(1.37) $(0.60)
Pro forma basic and diluted net
loss per share $(12.70) $(1.37) $(0.60)
</TABLE>
The fair value of each option is estimated on the date of grant using a type of
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 1997 and 1996,
respectively: dividend yield of 0%, expected volatility of 0%, risk-free
interest rate of 6.55% and 6.35% and expected terms of 5.0 and 5.8 years. The
following weighted-average assumptions were used for grants during the year
ended December 31, 1998: dividend yield of 0%, expected volatility of 0%,
risk-free interest rate of 5.18% and expected terms of 5.5 years.
F-20
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998 and 1997, the weighted average remaining
contractual life of the options is 8.63 years and 9.21 years, respectively. As
of December 31, 1998 and 1997 the pro forma tax effects would include an
increase to the deferred tax asset and the valuation allowance of approximately
$225,000, and $300 respectively; therefore, there is no pro forma tax effect.
11. VENDOR AGREEMENTS
Pursuant to a Master Agreement entered into by the Company and NEC on
August 8, 1997, as amended, the Company has the option to acquire, by March 31,
2003, a total of $200 million worth of certain equipment, services and licensed
software to be used by the Company in its network under pricing and payment
terms that the Company believes are favorable. In addition, NEC has agreed,
subject to certain conditions, to warranty equipment purchased by the Company
from NEC for three years, if defective, to repair or replace certain equipment
promptly and to maintain a stock of critical spare parts for up to 15 years. The
Company's agreement with NEC provides for fixed prices during the first three
years of its term. As of December 31, 1998, the Company had purchased $31.1
million of equipment under this agreement.
Pursuant to a supply agreement entered into by the Company and Lucent
Technologies (Lucent) on December 18, 1998, the Company agreed that Lucent
should be its exclusive supplier of fiber optic cable for its nationwide, voice
and data network. Lucent may provide financing of up to approximately $400
million of fiber purchases for the construction of the Company's network and may
provide or arrange financing for future phases of the fiber portion of the
Company's network. The total amount of financing over the life of this
seven-year agreement is not to exceed $1.8 billion. Certain material terms of
the Company's transactions with Lucent are currently under review by Lucent and
the Company. There can be no assurance that the financing contemplated by the
supply agreement will be consummated or, if consummated, consummated on the
terms and conditions described above. The supply agreement provides that Lucent
will provide the Company with a broad level of support, including fiber optic
equipment, network planning and design, technical and marketing support, and
financing. As of December 31, 1998, no purchases were made by the Company under
this agreement.
12. COMMITMENTS AND CONTINGENCIES
The Company maintains office space in Washington, D.C., Kansas and
Texas. The most significant lease relates to the Company's headquarters facility
in Washington, D.C. The partnership leasing the space in Washington, D.C. is
controlled by a director of the Company. The lease expires on August 31, 1999,
and is renewable by the Company for two additional one-year periods. Rent paid
to this related party during the year ended December 31, 1998, 1997 and 1996,
was $281,890, $60,980 and $0, respectively. The Company has no amounts due to
the related party as of December 31, 1998.
On December 30, 1998, the Company entered into a lease agreement for
the lease of tower site space, sufficient to perform its obligations under a
fixed point microwave agreement (FPMA) with an incumbent. Under the terms of the
lease, the Company is obligated to rent of $130,000 per month for a period
expiring on the later of (i) the expiration of the FPMA as to that site, or (ii)
ten years from the
F-21
<PAGE>
PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effective date of the agreement. The agreement provides for an increase in the
rent payable commencing on December 1, 1999 and on each succeeding year
thereafter to December 1, 2008, by an amount equal to 4 per cent of the rent
then in effect.
The Company's future minimum rental payments under noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 2,177,440
2000 1,913,822
2001 1,967,214
2002 2,033,577
2003 and thereafter 12,089,432
---------------
Total $ 20,181,485
===============
</TABLE>
Rent expense for the years ended December 31 1998, 1997, and 1996 was
$389,969, $114,673 and $4,399, respectively.
The Company earns microwave telecommunication capacity revenue under an
indefeasible right of use (IRU) agreement dated December 1, 1998, of $137,000
per month commencing December 1998 and expiring on the later of (i) the
expiration of the FPMA as to that site, or (ii) ten years from the effective
date of the agreement. The IRU agreement provides for an increase in the rent
receivable commencing on December 1, 1999 and on each succeeding year
thereafter to December 1, 2008, by an amount equal to 4 per cent of the rent
then in effect.
In exchange for a non-compete agreement, the Company has agreed to pay
a senior management employee a severance payment of $275,000, if such employee's
employment with the Company is terminated.
As at December 31, 1998, the Company had capital commitments of
approximately $28.0 million relating to telecommunications and transmission
equipment.
13. INCOME TAXES
The tax effect of temporary differences that give rise to significant
portions of the deferred tax asset at December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Deferred revenue $ 949 $ 117,000
Capitalized start-up costs 1,370,937 1,271,227
Capitalized research and development costs 66,111 79,333
Net operating loss carryforward. 15,325,484 754,458
-------------- -----------
16,763,481 2,222,018
Less valuation allowance (16,763,481) (2,222,018)
-------------- ------------
Net deferred tax asset $ -- $ --
============== ===========
</TABLE>
F-22
<PAGE>
Capitalized costs represent expenses incurred in the organization and
start-up of the Company. For federal income tax purposes, these costs are being
amortized over sixty months.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income in the periods in which those temporary
differences are deductible. The Company has provided a valuation allowance
against its deferred tax assets as they are long-term in nature and their
ultimate realization cannot be determined.
F-23
Exhibit 3.1
-----------
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
PATHNET, INC.
=========================================================
Adopted in accordance with the provisions of Section 242 of
the General Corporation Law of the State of Delaware
=========================================================
We, William R. Smedberg, V, Vice President, Finance and
Corporate Development, and Michael A. Lubin, Vice President, General Counsel and
Secretary, of Pathnet, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DO HEREBY CERTIFY as follows:
FIRST: The Restated Certificate of Incorporation of the
Corporation is hereby amended by deleting the current Section 10 thereof it in
its entirety and renumbering Section 11 as new Section 10.
SECOND: This Amendment has been duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be signed by William R. Smedberg, V, Vice President, Finance and
Corporate Development, and attested to by Michael A. Lubin, Vice President,
General Counsel and Secretary, on this 8th day of December, 1998.
PATHNET, INC.
By: /s/ William R. Smedberg, V
----------------------------
William R. Smedberg, V
Vice President,
Finance and Corporate Development
ATTEST:
By: /s/ Michael A. Lubin
---------------------
Michael A. Lubin
Vice President,
General Counsel and Secretary
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PATHNET, INC.
Pathnet, Inc., a corporation duly incorporated under the laws
of the State of Delaware, hereby certifies as follows:
FIRST: The name of the corporation is Pathnet, Inc. (the
"Corporation"). The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on 25th day of
August, 1995, under the name PathNet, Inc.
SECOND: This Amended and Restated Certificate of Incorporation
has been duly adopted in accordance with Sections 242 and 245 of the Delaware
General Corporation Law (the "General Corporation Law").
THIRD: This Amended and Restated Certificate of Incorporation
hereby restates, integrates and amends the Certificate of Incorporation, as
amended, of the Corporation as follows:
1. NAME. The name of the corporation is PATHNET, INC. (the
"Corporation").
2. ADDRESS; REGISTERED OFFICE AND AGENT. The address of the
Corporation's registered office is 1013 Centre Road, Wilmington, New Castle
County, Delaware 19805. The name of its registered agent at such address is The
Prentice-Hall Corporation System, Inc.
3. PURPOSE. The purpose of the Corporation is to engage in,
carry on and conduct any lawful act or activity for which corporations may be
organized under the General Corporation Law.
4. NUMBER OF SHARES. The total number of shares of stock that
the Corporation shall have authority to issue is 75,470,595, divided as follows:
10,000,000 shares of Preferred Stock, par value of $0.01 per share (the
"Preferred Stock"), 1,000,000 shares of Series A Convertible Preferred Stock,
par value of $0.01 per share (the "Series A Preferred Stock"), 1,651,046 shares
of Series B Convertible Preferred Stock, par value of $0.01 per share (the
"Series B Preferred Stock"), 2,819,549 shares of Series C Convertible Preferred
Stock, par value of $0.01 per share (the "Series C Preferred Stock," and
together with the Series A Preferred Stock and the
<PAGE>
Series B Preferred Stock, the "Series Preferred Stock"); and 60,000,000 shares
of Common Stock, par value of $0.01 per share (the "Common Stock").
5. DESIGNATION OF CLASSES; RELATIVE RIGHTS, ETC. The
designation, relative rights, preferences and limitations of the shares of each
class are as follows:
5.1 PREFERRED STOCK. The shares of Preferred Stock may be
issued from time to time in one or more series of any number of shares, provided
that the aggregate number of shares issued and not canceled of any and all such
series shall not exceed the total number of shares of Preferred Stock
hereinabove authorized, and with such powers, preferences and rights and
qualifications, limitations or restrictions thereof, and such distinctive serial
designations, all as shall hereafter be stated and expressed in the resolution
or resolutions providing for the issue of such shares of Preferred Stock from
time to time adopted by the Board of Directors of the Corporation (the "Board of
Directors") pursuant to authority so to do which is hereby vested in the Board
of Directors. Each series of shares of Preferred Stock (a) may have such voting
rights or powers, full or limited, or may be without voting rights or powers;
(b) may be subject to redemption at such time or times and at such prices; (c)
may be entitled to receive dividends (which may be cumulative or non-cumulative)
at such rate or rates, on such conditions and at such times, and payable in
preference to, or in such relation to, the dividends payable on any other class
or classes or series of stock; (d) may have such rights upon the voluntary or
involuntary liquidation, winding up or dissolution of, or upon any distribution
of the assets of, the Corporation; (e) may be made convertible into or
exchangeable for, shares of any other class or classes or of any other series of
the same or any other class or classes of stock of the Corporation at such price
or prices or at such rates of exchange and with such adjustments; (f) may be
entitled to the benefit of a sinking fund to be applied to the purchase or
redemption of shares of such series in such amount or amounts; (g) may be
entitled to the benefit of conditions and restrictions upon the creation of
indebtedness of the Corporation or any subsidiary, upon the issue of any
additional shares (including additional shares of such series or of any other
series) and upon the payment of dividends or the making of other distributions
on, and the purchase, redemption or other acquisition by the Corporation or any
subsidiary of, any outstanding shares of the Corporation and (h) may have such
other relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof; all as shall be stated in said resolution
or resolutions providing for the issue of such shares of Preferred Stock. Any of
the voting powers, designations, preferences, rights and qualifications,
limitations or restrictions of any such series of Preferred Stock may be made
dependent upon facts ascertainable outside of the resolution or resolutions
providing for the issue of such Preferred Stock adopted by the Board of
Directors pursuant to the authority vested in it by this Section 5.1, provided
that the manner in which such facts shall operate upon the voting powers,
designations, preferences, rights and qualifications, limitations or
restrictions of such series of Preferred Stock is clearly and expressly set
forth in the resolution or resolutions providing for the issue of such Preferred
Stock. The term "facts" as used in the next preceding sentence shall have the
meaning given to it in Section 151(a) of the General Corporation Law. Shares of
Preferred Stock of any series that have been redeemed (whether through the
operation of a sinking fund or otherwise) or that if
<PAGE>
5
convertible or exchangeable, have been converted into or exchanged for shares of
any other class or classes shall have the status of authorized and unissued
shares of Preferred Stock undesignated as to series and may be reissued as a
part of the series of which they were originally a part or as part of a new
series of shares of Preferred Stock to be created by resolution or resolutions
of the Board of Directors or as part of any other series of shares of Preferred
Stock, all subject to the conditions or restrictions on issuance set forth in
the resolution or resolutions adopted by the Board of Directors providing for
the issue of any series of shares of Preferred Stock.
5.2 COMMON STOCK. Subject to the provisions of any applicable
law or of the Bylaws of the Corporation, as from time to time amended (the
"Bylaws"), with respect to the closing of the transfer books or the fixing of a
record date for the determination of stockholders entitled to vote and except as
otherwise provided herein with respect to any shares of Series Preferred Stock,
by law or by the resolution or resolutions providing for the issue of any series
of shares of Preferred Stock, the holders of outstanding shares of Common Stock
shall exclusively possess voting power for the election of directors and for all
other purposes, each holder of record of shares of Common Stock being entitled
to one vote for each share of Common Stock standing in his or her name on the
books of the Corporation. Except as otherwise provided herein with respect to
any shares of Series Preferred Stock or by the resolution or resolutions
providing for the issue of any series of shares of Preferred Stock, the holders
of shares of Common Stock shall be entitled, to the exclusion of the holders of
shares of Preferred Stock of any and all series, to receive such dividends as
from time to time may be declared by the Board of Directors. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, after payment shall have been made to the holders of shares of any
Series Preferred Stock and any Preferred Stock of the full amount to which they
shall be entitled pursuant to this Amended and Restated Certificate of
Incorporation or the resolution or resolutions providing for the issue of any
series of shares of Preferred Stock, the holders of shares of Common Stock shall
be entitled, to the exclusion of the holders of shares of Series Preferred Stock
and Preferred Stock of any and all series, to share, ratably according to the
number of shares of Common Stock held by them, in all remaining assets of the
Corporation available for distribution to its stockholders.
5.3 SERIES PREFERRED STOCK.
5.3.1 SHARES.
(a) AUTHORIZED SHARES. The Corporation
shall have authority to issue Five Million Four Hundred Seventy Thousand Five
Hundred Ninety-Five (5,470,595) shares of Series Preferred Stock, of which One
Million (1,000,000) shares shall be designated the Series A Preferred Stock, One
Million Six Hundred Fifty One Thousand Forty Six (1,651,046) shares shall be
designated the Series B Preferred
<PAGE>
6
Stock and Two Million Eight Hundred Nineteen Thousand Five Hundred Forty-Nine
(2,819,549) shares shall be designated as the Series C Preferred Stock.
(b) DIVIDENDS. The holders of the Series
Preferred Stock shall be entitled to receive, out of funds legally available
therefor, dividends (other than dividends paid in additional shares of Common
Stock) in preference to and at the same rate as dividends are paid with respect
to the Common Stock (treating each share of Series Preferred Stock as being
equal to the number of shares of Common Stock into which each such share of
Series Preferred Stock could be converted pursuant to the provisions of Section
5.3.4 hereof, with such number determined as of the record date for the
determination of holders of Common Stock entitled to receive such dividend).
5.3.2 LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) DISTRIBUTIONS TO HOLDERS OF SERIES
PREFERRED STOCK. In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock shall rank on a
parity with each other and shall rank prior to the Common Stock or any class of
stock ranking junior to the Series Preferred Stock. Upon such liquidation,
holders of each share of Series Preferred Stock outstanding shall be entitled to
be paid, out of the assets of the Corporation available for distribution to
stockholders and before any payment shall be made to the holders of any class of
Common Stock or of any stock ranking on liquidation junior to the Series
Preferred Stock, an amount in cash equal to the original purchase price paid by
such holder for each such share of Series Preferred Stock held (appropriately
adjusted for stock splits, stock dividends and the like) plus any declared but
unpaid dividends thereon. If upon any liquidation, dissolution or winding up of
the Corporation, the assets to be distributed to the holders of the Series
Preferred Stock under the foregoing sentence shall be insufficient to permit
payment to such stockholders of the full preferential amounts aforesaid, then
all of the assets of the Corporation available for distribution to such holders
under such sentence shall be distributed among the holders of Series Preferred
Stock, pro rata in accordance with the total amount of preference which would
have been payable to such holders if funds had been available to pay the full
preference under the previous sentence. After such payment shall have been made
in full to such holders of Series Preferred Stock, or funds necessary for such
payment shall have been set aside by the Corporation in trust for the account of
such holders so as to be available for such payment, the holders of the
outstanding shares of Common Stock and any class of stock ranking junior to the
Series Preferred Stock shall share ratably in the distribution of the remaining
assets and funds of the Corporation available for distribution to shareholders.
(b) DEEMED LIQUIDATIONS. In the case of
(i) a consolidation or merger of the Corporation (other than a consolidation or
merger upon
<PAGE>
7
consummation of which the holders of voting securities of the Corporation
immediately prior to such transaction, continue to own directly or indirectly
not less than a majority of the voting power of the surviving corporation) or a
sale of all or substantially all of the assets of the Corporation or other
similar transaction and (ii) either receipt by the Corporation of (x)
consideration less than the equivalent of $1.00 per share (appropriately
adjusted for stock splits, stock dividends and the like) of Series A Preferred
Stock plus any declared but unpaid dividends, (y) consideration less than the
equivalent of $3.28 per share (appropriately adjusted for stock splits, stock
dividends and the like) of Series B Preferred Stock plus any declared but unpaid
dividends, or (z) consideration less than the equivalent of $10.64 per share
(appropriately adjusted for stock splits, stock dividends and the like) of
Series C Preferred Stock plus any declared but unpaid dividends, such event
shall be regarded, at the option of the holders of a majority of the then
outstanding shares of Series Preferred Stock, as a liquidation, dissolution or
winding up of the affairs of the Corporation within the meaning of this Section
5.3.2.
Notwithstanding the foregoing, each holder
of Series Preferred Stock shall have the right to elect the benefits of the
provisions of Section 5.3.4(h) hereof in lieu of receiving payment in
liquidation, dissolution or winding up of the Corporation pursuant to this
Section 5.3.2(b). For purposes of this Section 5.3.2 and Section 5.3.6 hereof, a
sale of substantially all of the assets of the Corporation shall mean (x) the
sale or other disposition other than in the ordinary course of business of more
than 50% of such assets, as determined by reference to either (A) the book value
or (B) the fair market value, of such assets, or (y) any issuance of Common
Stock by the Corporation or transfer of Common Stock by the holder thereof to
any person or persons acting in concert or a group of affiliated persons, which
issuance or transfer results in such person or persons or group holding in the
aggregate more than 50% of the issued and outstanding Common Stock after giving
effect to such issuance or transfer.
<PAGE>
(c) NON-CASH DISTRIBUTIONS. In the event
of a liquidation, dissolution or winding up of the Corporation resulting in the
availability of assets other than cash for distribution to the holders of the
Series Preferred Stock, the holders of the Series Preferred Stock shall be
entitled to a distribution of cash and/or assets equal in value to the
liquidation preference and other distribution rights stated in Section 5.3.2(a)
and Section 5.3.2(b) hereof. In the event that such distribution to the holders
of the Series Preferred Stock shall include any assets other than cash, the
following provisions shall govern. The Board of Directors shall first determine
the value of such assets for such purpose, and shall notify all holders of
shares of Series Preferred Stock of such determination. The value of such assets
for purposes of the distribution under this Section 5.3.2(c) shall be the value
as determined by the Board of Directors in good faith and with due care, unless
the holders of a majority of the outstanding shares of Series Preferred Stock
shall object thereto in writing within 15 days after the date of such notice. In
the event of such objection, the valuation of such
<PAGE>
8
assets for purposes of such distribution shall be determined by an arbitrator
selected by the objecting stockholders and the Board of Directors, or in the
event a single arbitrator cannot be agreed upon within 10 days after the written
objection sent by the objecting stockholders in accordance with the previous
sentence, the valuation of such assets shall be determined by arbitration in
which (i) the objecting stockholders shall name in their notice of objection one
arbitrator, (ii) the Board of Directors shall name a second arbitrator within 15
days from the receipt of such notice, (iii) the two arbitrators thus selected
shall select a third arbitrator within 15 days thereafter, and (iv) the three
arbitrators thus selected shall determine the valuation of such assets within 15
days thereafter for purposes of such distribution by majority vote. The costs of
such arbitration shall be borne by the Corporation or by the holders of the
Series Preferred Stock (on a pro rata basis out of the assets otherwise
distributable to them) as follows: (i) if the valuation as determined by the
arbitrators is greater than 95% of the valuation as determined by the Board of
Directors, the holders of the Series Preferred Stock shall pay the costs of the
arbitration, and (ii) otherwise, the Corporation shall bear the costs of the
arbitration.
5.3.3 VOTING RIGHTS.
(a) GENERAL. Except as otherwise
expressly provided herein or as required by law, the holder of each share of the
Series Preferred Stock shall be entitled to vote on any matters presented to the
holders of the Common Stock. Each share of Series Preferred Stock shall entitle
the holder thereof to such number of votes per share as shall equal the number
of shares of Common Stock into which such share of Series Preferred Stock is
convertible in accordance with the terms of Section 5.3.4 hereof at the record
date for the determination of stockholders entitled to vote on such matter or,
if no record date is established, at the date such vote is taken or any written
consent of stockholders is solicited. Except as otherwise expressly provided
herein (including, without limitation, the provisions of Section 5.3.6 hereof)
or as required by law, the holders of shares of Series Preferred Stock and the
Common Stock shall vote together as a single class on any matters presented to
the holders of the Common Stock.
(b) BOARD OF DIRECTORS.
(i) INVESTOR DIRECTORS. The
holders of the Series A Preferred Stock shall be entitled to vote as a class
separately from all other classes of stock of the Corporation in any vote for
the election of directors of the Corporation, and shall be entitled to elect by
such class vote two directors (the "Series A Investor Directors"), one of which
Series A Investor Directors to be designated by Spectrum Equity Investors, L.P.
("Spectrum") for so long as it owns shares of Series A Preferred Stock and
thereafter by the holders of a majority of the issued and outstanding shares of
Series A Preferred Stock, and the other to be designated by New Enterprise
Associates VI, Limited Partnership or its affiliates (collectively, "NEA VI")
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9
for so long as it owns shares of Series A Preferred Stock and thereafter by the
holders of a majority of the issued and outstanding shares of Series A Preferred
Stock. The holders of the Series B Preferred Stock shall be entitled to vote as
a class separately from all other classes of stock of the Corporation in any
vote for the election of directors of the Corporation, and shall be entitled to
elect by such class vote one director (the "Series B Investor Director") to be
designated by Grotech Capital Group IV, LLC ("Grotech IV") for so long as it
owns shares of Series B Preferred Stock and thereafter by the holders of a
majority of the issued and outstanding shares of Series B Preferred Stock. The
holders of the Series C Preferred Stock shall be entitled to vote as a class
separately from all other classes of stock of the Corporation in any vote for
the election of directors of the Corporation, and shall be entitled to elect by
such class vote one director (the "Series C Investor Director") to be designated
by the holders of a majority of the issued and outstanding shares of Series C
Preferred Stock; provided, however, that if the holders of a majority of the
issued and outstanding shares of Series C Preferred Stock designate for election
as the Series C Investor Director an individual who is not a partner or
associate of a Series C Investor or an entity under substantially the same
management as a Series C Investor, such designee shall be elected as a director
only with the vote of a majority of the Common Stock Directors and Investor
Directors, voting together. Initially, the Series C Investor Director will be
designated by Toronto Dominion Capital (U.S.A.), Inc. In no event shall the
Series C Investor Director be (i) a partner or associate of Spectrum or an
entity under substantially the same management as Spectrum for so long as
Spectrum has designation rights under this Section 5.5.3(a), (ii) a partner or
associate of NEA VI or an entity under substantially the same management as NEA
VI for so long as NEA VI has designation rights under this Section 5.3.3(a), and
(iii) a partner or associate of Grotech IV or an entity under substantially the
same management as Grotech IV for so long as Grotech IV has designation rights
under this Section 5.3.3(a).
(ii) COMMON STOCK DIRECTORS. For
so long as any Series Preferred Stock remains outstanding, the holders of Common
Stock shall be entitled to vote as a class separately from all other classes in
any vote for the election of directors of the Corporation, and shall be entitled
to elect by such class vote two directors (the "Common Stock Directors").
(iii) APPOINTMENT OF CHIEF
EXECUTIVE OFFICER/OFFICER DIRECTOR. Upon the termination or resignation of the
Chief Executive Officer of the Corporation, the Corporation will select and hire
a successor Chief Executive Officer (and any successor thereto) by the
affirmative vote of a majority of the Common Stock Directors, the Series A
Investor Directors, the Series B Investor Director and the Series C Investor
Director, voting together. The Chief Executive Officer (and any replacement or
successor Chief Executive Officer) as so selected and hired shall be elected to
the Corporation's Board of Directors by the holders of the Series Preferred
Stock and the Common Stock voting together as a single class (the "Officer
Director"). David Schaeffer may serve as Chief Executive Officer of the
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10
Corporation in the discretion of the Board of Directors, but in no event shall
David Schaeffer be elected as the Officer Director.
(iv) REMOVAL OF DIRECTORS. The
removal of any director of the Corporation shall be as set forth in the Bylaws
of the Corporation.
(c) SPECIAL VOTING RIGHTS. The holders
of the Series Preferred Stock shall be entitled to the special voting rights set
forth in Section 5.3.6 hereof.
5.3.4 CONVERSION. The holders of the Series
Preferred Stock shall have the following conversion rights:
(a) RIGHT TO CONVERT. Subject to and in
compliance with the provisions of this Section 5.3.4, any shares of the Series
Preferred Stock may, at any time or from time to time at the option of the
holder, be converted into fully-paid and non-assessable shares of Common Stock.
The number of shares of Common Stock to which a holder of the Series Preferred
Stock shall be entitled upon conversion shall be the product obtained by
multiplying the Applicable Conversion Rate (determined as provided in Section
5.3.4(c)) by the number of shares of Series Preferred Stock being converted.
(b) AUTOMATIC CONVERSION.
(i) Each share of the Series
Preferred Stock outstanding shall automatically be converted into the number of
shares of Common Stock into which such shares are convertible upon application
of the then effective Applicable Conversion Rate (determined as provided in
Section 5.3.4(c)) immediately upon the closing of an underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, or under such other applicable securities regulations
covering the offer and sale of capital stock of the Corporation (other than a
registration relating solely to Rule 145 under such Act (or any successor
thereto) or to an employee benefit plan of the Corporation) (i) immediately
prior to the consummation of which, the Corporation is valued (based on the
per-share price paid in such public offering, but without regard to any proceeds
to be received by the Company in connection with such offering) at greater than
$50,000,000, (ii) in which the gross proceeds received by the Corporation exceed
$20,000,000, and (iii) in which the Corporation uses a nationally recognized
underwriter approved by holders of a majority in interest of the Series
Preferred Stock (a "Qualified Public Offering").
(ii) Upon the occurrence of an
event specified in Section 5.3.4(b)(i), the outstanding shares of Series
Preferred Stock shall be converted automatically without any further action by
the holders of such shares and whether or not the certificates representing such
shares are surrendered to the Corporation or its transfer agent; provided,
however, that the Corporation shall not be
<PAGE>
11
obligated to issue certificates evidencing such shares of the Common Stock
unless certificates evidencing such shares of the Series Preferred Stock being
converted are either delivered to the Corporation or any transfer agent, as
hereinafter provided, or the holder notifies the Corporation or any transfer
agent, as hereinafter provided, that such certificates have been lost, stolen or
destroyed and executes an agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection therewith.
Upon the occurrence of the automatic
conversion of all of the outstanding Series Preferred Stock, the holders of the
Series Preferred Stock shall surrender the certificates representing such shares
at the office of the Corporation or of any transfer agent for the Common Stock.
Thereupon, there shall be issued and delivered to each such holder, promptly at
such office and in his name as shown on such surrendered certificate or
certificates, a certificate or certificates for the number of shares of Common
Stock into which the shares of the Series Preferred Stock surrendered were
convertible on the date on which such automatic conversion occurred and cash as
provided in Section 5.3.4(k) below in respect of any fraction of a share of
Common Stock issuable upon such automatic conversion.
(c) APPLICABLE CONVERSION RATE. The
conversion rate in effect at any time for the applicable series of Series
Preferred Stock (the "Applicable Conversion Rate") shall equal the quotient
obtained by dividing $1.00 in the case of Series A Preferred Stock, $3.28 in the
case of Series B Preferred Stock or $10.64 in the case of the Series C Preferred
Stock by the Applicable Conversion Value, calculated as hereinafter provided.
(d) APPLICABLE CONVERSION VALUE. The
Applicable Conversion Value in effect initially, and until first adjusted in
accordance with Section 5.3.4(e) or Section 5.3.4(f) hereof, shall be $1.00 in
the case of Series A Preferred Stock, $3.28 in the case of Series B Preferred
Stock and $10.64 in the case of the Series C Preferred Stock.
(e) ADJUSTMENT FOR COMMON STOCK
DIVIDENDS, SUBDIVIDENDS AND COMBINATIONS OF COMMON STOCK, ETC. Upon the
happening of any of the following: (i) the issuance of additional shares of
Common Stock of any class as a dividend or other distribution of outstanding
Common Stock, (ii) the subdivision of outstanding shares of Common Stock of any
class into a greater number of shares of Common Stock, or (iii) the combination
of outstanding shares of Common Stock of any class into a smaller number of
shares of Common Stock (each an "Extraordinary Common Stock Event"), the
Applicable Conversion Value shall, simultaneously with the happening of such
Extraordinary Common Stock Event, be adjusted by dividing the then effective
Applicable Conversion Value by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding (excluding treasury
<PAGE>
12
stock) immediately after such Extraordinary Common Stock Event and the
denominator of which shall be the number of shares of Common Stock outstanding
(excluding treasury stock) immediately prior to such Extraordinary Common Stock
Event, and the quotient so obtained shall thereafter be the Applicable
Conversion Value. The Applicable Conversion Value, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive Extraordinary
Common Stock Event or Events.
(f) ADJUSTMENTS FOR DILUTING ISSUES.
(i) Except as provided in
Section 5.3.4(e) above or for Excluded Shares (as defined below), if the
Corporation shall issue any additional shares of Common Stock of any class for
no consideration or at a price per share less than the Applicable Conversion
Value in effect for each applicable series of Series Preferred Stock immediately
prior to such issuance or sale, then in each such case such Applicable
Conversion Value shall be reduced to such lower price.
For purposes of this Section 5.3.4(f),
"Excluded Shares" shall mean (i) shares issued or delivered from treasury or
stock options (and shares of Common Stock issued upon the exercise thereof)
granted by the Corporation, with the approval of the Board of Directors, to
directors, officers, employees, agents or consultants of the Corporation for up
to an aggregate of 1,325,212 shares of the Common Stock (as adjusted for stock
splits, stock dividends and the like); (ii) warrants to purchase shares of
Common Stock (and any shares of Common Stock issued upon the exercise thereof)
issued by the Corporation in connection with the Corporation's offering of
units, each such unit consisting of $1,000 principal amount at maturity of
Senior Notes due 2008 (the "Notes") of the Corporation and warrants to purchase
shares of Common Stock; and (iii) warrants to purchase shares of Common Stock
(and any shares of Common Stock issued upon the exercise thereof) issued by the
Corporation in connection with the credit facilities among the Corporation
and/or its subsidiaries, its equipment vendors and certain other senior lenders.
For purposes of this Section 5.3.4(f),
if a part or all of the consideration received by the Corporation in connection
with the issuance of shares of the Common Stock or the issuance of any of the
securities described below in paragraph (ii) of this Section 5.3.4(f) consists
of property other than cash, such consideration shall be deemed to have the same
value as is determined by the Corporation's Board of Directors with respect to
receipt of such property so long as such determination was made reasonably and
in good faith, and shall otherwise be deemed to have a value equal to its fair
market value.
(ii) For the purpose of this
Section 5.3.4(f), the issuance of any warrants, options or other subscription or
purchase rights with respect to shares of Common Stock of any class and the
issuance of any securities convertible into shares of Common Stock of any class
(or the issuance of any warrants, options or any rights with respect to such
convertible securities) shall be deemed an issuance at such time of such Common
Stock if the Net Consideration Per Share which may be received by the
Corporation for such Common Stock (as hereinafter determined) shall
<PAGE>
13
be less than the Applicable Conversion Value at the time of such issuance and,
except as hereinafter provided, an adjustment in the Applicable Conversion Value
shall be made upon each such issuance in the manner provided in paragraph (i) of
this Section 5.3.4(f) as if such Common Stock were issued at such Net
Consideration Per Share. No adjustment of the Applicable Conversion Value shall
be made under this Section 5.3.4(f) upon the issuance of any additional shares
of Common Stock which are issued pursuant to the exercise of any warrants,
options or other subscription or purchase rights or pursuant to the exercise of
any conversion or exchange rights in any convertible securities if any
adjustment shall previously have been made upon the issuance of such warrants,
options or other rights. Any adjustment of the Applicable Conversion Value with
respect to this paragraph (ii) of this Section 5.3.4(f) shall be disregarded if,
as and when the rights to acquire shares of Common Stock upon exercise or
conversion of the warrants, options, rights or convertible securities which gave
rise to such adjustment expire or are canceled without having been exercised, so
that the Applicable Conversion Value effective immediately upon such
cancellation or expiration shall be equal to the Applicable Conversion Value in
effect immediately prior to the time of the issuance of the expired or canceled
warrants, options, rights or convertible securities, with such additional
adjustments as would have been made to that Applicable Conversion Value had the
expired or canceled warrants, options, rights or convertible securities not been
issued; provided, however, that no such readjustment of the Applicable
Conversion Value shall have the effect of increasing the Applicable Conversion
Value to an amount which exceeds the lower of (x) the Applicable Conversion
Value on the original adjustment date, or (y) the Applicable Conversion Value
that would have resulted from any issuance of any additional shares of Common
Stock pursuant to such warrants, options, rights or convertible securities
between the original adjustment date and such readjustment date. In the event
that the terms of any warrants, options, other subscription or purchase rights
or convertible securities previously issued by the Corporation are changed
(whether by their terms or for any other reason) so as to change the Net
Consideration Per Share payable with respect thereto (whether or not the
issuance of such warrants, options, rights or convertible securities originally
gave rise to an adjustment of the Applicable Conversion Value), the Applicable
Conversion Value shall be recomputed as of the date of such change, so that the
Applicable Conversion Value effective immediately upon such change shall be
equal to the Applicable Conversion Value in effect at the time of the issuance
of the warrants, options, rights or convertible securities subject to such
change, adjusted for the issuance thereof in accordance with the terms thereof
after giving effect to such change, and with such additional adjustments as
would have been made to that Applicable Conversion Value had the warrants,
options, rights or convertible securities been issued on such changed terms. For
purposes of this paragraph (ii), the Net Consideration Per Share which may be
received by the Corporation shall be determined as follows:
(A) The Net Consideration
Per Share shall mean the amount equal to the total amount of consideration, if
any, received by the Corporation for the issuance of such warrants, options,
rights or convertible securities, plus the minimum amount of consideration, if
any, payable to the
<PAGE>
14
Corporation upon exercise or conversion thereof, divided by the aggregate number
of shares of Common Stock that would be issued if all such warrants, options,
subscriptions, or other purchase rights or convertible securities were exercised
or converted at such net consideration per share.
(B) The Net Consideration
Per Share which may be received by the Corporation shall be determined in each
instance as of the date of issuance of warrants, options, rights or convertible
securities without giving effect to any possible future price adjustments or
rate adjustments which may be applicable with respect to such warrants, options,
rights or convertible securities and which are contingent upon future events;
provided that in the case of an adjustment to be made as a result of a change in
terms of such warrants, options, rights or convertible securities, the Net
Consideration Per Share shall be determined as of the date of such change.
(g) ADJUSTMENTS FOR RECLASSIFICATION. If
the Common Stock issuable upon the conversion of the Series Preferred Stock
shall be changed into the same or different number of shares of any class or
classes of stock, whether by reclassification or otherwise (other than an
Extraordinary Common Stock Event, or a reorganization, merger, consolidation or
sale of assets provided for elsewhere in this Section 5.3.4), then and in each
such event the holder of each share of Series Preferred Stock shall have the
right thereafter to convert such share into the kind and amount of shares of
stock and other securities and property receivable upon such reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which such shares of Series Preferred Stock might have been converted
immediately prior to such reorganization, reclassification or change, all
subject to further adjustment as provided herein. Without limiting the
generality of the foregoing, the Applicable Conversion Rate, as defined in this
Section 5.3.4, in respect of such other shares or securities so receivable upon
conversion of shares of Series Preferred Stock shall thereafter be adjusted, and
shall be subject to further adjustment from time to time, in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to
Common Stock contained in this Section 5.3.4, and the remaining provisions
herein with respect to the Common Stock shall apply on like or similar terms to
any such other shares or securities.
(h) ADJUSTMENTS FOR REORGANIZATIONS. If
at any time or from time to time there shall be a capital reorganization of the
Common Stock (other than a subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this Section 5.3.4) or a merger or
consolidation of the Corporation with or into another corporation or the sale of
all or substantially all of the Corporation's properties and assets to any other
person, then, as a part of and as a condition to the effectiveness of such
reorganization, merger, consolidation or sale, lawful and adequate provision
shall be made so that if the Corporation is not the surviving corporation, the
Series Preferred Stock shall be converted into preferred stock of the surviving
corporation having equivalent preferences, rights and privileges except that in
lieu of
<PAGE>
15
being able to convert into shares of Common Stock of the Corporation or the
successor corporation the holders of the Series Preferred Stock (including any
such preferred stock issued upon conversion of the Series Preferred Stock) shall
thereafter be entitled to receive upon conversion of the Series Preferred Stock
(including any such preferred stock issued upon conversion of the Series
Preferred Stock) the number of shares of stock or other securities or property
of the Corporation or of the successor corporation resulting from such merger or
consolidation or sale, to which a holder of the number of shares of Common Stock
deliverable upon conversion of the Series Preferred Stock immediately prior to
the capital reorganization, merger, consolidation or sale would have been
entitled on such capital reorganization, merger, consolidation, or sale. In any
such case, appropriate provisions shall be made with respect to the rights of
the holders of the Series Preferred Stock (including any such preferred stock
issued upon conversion of the Series Preferred Stock) after the reorganization,
merger, consolidation or sale to the end that the provisions of this Section
5.3.4 (including, without limitation, provisions for adjustment of the
Applicable Conversion Value and the number of shares purchasable upon conversion
of the Series Preferred Stock or such preferred stock) shall thereafter be
applicable, as nearly as may be, with respect to any shares of stock, securities
or assets to be deliverable thereafter upon the conversion of the Series
Preferred Stock or such preferred stock.
Each holder of Series Preferred Stock upon
the occurrence of a capital reorganization, merger or consolidation of the
Corporation or the sale of all or substantially all of its assets and properties
as such events are more fully set forth in the first paragraph of this Section
5.3.4(h), shall have the option of electing treatment of his shares of Series
Preferred Stock under either this Section 5.3.4(h) or Section 5.3.2(b) hereof,
and except as otherwise provided in said Section 5.3.2(b), notice of which
election shall be submitted in writing to the Corporation at its principal
offices no later than 10 days before the effective date of such event, provided
that any such notice shall be effective if given not later than 15 days after
the date of the Corporation's notice, pursuant to Section 5.3.8, with respect to
such event.
(i) CERTIFICATE AS TO ADJUSTMENTS. In
each case of an adjustment or readjustment of the Applicable Conversion Rate,
the Corporation will promptly furnish each holder of Series Preferred Stock with
a certificate, prepared by the chief financial officer of the Corporation,
showing such adjustment or readjustment, and stating in detail the facts upon
which such adjustment or readjustment is based.
(j) MECHANICS OF CONVERSION. To exercise
its conversion privilege, a holder of Series Preferred Stock shall surrender the
certificate or certificates representing the shares being converted to the
Corporation at its principal office, and shall give written notice to the
Corporation at that office that such holder elects to convert such shares. Such
notice shall also state the name or names (with address or addresses) in which
the certificate or certificates for shares of Common Stock issuable upon such
conversion shall be issued. The certificate or
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16
certificates for shares of Series Preferred Stock surrendered for conversion
shall be accompanied by proper assignment thereof to the Corporation or in
blank. The date when such written notice is received by the Corporation together
with the certificate or certificates representing the shares of Series Preferred
Stock being converted, shall be the "Conversion Date." As promptly as
practicable after the Conversion Date, the Corporation shall issue and shall
deliver to the holder of the shares of Series Preferred Stock being converted, a
certificate or certificates in such denominations as it may request in writing
for the number of full shares of Common Stock issuable upon the conversion of
such shares of Series Preferred Stock in accordance with the provisions of this
Section 5.3.4 and cash as provided in Section 5.3.4(k) below in respect of any
fraction of a share of Common Stock issuable upon such conversion. Such
conversion shall be deemed to have been effected immediately prior to the close
of business on the Conversion Date, and at such time the rights of the holder as
holder of the converted shares of Series Preferred Stock shall cease and the
person or persons in whose name or names any certificate or certificates for
shares of Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of shares of Common Stock
represented thereby.
(k) FRACTIONAL SHARES. No fractional
shares of Common Stock or scrip representing fractional shares shall be issued
upon conversion of Series Preferred Stock. Instead of any fractional shares of
Common Stock that would otherwise be issuable upon conversion of Series
Preferred Stock, the Corporation shall pay to the holder of the shares of Series
Preferred Stock that were converted a cash adjustment in respect of such
fraction in an amount equal to the same fraction of the market price per share
of the Common Stock (as determined in a manner prescribed in good faith by the
Board of Directors) at the close of business on the Conversion Date.
(l) PARTIAL CONVERSION. In the event
some but not all of the shares of Series Preferred Stock represented by a
certificate or certificates surrendered by a holder are converted, the
Corporation shall execute and deliver to or on the order of the holder, at the
expense of the Corporation, a new certificate representing the number of shares
of Series Preferred Stock which were not converted.
(m) RESERVATION OF COMMON STOCK. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series Preferred Stock, and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series Preferred Stock, the Corporation shall take such corporate action as may,
in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
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17
5.3.5 REDEMPTION.
(a) OPTIONAL REDEMPTION.
(i) OPTIONAL REDEMPTION OF
SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK. In the event that there
shall not have occurred a closing of a Qualified Public Offering (as defined in
Section 5.3.4(b) hereof) prior to December 23, 2000, at the election of any
holder of shares of Series A Preferred Stock or any holder of Series B Preferred
Stock outstanding as of December 24, 2000, the Corporation shall redeem all (but
not part) of the shares of Series A Preferred Stock and Series B Preferred Stock
then held by such holder. Payment of the Series A Redemption Price (as defined
below) to the holders of Series A Preferred Stock and the Series B Redemption
Price (as defined below) to the holders of shares of Series B Preferred Stock,
shall be made by the Corporation on January 23, 2001, for a cash price equal to
the original purchase price paid by such holders for each share of Series A
Preferred Stock and Series B Preferred Stock outstanding, adjusted for any stock
split, combined consolidation or stock distribution or stock dividends with
respect to such shares (the "Series A Redemption Price" and the "Series B
Redemption Price," respectively). On or prior to December 24, 2000, the
Corporation shall give written notice (the "Series A and Series B Redemption
Notice") by mail, postage prepaid, to the holders of the then outstanding shares
of Series A Preferred Stock and Series B Preferred Stock at the address of each
such holder appearing on the books of the Corporation or given by such holder to
the Corporation for the purpose of notice. Such notice shall set forth the
Series A Redemption Price and the Series B Redemption Price, as the case may be,
and shall further state that any holder of shares of Series A Preferred Stock or
Series B Preferred Stock who intends to request redemption of its Series A
Preferred Stock or Series B Preferred Stock, respectively, pursuant to this
Section 5.3.5(a) must give written notice to the Corporation of its request for
redemption on or before January 11, 2001. On or after January 11, 2001, each
holder of shares of Series A Preferred Stock and Series B Preferred Stock who
requested that such holder's shares of Series A Preferred Stock and Series B
Preferred Stock be so redeemed, shall surrender the certificate or certificates
evidencing such shares to the Corporation. In the case of any certificate or
certificates which have been lost, stolen or destroyed, the holder of such
certificate or certificates shall make and deliver an affidavit of that fact to
the Corporation without the necessity of giving the Corporation a bond.
(ii) MANDATORY REDEMPTION OF
SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK. If after sending the
Series A and Series B Redemption Notice, the Corporation receives requests for
redemption on or prior to January 11, 2001 from the holders of at least
sixty-seven percent (67%) of the Series A Preferred Stock and Series B Preferred
Stock taken together, it shall give written notice by mail, postage prepaid, to
the holders of Series A Preferred Stock and Series B Preferred Stock that all
shares of the Series A Preferred Stock and Series B Preferred Stock then
outstanding will be redeemed on January 23, 2001 (the "Series A
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18
and Series B Redemption Date") for a per share cash price equal to the Series A
Redemption Price and the Series B Redemption Price, as the case may be. The
notice shall further call upon such holders to surrender to the Corporation on
or before the Series A and Series B Redemption Date at the place designated in
the notice such holder's certificate or certificates representing the shares to
be redeemed. On or after the Series A and Series B Redemption Date, each holder
of shares of Series A Preferred Stock and Series B Preferred Stock called for
redemption shall surrender the certificate or certificates evidencing such
shares to the Corporation. In the case of any certificate or certificates which
have been lost, stolen or destroyed, the holder of such certificate or
certificates shall make and deliver an affidavit of that fact to the Corporation
without the necessity of giving the Corporation a bond.
(iii) OPTIONAL REDEMPTION OF
SERIES C PREFERRED STOCK. In the event there shall not have occurred a closing
of a Qualified Public Offering (as defined in Section 5.3.4(b) hereof) prior to
November 3, 2001, at the election of each holder of shares of Series C Preferred
Stock outstanding as of November 4, 2001, the Corporation shall redeem all (but
not part) of the shares of Series C Preferred Stock then held by such holder.
Payment of the applicable Series C Redemption Price (as defined below) to the
holders of Series C Preferred Stock shall be made by the Corporation on December
3, 2001, for a cash price equal to the original purchase price paid by such
holders for each share of Series C Preferred Stock outstanding, adjusted for any
stock split, combined consolidation or stock distribution or stock dividends
with respect to such shares (the "Series C Redemption Price"). On or prior to
November 4, 2001, the Corporation shall give written notice (the "Series C
Redemption Notice") by mail, postage prepaid, to the holders of the then
outstanding shares of Series C Preferred Stock at the address of each such
holder appearing on the books of the Corporation or given by such holder to the
Corporation for the purpose of notice. The Series C Redemption Notice shall set
forth the Series C Redemption Price and shall further state that any holder of
shares of Series C Preferred Stock who intends to request redemption of its
Series C Preferred Stock pursuant to this Section 5.3.5(a) must give written
notice to the Corporation of its request for redemption on or before November
21, 2001. On or after December 3, 2001, each holder of shares of Series C
Preferred Stock who requested that such holder's shares of Series C Preferred
Stock be so redeemed, shall surrender the certificate or certificates evidencing
such shares to the Corporation. In the case of any certificate or certificates
which have been lost, stolen or destroyed, the holder of such certificate or
certificates shall make and deliver an affidavit of that fact to the Corporation
without the necessity of giving the Corporation a bond.
(iv) MANDATORY REDEMPTION OF
SERIES C PREFERRED STOCK. If after sending the Series C Redemption Notice, the
Corporation receives requests for redemption on or prior to November 21, 2001
from the holders of at least sixty-seven percent (67%) of the Series C Preferred
Stock, it shall give written notice by mail, postage prepaid, to the holders of
Series C Preferred Stock that all shares of Series C Preferred Stock then
outstanding will be redeemed on December 3,
<PAGE>
19
2001 (the "Series C Redemption Date") for a per share cash price equal to the
Series C Redemption Price. The notice shall further call upon such holders to
surrender to the Corporation on or before the Series C Redemption Date at the
place designated in the notice such holder's certificate or certificates
representing the shares to be redeemed on or after the Series C Redemption Date,
each holder of shares of Series C Preferred Stock called for redemption shall
surrender the certificate or certificates evidencing such shares to the
Corporation. In the case of any certificate or certificates which have been
lost, stolen or destroyed, the holder of such certificate or certificates shall
make and deliver an affidavit of that fact to the Corporation without the
necessity of giving the Corporation a bond.
(v) EXTENSION OF REDEMPTION DATES.
Notwithstanding the foregoing clauses (i) through (iv), in the event any
indebtedness under the Notes remains outstanding, the holders of shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
shall not have the right to require the Corporation to redeem any of such shares
until ninety (90) days after the later of (x) the date on which such Notes shall
be indefeasibly paid in full and (y) the applicable Redemption Date.
(b) TERMINATION OF RIGHTS. From and
after the Series A and Series B Redemption Date or the Series C Redemption Date
(each a "Redemption Date"), as the case may be, unless there shall have been a
default in payment or tender by the Corporation of the Series A Redemption Price
and the Series B Redemption Price or the Series C Redemption Price (each a
"Redemption Price"), as the case may be, all rights of the holders with respect
to such redeemed shares of the Series Preferred Stock (except the right to
receive the applicable Redemption Price upon surrender or their certificate)
shall cease and such shares shall not thereafter be transferred on the books of
this Corporation or be deemed to be outstanding for any purpose whatsoever.
(c) INSUFFICIENT FUNDS. If the funds of
the Corporation legally available for redemption of shares of the Series
Preferred Stock on the applicable Redemption Date are insufficient to redeem the
total number of shares of Series A Preferred Stock and Series B Preferred Stock
or Series C Preferred Stock, as the case may be, on such Redemption Date, the
Corporation will use its best efforts to engage in a recapitalization or the
sale of its business or businesses to generate sufficient funds to redeem all of
the shares of the Series A Preferred Stock and Series B Preferred Stock or the
Series C Preferred Stock, as the case may be. The Corporation shall use those
funds which are legally available to redeem the maximum possible number of such
shares ratably among the holders of such shares to be redeemed. At any time
thereafter when additional funds of the Corporation are legally available for
the redemption of shares of the Series Preferred Stock, such funds will
immediately be used to redeem the balance of the shares which the Corporation
has become obligated to redeem on the applicable Redemption Date but which it
has not redeemed at the applicable Redemption Price. If any shares of the Series
Preferred Stock are not
<PAGE>
20
redeemed for the foregoing reason or because the Corporation otherwise failed to
pay or tender to pay the aggregate applicable Redemption Price on all
outstanding shares of Series Preferred Stock, all shares which have not been
redeemed shall remain outstanding and entitled to all the rights and preferences
provided herein, and the Corporation shall pay interest on the applicable
Redemption Price for the unredeemed portion at an aggregate per annum rate equal
to the greater of (i) twelve percent (12%) or (ii) the Base Rate or any similar
lending rate announced from time to time by The First National Bank of Boston or
any successor entity plus five percent (5%), increased, in each case, by one
percent (1%) at the end of each calendar quarter thereafter. All provisions
hereof are hereby expressly limited so that in no contingency or event
whatsoever shall the amount paid or agreed to be paid to the holders of the
Series Preferred Stock exceed the maximum amount which the holder is permitted
to receive under applicable law. If fulfillment of any provision hereof shall
involve exceeding such amount, then the obligation to be fulfilled shall
automatically be reduced to the limit of such maximum amount. As used herein,
the term "applicable law" shall mean the law in effect as of the date hereof,
provided, however, that in the event that there is a change in the law which
results in a higher permissible rate of interest, then these provisions shall be
governed by such new law as of its effective date.
5.3.6 RESTRICTIONS AND LIMITATIONS. The
Corporation shall not without the affirmative vote or written consent of the
holders of a majority of the then outstanding shares of the Series Preferred
Stock:
(i) Redeem, purchase or otherwise acquire
for value (or pay into or set aside for a sinking fund for such purpose), any
share or shares of Series Preferred Stock other than pursuant to Section 5.3.5
hereof;
(ii) Redeem, purchase or otherwise acquire
for value (or pay into or set aside for a sinking fund for such purpose) any of
the Common Stock of any class or any other capital stock of the Corporation
other than the Series Preferred Stock or any of the Corporation's options,
warrants or convertible or exchangeable securities, except that these provisions
will not prohibit the Corporation from repurchasing or redeeming any shares of
capital stock from individuals and entities who have entered into stockholder
agreements, stock option agreements, employment agreements or other similar
agreements with the Corporation in each case approved by a majority of the
Series A Investor Directors, Series B Investor Director and Series C Investor
Director under which the Corporation has the option to repurchase such shares
upon the occurrence of certain events, including the termination of employment
and involuntary transfers by operation of law (and their permitted transferees);
provided, however, that any such agreement between such individual and the
Corporation under which the Corporation has such options to repurchase, must be
approved by the affirmative vote or written consent of the holders of a majority
of the then outstanding Series Preferred Stock before such agreement is executed
by the Corporation;
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21
(iii) Authorize or issue, or obligate itself
to issue, any other debt or equity security, other than as provided in that
certain Investment and Stockholder's Agreement, by and among the Corporation and
the Investors named therein, dated as of October 31, 1997 (the "Investment
Agreement");
(iv) Increase or decrease (other than by
conversion as permitted hereby) the total number of authorized shares of Series
Preferred Stock;
(v) Pay or declare any dividend or
distribution on any of its capital stock;
(vi) Authorize any merger, consolidation of
the Corporation with or into any other company or entity, or authorize the
reorganization or sale of the Corporation or the sale of substantially all of
the assets of the Corporation;
(vii) Amend the charter documents of the
Corporation or amend the Bylaws of the Corporation in any manner that adversely
affects the preferences, powers, rights or privileges of the holders of Series
Preferred Stock;
(viii) Authorize any reclassification or
recapitalization of the outstanding capital stock of the Corporation;
(ix) Approve the annual operating budget of
the Corporation;
(x) Change the composition or compensation
of management of the Corporation except as provided in the Investment Agreement;
or
(xi) Incur, create, assume, become or be
liable in any manner with respect to, or permit to exist, any new or additional
indebtedness or liability in excess of $50,000, except as provided in the
Investment Agreement.
5.3.7 NO REISSUANCE OF SERIES PREFERRED STOCK. No
share or shares of the Series Preferred Stock acquired by the Corporation by
reason of redemption, purchase, conversion or otherwise shall be reissued, and
all such shares shall be canceled, retired, and eliminated from the shares which
the Corporation shall be authorized to issue. The Corporation may from time to
time take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of the Series Preferred Stock accordingly.
5.3.8 NOTICES OF RECORD DATE. In the event (i)
the Corporation establishes a record date to determine the holders of any class
of securities who are entitled to receive any dividend or other distribution, or
(ii) there occurs any capital
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22
reorganization of the Corporation, any reclassification or recapitalization of
the capital stock of the Corporation, any merger or consolidation of the
Corporation, or any transfer of all or substantially all of the assets of the
Corporation to any other company, or any other entity or person, or any
voluntary or involuntary dissolution, liquidation or winding up of the
Corporation, the Corporation shall mail to each holder of Series Preferred Stock
at least 20 days prior to the record date specified therein, a notice specifying
(a) the date of such record date for the purpose of such dividend or
distribution and a description of such dividend or distribution, (b) the date on
which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
and (c) the time, if any, that is to be fixed, as to when the holders of record
of Common Stock (or other securities) shall be entitled to exchange their shares
of Common Stock (or other securities) for securities or other property
deliverable upon such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up.
5.3.9 OTHER RIGHTS. Except as otherwise provided
in this Amended and Restated Certificate of Incorporation shares of each series
of the Series Preferred Stock and shares of Common Stock shall be identical in
all respects (each share of Series Preferred Stock having equivalent rights to
the number of shares of Common Stock into which it is then convertible), shall
have the same powers, preferences and rights, without preference of any such
class or share over any other such class or share, and shall be treated as a
single class of stock for all purposes.
5.3.10 RANKING. Each series of Series Preferred
Stock shall rank on a parity with the other series of Series Preferred Stock as
to the distribution of assets on liquidation, dissolution and winding up of the
Corporation. The Series Preferred Stock shall rank senior to the Common Stock as
to the distribution of assets on liquidation, dissolution and winding up of the
Corporation.
5.3.11 MISCELLANEOUS.
(a) All notices referred to herein shall
be in writing, and all notices hereunder shall be deemed to have been given,
upon the earlier of delivery thereof by hand delivery, by courier, or by
standard form of telecommunication, addressed: (i) if to the Corporation, to its
principal executive office (Attention: President) and to the transfer agent, if
any, for the Series Preferred Stock or other agent of the Corporation designated
as permitted hereby or (ii) if to any holder of the Series Preferred Stock or
Common Stock, as the case may be, to such holder at the address of such holder
as listed in the stock record books of the Corporation (which may include the
records of any transfer agent for the Series Preferred Stock or Common Stock, as
the case may be) or (iii) to such other address as the Corporation or any such
holder, as the case may be, shall have designated by notice similarly given.
(b) The Corporation shall pay any and
all stock transfer and documentary stamp taxes that may be payable in respect of
any issuance or
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23
delivery of shares of Series Preferred Stock or shares of Common Stock or other
securities issued on account of Series Preferred Stock pursuant hereto or
certificates representing such shares or securities. The Corporation shall not,
however, be required to pay any such tax which may be payable in respect of any
transfer involved in the issuance or delivery of shares of Series Preferred
Stock or Common Stock or other securities in a name other than that in which the
shares of Series Preferred Stock with respect to which such shares or other
securities are issued or delivered were registered, or in respect of any payment
to any person with respect to any such shares or securities other than a payment
to the registered holder thereof, and shall not be required to make any such
issuance, delivery or payment unless and until the person otherwise entitled to
such issuance, delivery or payment has paid to the Corporation the amount of any
such tax or has established, to the satisfaction of the Corporation, that such
tax has been paid or is not payable. (c) The Corporation may appoint, and from
time to time discharge and change, a transfer agent of the Series Preferred
Stock. Upon any such appointment or discharge of a transfer agent, the
Corporation shall send notice thereof by hand delivery, by courier, by standard
form of telecommunication or by first class mail (postage prepaid), to each
holder of record of the Series Preferred Stock. 5.4 Subject to the provisions of
this Amended and Restated Certificate of Incorporation and except as otherwise
provided by law, the stock of the Corporation, regardless of class, may be
issued for such consideration and for such corporate purposes as the Board of
Directors may from time to time determine.
60 COMPROMISE, ARRANGEMENT OR REORGANIZATION. Whenever a
compromise or arrangement is proposed between this Corporation and its creditors
or any class of them and/or between this Corporation and its stockholders or any
class of them, any court of equitable jurisdiction within the State of Delaware
may, on the application in a summary way of this Corporation or of any creditor
or stockholder thereof or on the application of any receiver or receivers
appointed for this Corporation under the provisions of Section 291 of the
General Corporation Law or on the application of trustees in dissolution or of
any receiver or receivers appointed for this Corporation under the provisions of
Section 279 of General Corporation Law order a meeting of the creditors or class
of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all stockholders or class of stockholders of this Corporation, as the case may
be, and also on this Corporation.
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24
70 LIMITATION OF LIABILITY. No director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (a) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 174 of
the General Corporation Law or (d) for any transaction from which the director
derived any improper personal benefits. If the General Corporation Law is
hereafter amended to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
80 INDEMNIFICATION.
8.1 INDEMNITY UNDERTAKING. To the extent not
prohibited by law, the Corporation shall indemnify any person (an "Eligible
Person") who is or was made, or threatened to be made, a party to any
threatened, pending or completed action, suit or proceeding (a "Proceeding"),
whether civil, criminal, administrative or investigative, including, without
limitation, an action by or in the right of the Corporation to procure a
judgment in its favor, by reason of the fact that such person, or a person of
whom such person is the legal representative, is or was a Director or officer of
the Corporation, or, while a Director or officer of the Corporation, is or was
serving, at the request of the Corporation, as a director or officer of any
other corporation or in a capacity with comparable authority or responsibilities
for any partnership, joint venture, trust, employee benefit plan or other
enterprise (an "Other Entity"), against judgments, fines, penalties, excise
taxes, amounts paid in settlement and costs, charges and expenses (including
attorneys' fees, disbursements and other charges).
8.2 PAYMENT OF EXPENSES. The Corporation shall,
from time to time pay to an Eligible Person the funds necessary for payment of
expenses, including attorneys' fees and disbursements, incurred by or on behalf
of such Eligible Person in connection with any Proceeding, as such expenses are
incurred in advance of the final disposition of such Proceeding; provided,
however, that, if required by the General Corporation Law, such expenses
incurred by or on behalf of such Eligible Person may be paid in advance of the
final disposition of a Proceeding only upon receipt by the Corporation of an
undertaking, by or on behalf of such Eligible Person, to repay any such amount
so advanced if it shall ultimately be determined by final judicial decision from
which there is no further right of appeal that such Eligible Person is not
entitled to be indemnified for such expenses.
<PAGE>
25
8.3 CERTAIN EXCLUSIONS. Section 8.1 and 8.2
shall not include any Proceeding commenced by any Eligible Person without the
advance approval of the Board of Directors.
8.4 BINDING EFFECT. The provisions of this
Section 8 shall be a contract between the Corporation, on the one hand, and each
Eligible Person, on the other hand, pursuant to which the Corporation and each
such Eligible Person intend to be, and shall be, legally bound. No repeal or
modification of this Section 8 shall affect any rights or obligations with
respect to any state of facts then or theretofore existing or any proceeding
theretofore or thereafter brought or threatened based in whole or in part upon
any such state of facts.
8.5 PROCEDURAL RIGHTS. The rights to
indemnification and payment of expenses provided by, or granted pursuant to,
this Section 8 shall be enforceable by an Eligible Person entitled to such
indemnification or payment of expenses in any court of competent jurisdiction.
The burden of proving that such indemnification or payment of expenses is not
appropriate shall be on the Corporation. Neither the failure of the Corporation
(including the disinterested Directors on its Board of Directors, a committee of
such disinterested Directors, the Corporation's independent legal counsel and
its stockholders) to have made a determination prior to the commencement of such
action that such indemnification or payment of expenses is proper in the
circumstances, nor an actual determination by the Corporation (including the
disinterested Directors on its Board of Directors, a committee of such
disinterested Directors, the Corporation's independent legal counsel and its
stockholders) that such person is not entitled to such indemnification or
payment of expenses shall constitute a defense to the action or create a
presumption that such person is not so entitled. Notwithstanding anything to the
contrary in Section 8.3, such Eligible Person shall also be indemnified for any
expenses incurred in connection with successfully establishing his or her right
to such indemnification or payment of expenses, in whole or in part, in any such
proceeding.
8.6 SERVICE DEEMED AT CORPORATION'S REQUEST. Any
Director or officer of the Corporation serving (a) as a director or officer of
another corporation of which a majority of the shares entitled to vote in the
election of its directors is held, directly or indirectly, by the Corporation or
(b) any employee benefit plan of the Corporation or any corporation referred to
in clause (a) shall be deemed to be doing so at the request of the Corporation.
8.7 ELECTION OF APPLICABLE LAW. Any person
entitled to be indemnified or to payment of expenses as a matter of right
pursuant to this Section 8 may elect to have the right to indemnification or
payment of expenses interpreted on the basis of the applicable law in effect at
the time of the occurrence of the event or events giving rise to the applicable
Proceeding, to the extent permitted by law, or on the basis of the applicable
law in effect at the time such indemnification or payment of expenses is sought.
Such election shall be made, by a notice in writing to the
<PAGE>
26
Corporation, at the time indemnification or payment of expenses is sought;
provided, however, that if no such notice is given, the right to indemnification
or payment of expenses shall be determined by the law in effect at the time
indemnification or payment of expenses is sought.
8.8 RIGHTS NOT EXCLUSIVE. The rights to
indemnification and reimbursement or advancement of expenses provided by, or
granted pursuant to, this Section 8 shall not be deemed exclusive of any other
rights to which a person seeking indemnification or reimbursement or advancement
of expenses may have or hereafter be entitled under any statute, this Restated
Certificate of Incorporation, the By-laws, any agreement, any vote of
stockholders or disinterested Directors or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding such
office.
8.9 CONTINUATION OF BENEFITS. The rights to
indemnification and reimbursement or advancement of expenses provided by, or
granted pursuant to, this Section 8 shall continue as to a person who has ceased
to be a Director or officer (or other person indemnified hereunder) and shall
inure to the benefit of the executors, administrators, legatees and distributees
of such person.
8.10 INSURANCE. The Corporation shall have power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of an
Other Entity, against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of such person's status as
such, whether or not the Corporation would have the power to indemnify such
person against such liability under the provisions of this Section 8 or under
Section 145 of the General Corporation Law or any other provision of law.
90 DIRECTORS. This Section is inserted for the management of
the business and for the conduct of the affairs of the Corporation and it is
expressly provided that it is intended to be in furtherance of and not in
limitation or exclusion of the powers conferred by applicable law.
9.1 NUMBER, ELECTION, AND TERMS OF OFFICE OF
BOARD OF DIRECTORS. The business of the Corporation shall be managed by a Board
of Directors consisting of not less than three or more than 15 members. The
exact number of directors within the minimum and maximum limitations specified
in the preceding sentence shall be fixed from time to time by resolution adopted
by a majority of the entire Board of Directors then in office, whether or not
present at a meeting. Directors need not be stockholders of the Corporation. The
directors shall be divided into three classes of approximately equal size with
the term of office of the first class to expire at the first annual meeting of
stockholders of the Corporation next following the end of the Corporation's
fiscal year ending December 31, 1998, the term of office of the
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27
second class to expire at the first annual meeting of stockholders of the
Corporation next following the end of the Corporation's fiscal year ending
December 31, 1999 and the term of office of the third class to expire at the
annual meeting of stockholders of the Corporation next following the end of the
Corporation's fiscal year ending December 31, 2000. At each annual meeting of
stockholders following such initial election as specified above, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election.
Notwithstanding the foregoing, whenever, pursuant to
the provisions of Section 5.1 of this Amended and Restated Certificate of
Incorporation, the holders of any one or more series of Preferred Stock shall
have the right, voting separately as a series or together with holders of other
such series, to elect Directors at an annual or special meeting of stockholders,
the election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of this Amended and Restated
Certificate of Incorporation and any certificate of designations applicable
thereto.
During any period when the holders of any series of
Preferred Stock have the right to elect additional Directors as provided for or
fixed pursuant to the provisions of this Amended and Restated Certificate of
Incorporation or any certificate of designation related thereto, then upon
commencement and for the duration of the period during which such right
continues: (i) the then otherwise total authorized number of Directors of the
Corporation shall automatically be increased by such specified number of
Directors, and the holders of such Preferred Stock shall be entitled to elect
the additional Directors so provided for or fixed pursuant to said provisions,
and (ii) each such additional Director shall serve until such Director's
successor shall have been duly elected and qualified, or until such Director's
right to hold such office terminates pursuant to said provisions, whichever
occurs earlier, subject to such Director's earlier death, disqualification,
resignation or removal. Except as otherwise provided by the Board in the
resolution or resolutions establishing such series, whenever the holders of any
series of Preferred Stock having such right to elect additional Directors are
divested of such right pursuant to the provisions of such stock, the terms of
office of all such additional Directors elected by the holders of such stock, or
elected to fill any vacancies resulting from the death, resignation,
disqualification or removal of such additional Directors, shall forthwith
terminate and the total and authorized number of Directors of the Corporation
shall be reduced accordingly.
9.2 TENURE. Notwithstanding any provisions to
the contrary contained herein, (i) each director shall hold office until his or
her successor is elected and qualified, or until the earlier of such director's
death, resignation or removal and (ii) the term of any director who is also an
officer of the Corporation shall terminate if he or she ceases to be an officer
of the Corporation.
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28
9.3 NEWLY CREATED DIRECTORSHIPS AND VACANCIES.
Subject to the rights of the holders of any series of Preferred Stock then
outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause shall be filled by a majority vote of the remaining
directors then in office although less than a quorum, or by a sole remaining
director and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of the class to which they have
been elected expires or, in each case, until their respective successors are
duly elected and qualified. No decrease in the number of directors constituting
the Board of Directors shall shorten the term of any incumbent director. When
any director shall give notice of resignation effective at a future date, the
Board of Directors may fill such vacancy to take effect when such resignation
shall become effective. In the event of a vacancy in the Board of Directors, the
remaining Directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
9.4 REMOVAL OF DIRECTORS. Any one or more or all
of the directors may be removed, at any time, but only for cause by the
stockholders having at least a majority in voting power of the then issued and
outstanding shares of capital stock of the Corporation.
100 ACTION BY STOCKHOLDERS. Notwithstanding the provisions of
Section 228 of the General Corporation Law (or any successor statute), any
action required or permitted by the General Corporation Law to be taken at any
annual or special meeting of stockholders of the Corporation may be taken only
at such an annual or special meeting of stockholders and cannot be taken by
written consent without a meeting. At any annual meeting or special meeting of
stockholders of the Corporation, only such business shall be conducted as shall
have been brought before such meeting in the manner provided by the By-laws.
<PAGE>
110 ADOPTION, AMENDMENT AND/OR REPEAL OF BYLAWS. The Board of
Directors may from time to time adopt, amend or repeal the Bylaws; provided,
however, that any Bylaws adopted or amended by the Board of Directors may be
amended or repealed, and any Bylaws may be adopted, by a vote of the
stockholders having at least two-thirds of the voting power of the then issued
and outstanding shares of capital stock of the Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Restated
Certification of Incorporation this _____ day of August, 1998.
PATHNET, INC.
By:
--------------------------------
Richard A. Jalkut
President and Chief Executive Officer
Attest:
By:
--------------------------------
Michael A. Lubin
Vice President, General Counsel and Secretary
Exhibit 3.2
-----------
AMENDED AND RESTATED BYLAWS
OF
PATHNET, INC.
A Delaware Corporation
------------------------
ARTICLE 1
DEFINITIONS
As used in these Bylaws, unless the context otherwise
requires, the term:
1.1 "Assistant Secretary" means an Assistant Secretary of
the Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of
the Corporation.
1.3 "Board" means the Board of Directors of the
Corporation.
1.4 "Business Day" means any day which is not a Saturday, a
Sunday, or a day on which banks are authorized to close in the City of New York.
1.5 "Bylaws" means the bylaws of the Corporation, as amended
from time to time.
1.6 "Certificate of Incorporation" means the certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.7 "Chairman" means the Chairman of the Board of the
Corporation.
1.8 "Chief Executive Officer" means the Chief Executive
Officer of the Corporation.
1.9 "Corporation" means Pathnet, Inc.
1.10 "Directors" means directors of the Corporation.
1.11 "Entire Board" means all Directors of the Corporation in
office, whether or not present at a meeting of the Board, but disregarding
vacancies.
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3
1.12 "Executive Vice President" means an Executive Vice
President of the Corporation.
1.13 "General Corporation Law" means the General Corporation
Law of the State of Delaware, as amended from time to time.
1.14 "Office of the Corporation" means the executive office of
the Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
1.15 "President" means the President of the Corporation.
1.16 "Secretary" means the Secretary of the Corporation.
1.17 "Stockholders" means stockholders of the Corporation.
1.18 "Treasurer" means the Treasurer of the Corporation.
1.19 "Vice President" means a Vice President of the
Corporation.
ARTICLE 2
STOCKHOLDERS
------------
2.1 PLACE OF MEETINGS. Every meeting of Stockholders shall be
held at the Office of the Corporation or at such other place within or without
the State of Delaware as shall be designated, from time to time, by the Board,
the Chairman or the President, and specified or fixed in the notice of such
meeting or in the waiver of notice thereof.
2.2 ANNUAL MEETING. A meeting of Stockholders shall be held
annually for the election of Directors and the transaction of other business at
such hour and on such business day in each year as may be determined by
resolution adopted by affirmative vote of a majority vote of the Entire Board
and designated in the notice of meeting.
2.3 DEFERRED MEETING FOR ELECTION OF DIRECTORS, ETC. If the
annual meeting of Stockholders for the election of Directors and the transaction
of other business is not held on the date designated therefor or at any
adjournment of a meeting convened on such date, the Board shall call a meeting
of Stockholders for the election of Directors and the transaction of other
business as soon thereafter as convenient.
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2.4 SPECIAL MEETINGS. A special meeting of Stockholders,
unless otherwise prescribed by statute, may be called at any time by the Board,
the Chairman or by the President. At any special meeting of Stockholders, no
business may be transacted other than (i) such business stated in the notice
thereof given pursuant to Section 2.6 hereof or in any waiver of notice thereof
given pursuant to Section 2.7 hereof (in a form prepared by the Secretary) or
(ii) such business as is related to the purpose or purposes of such meeting and
which is properly brought before the meeting by or at the direction of the
Board.
2.5 FIXING RECORD DATE. For the purpose of (a) determining the
Stockholders entitled (i) to notice of or to vote at any meeting of Stockholders
or any adjournment thereof or (ii) to receive payment of any dividend or other
distribution or allotment of any rights, or to exercise any rights in respect of
any change, conversion or exchange of stock; or (b) any other lawful action, the
Board may fix a record date, which record date shall not precede the date upon
which the resolution fixing the record date was adopted by the Board and which
record date shall not be (x) in the case of clause (a)(i) above, more than sixty
nor less than ten days before the date of such meeting and (y) in the case of
clause (a)(ii) or (b) above, more than sixty days prior to such action. If no
such record date is fixed:
2.5.1 the record date for determining
Stockholders entitled to notice of or to vote at a meeting of
Stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived,
at the close of business on the day next preceding the day on which
the meeting is held; and
2.5.2 the record date for determining
Stockholders entitled to express consent to corporate action in
writing without a meeting (unless otherwise provided in the
Certificate of Incorporation), when no prior action by the Board is
required under the General Corporation Law, shall be the first day on
which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation by delivery to
its registered office in the State of Delaware, its principal place of
business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of Stockholders are
recorded; and when prior action by the Board is required under the
General Corporation Law, the record date for determining Stockholders
entitled to consent to corporate action in writing without a meeting
shall be at the close of business on the date on which the Board
adopts the resolution taking such prior action; and
2.5.3 the record date for determining
Stockholders for any purpose other than those specified in Section
2.5.1 and 2.5.2 hereof shall be at the close of business on the day on
which the Board adopts the resolution relating thereto.
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5
When a determination of Stockholders entitled to notice of or to vote at any
meeting of Stockholders has been made as provided in this Section 2.5, such
determination shall apply to any adjournment thereof unless the Board fixes a
new record date for the adjourned meeting.
Delivery made to the Corporation's registered office in
accordance with Section 2.5.2 shall be by hand or by certified or registered
mail, return receipt requested.
2.6 NOTICE OF MEETINGS OF STOCKHOLDERS. Except as otherwise
provided in Section 2.7 hereof, whenever under the provisions of any statute,
the Certificate of Incorporation or these Bylaws, Stockholders are required or
permitted to take any action at a meeting, written notice shall be given stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. Unless otherwise
provided by any statute, the Certificate of Incorporation or these By-laws, a
copy of the notice of any meeting shall be given, personally or by mail, not
less than ten nor more than sixty days before the date of the meeting, to each
Stockholder entitled to notice of or to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
with postage prepaid, directed to the Stockholder at his or her address as it
appears on the records of the Corporation. An affidavit of the Secretary or an
Assistant Secretary or of the transfer agent of the Corporation that the notice
required by this Section 2.6 has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. When a meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken, and at the adjourned meeting any business may be transacted that might
have been transacted at the meeting as originally called. If, however, the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each Stockholder of record entitled to vote at the
meeting.
2.7 WAIVERS OF NOTICE. Whenever the giving of any notice is
required by statute, the Certificate of Incorporation or these Bylaws, a waiver
thereof, in writing, signed by the Stockholder or Stockholders entitled to said
notice, whether before or after the event as to which such notice is required,
shall be deemed equivalent to notice. Attendance by a Stockholder at a meeting
shall constitute a waiver of notice of such meeting except when the Stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting has
not been lawfully called or convened.
2.8 LIST OF STOCKHOLDERS. The Secretary shall prepare and
make, or cause to be prepared and made, at least ten days before every meeting
of Stockholders, a complete list of the Stockholders entitled to vote at the
meeting, arranged in alphabetical
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6
order, and showing the address of each Stockholder and the number of shares
registered in the name of each Stockholder. If any voting group exists, such
list shall be arranged by voting group and within each voting group by series or
class of shares. Such list shall be open to the examination of any Stockholder,
the Stockholder's agent or attorney, at the Stockholder's expense, for any
purpose germane to the meeting, during ordinary business hours, for a period of
at least ten days prior to the meeting, either at a place within the city where
the meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any Stockholder who is
present. The Corporation shall maintain the list of Stockholders in written form
or in another form capable of conversion into written form within a reasonable
time. Upon the willful neglect or refusal of the Directors to produce such a
list at any meeting for the election of Directors, they shall be ineligible for
election to any office at such meeting. The stock ledger shall be the only
evidence as to who are the Stockholders entitled to examine the stock ledger,
the list of Stockholders or the books of the Corporation, or to vote in person
or by proxy at any meeting of Stockholders.
2.9 QUORUM OF STOCKHOLDERS; ADJOURNMENT. Except as otherwise
provided by any statute, the Certificate of Incorporation or these Bylaws, the
holders of a majority of all outstanding shares of stock entitled to vote at any
meeting of Stockholders, present in person or represented by proxy, shall
constitute a quorum for the transaction of any business at such meeting. When a
quorum is once present to organize a meeting of Stockholders, it is not broken
by the subsequent withdrawal of any Stockholders. The holders of a majority of
the shares of stock present in person or represented by proxy at any meeting of
Stockholders, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. Shares of its own
stock belonging to the Corporation or to another corporation, if a majority of
the shares entitled to vote in the election of Directors of such other
corporation is held, directly or indirectly, by the Corporation, shall neither
be entitled to vote nor be counted for quorum purposes; provided, however, that
the foregoing shall not limit the right of the Corporation to vote stock,
including but not limited to its own stock, held by it in a fiduciary capacity.
2.10 VOTING; PROXIES. Unless otherwise provided in the
Certificate of Incorporation, every Stockholder of record shall be entitled at
every meeting of Stockholders to one vote for each share of capital stock
standing in his or her name on the record of Stockholders determined in
accordance with Section 2.5 hereof. If the Certificate of Incorporation provides
for more or less than one vote for any share on any matter, each reference in
the Bylaws or the General Corporation Law to a majority or other proportion of
stock shall refer to such majority or other proportion of the votes of such
stock. The provisions of Sections 212 and 217 of the General Corporation Law
shall apply in determining whether any shares of capital stock may be voted and
the persons, if any, entitled to vote such shares; but the Corporation shall be
protected in
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7
assuming that the persons in whose names shares of capital stock stand on the
stock ledger of the Corporation are entitled to vote such shares. Holders of
redeemable shares of stock are not entitled to vote after the notice of
redemption is mailed to such holders and a sum sufficient to redeem the stocks
has been deposited with a bank, trust company, or other financial institution
under an irrevocable obligation to pay the holders the redemption price on
surrender of the shares of stock. At any meeting of Stockholders (at which a
quorum was present to organize the meeting), all matters, except as otherwise
provided by statute or by the Certificate of Incorporation or by these Bylaws,
shall be decided by a majority of the votes cast at such meeting by the holders
of shares present in person or represented by proxy and entitled to vote
thereon, whether or not a quorum is present when the vote is taken. Where a
separate vote by a class or classes of stock is required by statute, the
Certificate of Incorporation or these Bylaws, a majority of the outstanding
shares of such class or classes present in person or represented by proxy shall
constitute a quorum entitled to take action with respect to that vote on that
matter, and such matter shall be decided by a majority of the votes of such
class or classes present in person or represented by proxy at the meeting.
Directors may be elected either by written ballot or by voice vote. In voting on
any other question on which a vote by ballot is required by law or is demanded
by any Stockholder entitled to vote, the voting shall be by ballot. Each ballot
shall be signed by the Stockholder voting or the Stockholder's proxy and shall
state the number of shares voted. On all other questions, the voting may be by
voice vote. Each Stockholder entitled to vote at a meeting of Stockholders may
authorize another person or persons to act for such Stockholder by proxy. The
validity and enforceability of any proxy shall be determined in accordance with
Section 212 of the General Corporation Law. A Stockholder may revoke any proxy
that is not irrevocable by attending the meeting and voting in person or by
filing an instrument in writing revoking the proxy or by delivering a proxy in
accordance with applicable law bearing a later date to the Secretary.
2.11 VOTING PROCEDURES AND INSPECTORS OF ELECTION AT MEETINGS
OF STOCKHOLDERs. The Corporation, in advance of any meeting of Stockholders,
shall appoint one or more inspectors to act at the meeting and make a written
report thereof. The Corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting, the person presiding at the meeting shall
appoint, one or more inspectors to act at the meeting. Each inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspectors shall (a) ascertain
the number of shares outstanding and the voting power of each, (b) determine the
shares represented at the meeting and the validity of proxies and ballots, (c)
count all votes and ballots, (d) determine and retain for a reasonable period a
record of the disposition of any challenges made to any determination by the
inspectors, and (e) certify their determination of the number of shares
represented at the meeting and their count of all votes and ballots. The
inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of their duties. The date and time of the opening
and
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8
the closing of the polls for each matter upon which the Stockholders will vote
at a meeting shall be determined by the person presiding at the meeting and
shall be announced at the meeting. No ballot, proxies or votes, or any
revocation thereof or change thereto, shall be accepted by the inspectors after
the closing of the polls unless the Court of Chancery of the State of Delaware
upon application by a Stockholder shall determine otherwise.
2.12 CONDUCT OF MEETINGS. (a) At each meeting of Stockholders,
the President, or in the absence of the President, the Chairman, or if there is
no Chairman or if there be one and the Chairman is absent, an Executive Vice
President, and in case more than one Executive Vice President shall be present,
that Executive Vice President designated by the Board (or in the absence of any
such designation, in the order of their first election, present), or it there is
no Executive Vice President or if there be one and the Executive Vice President
is absent, a Vice President, and in case more than one Vice President shall be
present, that Vice President designated by the Board (or in the absence of any
such designation, in the order of their first election, present), shall act as
chairman of the meeting. The Secretary, or in his or her absence one of the
Assistant Secretaries, shall act as secretary of the meeting. In case none of
the officers above designated to act as chairman or secretary of the meeting,
respectively, shall be present, a chairman or a secretary of the meeting, as the
case may be, shall be chosen by a majority of the votes cast at such meeting by
the holders of shares of capital stock present in person or represented by proxy
and entitled to vote at the meeting.
2.13 ORDER OF BUSINESS. The order of business at all meetings
of Stockholders shall be as determined by the chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
2.14 WRITTEN CONSENT OF STOCKHOLDERS WITHOUT A MEETING. Unless
otherwise provided in the Certificate of Incorporation, any action required or
permitted by the General Corporation Law to be taken at any annual or special
meeting of Stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted and shall be delivered (by hand or by certified or registered mail,
return receipt requested) to the Corporation by delivery to its registered
office in the State of Delaware, its principal place of business, or an officer
or agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Every written consent shall bear the date
of signature of each stockholder who signs the consent and no written consent
shall be effective to take the corporate action referred to therein unless,
within 60 days of the earliest dated consent delivered in the manner required by
this Section 2.14, written consents signed by a
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9
sufficient number of Stockholders to take action are delivered to the
Corporation as aforesaid. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
Stockholders who have not consented in writing and who, if the action had been
taken at a meeting, would have been entitled to notice of the meeting if the
record date for such meeting had been the date that written consents signed by a
sufficient number of Stockholders to take the action were delivered to the
Corporation as aforesaid.
ARTICLE 3
DIRECTORS
---------
3.1 GENERAL POWERS. Except as otherwise provided in the
Certificate of Incorporation, the business and affairs of the Corporation shall
be managed by or under the direction of the Board. The Board may adopt such
rules and regulations, not inconsistent with the Certificate of Incorporation or
these Bylaws or applicable laws, as it may deem proper for the conduct of its
meetings and the management of the Corporation. In addition to the powers
expressly conferred by these Bylaws, the Board may exercise all powers and
perform all acts that are not required, by these Bylaws or the Certificate of
Incorporation or by statute, to be exercised and performed by the Stockholders.
3.2 NUMBER; QUALIFICATION; TERM OF OFFICE. The Board shall
consist of not less than three or more than 15 members. The exact number of
Directors within the minimum and maximum limitations specified in the preceding
sentence shall be fixed from time to time by resolution adopted by a majority of
the Entire Board then in office, whether or not present at a meeting. Directors
need not be Stockholders. The Directors shall be divided into three classes with
the term of office of the first class to expire at the first annual meeting of
Stockholders of the Corporation next following the end of the Corporation's
fiscal year ending December 31, 1998, the term of office of the second class to
expire at the first annual meeting of Stockholders of the Corporation next
following the end of the Corporation's fiscal year ending December 31, 1999 and
the term of office of the third class to expire at the annual meeting of
Stockholders of the Corporation next following the end of the Corporation's
fiscal year ending December 31, 2000. At each annual meeting of Stockholders
following such initial election as specified above, Directors elected to succeed
those Directors whose terms expire shall be elected for a term of office to
expire at the third succeeding annual meeting of Stockholders after their
election.
3.3 TENURE. Notwithstanding any provisions to the contrary
contained herein, (i) each Director shall hold office until his or her successor
is elected and qualified, or until the earlier of such Director's death,
resignation or removal and (ii) the
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10
term of any director who is also an officer of the Corporation shall terminate
if he or she ceases to be an officer of the Corporation.
3.4 ELECTION. Directors shall, except as otherwise required by
statute or by the Certificate of Incorporation, be elected by a plurality of the
votes cast at a meeting of Stockholders by the holders of shares present in
person or represented by proxy at the meeting and entitled to vote in the
election.
3.5 NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Subject to the
rights of the holders of any series of preferred stock of the Corporation then
outstanding, newly created directorships resulting from any increase in the
authorized number of Directors or any vacancies in the Board resulting from
death, resignation, retirement, disqualification, removal from office or other
cause shall be filled by a majority vote of the remaining Directors then in
office although less than a quorum, or by a sole remaining Director and
Directors so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of the class to which they have been elected
expires or, in each case, until their respective successors are duly elected and
qualified. No decrease in the number of Directors constituting the Board shall
shorten the term of any incumbent Director. When any Director shall give notice
of resignation effective at a future date, the Board may fill such vacancy to
take effect when such resignation shall become effective.
3.6 RESIGNATION. Any Director may resign at any time by
written notice to the Corporation. Such resignation shall take effect at the
time therein specified, and, unless otherwise specified in such resignation, the
acceptance of such resignation shall not be necessary to make it effective.
3.7 REMOVAL. Any one or more or all of the Directors may be
removed, at any time, but only for cause by the Stockholders having at least a
majority in voting power of the then issued and outstanding shares of capital
stock of the Corporation. If pursuant to the Certificate of Incorporation a
Director is elected by a voting group of Stockholders, only the Stockholders of
the voting group may participate in the vote to remove such Director.
3.8 COMPENSATION. Each Director, in consideration of his or
her service as such, may receive from the Corporation such amount per annum or
such fees for attendance at Directors' meetings, or both, as the Board may from
time to time determine, together with reimbursement for the reasonable
out-of-pocket expenses, if any, incurred by such Director in connection with the
performance of his or her duties. Each Director who shall serve as a member of
any committee of Directors in consideration of serving as such may receive such
additional amount per annum or such fees for attendance at committee meetings,
or both, as the Board may from time to time determine, together with
reimbursement for the reasonable out-of-pocket expenses, if any, incurred by
such Director in the performance of his or her duties. Nothing
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11
contained in this Section 3.8 shall preclude any Director from serving the
Corporation or its subsidiaries in any other capacity and receiving proper
compensation therefor.
3.9 TIMES AND PLACES OF MEETINGS. The Board may hold meetings,
both regular and special, either within or without the State of Delaware. The
times and places for holding meetings of the Board may be fixed from time to
time by resolution of the Board or (unless contrary to a resolution of the
Board) in the notice of the meeting.
3.10 ANNUAL MEETINGS. On the day when and at the place where
the annual meeting of Stockholders for the election of Directors is held, and as
soon as practicable thereafter, the Board may hold its annual meeting, without
notice of such meeting, provided a quorum shall be present, for the purposes of
organization, the election of officers and the transaction of other business.
The annual meeting of the Board may be held at any other time and place
specified in a notice given as provided in Section 3.12 hereof for special
meetings of the Board or in a waiver of notice thereof.
3.11 REGULAR MEETINGS. Regular meetings of the Board may be
held without notice at such times and at such places as shall from time to time
be determined by the Board.
3.12 SPECIAL MEETINGS. Special meetings of the Board may be
called by the President or any Director then serving on at least one day's
notice to each Director given by one of the means specified in Section 3.15
hereof other than by mail, or on at least three days' notice if given by mail.
3.13 TELEPHONE MEETINGS. Directors or members of any committee
designated by the Board may participate in a meeting of the Board or of such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 3.13 shall constitute
presence in person at such meeting.
3.14 ADJOURNED MEETINGS. A majority of the Directors present
at any meeting of the Board, including an adjourned meeting, whether or not a
quorum is present, may adjourn such meeting to another time and place. At least
one day's notice of any adjourned meeting of the Board shall be given to each
Director whether or not present at the time of the adjournment, if such notice
shall be given by one of the means specified in Section 3.15 hereof other than
by mail, or at least three days' notice if by mail. Any business may be
transacted at an adjourned meeting that might have been transacted at the
meeting as originally called.
3.15 NOTICE PROCEDURE. Subject to Sections 3.13 and 3.16
hereof, whenever, under the provisions of any statute, the Certificate of
Incorporation or these Bylaws, notice is required to be given to any Director,
such notice shall be deemed given effectively if given in person or by
telephone, by mail addressed to such Director at such
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12
Director's address as it appears on the records of the Corporation, with postage
thereon prepaid, or by telegram, telex, telecopy or similar means addressed as
aforesaid.
3.16 WAIVER OF NOTICE. Whenever the giving of any notice is
required by statute, the Certificate of Incorporation or these Bylaws, a waiver
thereof, in writing, signed by the person or persons entitled to said notice,
whether before or after the event as to which such notice is required, shall be
deemed equivalent to notice. Attendance by a person at a meeting shall
constitute a waiver of notice of such meeting except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business on the ground that the meeting has not been
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Directors or a committee of
Directors need be specified in any written waiver of notice unless so required
by statute, the Certificate of Incorporation or these Bylaws.
3.17 ORGANIZATION. At each meeting of the Board, the Chairman,
or in the absence of the Chairman, the President, or in the absence of the
President, a chairman chosen by a majority of the Directors present, shall
preside. The Secretary shall act as secretary at each meeting of the Board. In
case the Secretary shall be absent from any meeting of the Board, an Assistant
Secretary shall perform the duties of secretary at such meeting; and in the
absence from any such meeting of the Secretary and all Assistant Secretaries,
the person presiding at the meeting may appoint any person to act as secretary
of the meeting.
3.18 QUORUM OF DIRECTORS. Except as otherwise expressly
provided by statute or the Certificate of Incorporation, the presence in person
of a majority of the Entire Board shall be necessary and sufficient to
constitute a quorum for the transaction of business at any meeting of the Board,
but a majority of a smaller number may adjourn any such meeting to a later date.
3.19 ACTION BY MAJORITY VOTE. Except as otherwise expressly
required by statute, the Certificate of Incorporation or these Bylaws, the act
of a majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board.
3.20 ACTION WITHOUT MEETING. Unless otherwise restricted by
the Certificate of Incorporation or these By-laws, any action required or
permitted to be taken at any meeting of the Board or of any committee thereof
may be taken without a meeting if all Directors or members of such committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board or committee.
ARTICLE 4
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COMMITTEES OF THE BOARD
-----------------------
The Board, by resolution adopted by a majority of the Entire
Board, may designate one or more committees, each committee to consist of one or
more of the Directors of the Corporation. The Board may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of such committee. If a member of a committee
shall be absent from any meeting, or disqualified from voting thereat, the
remaining member or members present and not disqualified from voting, whether or
not such member or members constitute a quorum, may, by a unanimous vote,
appoint another member of the Board to act at the meeting in the place of any
such absent or disqualified member. Any such committee, to the extent provided
in the resolution of the Board or these Bylaws, shall have and may exercise all
the powers and authority of the Board in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
impressed on all papers that may require it, but no such committee shall have
the power or authority of the Board in reference to: (i) approving, or
recommending to the Stockholders, any action that the Delaware General
Corporation Law requires to be approved by the Stockholders; (ii) filling
vacancies on the Board or on any of its committees; (iii) amending the
Certificate of Incorporation; (iv) adopting, amending, or repealing these
Bylaws; (v) approving a plan of merger not requiring approval of the
Stockholders; (vi) authorizing or approving a distribution, except according to
a general formula or method prescribed by the Board; or (vii) authorizing or
approving the issuance or sale or contract for sale of shares, or determine the
designation and relative rights, preferences, and limitations of a class or
series of shares, except that the Board may authorize a committee, or a senior
executive officer of the Corporation, to do so within limits specifically
prescribed by the Board. Unless otherwise specified in the resolution of the
Board designating a committee, at all meetings of such committee a majority of
the total number of members of the committee shall constitute a quorum for the
transaction of business, and the vote of a majority of the members of the
committee present at any meeting at which there is a quorum shall be the act of
the committee. Each committee shall keep regular minutes of its meetings and
report the same to the Board when required. Unless the Board otherwise provides,
each committee designated by the Board may make, alter and repeal rules for the
conduct of its business. In the absence of such rules each committee shall
conduct its business in the same manner as the Board conducts its business
pursuant to Article 3 of these Bylaws.
ARTICLE 5
OFFICERS
--------
5.1 POSITIONS. The officers of the Corporation shall be a
President, a Secretary, a Treasurer and such other officers as the Board may
appoint, including a Chairman, a Chief Executive Officer, one or more Executive
Vice Presidents, one or more Vice Presidents and one or
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14
more Assistant Secretaries and Assistant Treasurers, who shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board. The Board may use descriptive words or phrases to designate the standing,
seniority or areas of special competence of the Vice Presidents elected or
appointed by it. Any number of offices may be held by the same person unless the
Certificate of Incorporation or these Bylaws otherwise provide.
5.2 APPOINTMENT. The officers of the Corporation shall be
chosen by the Board at its annual meeting or at such other time or times as the
Board shall determine.
5.3 COMPENSATION. The compensation of all officers of the
Corporation shall be fixed by, or in the manner prescribed by, the Board. No
officer shall be prevented from receiving a salary or other compensation by
reason of the fact that the officer is also a Director.
5.4 TERM OF OFFICE. Each officer of the Corporation shall hold
office for the term for which he or she is elected and until such officer's
successor is chosen and qualifies or until such officer's earlier death,
resignation or removal. Any officer may resign at any time upon written notice
to the Corporation. Such resignation shall take effect at the date of receipt of
such notice or at such later time as is therein specified, and, unless otherwise
specified, the acceptance of such resignation shall not be necessary to make it
effective. The resignation of an officer shall be without prejudice to the
contract rights of the Corporation, if any. Any officer elected or appointed by
the Board may be removed at any time, with or without cause, by vote of a
majority of the Entire Board. Any vacancy occurring in any office of the
Corporation shall be filled by the Board. The removal of an officer without
cause shall be without prejudice to the officer's contract rights, if any. The
election or appointment of an officer shall not of itself create contract
rights.
5.5 FIDELITY BONDS. The Corporation may secure the fidelity
of any or all of its officers or agents by bond or otherwise.
5.6 CHAIRMAN. The Chairman shall exercise such duties as are
and may be prescribed from time to time by the Board. In the absence of or
disability of the Chairman, an officer appointed by the Chairman, or if the
Chairman fails to make such appointment, by the Board, shall perform the duties
and exercise the powers of the Chairman. The Chairman may sign, execute and
deliver, in the name of the Corporation, powers of attorney, contracts, bonds
and other obligations which implement policies established by the Board. The
Chairman shall preside at all meetings the Board at which he is present, and
shall perform such other duties as may be prescribed from time to time by the
Board or these Bylaws.
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15
5.7 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
exercise such duties as are and may be prescribed from time to time by the
Board. The Chief Executive Officer may sign, execute and deliver, in the name of
the Corporation, powers of attorney, contracts bonds and other obligations which
implement policies established by the Board.
5.8 PRESIDENT. The President shall be responsible to, and
shall exercise such duties as are and may be prescribed from time to time by,
the Board. The President may sign, execute and deliver, in the name of the
Corporation, powers of attorney, contracts, bonds and other obligations which
implement policies established by the Board.
5.9 EXECUTIVE VICE PRESIDENT. In the absence of the President
or in the event of his death, inability or refusal to act, the Executive Vice
President, if any, or in the event there be more than one Executive Vice
President, the Executive Vice Presidents, in the order designated, or in the
absence of any designation, then in the order of their first election, shall
perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. The
Executive Vice President shall generally assist the President and shall perform
such other duties and have such other powers as the Board may from time to time
prescribe.
5.10 VICE PRESIDENT. In the absence of the Executive Vice
President or in the event of his death, inability or refusal to act, the Vice
President, if any, or in the event there be more than one Vice President, the
Vice Presidents, in the order designated, or in the absence of any designation,
then in the order of their first election, shall perform the duties of the
Executive Vice President, and when so acting, shall have all the powers of and
be subject to all the restrictions upon the Executive Vice President. The Vice
President shall generally assist the President and shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
5.11 SECRETARY. The Secretary shall attend all meetings of the
Board and all meetings of the stockholders and shall record all the proceedings
of the meetings of the stockholders and of the Board in a book to be kept for
that purpose and shall perform like duties for the standing committees when
requested by such committees. The Secretary shall give, or cause to be given,
required notice of all meetings of the stockholders and the Board, and shall
perform such other duties as may be prescribed by the Board or assigned by the
President or Chairman. The Secretary shall have custody of the stock certificate
books and stockholder records and such other books and records as the Board may
direct. The Secretary shall have custody of the corporate seal of the
Corporation and shall have authority to affix the same to any instrument, and
when so affixed, it may be attested by the Secretary's signature. The Board may
give general authority to any other officer to affix the seal of the Corporation
and to attest the affixing thereof by his signature.
<PAGE>
16
5.12 ASSISTANT SECRETARY. Any Assistant Secretary elected by
the Board shall have the same duties as prescribed for the Secretary and shall
perform such duties at the direction of the Secretary, to assist the Secretary,
and in the absence of the Secretary, at the direction of the Chairman, the
President or any Vice President, and otherwise as directed from time to time by
the Chairman, the President or the Board.
5.13 TREASURER OR CHIEF FINANCIAL OFFICER. The Treasurer or
Chief Financial Officer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation, and shall deposit all
moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board, and shall
disburse the funds of the Corporation, as may be ordered by the Board, taking
proper vouchers for such disbursements, and shall render to the Chairman, the
President and the Board at its regular meetings, or when the Board so requires,
an account of all his transactions as treasurer and of the financial condition
of the Corporation, and shall perform such other duties and have such other
powers as the Board, the Chairman or the President may from time to time
prescribe.
5.14 ASSISTANT TREASURER. Any Assistant Treasurer elected by
the Board shall have the same duties as prescribed for the Treasurer and shall
perform such duties at the direction of the Treasurer, to assist the Treasurer,
and in the absence of the Treasurer, at the direction of the Chairman, the
President or any Vice President, and otherwise as directed from time to time by
the Chairman, the President or the Board.
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
----------------------------------------------
6.1 EXECUTION OF CONTRACTS. The Board, except as otherwise
provided in these Bylaws, may prospectively or retroactively authorize any
officer or officers, employee or employees or agent or agents, in the name and
on behalf of the Corporation, to enter into any contract or execute and deliver
any instrument, and any such authority may be general or confined to specific
instances, or otherwise limited.
6.2 LOANS. The Board may prospectively or retroactively
authorize the President or any other officer, employee or agent of the
Corporation to effect loans and advances at any time for the Corporation from
any bank, trust company or other institution, or from any firm, corporation or
individual, and for such loans and advances the person so authorized may make,
execute and deliver promissory notes, bonds or other certificates or evidences
of indebtedness of the Corporation, and, when authorized by the Board so to do,
may pledge and hypothecate or transfer any securities or other property of the
Corporation as security for any such loans or advances. Such authority conferred
by the Board may be general or confined to specific instances, or otherwise
limited.
<PAGE>
17
6.3 CHECKS, DRAFTS, ETC. All checks, drafts and other orders
for the payment of money out of the funds of the Corporation and all evidences
of indebtedness of the Corporation shall be signed on behalf of the Corporation
in such manner as shall from time to time be determined by resolution of the
Board.
6.4 DEPOSITS. The funds of the Corporation not otherwise
employed shall be deposited from time to time to the order of the Corporation
with such banks, trust companies, investment banking firms, financial
institutions or other depositaries as the Board may select or as may be selected
by an officer, employee or agent of the Corporation to whom such power to select
may from time to time be delegated by the Board.
ARTICLE 7
STOCK AND DIVIDENDS
-------------------
7.1 CERTIFICATES REPRESENTING SHARES. The shares of capital
stock of the Corporation shall be represented by certificates in such form
(consistent with the provisions of Section 158 of the General Corporation Law)
as shall be approved by the Board. Such certificates shall be signed by the
Chairman, the President, an Executive Vice President or a Vice President and by
the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, and may be impressed with the seal of the Corporation or a facsimile
thereof. If the Corporation is authorized to issue direct classes of shares or
different series within a class, the designations, relative rights, preferences,
and limitations applicable to each class and the variations in rights,
preferences, and limitations determined for each series (and the authority of
the Board to determine variations for future series) shall be summarized on the
front or back of each certificate of shares of such class or series.
Alternatively, each certificate may state conspicuously on its front or back
that the Corporation will furnish the Stockholder this information on request in
writing and without charge. All certificates for shares shall be consecutively
numbered or otherwise identified. The name and address of the person to whom the
shares represented thereby are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the Corporation. The
signatures of the officers upon a certificate may be facsimiles, if the
certificate is countersigned, manually or by facsimile signature, by a transfer
agent or registrar other than the Corporation itself or its employee. In case
any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon any certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, such
certificate may, unless otherwise ordered by the Board, be issued by the
Corporation with the same effect as if such person were such officer, transfer
agent or registrar at the date of issue.
<PAGE>
18
7.2 TRANSFER OF SHARES. Transfers of shares of capital stock
of the Corporation shall be made only on the books of the Corporation by the
holder thereof or by the holder's duly authorized attorney appointed by a power
of attorney duly executed and filed with the Secretary or a transfer agent of
the Corporation, and on surrender of the certificate or certificates
representing such shares of capital stock properly endorsed for transfer and
upon payment of all necessary transfer taxes. Every certificate exchanged,
returned or surrendered to the Corporation shall be marked "Canceled," with the
date of cancellation, by the Secretary or an Assistant Secretary or the transfer
agent of the Corporation. A person in whose name shares of capital stock shall
stand on the books of the Corporation shall be deemed the owner thereof to
receive dividends, to vote as such owner and for all other purposes as respects
the Corporation. No transfer of shares of capital stock shall be valid as
against the Corporation, its Stockholders and creditors for any purpose, except
to render the transferee liable for the debts of the Corporation to the extent
provided by law, until such transfer shall have been entered on the books of the
Corporation by an entry showing from and to whom transferred.
7.3 TRANSFER AND REGISTRY AGENTS. The Corporation may from
time to time maintain one or more transfer offices or agents and registry
offices or agents at such place or places as may be determined from time to time
by the Board.
7.4 LOST, DESTROYED, STOLEN AND MUTILATED CERTIFICATES. The
holder of any shares of capital stock of the Corporation shall immediately
notify the Corporation of any loss, destruction, theft or mutilation of the
certificate representing such shares, and the Corporation may issue a new
certificate to replace the certificate alleged to have been lost, destroyed,
stolen or mutilated. The Board may, in its discretion, as a condition to the
issue of any such new certificate, require the owner of the lost, destroyed,
stolen or mutilated certificate, or his or her legal representatives, to make
proof satisfactory to the Board of such loss, destruction, theft or mutilation
and to advertise such fact in such manner as the Board may require, and to give
the Corporation and its transfer agents and registrars, or such of them as the
Board may require, a bond in such form, in such sums and with such surety or
sureties as the Board may direct, to indemnify the Corporation and its transfer
agents and registrars against any claim that may be made against any of them on
account of the continued existence of any such certificate so alleged to have
been lost, destroyed, stolen or mutilated and against any expense in connection
with such claim.
7.5 RULES AND REGULATIONS. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws or with
the Certificate of Incorporation, concerning the issue, transfer and
registration of certificates representing shares of its capital stock.
7.6 RESTRICTION ON TRANSFER OF STOCK. A written restriction on
the transfer or registration of transfer of capital stock of the Corporation, if
permitted by Section 202 of the General Corporation Law and noted conspicuously
on the certificate
<PAGE>
19
representing such capital stock, may be enforced against the holder of the
restricted capital stock or any successor or transferee of the holder, including
an executor, administrator, trustee, guardian or other fiduciary entrusted with
like responsibility for the person or estate of the holder. Unless noted
conspicuously on the certificate representing such capital stock, a restriction,
even though permitted by Section 202 of the General Corporation Law, shall be
ineffective except against a person with actual knowledge of the restriction. A
restriction on the transfer or registration of transfer of capital stock of the
Corporation may be imposed either by the Certificate of Incorporation or by an
agreement among any number of Stockholders or among such Stockholders and the
Corporation. No restriction so imposed shall be binding with respect to capital
stock issued prior to the adoption of the restriction unless the holders of such
capital stock are parties to an agreement or voted in favor of the restriction.
7.7 DIVIDENDS, SURPLUS, ETC. Subject to the provisions of
the Certificate of Incorporation and of law, the Board:
7.7.1 may declare and pay dividends or
make other distributions on the outstanding shares of capital stock in
such amounts and at such time or times as it, in its discretion, shall
deem advisable giving due consideration to the condition of the
affairs of the Corporation;
7.7.2 may use and apply, in its discretion,
any of the surplus of the Corporation in purchasing or acquiring any
shares of capital stock of the Corporation, or purchase warrants
therefor, in accordance with law, or any of its bonds, debentures,
notes, scrip or other securities or evidences of indebtedness; and
7.7.3 may set aside from time to time out of
such surplus or net profits such sum or sums as, in its discretion, it
may think proper, as a reserve fund to meet contingencies, or for
equalizing dividends or for the purpose of maintaining or increasing
the property or business of the Corporation, or for any purpose it may
think conducive to the best interests of the Corporation.
ARTICLE 8
BOOKS AND RECORDS
8.1 BOOKS AND RECORDS. There shall be kept at the Office of
the Corporation correct and complete records and books of account recording the
financial transactions of the Corporation and minutes of the proceedings of the
Stockholders, the Board and any committee of the Board. The Corporation shall
keep at its principal office, or at the office of the transfer agent or
registrar of the Corporation, a record
<PAGE>
20
containing the names and addresses of all Stockholders, the number and class of
shares held by each and the dates when they respectively became the owners of
record thereof.
8.2 FORM OF RECORDS. Any records maintained by the Corporation
in the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of, punch cards,
magnetic tape, photographs, microphotographs, or any other information storage
device, provided that the records so kept can be converted into clearly legible
written form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
8.3 INSPECTION OF BOOKS AND RECORDS. Except as otherwise
provided by law, the Board shall determine from time to time whether, and, if
allowed, when and under what conditions and regulations, the accounts, books,
minutes and other records of the Corporation, or any of them, shall be open to
the Stockholders for inspection.
<PAGE>
21
ARTICLE 9
SEAL
----
The corporate seal, if the Board elects to adopt one, shall
have inscribed thereon the name of the Corporation, the year of its organization
and the words "Corporate Seal, Delaware." The seal may be used by causing it or
a facsimile thereof to be impressed or affixed or otherwise reproduced.
ARTICLE 10
FISCAL YEAR
-----------
The fiscal year of the Corporation shall end on December 31 of
each calendar year, and may be changed, by resolution of the Board.
ARTICLE 11
PROXIES AND CONSENTS
--------------------
Unless otherwise directed by the Board, the Chairman, the
President, any Executive Vice President, any Vice President, the Secretary or
the Treasurer, or any one of them, may execute and deliver on behalf of the
Corporation proxies respecting any and all shares or other ownership interests
of any Other Entity owned by the Corporation appointing such person or persons
as the officer executing the same shall deem proper to represent and vote the
shares or other ownership interests so owned at any and all meetings of holders
of shares or other ownership interests, whether general or special, and/or to
execute and deliver consents respecting such shares or other ownership
interests; or any of the aforesaid officers may attend any meeting of the
holders of shares or other ownership interests of such Other Entity and thereat
vote or exercise any or all other powers of the Corporation as the holder of
such shares or other ownership interests.
ARTICLE 12
OFFICES
-------
12.1 REGISTERED OFFICE. The registered office of the
Corporation shall be at 32 Loockerman Square, Suite L-100, in the City of Dover,
County of Kent, State of Delaware. The registered agent of the corporation at
such address is The Prentice-Hall Corporation System, Inc.
<PAGE>
22
12.2 OTHER OFFICES. The Corporation may also have offices,
including its principal office, at such other places both within and without the
State of Delaware as the Board of Directors may from time to time determine or
the business of the Corporation may require.
ARTICLE 13
EMERGENCY BYLAWS
----------------
Unless the Certificate of Incorporation provides otherwise, the
following provisions of this Article 13 shall be effective during an emergency
resulting from an attack on the United States or during any nuclear or atomic
disaster or during the existence of a similar catastrophe. During such
emergency:
13.1 NOTICE TO BOARD MEMBERS. Any one member of the Board or
any one of the following officers: Chairman, President, any Executive Vice
President, any Vice President, Secretary, or Treasurer, may call a meeting of
the Board. Such person shall use reasonable efforts to notify all members of the
Board, but notice of such meeting need be given only to those Directors whom
after reasonable effort it is practicable to reach, and may be given in any
practical manner, including by publication and radio. Such notice shall be given
at least six hours prior to commencement of the meeting.
13.2 TEMPORARY DIRECTORS AND QUORUM. One or more officers of
the Corporation present at the emergency Board meeting, as is necessary to
achieve a quorum, shall be considered to be Directors for the meeting, and shall
so serve in order of rank, and within the same rank, in order of seniority. In
the event that less than a quorum of the Directors are present (including any
officers who are to serve as Directors for the meeting), those Directors present
(including the officers serving as Directors) shall constitute a quorum.
Notwithstanding the foregoing, no meeting of the Board shall take place pursuant
to this Article 13 without the presence of at least three Directors (not
including officers serving as Directors for the meeting).
13.3 ACTIONS PERMITTED TO BE TAKEN. The Board as
constituted in Section 13.2 hereof, and after notice as set forth in Section
13.1 hereof may:
13.3.1 prescribe emergency powers to any officer of
the Corporation;
13.3.2 delegate to any officer or Director, any of
the powers of the Board;
<PAGE>
23
13.3.3 designate lines of succession of officers and
agents, in the event that any of them are unable to discharge their
duties;
13.3.4 relocate the principal place of business, or
designate successive or simultaneous principal places of business; and
13.3.5 take any other action reasonably necessary to
carry on the business of the Corporation.
13.4 EFFECTIVENESS OF EMERGENCY BYLAWS. To the extent that
they are not inconsistent with the provisions of this Article 13, all other
provisions of these Bylaws shall remain in effect during an emergency. Upon
termination of the emergency, the provisions of this Article 13 shall cease to
be operative.
ARTICLE 14
AMENDMENTS
----------
Except as otherwise expressly specified in the Certificate of
Incorporation or these Bylaws, the Board may from time to time adopt, amend or
repeal the Bylaws; provided, however, that any Bylaws adopted or amended by the
Board may be amended or repealed, and any Bylaws may be adopted, by a vote of
the Stockholders having at least two-thirds of the voting power of the then
issued and outstanding shares of capital stock of the Corporation.
* * *
CERTIFICATION
-------------
The undersigned, in his capacity as Secretary of the
Corporation, hereby certifies that the foregoing is the Amended and Restated
Bylaws of the Corporation adopted by the Board of the Corporation on this _____
day of July, 1998.
------------------------------
Michael A. Lubin
Secretary of Pathnet, Inc.
Exhibit 10.1.3
--------------
Amendment #5 to Master Agreement
Dated 8 August, 1997 between Pathnet, Inc.
and NEC America, Inc.
Except as expressed herein, the terms and conditions of the Master Agreement
remain in full force and effect:
Article 2. Scope of Contract
-----------------
2.2 Modify (a) to read, "Appendix A - Sellers Quotation,
DCQ98-M200554A, dated 9/18/98, excluding General Terms and
Conditions".
Article 3. Prices
------
Delete "Subject to Section 3.2, the pricing stated in Appendix
A is valid for orders placed within three years from the
signing of this Agreement and is" and modify first paragraph
to read, "Subject to Article 3.2, the pricing stated in
Appendix A hereto is valid for orders placed from the date
9/18/98 for the balance of the Master Agreement term, subject
to Article 3.5 below, as expressed in Article 5. Term and
Option, and is...."
3.5 Delete in its entirety Amendment #3 and replace in the Master
Agreement with the following, "At the end of calendar year
1999, the Parties agree to have a good faith negotiation to
reach mutually beneficial prices for the balance of the
Agreement term. In consideration of the prices stated in
Appendix A hereto, Buyer agrees to hold Seller as the primary
supplier of digital microwave equipment as listed in Appendix
A with a minimum share of purchase volume in U.S. dollars of
60% with Buyer having a two supplier relationship and 50% with
Buyer having a three supplier relationship.
Furthermore, Buyer agrees it shall purchase from Seller,
Equipment in a cumulative amount of no less than
$200,000,000.00 U.S. dollars by the end of calendar year 2002.
As part of this commitment, in good faith effort, Buyer will
procure no less than a quantity of 700 T/R's (digital
microwave terminals) each six month period beginning 9/18/98.
Buyer's failure to meet this T/R commitment level as set forth
herein shall result in the sole and exclusive remedy of Seller
as follows: Seller shall reserve the right to withdraw the
pricing levels set forth in this Agreement for subsequent
purchases of Equipment."
3.6 Modify to read, "The pricing set forth in Appendix A hereto is
applicable to any orders placed after 9/18/98."
<PAGE>
Article 27. Product Support, Training and Other Support
-------------------------------------------
27.1 Product Support and Training shall be performed as stated in
the Product Line Support Policy in Appendix A. In addition to
this Appendix, Seller shall provide Sales Engineering support
to Buyer on an "as needed" basis at no cost during the term of
this Agreement.
27.2 Seller agrees to provide training on an agreed upon scheduled
basis to any new Buyer or Buyer Company engineering personnel
and Buyer operations personnel. Such training can be either at
Seller's facility in Herndon, VA or Buyer's facilities in
Washington, D.C. or Richardson, Texas. For training at Buyer
or Buyer's Company's facility, Buyer agrees to reimburse
Seller for the instructor's reasonable travel and living
expense only.
27.3 Seller agrees to provide Buyer: two hops of radio in
terminal-terminal arrangement configured as follows: 1X1,
frequency diversity/space diversity with switchover
processors. One hop would be installed in each of the Buyer
facilities in Washington, D.C. and Richardson, Texas.
27.4 In a good faith effort and to the extent reasonably feasible,
Seller to provide for Seller radio and multiplexer product -
including any enhancements or modifications thereto, (i)
detailed specification for the OS (Operation System) to NE
(Network Element) operations communications path. This will
include detailed specifications on how the network elements
may be accessed directly or indirectly by the OS and
identifying the protocols used for OS to NE operations and NE
to NE operations. Conformance statements to all relevant
protocols at the physical, data link, transport, session,
presentation and application layer should be provided. Use of
the proprietary or non-standard protocol implementations must
be identified; (ii) a detailed description of the management
interfaces and functionality implemented at the application
layer described in terms of GDMO or TL-1; (iii) a technical
contact available to support Buyer during OS development. This
point of contact should possess a detailed understanding of
the protocol interfaces and the network management
applications implemented on the NE. The primary means of
contact will be through email to both Wally Strader (Director,
Systems Engineering) and Robert Lowell (Director, Customer
Engineering) or their successors, if any. To assist Seller in
its response, each such contact should include a priority
listing ranking of either a Level One, Two or Three inquiry
(Level One to denote in need of a response within less than a
week. Level Two or denote in need of response within one to
two weeks, and Level Three to denote in need of response
beyond two weeks), and (iv) notification to Buyer in the event
of any modifications to the above TMN interfaces or
communication protocols for new product releases and the
appropriate documentation and support provided as describe
above.
27.5 In good faith effort and to the extent reasonably feasible,
Seller will test the current 2000S radio to Bellcore's Network
Equipment Building System (NEBS) requirements. Such tests
shall be conducted by either an independent third party
testing facility or by the manufacturer as witnessed by a
third party. The testing criteria shall be those elements off
NEBS only that are applicable to the 2000S radio
<PAGE>
equipment and that Seller has stated either meet or may meet
the NEBS standard. Seller's intention is to assist Buyer,
where and when practical, in using these tests' results to
obtain collocation approval.
Furthermore, in a good faith effort, Seller will design, build
and make available during the term of this Master Agreement, a
new enhanced version of the 2000S radio. This new version will
be in significant compliance with the NEBS' standard.
NEC America, Inc. Pathnet, Inc.
By: /s/Patrick Stewart By: /s/David Schaeffer
----------------- ------------------
P. Stewart D. Schaeffer
Title: AGM, RCSD Title: Chairman
--------- --------
Date: 11/19/98 Date: 11/20/98
-------- --------
Exhibit 10.10.2
---------------
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE (this "Third Amendment") is entered into
as of the 1st day of September 1998 (the "Effective Date") by and between 6715
Kenilworth Avenue General Partnership ("Landlord") and Pathnet, Inc.
("Tenant").
R E C I T A L S
A. Landlord and Tenant are parties to that certain Lease Agreement
dated August 9, 1997, as amended by that certain Amendment to Lease dated March
5, 1998 and that Second Amendment to Lease dated May 1, 1998 (together,
the"Lease").
B. Landlord and Tenant desire to add certain premises to the Lease and
make certain other modifications to the Lease as more particularly set forth
herein.
NOW, THEREFORE, in consideration of the mutual promises of the parties
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
1. PREMISES. From and after the Effective Date, the area
described in Exhibit A, attached hereto and incorporated
herein, located on the first floor of the building containing
the Premises and consisting of approximately 1,500 square
feet, is hereby incorporated into the Premises for all
purposes.
2. RENT. In Paragraph 3 of the Lease, as amended by the Second
Amendment to Lease, (i) the number "$305,860.00" is hereby
deleted and the number "335,860.00" is inserted in its place;
and (ii) the number "25,488.33" is hereby deleted, and the
number "27,988.00" is inserted in its place.
3. SECURITY DEPOSIT. As of the date hereof, Tenant has increased
the Security Deposit under the Lease by delivering to
Landlord, and Landlord hereby acknowledges receipt of, the sum
of $2,500. The parties acknowledge that the Security Deposit
is currently $19,493.33.
4. IMPROVEMENTS. The parties acknowledge that certain
improvements will be constructed in the Premises pursuant to a
separate agreement.
5. CAPITALIZED TERMS. All capitalized terms not defined herein
shall have the meanings ascribed to such terms in the Lease.
6. RATIFICATION. Except as expressly modified herein, the Lease
remains in full force and effect in accordance with its terms.
[SIGNATURES BEGIN ON FOLLOWING PAGE]
<PAGE>
EXECUTED, under seal, as of the day and year first written above.
LANDLORD:
6715 KENILWORTH AVENUE
GENERAL PARTNERSHIP
BY: /s/David Schaeffer
---------------------
David Schaeffer
General Partner
TENANT:
PATHNET, INC.
BY: /s/William R. Smedberg V
--------------------------
William R. Smedberg V
Vice President, Finance and
Corporate Development
Exhibit 21.1
------------
SUBSIDIARIES OF THE COMPANY
Pathnet Finance I, LLC, a Delaware limited liability company.
Pathnet/Idaho Power License, LLC, a Delaware limited liability company.
Pathnet/Idaho Power Equipment, LLC, a Delaware limited liability company.
Pathnet BNSF Equipment, LLC, a Delaware limited liability company.
Pathnet Fiber Optics, LLC, a Delaware limited liability company.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the Company's
balance sheet as of September 30, 1998 and the Statements of Operations for the
year ended December 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0001061148
<NAME> Pathnet, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 57,322
<SECURITIES> 97,896
<RECEIVABLES> 3,207
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 162,479
<PP&E> 48,760
<DEPRECIATION> 789
<TOTAL-ASSETS> 365,414
<CURRENT-LIABILITIES> 20,280
<BONDS> 346,212
35,970
0
<COMMON> 29
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<TOTAL-LIABILITY-AND-EQUITY> 365,414
<SALES> 1,584
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<CGS> 7,548
<TOTAL-COSTS> 7,548
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 32,572
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</TABLE>
