<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
NOTE EXCHANGE OFFER
ON
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RHYTHMS NETCONNECTIONS INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 4813 33-0747515
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employee
of incorporation or Classification Code Number) Identification Number)
organization)
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9100 EAST MINERAL CIRCLE
ENGLEWOOD, COLORADO 80112
(303) 476-4200
(Name, address, including zip code and telephone number, including area code, of
agent for service)
CATHERINE HAPKA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
RHYTHMS NETCONNECTIONS INC.
9100 EAST MINERAL CIRCLE
ENGLEWOOD, COLORADO 80112
(303) 476-4200
(Name, address, including zip code and telephone number, including area code, of
agent for service)
COPIES TO:
RICHARD R. PLUMRIDGE
LEXI METHVIN
BROBECK, PHLEGER & HARRISON, LLP
370 INTERLOCKEN BLVD.
BROOMFIELD, COLORADO 80209
(303) 410-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practiable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G. check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registation statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING PRICE AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE PER OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED NOTE PRICE(1) REGISTRANT FEE
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14% Senior Notes due 2010.... $300,000,000 100% $300,000,000 $79,200
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(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRATION HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FUTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 23, 2000
The information in this prospectus is not complete and may be changed. Although
we are permitted by US Federal securities laws to offer these securities, using
this prospectus, we may not sell them or accept your offer to buy them until the
documentation filed with the SEC relating these securities has been declared
effective by the SEC. This prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted or legal.
<PAGE>
OFFER TO EXCHANGE
14% SENIOR NOTES DUE 2010, SERIES A (UNREGISTERED)
FOR UP TO $300,000,000 IN PRINCIPAL AMOUNT
OUTSTANDING OF 14% SENIOR NOTES DUE 2010,
SERIES B (REGISTERED)
[LOGO]
RHYTHMS NETCONNECTIONS INC.
------------
We currently have outstanding $300.0 million in principal amount of 14%
Senior Notes due 2010, Series A (the "old notes"). We are offering to exchange
new registered 14% Senior Notes due 2010, Series B (the "new notes") for any and
all of the old notes.
TO EXCHANGE YOUR UNREGISTERED OLD NOTES FOR REGISTERED NEW NOTES, YOU MUST
TENDER YOUR OLD NOTES NO LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON
, 2000, UNLESS EXTENDED.
-------------------
No public market currently exists for the new notes. We do not expect that
an active public market in the new notes will develop. We do not intend to list
the new notes on any securities exchange or on the Nasdaq National Market.
-------------------
SEE THE "RISK FACTORS" SECTION ON PAGE 9 FOR INFORMATION THAT YOU SHOULD
CONSIDER BEFORE YOU DECIDE TO PARTICIPATE IN THIS EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES OR DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
The date of this prospectus is , 2000.
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TABLE OF CONTENTS
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PAGE
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Summary..................................................... 1
Risk Factors................................................ 9
Use of Proceeds............................................. 22
Capitalization.............................................. 23
Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Forward-Looking Statements.................................. 35
Description of Indebtedness................................. 36
Business.................................................... 37
Management.................................................. 64
Certain Relationships and Related Transactions.............. 77
Principal Stockholders...................................... 82
The Exchange Offer.......................................... 84
Certain Terms of the New Notes.............................. 92
Description of the Notes.................................... 93
Certain United States Federal Tax Consequences.............. 124
Plan of Distribution........................................ 125
Legal Matters............................................... 126
Experts..................................................... 126
Where You Can Find More Information......................... 126
Glossary of Terms........................................... A-1
Index to Financial Statements............................... F-1
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------------------------
You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
This prospectus is based on information provided by us and by other sources
that we believe are reliable. We cannot assure you that this information is
accurate or complete. This prospectus summarizes certain documents and other
information and we refer you to them for a more complete understanding of what
we discuss in this prospectus. In making an investment decision, you must rely
on your own examination of our company and the terms of the offering and the new
notes, including the merits and risks involved.
We are not making any representation to any purchaser of the new notes
regarding the legality of an investment in the new notes by such purchaser under
any legal investment or similar laws or regulations. You should not consider any
information in this prospectus to be legal, business or tax advice. You should
consult your own attorney, business advisor and tax advisor for legal, business
and tax advice regarding an investment in the notes.
------------------------
We own applications for federal registration and claim rights in the
following trademarks: APPLINET-TM-; CHOICE ROUTE-TM-; DSL ... CAN YOU HANDLE THE
SPEED?-TM-; HOME.RHYTHMS-TM-; LOOP.RHYTHMS-TM-; NET.RHYTHMS-TM-; NETRHYTHMS-TM-;
RHYTHM
i
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WORKS-TM-; RHYTHMS-TM-; RHYTHMS COGNITIVE NETWORK-TM-; RHYTHMS LINKS-TM-;
RHYTHMS.NET-TM-; RHYTHMS NETCONNECTIONS-TM-; RHYTHMS NETSELECT-TM-; RHYTHMS
NETWORKNOW-TM-; RHYTHMS PBXPRESS-TM-; RHYTHMS TOOLBAR-TM-; RHYTHMS TOTAL ACCESS
SOLUTIONS-TM-; RHYTHMS U.S. LAN-TM-; RING.RHYTHMS-TM-; WHERE INTERNET
CONNECTIONS ARE MOVING-TM-; WORK.RHYTHMS-TM- and [LOGO].
This prospectus also refers to trade names and trademarks of other
companies.
ii
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS ASPECTS OF OUR BUSINESS AND THIS EXCHANGE OFFER
WHICH WE CONSIDER TO BE SIGNIFICANT, BUT YOU SHOULD READ THE ENTIRE PROSPECTUS,
INCLUDING THE FINANCIAL DATA AND RELATED NOTES, BEFORE DECIDING TO PARTICIPATE
IN THE EXCHANGE OFFER. WHEN WE REFER TO OUR COMPANY IN THIS PROSPECTUS, WE REFER
TO US AND OUR SUBSIDIARIES, AS A COMBINED ENTITY, EXCEPT WHERE WE INDICATE
OTHERWISE. WE HAVE PROVIDED A GLOSSARY OF TERMS FOR YOUR CONVENIENCE BEGINNING
ON PAGE A-1. YOU SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS."
OUR COMPANY
We are a leading provider of broadband local access communication services
to businesses and consumers. Our services include high-speed, "always on"
connections to the Internet and to private networks. We also offer a growing
suite of network features and applications including Internet services, that
bring added value to our service offerings. We use multiple Digital Subscriber
Line (DSL) technologies to provide data transfer rates ranging from 128 kbps to
7.1 Mbps delivering data to the user and from 128 kbps to 1.5 Mbps receiving
data from the user. Accordingly, we believe that our peak network transfer rates
to and from the user are higher than those of other national DSL service
providers. For customers that subscribe at the 7.1 Mbps rate, our network
provides data speeds to the user up to 125 times the speed of the fastest
dial-up modem and over 55 times the speed of integrated services digital network
(ISDN) lines. We believe that our Internet Protocol (IP)-over-DSL network
capability is unique compared to other national DSL service providers because it
allows us to provide a broader range of IP internetworking capabilities in a
simpler, more cost-effective way than those offered by traditional networking
alternatives.
Our customers include Internet service providers (ISPs), telecommunications
carriers and broadband communication services resellers, which we refer to as
broadband service providers. We also sell to businesses or enterprises that are
not otherwise served by our broadband service provider customers. Internet
service providers and broadband communication services resellers typically
purchase our services in order to provide high-speed Internet access to their
business and consumer end users. Telecommunications carriers typically purchase
our services for resale to their Internet service provider affiliates and
business customers. Enterprise customers typically purchase our services
indirectly from our telecommunications carriers or directly from us to provide
their employees, branch offices and other affiliates with high-speed remote
access to the enterprise's local and wide area networks.
We believe we have one of the nation's largest DSL networks with over 1,350
built or operational collocation sites in incumbent carrier central offices
providing access to approximately 35 million homes and businesses as of
March 31, 2000. At March 31, 2000, we had approximately 20,000 DSL lines in
service and were providing service to approximately 3,400 broadband service
providers and businesses. Our broadband service provider customers include MCI
WorldCom, AT&T, Qwest, Level 3 Communications, Williams Communications,
Intermedia Communications, UUNET, Microsoft Network, Flashcom, PSINet, SAVVIS
Communications, CAIS Internet, Telocity, Phoenix Networks, Digital
Island/Sandpiper Networks and iPhysicianNet. Our enterprise customers include
Cisco, Ford Motor Company and SGI, among others. We believe our higher data
transfer rates, combined with our network features and applications, allow us to
record the highest average revenue per installed line per month among national
DSL service providers. From our inception in February 1997 through March 31,
2000, our average revenue per installed line was approximately $119 per month.
As of March 31, 2000, we offered our services in 46 markets and 83 of the
largest metropolitan statistical areas (MSAs) in the United States, of which
there are 314 total. We expect to complete the initial build-out of our network
by the end of 2000. At that time, we anticipate that our services will be
offered in 70 markets and 108 MSAs, and our network will pass a total of
51 million homes and businesses, representing approximately 45% of U.S. homes
and 50% of U.S. businesses.
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In addition to our high speed access services, we plan to offer an
increasing variety of network features and applications, such as voice-over-DSL.
We believe these new services are important to increase our revenue. First,
these services expand the size of our addressable market by enhancing and
enabling new broadband services, such as video streaming, that cannot be
practically achieved with narrowband communications connections. Second, certain
of these services require higher speed connections that may result in higher
average revenue per installed line per month for us. Third, some of these
services may contain additional network features and applications that may
provide us with additional recurring monthly revenue from our broadband
communication services resellers and business customers.
To further our goal of offering network features and applications, we expect
to continue to enter into business arrangements and trials with broadband
service providers, such as our arrangement with Digital Island/Sandpiper
Networks, as well as telecommunications carriers, such as our arrangements with
MCI WorldCom and Level 3 Communications, and leading networking equipment
providers, such as our arrangement with Cisco.
We intend to continue to explore expansion of our DSL network both in the
United States and internationally. In October 1999, we invested $5.3 million in
OCI Communications Inc., the parent company of Optel Communications Corporation,
a competitive local exchange carrier in Canada. This investment was made in
connection with our establishing a joint venture company, Rhythms Canada, with
Optel in January 2000. Rhythms Canada is expected to develop a Canadian DSL
network and offer dedicated high-speed DSL services to enterprise customers and
telecommunications carriers throughout Canada.
Our investors and strategic partners include MCI WorldCom, Qwest, Microsoft,
Cisco, Enron Communications (a subsidiary of Enron Corp.), Kleiner Perkins
Caufield & Byers and Hicks, Muse, Tate & Furst Inc.
OUR MARKET OPPORTUNITY
We believe that we have a substantial business opportunity for the following
reasons:
- there is a growing demand for broadband local access communications
services;
- DSL is a cost-effective technology for broadband local access
communications services; and
- the current regulatory environment facilitates the growth of competitive
broadband local access communications service providers.
OUR COMPETITIVE STRENGTHS
WE OFFER AN ATTRACTIVE VALUE PROPOSITION COMPARED TO ALTERNATIVE LOCAL
ACCESS COMMUNICATIONS SERVICES. For end users that subscribe at the 7.1 Mbps
rate, our network provides transfer speeds over 55 times the speed of ISDN lines
at monthly rates similar to or lower than those for heavily used ISDN lines, and
over four times the speed of T1 private lines and frame relay circuits at a
substantially lower price. Because we use dedicated connections from each end
user to the network of our broadband service providers and business customers,
end users can receive dependable data transfer rates and reduce the risk of
unauthorized access.
Unlike dial-up modems and ISDN lines, the DSL solution is "always on" and
provides 24-hour continuous connection. Users are not required to dial-up to
connect to the Internet or their private network for each use. In addition, our
DSL network has been designed to allow us, for certain customers and services,
to proactively and continuously monitor our network to the end user's DSL modem
or router, eliminating the need for the end user to initiate a report of network
malfunctions, as is the case with dial-up modems or ISDN lines.
2
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OUR NETWORK HAS BEEN DESIGNED TO BE FLEXIBLE AND EASILY UPGRADEABLE TO
SUPPORT NEW NETWORK FEATURES AND APPLICATIONS. Because our network utilizes
multiple technology platforms, we can provide higher end user speeds than other
national providers, a broad range of IP internetworking capabilities in addition
to traditional virtual point-to-point connectivity and various types of network
traffic including data, voice and video.
The quality and characteristics of each end user's copper telephone wire are
different. Because we use a variety of technologies, we are able to select a
solution that provides the highest speed available for each end user. As a
result, as of March 31, 2000, users on our network were capable of receiving
average data transfer rates of 1.7 Mbps.
Our network supports traditional transmission protocols such as Asynchronous
Transfer Mode and frame relay, as well as the rapidly growing IP transmission
protocol. Our IP-over-DSL network capability allows us to provide a broad range
of IP internetworking capabilities in a simpler, more cost-effective manner
compared to traditional protocols. For example, our network can give each user
simultaneous access to the Internet and private networks using a single
connection, the ability to take advantage of distributed content caching
services in an internetworked environment and the ability to add other emerging
IP services such as voice-over-IP using their existing connection.
Our network has also been designed to support multiple types of network
traffic, starting with data and expanding to voice applications, including a
variety of voice-over-DSL technologies, and video applications, such as
conferencing and streaming. Our network can also be easily upgraded, as it has
been designed to incorporate new applications and features, thereby avoiding
costly and time consuming network upgrades.
WE HAVE LEVERAGED OUR EARLY MOVER ADVANTAGE TO RAPIDLY EXPAND OUR DENSE,
NATIONAL NETWORK AND GROW OUR NUMBER OF INSTALLED LINES. We were among the
first to widely roll out national DSL services, offering commercial services in
our first market in April 1998. This early start enabled us to rapidly expand
our network to our targeted markets and develop early relationships with
customers requiring a dense, national footprint. Because our initial network
footprint in each market or MSA is extensive in coverage, we typically are able
to make our services available to at least 70% of our customers' end user homes
and businesses.
WE HAVE BEEN ABLE TO ESTABLISH CUSTOMER RELATIONSHIPS WITH RECOGNIZED
LEADERS IN THE NETWORKING INDUSTRY. We currently have strategic and/or customer
relationships with many of the major telecommunications carriers, including MCI
WorldCom, AT&T, Qwest, Level 3 Communications and Williams Communications. We
also have customer relationships with many of the leading national business and
consumer ISPs, including UUNET, Microsoft Network, PSINet, SAVVIS, Flashcom,
Telocity and Phoenix Networks. MCI WorldCom has designated us as their preferred
provider in its alternative carrier access provisioning system for DSL services
in certain circumstances. MCI WorldCom and Qwest have committed to purchase an
aggregate of 200,000 lines over a seven year period subject to penalties for
failure to reach target commitments. Under the terms of our strategic
partnership with Cisco, Cisco has agreed to jointly market and sell our
networking solutions to its customer base in conjunction with our
telecommunications carrier customers and engage in joint development projects
with us including voice-over-DSL and video streaming applications.
OUR MANAGEMENT TEAM HAS EXTENSIVE EXPERIENCE. Our senior management team
has extensive experience in developing next generation networking businesses.
Our Chairman and Chief Executive Officer, Catherine Hapka, was previously the
founder, President and Chief Operating Officer of !NTERPRISE Networking
Services, U S WEST's data networking business. Steve Stringer, our President and
Chief Operating Officer, was previously the Global Chief Operating Officer of GE
Capital IT Solutions.
3
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OUR BUSINESS STRATEGY
Our goal is to become the leading national service provider of high
performance networking solutions for businesses and consumers. We intend to
implement the following strategies to achieve our goal:
- complete our dense, national network build-out in our target markets and
MSAs;
- maintain and expand our sales and marketing relationships with leading
broadband service provider customers;
- expand the number of network features and applications we offer;
- lead the industry in customer service and build a reputation for being a
desirable business partner;
- capitalize on new regulatory developments to advance our business; and
- evaluate and selectively pursue attractive international markets.
RECENT DEVELOPMENTS
In April 2000, the Company entered into an agreement to form a multiyear
strategic relationship with Excite@Home. Excite@Home is a leading broadband
provider. Under the terms of the agreement, the Company will make a
$15.0 million investment in @Home Solutions, an affiliate of Excite@Home. The
Company will become @Home Solutions' exclusive provider of a residential DSL
connectivity for Excite@Home in several specific markets outside of
Excite@Home's current cable footprint. Excite@Home will be a preferred internet
service provider for new consumers in those markets. The new relationship will
offer broadband connectivity, a custom software package, Excite for broadband
content and ISP services such as e-mail. This agreement is subject to various
customary closing conditions.
-------------------
Our principal executive office is located at 9100 East Mineral Circle,
Englewood, Colorado 80112, and our telephone number is (303) 476-4200 or (800)
RHYTHMS.
4
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SUMMARY OF THE EXCHANGE OFFER
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Registration rights agreement................ You are entitled under the registration agreement to
exchange your unregistered notes for registered notes
with substantially, identical terms. We are now
offering to exchange your unregistered old notes for
registered new notes with substantially the same
terms in the exchange offer. The exchange offer is
intended to satisfy our obligations under the
registration rights agreement. After the exchange
offer is completed, you will no longer be entitled to
any exchange or registration rights with respect to
your old notes.
The registration rights agreement requires us to file
a registration statement for a continuous offering in
accordance with Rule 415 under the Securities Act for
your benefit if you would not receive freely
tradeable registered notes in the exchange offer or
you are ineligible to participate in the exchange
offer and indicate that you wish to have your old
notes registered under the Securities Act. See "The
exchange offer--Procedures for tendering."
The exchange offer........................... We are offering to exchange $1,000 principal amount
of new notes, our Series B 14% Senior Notes due 2010
which have been registered under the Securities Act,
for each $1,000 principal amount of old notes, our
Series A 14% Senior Notes due 2010 which were issued
on February 23, 2000 in a private placement. In
order to be exchanged, an old note must be properly
tendered and accepted. All old notes that are validly
tendered and not validly withdrawn will be exchanged
for new notes.
As of this date, there is $300.0 million aggregate
principal amount of old notes outstanding.
We will issue the new notes promptly after the
expiration of the exchange offer.
Resales of the registered notes.............. We believe that the new notes may be offered for
resale, resold and otherwise transferred by you
without compliance with the registration and
prospectus delivery provisions of the Securities Act
if you meet the following conditions:
- The new notes to be acquired by you in the exchange
offer are acquired by you in the ordinary course of
your business;
- you are not engaging in and do not intend to engage
in a distribution of the new notes;
- you do not have an arrangement or understanding
with any person to participate in the distribution of
the new notes; and
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5
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- you do not control us, you are not controlled by
us, and you are not under common control with us,
either directly or indirectly.
If you do not meet the above conditions, you may
incur liability under the Securities Act if you
transfer any new note without delivering a prospectus
meeting the requirements of the Securities Act. We do
not assume or indemnify you against the liability.
Each broker-dealer that receives new notes in the
exchange offer for its own account in exchange for
old notes which were acquired by that broker-dealer
as a result of market-making activities or other
trading activities must acknowledge that it will
deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of the
registered notes. A broker-dealer may use this
prospectus for an offer to resell or to otherwise
transfer these new notes.
Expiration date.............................. The exchange offer will expire at 5:00 p.m., New York
City time, on [ ], 2000, unless we decide
to extend the exchange offer. We do not intend to
extend the exchange offer, although we reserve the
right to do so.
Conditions to the exchange offer............. The only conditions to completing the exchange offer
are that the exchange offer not violate applicable
law or any applicable interpretation of the staff of
the Securities and Exchange Commission and no
injunction, order or decree has been issued which
would prohibit, prevent or materially impair our
ability to proceed with the exchange offer. See "The
exchange offer--Conditions."
Withdrawal................................... You may withdraw the tender of your old notes at any
time prior to 5:00 p.m., New York City time, on the
expiration date. We will return to you any old notes
not accepted for exchange for any reason without
expense to you as promptly as we can after the
expiration or termination of the exchange offer.
Exchange agent............................... State Street Bank Trust Company of California N.A. is
serving as the exchange agent in connection with the
exchange offer.
Consequences of failure to exchange.......... If you do not participate in the exchange offer, upon
completion of the exchange offer, the liquidity of
the market for your old notes could be adversely
affected. If the liquidity of the market for your old
notes is adversely affected, you may be unable to
sell or transfer your old notes and the value of your
old notes may decline. See "Risk factors--The value
of your old notes may decline if you fail to exchange
your old notes for new notes."
Federal income tax consequences.............. The exchange of the new notes for the old notes will
not be a taxable event for federal income tax
purposes. See
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"Certain United States Federal Income Tax
Considerations."
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SUMMARY OF NEW NOTES
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The new notes................................ $300,000,000 aggregate principal amount of 14% senior
notes due 2010, Series B.
Maturity..................................... February 15, 2010.
Interest payment dates....................... February 15 and August 15, beginning August 15, 2000.
Ranking...................................... The new notes will be unsecured and rank equally with
our senior unsecured debt. The new notes will be
subordinated to our secured debt as to the assets
securing such debt.
As of March 31, 2000:
- we had outstanding approximately $812.0 million of
senior unsecured debt and
- we had outstanding approximately $0.4 million of
senior secured debt.
As of March 31, 2000, our subsidiaries had no
outstanding debt.
Optional redemption.......................... We may redeem some or all of the new notes, at any
time on or after February 15, 2005 at the redemption
price described in this prospectus.
Change of control............................ When a change of control event occurs, each holder of
new notes may require us to repurchase all or a
portion of its new notes at a purchase price equal to
101% of the principal amount of the new notes, plus
accrued interest.
Public equity offering and strategic equity Before February 15, 2003, we may redeem up to 35% of
sale optional redemption..................... the aggregate principal amount of the new notes with
the net proceeds of certain public equity offerings
and/or certain private sales of capital stock at 114%
of the principal amount of the new notes, plus
accrued interest, if at least $195.0 million of the
aggregate principal amount of the new notes
originally issued remains outstanding immediately
after such redemption.
Covenants.................................... The indenture governing the new notes contains
covenants that, among other things, will limit our
ability and the ability of our restricted
subsidiaries to:
- incur additional debt,
- pay dividends on, redeem or repurchase our capital
stock,
- make investments,
- grant security interests in our assets,
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- consolidate, merge or transfer all or substantially
all of our assets,
- restrict dividend or other payments to us by our
restricted subsidiaries,
- dispose of the proceeds of asset sales,
- issue and sell capital stock of our restricted
subsidiaries,
- engage in transactions with related persons,
- enter new lines of business,
- issue guarantees of our other debt by our
restricted subsidiaries,
- engage in sale/leaseback transactions and
- designate unrestricted subsidiaries.
These covenants are subject to important exceptions
and qualifications, which are described under the
heading "Description of the Notes" in this
prospectus.
Risk factors................................. See "Risk Factors" and the other information in this
prospectus for a discussion of factors you should
carefully consider before deciding to tender the old
notes for the new notes.
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RISK FACTORS
THE NEW NOTES, LIKE THE OLD NOTES, ENTAIL A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO TENDER OLD NOTES FOR NEW
NOTES. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING
OUR COMPANY.
WE CANNOT PREDICT OUR SUCCESS BECAUSE WE HAVE A SHORT OPERATING HISTORY
We formed our company in February 1997, and we have a short operating
history for you to review in evaluating our business. We have limited historical
financial and operating data upon which you can evaluate our business and
prospects. We entered into our first interconnection agreement with an incumbent
carrier in July 1997 and began to offer commercial services in our first market
in April 1998. We have limited commercial operations and have recognized limited
revenues since our inception. In addition, our senior management team and our
other employees have worked together at our company for only a short period of
time.
BECAUSE OUR MARKET IS NEW AND EVOLVING, WE CANNOT PREDICT ITS FUTURE GROWTH OR
ULTIMATE SIZE, AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY
The market for broadband local access DSL communication services using
copper telephone lines is in the early stages of development. Since this market
is new and evolving and because our current and future competitors are likely to
introduce competing services, we cannot accurately predict the rate at which
this market will grow, if at all, or whether new or increased competition will
result in market saturation. Various providers of broadband local access DSL
communication services are testing products from various suppliers for various
applications. Certain critical issues concerning commercial use of DSL for
Internet and private network access, including security, reliability, ease and
cost of access and quality of service, remain unresolved and may impact the
growth of these services. If the markets for our services fail to develop, grow
more slowly than anticipated or become saturated with competitors, these events
could materially and adversely affect our business, prospects, operating results
and ability to repay our debt, including the new notes.
Our success will depend on the development of this new and rapidly evolving
market and our ability to compete effectively in this market. To address these
risks, we must, among other things:
- rapidly expand the geographic coverage of our network services;
- raise additional capital;
- enter into interconnection agreements and working arrangements with
additional incumbent carriers, substantially all of which we expect to be
our competitors;
- deploy an effective network infrastructure;
- attract and retain customers;
- successfully develop and maintain relationships and activities with our
broadband service providers, including MCI WorldCom, Microsoft, Qwest,
Level 3 Communications and Cisco;
- continue to attract, retain and motivate qualified personnel;
- accurately assess potential markets and effectively respond to competitive
developments;
- continue to develop and integrate our operational support system and other
back office systems;
- obtain any required governmental authorizations;
- comply with evolving governmental regulatory requirements;
- increase awareness of our services;
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- rapidly scale our operations and the systems that support those
operations;
- continue to upgrade our technologies; and
- effectively manage our expanding operations.
We may not be successful in addressing these and other risks, and our
failure to address risks would materially and adversely affect our business,
prospects, operating results and ability to repay our debt, including the new
notes.
OUR SUBSTANTIAL DEBT CREATES FINANCIAL AND OPERATING RISK
We are highly leveraged, and we intend to seek additional debt funding in
the future. As of March 31, 2000, we had approximately $812.4 million of
outstanding debt and our debt made up 60.5% of our capitalization. Please see
"Capitalization." We are not generating sufficient revenue to fund our
operations or to repay our debt, including the new notes. Our substantial
leverage poses the risks that:
- we may be unable to repay our debt, including the new notes, due to one or
more events discussed in "Risk Factors;"
- we may be unable to obtain additional financing;
- we must dedicate a substantial portion of our cash flow from operations to
servicing our debt once our debt requires us to make cash interest
payments, and any remaining cash flow may not be adequate to fund our
planned operations; and
- we may be more vulnerable during economic downturns, less able to
withstand competitive pressures and less flexible in responding to
changing business and economic conditions.
WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS, WHICH WE MAY NOT BE ABLE TO OBTAIN
The expansion and development of our business will require significant
additional capital. We intend to seek substantial additional financing in the
future to fund the growth of our operations, including funding the significant
capital expenditures and working capital requirements necessary for us to
provide service in our targeted markets. We believe that our current capital
resources will be sufficient to fund our aggregate capital expenditures and
working capital requirements, including operating losses, through approximately
August 2001. Although we expect that our initial build-out will be complete by
this date, we anticipate that we will continue building our network beyond our
initial build-out plans and will need significant additional capital, whether or
not our estimate on how long current capital resources will last is accurate. In
addition, our actual funding requirements may differ materially if our
assumptions underlying this estimate turn out to be incorrect. Therefore, you
should consider our estimate in light of the following facts:
- we have no meaningful history of operations or revenues;
- our estimated funding requirements do not reflect any contingency amounts
and may increase, perhaps substantially, if we are unable to generate
revenues in the amount and within the time frame we expect or if we have
unexpected cost increases; and
- we face many challenges and risks, including those discussed elsewhere in
"Risk Factors."
We may be unable to obtain any future equity or debt financing on acceptable
terms or at all. Recently the financial markets have experienced extreme price
fluctuations. A market downturn or general market uncertainty may adversely
affect our ability to secure additional financing. The indentures that govern
the new and old notes, the 1998 senior discount notes and the 1999 senior notes
restrict our ability to obtain additional debt financing. Any future borrowing
instruments, such as credit facilities and lease agreements, are likely to
contain similar or more restrictive covenants and could
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require us to pledge assets as security for the borrowings. If we are unable to
obtain additional capital or are required to obtain it on terms less
satisfactory than what we desire, we will need to delay deployment of our
network services or take other actions that could adversely affect our business,
prospects, operating results and financial condition. If we are unable to
generate sufficient cash flow or obtain funds necessary to meet required
payments of our debt, then we will be in default on our debt instruments. To
date, our cash flow from operations has been insufficient to cover our expenses
and capital needs. For more details about our financial condition, please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR BUSINESS MODEL IS UNPROVEN
We have not validated our business model and strategy in the market. We
believe that the combination of our unproven business model and the highly
competitive and fast changing market in which we compete makes it impossible to
predict the extent to which our network services will achieve market acceptance
and our overall success. To be successful, we must develop and market network
services that are widely accepted at profitable prices. We may never be able to
deploy our network as planned, achieve significant market acceptance, favorable
operating results or profitability or generate sufficient cash flow to repay our
debt. Of the approximately 20,000 lines that are in service, we installed
approximately 52% to only five customers, with approximately 30% of these total
lines to Cisco. None of our large business customers, with the exception of
Cisco, has rolled out our services broadly to its employees and none of our
broadband service provider customers has rolled out our services broadly to its
end-users, and we cannot be certain when or if these rollouts will occur. We
will not receive significant revenue from our large customers unless these
rollouts occur. Any continued or ongoing failure for any reason of large
customers to roll out our services, failure to validate our business model in
the market, including failure to build-out our network, achieve widespread
market acceptance or sustain desired pricing would materially and adversely
affect our business, prospects, operating results and financial condition.
WE EXPECT OUR LOSSES TO CONTINUE
We have incurred losses and experienced negative operating cash flow for
each month since our formation. As of March 31, 2000, we had an accumulated
deficit of approximately $375.7 million. We intend to rapidly and substantially
increase our expenditures and operating expenses in an effort to expand our
network services. We expect to have annual interest and amortization expense
relating to the old and new notes, our 1998 senior discount notes and our 1999
senior notes of approximately $89.0 million in 2000 and increasing to
$123.0 million in 2003. In addition, we may incur more debt in the future. In
addition, dividends on the Series E preferred stock of approximately
$126.0 million will accrue through February 2005 and dividends on the Series F
preferred stock of approximately $5.1 million are payable quarterly. We have the
option to deliver shares of our common stock to the transfer agent for the
preferred stock, which will resell those shares of common stock and use the
proceeds to pay cash dividends to the holders of the Series F Preferred Stock.
No cash dividends on the Series E Preferred Stock will be payable until 2005,
and at our option such dividends may continue to accrue as liquidation
preference. As a result of these factors, we expect to incur substantial
operating and net losses and negative operating cash flow for the foreseeable
future. We will need to obtain additional financing to pay our expenses and to
make payments on our debt. We cannot give you any assurance about whether or
when we will have sufficient revenues to satisfy our funding requirements or pay
our debt service obligations.
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OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS ARE LIKELY TO FLUCTUATE
SIGNIFICANTLY AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES
ANALYSTS OR INVESTORS
Our annual and quarterly operating results are likely to fluctuate
significantly in the future due to numerous factors, many of which are outside
of our control. These factors include:
- the rate of customer acquisition and turnover;
- the prices our customers are willing to pay which may decline due to
competitive factors;
- the amount and timing of expenditures relating to the expansion of our
services and infrastructure;
- the timing and availability of incumbent carrier central office
collocation facilities and transport facilities;
- our ability to effectively develop and market network features and
applications;
- the mix of our services that our customers purchase at different prices;
- our ability to scale our business to meet the demands of our customers;
- our ability to control our corporate overhead while rapidly growing our
business;
- the success of our relationships with our partners and distributors,
including MCI WorldCom, Microsoft, Qwest and Cisco;
- our ability to deploy our network on a timely basis;
- introduction of new services or technologies by our competitors;
- price competition;
- the ability of our equipment and service suppliers to meet our needs;
- regulatory developments, including interpretations of the 1996
Telecommunications Act;
- technical difficulties or network downtime;
- the success of our strategic alliances; and
- the condition of the telecommunication and network service industries and
general economic conditions.
Because of these factors, our operating results in one or more future
periods could fail to meet or exceed the expectations of securities analysts or
investors. In that event, any trading price of our notes would likely decline.
WE DEPEND ON THIRD PARTIES FOR THE MARKETING AND SALES OF OUR SERVICES
We rely significantly on indirect sales channels for the marketing and sales
of our services. We will seek to continue to establish and maintain
relationships with numerous broadband service providers in order to gain access
to end users. Our agreements to date with these broadband service providers are
non-exclusive, and we anticipate that future agreements will also be on a
non-exclusive basis, allowing these broadband service providers to sell services
offered by our competitors. These agreements are generally short term, and can
be cancelled by the these broadband service providers without significant
financial consequence. We cannot control how these broadband service providers
perform and cannot be certain that their performance will be satisfactory to us
or our customers. Many of these companies have similar arrangements with our
competitors and also compete directly with us. If the number of customers we
obtain through indirect sales channels is significantly lower than our forecast
for any reason, or if these broadband service providers with which we have
contracted are unsuccessful in
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competing in their own intensely competitive markets, these events would have a
material and adverse effect on our business, prospects, operating results and
ability to repay our debt, including the new notes.
IF FORECASTED SALES FOR SERVICES SOLD DIRECTLY TO OUR BUSINESS CUSTOMERS FOR A
PARTICULAR PERIOD ARE NOT REALIZED IN THAT PERIOD DUE TO THE LENGTHY SALES CYCLE
OF OUR SERVICES, OUR OPERATING RESULTS FOR THAT PERIOD WILL BE HARMED
The sales cycle of our network services can be very lengthy, particularly
for large businesses. Our sales cycle for large businesses typically lasts at
least six months. During this lengthy sales cycle, we will incur significant
expenses in advance of the receipt of revenues. If sales that we forecast for a
particular period do not occur because of our lengthy sales cycle, this event
could materially and adversely affect our business, prospects, operating results
and ability to make payments on our debt, including the notes, during that
period.
WE DEPEND ON INCUMBENT CARRIERS FOR COLLOCATION AND TRANSMISSION FACILITIES
We must use copper telephone lines controlled by the incumbent carriers to
provide DSL connections to customers. We also depend on the incumbent carriers
for collocation and for a substantial portion of the transmission facilities we
use to connect our equipment in incumbent carrier central offices to our Metro
Service Centers. In addition, we depend on the incumbent carriers to test and
maintain the quality of the copper telephone lines that we use. In many cases,
we may be unable to obtain access to collocation and transmission facilities
from the incumbent carriers, or to gain access at acceptable rates, terms and
conditions, including timeliness. We have experienced, and expect to experience
in the future, lengthy periods between our request for and the actual provision
of the collocation space and copper telephone lines. An inability to obtain or
maintain adequate and timely access to collocation space or transmission
facilities on acceptable terms and conditions from incumbent carriers could have
a material and adverse effect on our business, prospects, operating results and
ability to repay our debt, including the new notes.
Because we compete with incumbent carriers in our markets, they may be
reluctant to cooperate with us. The incumbent carriers may experience, or claim
to experience, a shortage of collocation space or transmission capacity. If this
occurs, we may not have alternate means of connecting our DSL equipment with the
copper telephone lines or connecting our equipment in central offices to Metro
Service Centers. We have experienced rejections of some of our collocation
applications on the grounds that no space is available. We may receive
additional rejections in the future. The number of other competitive local
exchange carriers that request collocation space will also affect the
availability of collocation space and transmission capacity. If we are unable to
obtain physical collocation space or transmission capacity from our targeted
incumbent carriers, we may face delays, additional costs or an inability to
provide services in certain locations. Where we use virtual collocation in our
network, it reduces our control over our equipment, and therefore may reduce the
level of quality and service we provide to our customers. Delays in obtaining
access to collocation space and copper telephone lines or the rejection of our
applications for collocation could result in delays in, and increased expenses
associated with, the rollout of our services, which in turn could have a
material and adverse effect on our business, prospects, operating results and
ability to repay our debt, including the new notes.
WE ARE UNABLE TO CONTROL THE TERMS AND CONDITIONS UNDER WHICH WE GAIN ACCESS TO
INCUMBENT CARRIER COLLOCATION AND TRANSMISSION FACILITIES
We cannot control the terms under which we collocate our equipment, connect
to copper telephone lines or gain the use of an incumbent carrier's transmission
facilities. State tariffs, state public utility commissions, the Federal
Communications Commission and interconnection agreements with the incumbent
carriers determine the price, terms and conditions under which collocation space
is
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made available, and they make these administrative determinations in ongoing
hearings. Interconnection agreements and state public utility commissions also
determine the terms and conditions of access to copper telephone lines and other
components of an incumbent carrier's network. We may be unable to negotiate or
enter into interconnection agreements on acceptable terms or at all. In
addition, we cannot be sure that incumbent carriers will abide by their
obligations under those agreements. Delays in obtaining interconnection
agreements would delay our entry into certain markets. In addition, disputes may
arise between us and the incumbent carriers with respect to interconnection
agreements, and we may be unable to resolve disputes in our favor. If we are
unable to enter into, or experience a delay in obtaining, interconnection
agreements, this inability or delay could adversely affect our business,
prospects, operating results and ability to repay our debt, including the new
notes. Further, the interconnection agreements are generally short term, and we
may be unable to renew the interconnection agreements on acceptable terms or at
all. The state commissions, the Federal Communications Commission and the courts
oversee, in varying degrees, interconnection arrangements as well as the terms
and conditions under which we gain access to incumbent carrier copper telephone
lines and transmission facilities. These government entities may modify the
terms or prices of our interconnection agreements and our access to incumbent
carrier copper telephone lines and transmission facilities in ways that would be
adverse to our business. The Federal Communications Commission and state
regulatory commissions establish the rates for DSL-capable copper telephone
lines as well as other rates, terms and conditions of our dealings with the
incumbent carriers in ongoing public hearings. Participation in these hearings
will involve significant management time and expense. Incumbent carriers may
from time to time propose new rates, and the outcomes of hearings and rulings
could have a material and adverse effect on our business, prospects, operating
results and ability to repay our debt, including the new notes.
THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED INDUSTRY COMPETITORS WITH
SIGNIFICANTLY GREATER FINANCIAL RESOURCES
We will face competition from many competitors with significantly greater
financial resources, well-established brand names and large, existing installed
customer bases. We expect the level of competition to intensify in the future.
We expect significant competition from incumbent local exchange carriers,
traditional and new interexchange carriers, other DSL providers, cable modem
service providers, Internet service providers, wireless and satellite data
service providers and other competitive carriers. Incumbent local exchange
carriers have existing metropolitan area networks and circuit-switched local
access networks. In addition, most incumbent local exchange carriers are
establishing their own Internet service provider businesses and are in some
stage of market trials and retail sales of DSL-based access services. Incumbent
local exchange carriers are aggressively marketing these services to their
residential customers at attractive prices. We believe that incumbent local
exchange carriers have the potential to quickly overcome many of the issues that
have delayed widespread deployment of DSL services in the past. It is possible
that present or future competitors may reduce prices for competitive services,
perhaps drastically. In addition, we may experience substantial customer
turnover in the future. Many providers of telecommunications and networking
services experience high rates of customer turnover.
Many of the leading traditional long distance carriers, including AT&T
Corporation, MCI WorldCom and Sprint, are expanding their capabilities to
support high-speed, end-to-end networking services. The newer long distance
carriers, including Williams, Level 3 Communications, Inc. and Qwest, are
building and managing high bandwidth, nationwide packet networks and partnering
with Internet service providers to offer services directly to the public. Cable
modem service providers, like Excite@Home Networks, are offering or preparing to
offer high-speed Internet access over hybrid fiber networks to consumers, and
@Work has positioned itself to do the same for businesses. Several new companies
are emerging as wireless, including satellite-based, data service providers.
Internet service providers, including some with significant and even nationwide
presences, provide Internet access to
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residential and business customers, generally over the incumbent carriers'
circuit switched networks, although some offer competitive DSL-based access.
Certain competitive carriers, including Covad Communications Group, Inc. and
NorthPoint Communications, Inc., offer competitive DSL-based access services,
and, like us, have attracted strategic equity investors, marketing allies and
product development partners. Others are likely to do the same in the future. In
addition, regional Internet service providers and competitive carriers,
including HarvardNet, Inc., Network Access Solutions Corp. and DSL.net, Inc.
offer competitive DSL-based services that compete with the services we offer. As
a result of increasing competition for our services, we are experiencing
substantial price competition, particularly with respect to sales generated
through our indirect sales channels.
Many of these competitors are offering, or may soon offer, technologies and
services that will directly compete with some or all of our service offerings.
Some of the technologies used by these competitors for local access connections
include ISDN, DSL, wireless data and cable modems. Some of the competitive
factors in our markets include transmission speed, reliability of service,
breadth of service availability, price, network security, ease of access and
use, content bundling, customer support, brand recognition, operating
experience, capital availability and exclusive contracts. We believe that we
compare unfavorably with many of our competitors with regard to, among other
things, brand recognition, existing relationships with end users, available
pricing discounts, central office access, capital availability and exclusive
contracts. Substantially all of our competitors and potential competitors have
substantially greater resources than us. We may not be able to compete
effectively in our target markets. Our failure to compete effectively would have
a material and adverse effect on our business, prospects, operating results and
ability to repay our debt, including the new notes. For more details about our
competitors, please see "Business--Competition."
OUR NETWORK SERVICES MAY NOT ACHIEVE SIGNIFICANT MARKET ACCEPTANCE BECAUSE OUR
PRICES ARE OFTEN HIGHER THAN THOSE CHARGED FOR COMPETING SERVICES
Our prices are in some cases higher than those that our competitors charge
for some of their services. Prices for digital communications services have
fallen historically, and we expect prices in the industry in general, and for
the services we offer now and plan to offer in the future, to continue to fall.
We may be required to reduce prices periodically to respond to competition and
to generate increased sales volume. Our prices may not permit our network
services to gain a desirable level of commercial acceptance, and we may be
unable to sustain any current or future pricing levels. Due to these factors, we
cannot accurately forecast our revenues or the rate at which we will add new
customers.
OUR SERVICES ARE SUBJECT TO GOVERNMENT REGULATION, AND CHANGES IN CURRENT OR
FUTURE LAWS OR REGULATIONS COULD RESTRICT THE WAY WE OPERATE OUR BUSINESS
A significant portion of the services that we offer through our subsidiaries
is subject to regulation at the federal, state and/or local levels. Future
federal or state regulations and legislation may be less favorable to us than
current regulation and legislation and therefore have an adverse impact on our
business, prospects, operating results and ability to repay our debt, including
the notes. In addition, we may expend significant financial and managerial
resources to participate in rule-setting proceedings at either the federal or
state level, without achieving a favorable result. In particular, we believe
that incumbent carriers will work aggressively to modify or restrict the
operation of many provisions of the 1996 Telecommunications Act. We expect
incumbent carriers will pursue litigation in courts, institute administrative
proceedings with the Federal Communications Commission and other regulatory
agencies and lobby the United States Congress, all in an effort to affect laws
and regulations in a manner favorable to the incumbent carriers and against the
interest of competitive carriers such as us. If the incumbent carriers succeed
in any of their efforts, if these laws and regulations change or if the
administrative implementation of laws develops in an adverse manner, these
events could have a
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material and adverse effect on our business, prospects, operating results and
ability to repay our debt, including the new notes. For more details about our
regulatory situation, please see "Business--Government Regulation."
OUR FAILURE TO MANAGE GROWTH COULD ADVERSELY AFFECT US
We have rapidly and significantly expanded our operations. We anticipate
further significant expansion of our operations and the systems supporting those
operations in an effort to achieve our network rollout and deployment
objectives. Our expansion to date has strained our management, financial
controls, operations systems, personnel and other resources. Any future rapid
expansion would increase these strains. If our marketing strategy is successful,
we may experience difficulties responding to customer demand for services and
technical support in a timely manner and in accordance with their expectations.
As a result, rapid growth of our business would make it difficult to implement
successfully our strategy to provide superior customer service. To manage any
growth of our operations, we must:
- improve existing and implement new operational, financial and management
information controls, operational support systems, reporting systems and
procedures;
- hire, train and manage additional qualified personnel;
- expand and upgrade our core technologies; and
- effectively manage multiple relationships with our customers, suppliers
and other third parties.
We may not be able to install operational support systems or management
information and control systems in an efficient and timely manner, and our
current or planned personnel, systems, procedures and controls may not be
adequate to support our future operations. Failure to manage our future growth
effectively could adversely affect the expansion of our customer base and
service offerings. Any failure to successfully address these issues could
materially and adversely affect our business, prospects, operating results and
ability to repay our debt, including the new notes.
FAILURE TO EFFECTIVELY DEVELOP AND MARKET NETWORK FEATURES AND APPLICATIONS
COULD LIMIT OUR REVENUE GROWTH
Our business model relies on network features and applications to increase
our revenues. We have only recently begun to develop these network features and
applications. In order to be successful, we must develop and effectively market
network features and applications that are widely accepted, at profitable
prices. We cannot assure you that we will be able to do so. Our failure to
develop and market these features and applications could materially and
adversely affect our business, prospects, operating results and ability to repay
our debt, including the new notes.
THE TELECOMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGE, AND
NEW TECHNOLOGIES MAY BE SUPERIOR TO THE TECHNOLOGY WE USE
The telecommunications industry is subject to rapid and significant
technological changes, such as continuing developments in DSL technology and
alternative technologies for providing high-speed data communications. We cannot
predict the effect of technological changes on our business. We will rely in
part on third parties, including certain of our competitors and potential
competitors, for the development of and access to communications and networking
technology. We expect that new products and technologies applicable to our
market will emerge. New products and technologies may be superior to and/or
render obsolete the products and technologies that we currently use. Our future
success will depend, in part, on our ability to anticipate and adapt to
technological changes and evolving industry standards. We may be unable to
obtain access to new technology on acceptable terms or at all, and we may be
unable to adapt to new technologies and offer services in a competitive manner.
Our joint development projects with Cisco and MCI WorldCom and our strategic
arrangement with Microsoft may not produce useful technologies or services for
us. Further, new technologies and products may not be compatible with our
technologies and business plan. In addition, many of the products and
technologies that we intend to use in our network services are relatively new
and unproven and may be unreliable.
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WE MAY BE UNABLE TO EFFECTIVELY EXPAND OUR NETWORK SERVICES AND PROVIDE HIGH
PERFORMANCE TO A SUBSTANTIAL NUMBER OF END USERS
Due to the limited deployment of our network services, we cannot guarantee
that our network will be able to connect and manage a substantial number of end
users at high transmission speeds. We may be unable to scale our network to
service a substantial number of end users while achieving high performance.
Further, our network may be unable to achieve and maintain competitive digital
transmission speeds. While digital transmission speeds of up to 7.1 Mbps are
possible on certain portions of our network, that speed is not available over a
majority of our network. Actual transmission speeds on our network will depend
on a variety of factors and many of these factors are beyond our control,
including the type of DSL technology deployed, the distance an end user is
located from a central office, the quality of the telephone lines, the presence
of interfering transmissions on nearby lines and other factors. As a result, we
may not be able to achieve and maintain digital transmission speeds that are
attractive in the market.
OUR SERVICES MAY SUFFER OR BE UNAVAILABLE BECAUSE THE COPPER TELEPHONE LINES WE
REQUIRE MAY BE UNAVAILABLE OR IN POOR CONDITION
Our ability to provide DSL-based services to potential customers depends on
the quality, physical condition, availability and maintenance of copper
telephone lines within the control of the incumbent carriers. We believe that
the current condition of copper telephone lines in many cases will be inadequate
to permit us to fully implement our network services. In addition, the incumbent
carriers may not maintain the copper telephone lines in a condition that will
allow us to implement our network effectively. The copper telephone lines may
not be of sufficient quality or the incumbent carriers may claim they are not of
sufficient quality to allow us to fully implement or operate our network
services. Further, some telephone services employ technologies other than copper
lines, and DSL might not be available over these telephone lines.
OUR SUCCESS DEPENDS ON OUR RETENTION OF CERTAIN KEY PERSONNEL AND ON THE
PERFORMANCE OF THOSE PERSONNEL
Our success depends on the performance of our officers and key employees,
especially our Chief Executive Officer and our President and Chief Operating
Officer. Members of our senior management team have worked together for only a
short period of time. We do not have "key person" life insurance policies on any
of our employees nor do we have employment agreements for fixed terms with any
of our employees. Any of our employees, including any member of our senior
management team, may terminate his or her employment with us at any time. Given
our early stage of development, we depend on our ability to retain and motivate
high quality personnel, especially our management. Our future success also
depends on our continuing ability to identify, hire, train and retain highly
qualified technical, sales, marketing and customer service personnel. Moreover,
the industry in which we compete has a high level of employee mobility and
aggressive recruiting of skilled personnel. We may be unable to continue to
employ our key personnel or to attract and retain qualified personnel in the
future. We face intense competition for qualified personnel, particularly in
software development, network engineering and product management. For more
details about our officers and key employees, please see "Business--Employees"
and "Management."
WE DEPEND ON THIRD PARTIES FOR EQUIPMENT, INSTALLATION AND PROVISION OF FIELD
SERVICE
We currently plan to purchase all of our equipment from many vendors and
outsource the majority of the installation and field service of our networks to
third parties. Our reliance on third party vendors involves a number of risks,
including the absence of guaranteed capacity and reduced control over delivery
schedules, quality assurance, production yields and costs. If any of our
suppliers reduces or interrupts its supply, or if any significant installer or
field service provider interrupts its service to us, this reduction or
interruption could disrupt our business. Although multiple manufacturers
currently
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produce or are developing equipment that will meet our current and anticipated
requirements, our suppliers may be unable to manufacture and deliver the amount
of equipment we order, or the available supply may be insufficient to meet our
demand. Currently, almost all of the DSL modem and DSL multiplexing equipment we
use for a single connection over a copper telephone line must come from the same
vendor since there are no existing interoperability standards for the equipment
used in our higher speed services. If our suppliers or licensors enter into
competition with us, or if our competitors enter into exclusive or restrictive
arrangements with the suppliers or licensors, then these events may materially
and adversely affect the availability and pricing of the equipment we purchase
and the technology we license.
A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS
Our operations depend on our ability to avoid damages from fires,
earthquakes, floods, power losses, excessive sustained or peak user demand,
telecommunications failures, network software flaws, transmission cable cuts and
similar events. A natural disaster or other unanticipated problem at our owned
or leased facilities could interrupt our services. Additionally, if an incumbent
carrier, competitive carrier or other service provider fails to provide the
communications capacity we require, as a result of a natural disaster,
operational disruption or any other reason, then this failure could interrupt
our services.
Despite the implementation of security measures, our network may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Corporate networks and Internet service providers have in the past
experienced, and may in the future experience, interruptions in service as a
result of accidental or intentional actions of Internet users, current and
former employees and others. Unauthorized access could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers, which might cause us to be liable to our customers,
and also might deter potential customers. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to our customers and our customers' end users.
INTERFERENCE OR CLAIMS OF INTERFERENCE COULD DELAY OUR ROLLOUT OR HARM OUR
SERVICES
All transport technologies deployed on copper telephone lines have the
potential to interfere with, or to be interfered with by, other transport
technologies on the copper telephone lines. We believe that our DSL
technologies, like other transport technologies, do not interfere with existing
voice services. We believe that a workable plan that takes into account all
technologies could be implemented in a scalable way across all incumbent
carriers using existing plant engineering principles. There are several
initiatives underway to establish national standards and principles for the
deployment of DSL technologies. We believe that our technologies can be deployed
consistently with these evolving standards. Nevertheless, incumbent carriers may
claim that the potential for interference permits them to restrict or delay our
deployment of DSL services. Interference could degrade the performance of our
services or make us unable to provide service on selected lines. The procedures
to resolve interference issues between competitive carriers and incumbent
carriers are still being developed, and these procedures may not be effective.
We may be unable to successfully negotiate interference resolution procedures
with incumbent carriers. Moreover, incumbent carriers may make claims regarding
interference or unilaterally take action to resolve interference issues to the
detriment of our services. State or federal regulators could also institute
responsive actions. Interference, or claims of interference, if widespread,
would adversely affect our speed of deployment, reputation, brand image, service
quality and customer satisfaction and retention.
WE DEPEND ON THIRD PARTIES FOR FIBER OPTIC TRANSPORT FACILITIES
We depend on the availability of fiber optic transmission facilities from
third parties to connect our equipment within and between metropolitan areas.
These third party fiber optic carriers include long
18
<PAGE>
distance carriers, incumbent carriers and other competitive carriers. Many of
these entities are, or may become, our competitors. This approach includes a
number of risks. For instance, we may be unable to negotiate and renew favorable
supply agreements. Further, we depend on the timeliness of these companies to
process our orders for customers who seek to use our services. We have in the
past experienced supply problems with certain of our fiber optic suppliers, and
they may not be able to meet our needs on a timely basis in the future.
Moreover, the fiber optic transport providers whose networks we lease may be
unable to obtain or maintain permits and rights-of-way necessary to develop and
operate existing and future networks.
UNCERTAIN FEDERAL AND STATE TAX AND OTHER SURCHARGES ON OUR SERVICES MAY
INCREASE OUR PAYMENT OBLIGATIONS
Telecommunications providers pay a variety of surcharges and fees on their
gross revenues from interstate and intrastate services. The division of our
services between interstate and intrastate services is a matter of
interpretation, and in the future the Federal Communications Commission or
relevant state commission authorities may contest this division. A change in the
characterization of the jurisdiction of our services could cause our payment
obligations to increase. In addition, pursuant to periodic revisions by state
and federal regulators of the applicable surcharges, we may be subject to
increases in the surcharges and fees currently paid.
OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS, AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS
We rely on a combination of licenses, confidentiality agreements and other
contracts to establish and protect our technology and other intellectual
property rights. We have applied for trademarks and servicemarks on certain
terms and symbols that we believe are important for our business. We currently
have no patents or patent applications pending. The steps we have taken may be
inadequate to protect our technology or other intellectual property. Moreover,
our competitors may independently develop technologies that are substantially
equivalent or superior to ours. Third parties may assert infringement claims
against us and, in the event of an unfavorable ruling on any claim, we may be
unable to obtain a license or similar agreement to use technology we rely upon
to conduct our business. We also rely on unpatented trade secrets and know-how
to maintain our competitive positions, which we seek to protect, in part, by
confidentiality agreements with employees, consultants and others. However,
these agreements may be breached or terminated, and we may not have adequate
remedies for any breach. In addition, our competitors may otherwise learn or
discover our trade secrets. Our management personnel were previously employees
of other telecommunications companies. In many cases, these individuals are
conducting activities for us in areas similar to those in which they were
involved prior to joining us. As a result, we or our employees could be subject
to allegations of violation of trade secrets and other similar claims.
RISKS ASSOCIATED WITH POTENTIAL GENERAL ECONOMIC DOWNTURN
In the last few years the general health of the economy, particularly the
economy of California where we have conducted a significant portion of our
operations to date, has been relatively strong and growing, a consequence of
which has been increasing capital spending by individuals and growing companies
to keep pace with rapid technological advances. To the extent the general
economic health of the United States or of California declines from recent
historically high levels, or to the extent individuals or companies fear a
decline is imminent, these individuals and companies may reduce expenditures
such as those for our services. Any decline or concern about an imminent decline
could delay decisions among certain of our customers to roll out our services or
could delay decisions by prospective customers to make initial evaluations of
our services. Any delays would have a material and adverse effect on our
business, prospects, operating results and ability to repay our debt, including
the notes.
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<PAGE>
WE MAY BE UNABLE TO SATISFY, OR MAY BE ADVERSELY CONSTRAINED BY, THE COVENANTS
IN OUR DEBT SECURITIES
The indentures governing the new and old notes, our 1998 senior discount
notes and our 1999 senior notes impose significant restrictions on how we can
conduct our business. For example, the restrictions prohibit or limit our
ability to incur additional debt, make dividend payments and engage in certain
business activities. The restrictions may materially and adversely affect our
ability to finance future operations or capital needs or conduct additional
business activities. Any future senior debt that we may incur will likely impose
additional restrictions on us. If we fail to comply with any existing or future
restrictions, we could default under the terms of the applicable debt and be
unable to meet our debt obligations. If we default, the holders of the
applicable debt could demand that we repay the debt, including interest,
immediately. We may be unable to make the required payments or raise sufficient
funds from alternative sources to make the payments. Even if additional
financing is available in the event that we default, it may not be on acceptable
terms.
OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF OUR
COMPANY, HAVE INTERESTS THAT MAY CONFLICT WITH THE INTERESTS OF THE HOLDERS OF
NOTES AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR COMPANY
Our executive officers, directors and principal stockholders together
beneficially own 46.6% of the total voting power of our company. Accordingly,
these stockholders will be able to determine the composition of our Board of
Directors, will retain the voting power to approve all matters requiring
stockholder approval and will continue to have significant influence over our
affairs. Certain decisions concerning our operations or financial structure may
present conflicts of interest between the stockholders and the holders of new
notes. For example, if we encounter financial difficulties or are unable to pay
our debts as they mature, the stockholders' interests may conflict with those of
the holders of new notes. In addition, the stockholders may wish to pursue
acquisitions, divestitures, financings or other transactions and business
strategies that, in their judgment, could enhance their equity investment in our
company even though these transactions might involve increased risks to the
holders of new notes.
IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, WE WOULD BECOME SUBJECT
TO SUBSTANTIAL REGULATION WHICH WOULD INTERFERE WITH OUR ABILITY TO CONDUCT OUR
BUSINESS ACCORDING TO OUR BUSINESS PLAN
As a result of our previous financings, we have substantial cash, cash
equivalents and short-term investments. We plan to continue investing the excess
proceeds of these financings 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 our being treated as an "investment company"
under the Investment Company Act of 1940. The Investment Company Act requires
the registration of companies that are primarily in the business of investing,
reinvesting or trading securities or that fail to meet certain statistical tests
regarding their composition of assets and sources of income even though they
consider themselves not to be primarily engaged in investing, reinvesting or
trading securities.
We believe that we are primarily engaged in a business other than investing
in or trading securities and, therefore, are not an investment company within
the meaning of the Investment Company Act. If the Investment Company Act
required us to register as an investment company, we would become subject to
substantial regulation with respect to our capital structure, management,
operations, transactions with affiliated persons and other matters. Application
of the provisions of the Investment Company Act to us would materially and
adversely affect our business, prospects, operating results and our ability to
repay our debt, including the new notes.
20
<PAGE>
THE NEW NOTES WILL BE EFFECTIVELY SUBORDINATED TO OUR SECURED DEBT AND OUR
SUBSIDIARIES' DEBT
The new notes will be senior unsecured obligations and will rank equally in
right of payment with all other existing and future senior unsecured debt we
incur, including our 1998 senior discount notes and our 1999 senior notes. Our
assets, the assets of our current subsidiaries and the assets of any future
subsidiaries will not secure the new notes. The indenture governing the new
notes will permit us and our subsidiaries to incur certain secured debt in the
future. Any secured debt would have a prior claim over the new notes to the
extent of the assets that secure such debt. For example, the holders of secured
debt would have the right to receive payment with respect to their collateral
before any payment to the holders of general unsecured debt, including the new
notes, if we or our subsidiaries were to default on the secured debt or if we or
our subsidiaries undergo a bankruptcy, liquidation or reorganization. In
addition, none of our current or future subsidiaries will guarantee the new
notes; therefore, the new notes will rank behind all debt and other liabilities
of our subsidiaries, including subordinated debt and trade payables.
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the exchange offer, we will have no further obligation
to register the old notes. Thereafter, any holder of old notes who does not
tender its old notes in the exchange offer, including any holder which is an
"affiliate" of ours which cannot tender its old notes in the exchange offer,
will continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of securities,
provided that an opinion of counsel is furnished to us that such an exemption is
available. These restrictions may limit the trading market and price for the old
notes.
THERE IS NO PUBLIC MARKET FOR THE NEW NOTES
The new notes are being offered to the holders of the old notes. Prior to
this exchange offer, there has been no existing trading market for the new
notes. Although the new notes are eligible for trading in the PORTAL-SM- market,
no liquid market may develop for the new notes, and their holders might be
unable to sell them. Future trading prices of the new notes will depend on many
factors, such as:
- prevailing interest rates;
- our operating results; and
- the market for similar securities.
In connection with the old note issuance, we were advised by the initial
purchasers that they intended to make a market in the new notes. However, they
are not obligated to do so, and they may discontinue any market-making
activities at any time without notice. We do not intend to apply to list the new
notes on any securities exchange or automated quotation system.
WE MAY BE UNABLE TO MAKE PAYMENTS UPON A CHANGE OF CONTROL
If we merge, sell our company or sell most of our assets, then the
indentures governing the new and old notes, our 1998 senior discount notes and
our 1999 senior notes will require us to offer to repurchase all of the
outstanding new and old notes, 1998 senior discount notes and 1999 senior notes
for a cash purchase price of 101% of their principal amount or accreted value,
as the case may be, plus any accrued interest and liquidated damages. If such an
event occurs, we may be unable to repay all of our obligations under the new and
old notes, the 1998 senior discount notes, the 1999 senior notes, and any other
debt that may become payable because of that event. In addition, other debt we
have incurred may restrict us from repurchasing the notes upon a change of
control. We may be unable to refinance any of these obligations on commercially
reasonable terms, if at all, and therefore we may be unable to repurchase any of
the notes upon a change of control.
21
<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the exchange of the new notes for
the old notes pursuant to this exchange offer.
The aggregate net proceeds of the sale of the old notes were approximately
$291.3 million after deducting estimated offering expenses and are expected to
be used as follows:
- to fund the expenditures incurred in the continuing deployment of network
services in our existing markets, as well as our planned rollout in
additional markets,
- for expenses associated with the continued development of our sales and
marketing activities,
- to fund the addition of subscribers or end users,
- to fund operating losses,
- to pay our debt obligations, and
- for general corporate purposes.
Pending use of the net proceeds, we have invested them in short-term,
investment grade securities to the extent permitted by the covenants governing
the old and new notes, our existing 1998 senior discount notes and our 1999
senior notes and our existing debt and any statistical asset tests imposed by
the Investment Company Act of 1940.
The actual amounts we spend will vary significantly depending upon a number
of factors, including future revenue growth, if any, capital expenditures, the
amount of cash generated by our operations and other factors, many of which are
beyond our control. Additionally, we may modify the number, selection and timing
of our entry with respect to any or all of our targeted markets. Accordingly,
our management retains broad discretion in the allocation of the net proceeds.
22
<PAGE>
CAPITALIZATION
The following unaudited table shows our cash, cash equivalents and
short-term investments and capitalization as of March 31, 2000.
Please read this table in conjunction with our consolidated financial
statements, the related notes to the financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
In the following table:
- the restricted cash balances below reflect the portion of the net proceeds
from the issuance of our 1999 senior notes that were used to purchase a
portfolio of U.S. government securities to fund the first six scheduled
interest payments on the 1999 senior notes.
- the bank note consists of a $1.0 million note payable to Silicon Valley
Bank which is being amortized over a 36-month period that ends in
April 2001.
- the common stock component of stockholders' equity excludes 7,828,402
shares of our common stock issuable upon the exercise of outstanding
warrants and 8,441,604 shares of our common stock issuable upon the
exercise of outstanding options as of March 31, 2000, as well as the
warrants issued in connection with the investment by Hicks Muse.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
--------------------
(IN THOUSANDS)
<S> <C>
Cash, cash equivalents and short-term investments........... $1,046,373
==========
Restricted cash............................................. $ 98,258
==========
Debt:
Bank note................................................. $ 389
13 1/2% senior discount notes due 2008.................... 186,992
12 3/4% senior notes due 2009............................. 325,000
14% senior notes due 2010................................. 300,000
----------
Total debt.............................................. 812,381
----------
Mandatorily redeemable common stock warrants................ 42
----------
Series E mandatorily redeemable convertible preferred stock,
par value $0.001; 250,000 shares authorized and issued.... 173,101
Series F mandatorily redeemable convertible preferred stock,
par value $0.001; 3,000,000 shares authorized and
issued.................................................... 292,692
----------
Total mandatorily redeemable preferred stock............ 465,793
----------
Stockholders' equity:
Common stock, $0.001 par value; 250,000,000 shares
authorized; 78,452,789 shares issued.................... 78
Treasury stock, at cost; 1,107,440 shares................. (499)
Additional paid-in capital................................ 371,562
Warrants.................................................. 74,373
Deferred compensation..................................... (10,350)
Accumulated deficit....................................... (375,667)
Accumulated comprehensive income.......................... 4,811
----------
Total stockholders' equity................................ 64,308
----------
Total capitalization.................................... $1,342,524
==========
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following statement of operations data for the period from February 27,
1997 to December 31, 1997 and the years ended December 31, 1998 and
December 31, 1999 and three months ended March 31, 1999 and March 31, 2000 and
the balance sheet data as of December 31, 1997, December 31, 1998, December 31,
1999 and March 31, 2000 have been derived from our consolidated financial
statements and the related notes to the financial statements. The following
selected consolidated financial data should be read in conjunction with our
consolidated financial statements and the related notes to the financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.
In the following table:
- EBITDA consists of the net loss excluding net interest, depreciation and
amortization of capital assets, deferred business acquisition costs and
deferred compensation expense. EBITDA is presented to enhance an
understanding of our operating results and is not intended to represent
cash flow or results of operations in accordance with generally accepted
accounting principles for the period indicated and may be calculated
differently from EBITDA for other companies.
- Adjusted EBITDA reflects EBITDA excluding total operating lease expenses
to GATX Capital Corporation and Cisco Capital Corporation for the years
ended December 31, 1998, December 31, 1999, and three months ended
March 31, 1999 and March 31, 2000 which were $1,592,000, $22,004,000,
$2,256,000, 12,130,000 respectively. No amounts were incurred for
operating leases for the period ended December 31, 1997. Adjusted EBITDA
is presented to enhance an understanding of our operating results and is
not intended to represent cash flow or results of operations in accordance
with generally accepted accounting principles for the period indicated and
may be calculated differently from adjusted EBITDA for other companies.
- The restricted cash balances in the balance sheet data table reflect the
portion of the net proceeds from the issuance of our 1999 senior notes
that were used to purchase a portfolio of U.S. government securities to
fund the first six scheduled interest payments on the 1999 senior notes.
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<PAGE>
<TABLE>
<CAPTION>
FEBRUARY 27, THREE MONTHS ENDED
1997 YEARS ENDED -------------------------
(INCEPTION) TO ---------------------------- MARCH 31, MARCH 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 2000
1997 1998 1999 (UNAUDITED) (UNAUDITED)
-------------- ------------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................ $ -- $ 528 $ 11,089 $ 660 $ 8,137
Operating expenses:
Network and service costs........ -- 4,695 68,161 6,138 39,894
Selling, marketing, general and
administrative................. 2,534 23,153 114,689 13,665 61,457
Depreciation and amortization.... 1 1,081 12,639 782 9,400
Amortization of deferred business
acquisition costs.............. -- -- 4,765 131 1,563
------- --------- --------- --------- ---------
Total operating expenses....... 2,535 28,929 200,254 20,716 112,314
------- --------- --------- --------- ---------
Loss from operations............... (2,535) (28,401) (189,165) (20,056) (104,177)
Interest and other income
(expense), net................... 113 (7,933) (29,715) (3,843) (13,854)
------- --------- --------- --------- ---------
Net loss........................... $(2,422) $ (36,334) $(218,880) $ (23,899) $(118,031)
------- --------- --------- --------- ---------
Preferred stock dividends and
accretion.......................... -- -- -- -- 2,609
Net loss available to common
shareholders....................... $(2,422) $ (36,334) $(216,247) $ (23,899) $(120,640)
======= ========= ========= ========= =========
Net loss per common share (basic
and diluted)..................... $ (1.12) $ (12.18) $ (4.15) $ (5.38) $ (1.63)
======= ========= ========= ========= =========
OTHER FINANCIAL DATA:
EBITDA............................. $(2,342) $ (26,562) $(167,870) $ (18,507) $ (91,369)
Adjusted EBITDA.................... (2,342) (24,970) (145,866) (16,251) (79,239)
Net cash used for operating
activities....................... (1,560) (19,024) (153,774) (17,478) (97,281)
Net cash used for investing
activities....................... (1,345) (139,032) (471,401) (31,966) (781,440)
Net cash provided by financing
activities....................... 13,071 169,205 652,107 61,881 832,111
Deficiency of earnings to cover
fixed charges.................... (2,422) (36,334) (218,880) (23,899) (118,031)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999 2000
------------- ------------- ------------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................ $10,166 $136,812 $340,255 $1,046,373
Restricted cash.............................. -- -- 96,233 98,258
Equipment and furniture, net................. 1,621 11,510 124,831 137,170
Collocation fees, net........................ 327 13,804 57,421 64,547
Total assets................................. 12,241 171,726 685,424 1,437,675
Total debt................................... 568 158,270 506,140 812,381
Mandatorily redeemable common stock
warrants................................... -- 6,567 42 42
Series E mandatorily redeemable convertible
preferred stock............................ -- -- -- 173,101
Series F mandatorily redeemable convertible
preferred stock............................ -- 292,692
Total stockholders' equity (deficit)......... 10,346 (6,747) 116,287 64,308
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading provider of broadband local access communication services
to businesses and consumers. We began offering commercial services in the United
States in April 1998. As of March 31, 2000, we offered our services in 46
markets and 83 of the largest of the 314 MSAs in the United States, and our
national DSL network passed over 51 million homes and businesses. We intend to
continue our United States network rollout into an additional 24 markets and 25
MSAs by the end of 2000.
Since our inception in February 1997, our primary activities have consisted
of:
- obtaining required governmental authorizations;
- negotiating and executing interconnection agreements with incumbent
carriers;
- entering into strategic alliances;
- identifying collocation space and locations for our connection points,
Metro Service Centers and business offices;
- acquiring and deploying equipment and facilities;
- launching service trials;
- hiring management and other personnel;
- raising capital;
- forming a joint venture company, Rhythms Canada, to develop a Canadian DSL
network;
- adding end user subscribers to our network;
- various marketing and sales activities;
- launching a national brand campaign;
- creating and expanding relationships with broadband service providers;
- implementing process improvement and quality programs; and
- developing, implementing and integrating our operations support system and
other back office systems.
Since January 1, 1999 we continued the development of our business
operations as follows:
- entered 36 new markets for a total of 46 markets at March 31, 2000;
- added 1,180 central office locations for a total of 1,380 central offices
at March 31, 2000;
- added 19,500 DSL lines for a total of 20,000 DSL lines at March 31, 2000;
and
- increased headcount by 1,240 employees for a total of approximately 1,400
employees at March 31, 2000.
We have incurred operating losses, net losses and negative operating cash
flow for each month since our formation. As of March 31, 2000, we had an
accumulated deficit of approximately $375.7 million. We intend to substantially
increase our expenditures and operating expenses in an effort to expand our
network infrastructure, network features and applications, and add end user
subscribers. We expect to incur substantial operating losses, net losses and
negative cash flow during the network build-out and initial penetration of each
new market we enter. These losses are expected to continue for at least the next
several years.
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<PAGE>
FACTORS AFFECTING OPERATIONS
REVENUE
The following factors affect our revenue:
- SERVICE OFFERINGS. We derive a majority of our operating revenue from
broadband local connection services, metropolitan area inter-network
connection services and installation. For broadband local connection
services, we bill our customers a flat rate, monthly recurring charge
based on the data transfer speeds selected by the end user. We also bill
our broadband local connection services customers for nonrecurring service
activation and installation charges on each line. For our metropolitan
area inter-network connection services, we bill fixed, monthly recurring
charges and nonrecurring charges to each customer for the high-speed
connection between our Metro Service Center and the customer's router and
switch. To encourage potential customers to adopt our services, we
sometimes offer reduced metropolitan area inter-network connection service
prices for an initial period of time. In some situations we reduce the
nonrecurring service activation and installation charges on our broadband
local connection services for customers who sign long-term contracts of
greater than 12 months. We expect that, as a result of competitive forces
and our evolving service offerings, our prices will decline over time. We
expect that the mix of services our customers purchase from us will change
from time to time and that a mix more heavily weighted toward the lower
priced services would reduce the average revenues.
- NUMBER AND PENETRATION OF TARGET MARKETS. The total number of markets in
which we choose to provide our service offerings, as well as the
penetration within each market, will affect our revenues. We base our
target market assessment on the number of local area networks in each
market, which we believe is the best indication of data intensive business
density and potential customers for our service offerings. For each target
market, we expect to collocate in the appropriate number of incumbent
local exchange carrier central (ILEC) offices to cover 70% of the total
market opportunity within the metropolitan area.
- TURNOVER. To date, our customer turnover has been minimal. We expect this
to increase in the future as competition intensifies.
NETWORK AND SERVICE COSTS
Our network and service costs are generally comprised of the following:
- END USER SUBSCRIBER INSTALLATION CHARGES. In each market, we require a
number of field service technicians to perform installation services at
end user locations. We currently outsource most of this function.
- CUSTOMER PREMISE EQUIPMENT. We provide a DSL modem or router for use at
the end user's location. We purchase this equipment from various DSL
equipment providers.
- MONTHLY RECURRING AND NONRECURRING LINE AND SERVICE CHARGES. We pay ILECs
a one-time installation and activation fee and a monthly service fee for
each copper telephone line.
- METROPOLITAN AREA NETWORK TRANSPORT CHARGES. We incur monthly recurring
and non-recurring charges for transport between our connection points and
our Metro Service Centers. These charges are typically for DS-3 services
from a competitive local exchange carrier (CLEC) or ILEC. These charges
also include metropolitan area inter-network connections to our network.
- NETWORK FACILITIES OPERATING EXPENSES. We incur various monthly recurring
costs at our connection points and Metro Service Centers. These costs
include facility rent and utility costs.
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<PAGE>
- WIDE AREA NETWORK CONNECTION CHARGES. We pay interexchange carriers a
one-time installation and activation fee and a monthly service fee for
leasing wide area network connections over a frame relay or Asynchronous
Transfer Mode (ATM) network.
- EQUIPMENT OPERATING LEASE EXPENSES. We currently take advantage of short
term operating leases to finance the acquisition of substantially all of
our network equipment, including DSL multiplexers, ATM switches and
routers.
- LINE REPAIR AND SUPPORT COSTS. Similar to other telecommunications
providers, we estimate that a small percentage of our lines may require
repair or support. These costs will consist of field dispatch labor and a
portion of our Network Operations Center costs.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE COSTS
Our selling, marketing, general and administrative expenses include customer
service and technical support, information systems, billing and collections,
general management and overhead, and administrative functions. Headcount in
functional areas, such as customer service, engineering and operations, will
increase as we expand our network, and if our number of customers and end user
subscribers increases.
- SALES AND MARKETING COSTS. Our sales and marketing efforts focus on
attracting and retaining broadband service providers and business
customers, as well as building and maintaining our brand.
- GENERAL AND ADMINISTRATIVE COSTS. As we expand our network, we expect the
number of employees located in specific markets to grow. Certain
functions, such as customer service, network operations, information
systems, marketing, quality, national sales management, finance, billing
and site planning, are likely to remain centralized in order to achieve
economies of scale.
DEPRECIATION AND AMORTIZATION
Depreciation expense arising from the capitalization of our equipment and
furniture. Collocation fees are capitalized and amortized over an estimated
useful life of ten years.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO MARCH 31, 1999
REVENUE
Revenue for the three months ended March 31, 2000 was $8.1 million, or an
increase of $7.4 million, compared to $0.7 million in the similar period in
1999. Net monthly recurring service fees totaled $0.5 million in the first three
months of 1999 compared to $5.5 million in the first three months of 2000.
Nonrecurring net installation revenue totaled $0.3 million in the first three
months of 1999 compared to $2.6 million in the first three months of 2000. The
significant increase in revenue for the first three months of 2000 compared to
the same period in 1999 is a result of increased sales and marketing efforts and
network deployment in 46 markets compared to 11 markets one year ago.
NETWORK AND SERVICE COSTS
Network and service costs for the three months ended March 31, 2000 were
$39.9 million compared to $6.1 million for the same period in 1999. The increase
in network and service costs is attributable to the expansion of the Company's
network and increased sales and marketing efforts.
28
<PAGE>
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE
Selling, marketing, general and administrative expenses for the three months
ended March 31, 2000 were $59.6 million compared to $13.1 million for the same
period in 1999. This increase reflects continued growth in staffing levels,
sales and marketing efforts, and legal expenses associated with the development
and launch of new markets.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the three months ended March 31, 2000 was
$9.4 million compared to $0.8 million for the same period in 1999. This increase
reflects the rapid expansion of the Company's network into 46 markets at
March 31, 2000, a 318% increase compared to 11 markets at March 31, 1999.
Depreciation and amortization is expected to continue to increase in the future
as the Company continues to expand its network.
During the first and second quarters of 1999, the Company entered into
strategic arrangements with Microsoft Corp. and Qwest Communications
International Inc. In addition to their investments in the Company totaling
$45.0 million, the strategic arrangements provide for certain other business
relationships. Combined, these business relationships were valued at
$23.2 million and have been capitalized as deferred assets, which are being
amortized over three- and five-year periods. For the three months ended
March 31, 1999 and March 31, 2000, $0.1 million and $1.6 million, respectively,
in amortization for deferred business acquisition costs were recorded.
DEFERRED COMPENSATION
Deferred compensation expense increased to $1.8 million for the three months
ended March 31, 2000 compared to $0.6 million for the same period in 1999. This
increase reflects the granting of stock options to the Company employees and
officers with per share exercise prices below the per share fair values of the
Company's common stock at the dates of grant. The deferred compensation is
amortized over the vesting period of such stock options.
NET INTEREST INCOME AND EXPENSE
Interest income during the three months ended March 31, 2000 was
$8.3 million compared to $1.7 million for the same period in 1999. The increase
is primarily attributable to an increase in invested cash balances. As of
March 31, 2000, unrestricted cash and investments totaled $1.0 billion compared
to $149.3 million at March 31, 1999. The increase resulted from a variety of
financing activities, including:
- issuing Series C and Series D Preferred Stock and warrants for cash
proceeds totaling $75.0 million in March and April 1999;
- issuing common stock upon initial public offering in April 1999 for net
cash proceeds of $210.1 million;
- issuing 12 3/4% senior debt in April 1999 for net cash proceeds of
$314.5 million;
- obtaining equipment lease lines of $175.0 million;
- issuing common stock in a secondary public offering in September 1999 for
net cash proceeds of $16.4 million;
- issuing 14% senior debt in February 2000 for net cash proceeds of
$291.3 million; and
- issuing Series E and Series F Preferred Stock and warrants in the first
quarter of 2000 for net cash proceeds totaling $527.3 million.
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Interest expense and amortized debt discount and issue costs increased to
$22.2 million for the three months ended March 31, 2000 as compared to
$5.6 million for the same period in 1999. This increase primarily resulted from
the senior notes issued in April 1999 and March 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE
We recorded $11.1 million in revenue in 1999 compared to $0.5 million in
revenue in 1998. Revenue consisted of net monthly recurring service fees of
$7.5 million in 1999 compared to $0.3 million in 1998. Nonrecurring net
installation revenue totaled $3.5 million for 1999 compared to $0.2 million in
1998. We recorded late fees of $0.1 million in 1999 compared to none in 1998.
The substantial increase in revenue in 1999 is a result of our increased sales
and marketing efforts and continued network deployment as more fully detailed
above. Each new market we enter provides us with an additional revenue
opportunity, but also higher costs until we have an established customer base in
the market.
NETWORK AND SERVICE COSTS
Our network and service costs for 1999 were $68.2 million compared to
$4.7 million in 1998. The significant increase in network and service costs in
1999 is a result of our continued network deployment as more fully detailed
above.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE
Our selling, marketing, general and administrative expenses were
$110.9 million in 1999, compared to $22.4 million for the same period one year
ago. This increase reflects our continued growth in staffing levels, sales and
marketing efforts, and legal expenses associated with the development and launch
of new markets as more fully detailed above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization in 1999 was $12.6 million, a significant
increase over the $1.1 million recorded in 1998. This increase reflects the
rapid expansion of our network, as discussed above, and includes amortization of
collocation fees and depreciation on operating equipment as we begin service in
each new location. We expect depreciation and amortization to continue to
increase in the future as we continue to expand our network.
During the first and second quarters of 1999, we entered into strategic
arrangements with Microsoft Corp. and Qwest Communications International Inc. In
addition to their investments in our company totaling $45.0 million, the
strategic arrangements provide for certain other business relationships.
Combined, these business relationships along with certain warrant issuances are
valued at $23.2 million and we have capitalized these costs as deferred assets.
These assets are being amortized over three- and five-year periods. Accordingly,
during 1999 we recorded $4.8 million in amortization for deferred business
acquisition costs that have no corresponding amortization in the prior year.
Deferred compensation expense increased to $3.7 million in 1999 as compared
to $0.7 million for the same period one year ago and reflects the granting of
stock options to our employees and officers with per share exercise prices below
the per share fair values of our common stock at the dates of grant. We are
amortizing the deferred compensation over the vesting period of the applicable
options.
NET INTEREST INCOME AND EXPENSE
During 1999, we recorded interest income of $22.7 million, compared to
$5.8 million in 1998. The increase between years resulted primarily from a
substantial increase in invested cash balances. As of
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December 31, 1999, we had unrestricted cash and investments totaling
$340.3 million, compared to unrestricted cash and investments of $136.8 million
at December 31, 1998. The increase during 1999 resulted from a variety of
financing activities, including:
- issuing Series C and Series D preferred stock and warrants for cash
proceeds totaling $75.0 million in March and April 1999;
- issuing common stock upon our initial public offering in April 1999 for
net cash proceeds of $210.1 million;
- issuing 12 3/4% senior debt in April 1999 for net cash proceeds of
$314.5 million;
- executing additional equipment lease lines of $100.0 million;
- issuing common stock upon our secondary public offering in September 1999
for net cash proceeds of $16.4 million.
Interest expense and amortized debt discount and issue costs increased
significantly to $52.5 million in 1999 as compared to $13.8 million in 1998.
This increase primarily resulted from the senior notes we issued in April 1999.
INCOME TAXES
We generated net operating loss carryforwards of $2.1 million,
$21.2 million, and $186.9 million in 1997, 1998, and 1999, respectively. We
expect significant consolidated losses for the foreseeable future that will
generate additional net operating loss carryforwards. However, our ability to
use net operating losses may be subject to annual limitations. In addition,
income taxes may be payable during this time due to operating income in certain
tax jurisdictions. In the future, if we achieve operating profits and the net
operating losses have been exhausted or have expired, we may incur significant
tax expense. We continue to be in a net operating loss tax position through
December 31, 1999; consequently, we have not recorded a provision for income
taxes for periods through December 31, 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO PERIOD ENDED DECEMBER 31, 1997 (FROM
FEBRUARY 27, 1997 (INCEPTION))
REVENUE
We did not offer commercial services in 1997 and, as a result, did not
record any revenue in 1997. During the year ended December 31, 1998, we
continued the development of our business operations, commencing service in the
San Diego market in April, the San Francisco, the Oakland/East Bay and San Jose
markets in July, the Los Angeles and Orange County markets in September and the
Chicago market in October. We recorded revenue of $0.5 million during this
period, which was primarily from DSL service and installation charges, net of
discounts given to customers.
NETWORK AND SERVICE COSTS
Since we did not offer commercial services in 1997, we did not record any
network or service costs in 1997. For the year ended December 31, 1998, we
recorded network and service costs of $4.7 million. We expect network and
service costs to increase significantly in future periods as we expand our
network into additional markets.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE
From inception through December 31, 1997, selling, marketing, general and
administrative expenses were $2.3 million and consisted primarily of salaries
and legal and consulting fees incurred to establish a management team and
develop our business. For the year ended December 31, 1998, we
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recorded selling, marketing, general and administrative expenses of
$22.4 million. This increase is attributable to a continued increase in staffing
levels, increased marketing efforts coinciding with the launch of commercial
services and increased legal fees associated with the development of additional
markets. We expect selling, marketing, general and administrative expenses to
continue to increase significantly as we expand our business.
DEPRECIATION AND AMORTIZATION
Depreciation from network equipment was minimal since substantially all of
this equipment was leased. Depreciation and amortization was $1,000 for the
period from inception through December 31, 1997 and was $1.1 million for the
year ended December 31, 1998. The increase was due to the commencement of our
operations in 1998.
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of interest income from our cash
and short-term investments and interest expense associated with our debt. From
inception through December 31, 1997, net interest income was $0.1 million, which
was primarily attributable to the interest income earned from the proceeds
raised in our Series A preferred stock financing. For the year ended
December 31, 1998, we recorded net interest expense of $8.0 million, consisting
of interest income of $5.8 million generated from invested cash balances, offset
by $13.8 million in interest expense. The increase in the interest expense is
substantially due to the accretion of interest on the senior discount notes that
were issued in May 1998.
INCOME TAXES
We generated net operating loss carryforwards of $2.1 million from inception
to December 31, 1997 and $21.2 million during the year ended December 31, 1998.
We expect significant consolidated losses for the foreseeable future which will
generate additional net operating loss carryforwards. However, our ability to
use net operating losses may be subject to annual limitations. In addition,
income taxes may be payable during this time due to operating income in certain
tax jurisdictions. In the future, if we achieve operating profits and the net
operating losses have been exhausted or have expired, we may experience
significant tax expense. We recognized no provision for taxes because we
operated at a loss throughout 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have substantial indebtedness and debt service obligations. As of
March 31, 2000, giving effect to the sale of the old notes, we had
$812.4 million of total indebtedness. In addition, the development and expansion
of our business requires significant capital expenditures. These capital
expenditures primarily include network build-out costs such as the procurement,
design and construction of our connection points and one or two Metro Service
Center locations in each market, as well as other costs that support our network
design.
The number of targeted central offices in each market varies, as does the
average capital cost to build our connection points in such market. Capital
expenditures, including payments for collocation fees, were $193.3 million
during in 1999 and $28.9 million during the three months ended March 31, 2000.
We expect our capital expenditures to be higher in future periods, arising
primarily from payments of collocation fees and the purchase of infrastructure
equipment necessary for the development and expansion of our network.
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Through March 31, 2000, we have financed our operations and market
build-outs primarily through:
- private placements of equity totaling $105.8 million, net;
- executing equipment lease lines totaling $201.5 million;
- issuing 13 1/2% senior discount notes in May 1998 for $144.0 million in
net proceeds;
- issuing 12 3/4% senior notes in April 1999 for $314.5 million in net
proceeds;
- issuing common stock in April 1999 in our initial public offering for
$210.1 million in net proceeds;
- issuing common stock in September 1999 in a secondary public offering for
$16.4 million;
- issuing the old notes in February 2000 for $291.3 million in net proceeds;
- issuing 6 3/4% Series F preferred stock in March 2000 for $291.0 million
in net proceeds; and
- issuing $250 million of Series E preferred stock to Hicks Muse in a
privately negotiated transaction in March 2000.
Please see "Certain Relationships and Related Transactions" and Note 10 of
the accompanying consolidated financial statements for terms and descriptions of
these transactions.
The indentures for the new and old notes, the 1998 senior discount notes and
the 1999 senior notes contain covenants that limit our ability to:
- pay dividends on, redeem or repurchase our capital stock;
- incur additional debt;
- make investments;
- consolidate, merge or transfer all or substantially all of our assets; and
- restrict dividend or other payments to us by our restricted subsidiaries.
As of March 31, 2000, we had $1.1 billion in cash and investments and we had
an accumulated deficit of $375.7 million. Of this cash, $98.3 million is
restricted in accordance with the terms of the 1999 senior notes.
For the three months ended, March 31, 2000, the net cash used in our
operating activities was $97.3 million. This cash was used for a variety of
operating purposes, including salaries, consulting and legal expenses, network
operations and overhead expenses. Our net cash used for investing activities for
the three months ended, March 31, 2000 was $781.4 million and was used primarily
for purchases of short-term investments and equipment and payments of
collocation fees. Net cash provided by financing activities for the three months
ended, March 31, 2000 was $832.1 million and primarily came from the issuance of
equity and senior notes as described above.
Our capital requirements may vary based upon the timing and success of our
rollout and as a result of regulatory, technological, and competitive
developments or if:
- demand for our services or our anticipated cash flow from operations is
less or more than expected;
- our development plans or projections change or prove to be inaccurate;
- we engage in any acquisitions; or
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- we accelerate deployment of our network services or otherwise alter the
schedule or targets of our rollout plan.
We believe that our existing cash and investment balances as of March 31,
2000 and anticipated future revenue generated from operations, will be
sufficient to fund our operating losses, capital expenditures, lease payments,
and interest payments through approximately December 2001. We expect our
operating losses and capital expenditures to increase substantially in the
near-term, primarily due to our network expansion. We expect that significant
additional financing will be required in the future. We may attempt to raise
financing through some combination of commercial bank borrowings, leasing,
vendor financings, or the private or public sale of equity or debt securities.
Future equity or debt financings may not be available to us at all, or, if
available, may not be on favorable terms. If we are unable to obtain financing
in the future, we will continue the expansion of our operations on a reduced
scale based on our existing capital resources.
FINANCIAL INFORMATION
The preceding discussion and analysis is based on our consolidated financial
statements and the related notes and should be read in conjunction with the
consolidated financial statements and the related notes included in this
prospectus.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. These forward-looking
statements address, among other things:
- our network rollout plans and strategies;
- development and management of our business;
- our ability to attract, retain and motivate qualified personnel;
- success of our strategic alliances;
- our ability to attract and retain customers;
- the extent of acceptance of our services;
- the market opportunity and trends in the markets for our services;
- our ability to upgrade our technologies;
- prices of telecommunication services;
- the nature of regulatory requirements that apply to us;
- our ability to obtain any required governmental authorizations;
- our future capital expenditures and needs;
- our ability to obtain financing on commercially reasonable terms;
- our ability to compete; and
- the extent and nature of competition.
These statements may be found in this section, in the front inside cover of
this prospectus, in the sections of this prospectus entitled "Summary," "Risk
Factors," "Use of Proceeds" and "Business" and in this prospectus generally.
We have based these forward-looking statements on our current expectations
and projections about future events. However, our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of risks facing us, including risks stated in "Risk Factors," or faulty
assumptions on our part. For example, assumptions that could cause actual
results to vary materially from future results include, but are not limited to:
- our ability to successfully market our services to current and new
customers;
- our ability to generate customer demand for our services in our target
markets;
- the development of our target market and market opportunities;
- market pricing for our services and for competing services;
- the extent of increasing competition;
- our ability to acquire funds to expand our network;
- the ability of our equipment and service suppliers to meet our needs;
- trends in regulatory, legislative and judicial developments;
- our ability to scale our business to meet the demands of our customers;
- our ability to control our corporate overhead while rapidly growing our
business;
- the mix of our services that our customers purchase at different prices;
- our ability to manage growth of our operations; and
- our ability to access regions and enter into suitable interconnection
agreements with incumbent carriers.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
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DESCRIPTION OF INDEBTEDNESS
In December 1997 and May 1998 we entered into 36-month lease lines for an
aggregate $26.5 million in lease financing with Sun Financial Group, Inc., now
GATX Capital Corporation, under which we lease office equipment,
telecommunications equipment, network equipment and furniture on an operating
lease basis. In connection with this leasing arrangement, we issued to GATX a
warrant to purchase 574,380 shares of our common stock at a price of $1.85 per
share. GATX transferred warrants to purchase an aggregate of 258,472 of these
shares to two parties. These transferred warrants have been exercised. The
remaining GATX warrant, exercisable for 315,908 shares of common stock, is
immediately exercisable. In March 1999, we entered into additional 36-month
lease lines for an aggregate of up to $24 million in lease financing with GATX
to be used for equipment. In connection with these March 1999 leases, we issued
to GATX warrants to purchase an aggregate of 45,498 shares of our common stock
at a price of $10.55 per share. These warrants are immediately exercisable. In
July 1999, we entered into an additional 36-month lease line for an aggregate of
up to $26 million in lease financing with GATX to be used for equipment. In
connection with this July 1999 lease, we issued to GATX a warrant to purchase
10,000 shares of common stock at a price of $50 per share. This warrant is
immediately exercisable. In April 1999, we entered into an agreement with Cisco
Systems Capital Corporation for up to $20 million in equipment lease financing
and issued to Cisco a warrant to purchase up to 75,000 shares of common stock at
an exercise price per share of $10.55. This warrant is immediately exercisable.
In August 1999, we entered into an additional 36-month lease line for an
aggregate of up to $30 million in lease financing with Cisco Systems Capital
Corporation to be used for equipment. In January and February 2000, we entered
into an additional 36-month lease line for an aggregate of up to $50 million in
lease financing with GATX to be used for equipment. In February 2000, we entered
into an additional $25 million in lease financing with Cisco Systems Capital
Corporation to be used for equipment.
We also have outstanding $290 million in aggregate principal amount at
maturity of senior discount notes, which we issued in May 1998. These 13 1/2%
notes were issued at a discount and raised net proceeds of approximately
$144.0 million. These 1998 senior discount notes are senior unsecured
obligations that mature with a principal amount of $290 million on May 15, 2008.
The discount amount is being accreted to interest expense for the first
five years of the 1998 senior discount notes; cash interest on the 1998 senior
discount notes will not accrue prior to May 15, 2003, but will do so after that
date and will be payable semi-annually each year, commencing November 15, 2003.
The 1998 senior discount notes are redeemable at our option, in whole or in
part, at any time after May 15, 2003 and, prior to May 15, 2001, out of the
proceeds of certain equity offerings, at predetermined redemption prices
together with accrued and unpaid interest through the date of redemption. Upon a
change of control, each holder of the 1998 senior discount notes may require us
to repurchase the notes at 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of purchase. The 1998 senior discount notes
contain restrictive covenants, including limitations on future indebtedness,
restricted payments, transactions with affiliates, liens, sale of stock of
subsidiaries, dividends, mergers and transfers of assets.
In addition, in April 1999 we issued $325 million aggregate principal amount
of 12 3/4% senior notes due 2009. In that offering, we raised net proceeds of
approximately $314.5 million, of which approximately $113.2 million was used to
purchase a portfolio of U.S. government securities to secure payment of the
first six scheduled interest payments on the 1999 senior notes. These senior
notes are our general unsecured obligations that mature on April 15, 2009. The
1999 senior notes are redeemable at our option, in whole or in part, at any time
after April 15, 2004 at predetermined redemption prices, together with any
accrued and unpaid interest through the date of redemption. Upon a change of
control, each holder of the senior notes may require us to purchase the notes at
101% of the principal amount thereof, plus any accrued and unpaid interest to
the date of purchase. The 1999 senior notes contain restrictive covenants,
including limitations on future indebtedness, restricted payments, transactions
with affiliates, liens, sale of stock of subsidiaries, entering new lines of
business, dividends, mergers and transfers of assets.
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BUSINESS
OVERVIEW
We are a leading provider of broadband local access communication services
to businesses and consumers. Our services include high-speed, "always on"
connections to the Internet and to private networks. We also offer a growing
suite of network features and applications including Internet services that
bring added value to our service offerings. We use multiple Digital Subscriber
Line (DSL) technologies to provide data transfer rates ranging from 128 kbps to
7.1 Mbps delivering data to the user and from 128 kbps to 1.5 Mbps receiving
data from the user. Accordingly, we believe that our peak network transfer rates
to and from the user are higher than those of other national DSL service
providers. For customers that subscribe at the 7.1 Mbps rate, our network
provides data speeds to the user up to 125 times the speed of the fastest
dial-up modem and over 55 times the speed of integrated services digital network
(ISDN) lines. We believe that our Internet Protocol (IP)-over-DSL network
capability is unique compared to other national DSL service providers because it
allows us to provide a broader range of IP internetworking capabilities in a
simpler, more cost-effective way than those offered by traditional networking
alternatives.
Our customers include Internet service providers (ISPs), telecommunications
carriers and broadband communication services resellers, which we refer to as
broadband service providers. We also sell to businesses or enterprises that are
not otherwise served by our broadband service provider customers. Internet
service providers and broadband communication services resellers typically
purchase our services in order to provide high-speed Internet access to their
business and consumer end users. Telecommunications carriers typically purchase
our services for resale to their Internet service provider affiliates and
business customers. Enterprise customers typically purchase our services
indirectly from our telecommunications carriers or directly from us to provide
employees, branch offices and other affiliates with high-speed remote access to
the enterprise's local and wide area networks.
We believe we have one of the nation's largest DSL networks with over 1,350
built or operational collocation sites in incumbent carrier central offices
providing access to approximately 35 million homes and businesses as of
March 31, 2000. As of March 31, 2000, we had approximately 20,000 DSL lines in
service and were providing service to approximately 3,400 broadband service
providers and businesses. Our broadband service provider customers include MCI
WorldCom, AT&T, Qwest, Level 3 Communications, Williams Communications,
Intermedia Communications, UUNET, Microsoft Network, Flashcom, PSINet, SAVVIS
Communications, CAIS Internet, Telocity, Phoenix Networks, Digital
Island/Sandpiper Networks and iPhysicianNet. Our enterprise customers include
Cisco, Ford Motor Company and SGI, among others. We believe our higher data
transfer rates, combined with our network features and applications, allow us to
record the highest average revenue per installed line per month among national
DSL service providers. From our inception in February 1997 through March 31,
2000 our average revenue per installed line was approximately $119 per month.
As of March 31, 2000, we offered our services in 46 markets and 83 of the
largest metropolitan statistical areas (MSAs) in the United States, of which
there are 314 total. We expect to complete the initial build-out of our network
by the end of 2000. At that time we anticipate that our services will be offered
in 70 markets and 108 MSAs, and our network will pass a total of 51 million
homes and businesses, representing approximately 45% of U.S. homes and 50% of
U.S. businesses.
In addition to our high speed access services, we plan to offer an
increasing variety of network features and applications such as voice-over-DSL.
We believe these new services are important to increase our revenue. First,
these services expand the size of our addressable market by enhancing and
enabling new broadband services, such as video streaming, that cannot be
practically achieved with narrowband communications connections. Second, certain
of these services require higher speed connections that may result in higher
average revenue per installed line per month for us. Third, some of these
services may contain additional network features and applications that may
provide us with
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additional recurring monthly revenue from our communication services resellers
and business customers.
To further our goal of offering network features and applications, we expect
to continue to enter into business arrangements and trials with broadband
service providers, such as our arrangements with Digital Island/Sandpiper
Networks, as well as telecommunications carriers, such as our arrangements with
MCI WorldCom and Level 3 Communications, and leading networking equipment
providers such as our arrangements with Cisco.
We intend to continue to explore expansion of our DSL network both in the
United States and internationally. In October 1999 we invested $5.3 million in
OCI Communications Inc., the parent company of Optel Communications Corporation,
a competitive local exchange carrier in Canada. This investment was made in
connection with our establishing a joint venture company, Rhythms Canada, with
Optel in January 2000. Rhythms Canada is expected to develop a Canadian DSL
network and offer dedicated high-speed DSL services to enterprise customers and
telecommunications carriers throughout Canada.
MARKET OPPORTUNITY
GROWING DEMAND FOR BROADBAND LOCAL ACCESS COMMUNICATIONS SERVICES
Demand for broadband local access communication services is growing at a
rapid rate as the use of the Internet, intranets and extranets increases.
Industry experts believe that by 2003, 55% of all enterprises in the United
States and 71% of all home-based businesses in the United States will be on-
line.
To remain competitive, small and medium-sized businesses increasingly need
high-speed Internet connections to maintain complex web sites, access critical
business information, communicate more effectively with employees, customers and
business partners, and participate in the rapidly growing e-commerce market.
According to industry analysts, Internet commerce revenue in the United States
will reach $556 billion by 2002.
Today, business spending for connecting remote workers, branch or affiliate
offices and corporate headquarters to each other and to customers, suppliers and
partners either through the Internet or private networks is large and growing.
Much of that growth will be driven by enterprises seeking to find a cost
effective way to make their remote workers, offices and affiliates as productive
as those who have access to all of the high performance communications and
networking resources available to workers located at the corporate headquarters.
Today, a record number of households use the Internet for e-mail,
information, entertainment and shopping. Increasingly, consumers are demanding
high-speed remote access connections. According to industry analysts, the number
of U.S. residential subscribers to high-speed Internet access services should
grow to 3.3 million by the end of 2000, and 16.6 million by 2004, up from
1.4 million at the end of 1999.
Rapid adoption of new applications and services that are enhanced or enabled
by broadband access is expected to further fuel the growth in broadband local
access communication services. Collaboration services, such as video
conferencing, are expected to grow rapidly, as are video and audio streaming
services. Industry experts project that revenues from video services will
increase from $469 million in 1998 to approximately $1.6 billion in 2002.
Broadcast programming and on-line shopping are expected to grow dramatically in
the consumer market.
The trend toward convergence of voice, data and video services over a
single, broadband, multimedia Internet Protocol network should further fuel the
demand for broadband local access communication services. Historically,
telecommunications service providers offered multiple, single
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purpose networks to deliver a range of voice and data services. Increasingly,
small businesses and consumers will be able to purchase a full range of local
and long distance voice services and features, Internet access services and
video services over a single, cost-effective, high-speed DSL connection.
Communications industry researchers project that by 2005, almost 25 million
lines of voice-over-DSL will be deployed worldwide -- with about one third of
these lines being deployed in North America.
DSL IS A COST-EFFECTIVE TECHNOLOGY FOR BROADBAND LOCAL ACCESS COMMUNICATION
SERVICES
We believe that traditional network alternatives are inadequate and costly
as compared to DSL. Only a fraction of buildings in the United States are
currently connected to high-speed fiber networks--typically large buildings in
metropolitan areas, or clusters of buildings in regional campus parks.
Consequently, the vast majority of connections to the Internet or private data
networks are through slow, dial-up modems connected to the traditional circuit
switched public telephone system. The data carrying capacity of the fastest
commercially available dial-up modem is only 56 kbps, and the capacity of
another alternative, ISDN, is only 128 kbps.
DSL technology dramatically increases the data, voice and video carrying
capacity of standard copper telephone lines. Our peak data transfer rates range
as high as 7.1 Mbps which is up to 125 times the speed of the fastest dial-up
modem and over 55 times the speed of ISDN lines. We anticipate that continued
advances in semiconductor technology will continue to increase peak data
transfer rates, and that equipment prices will decline as DSL technology
continues to be broadly deployed.
DSL services are generally favorably priced relative to other available
alternatives, and can be less complex to order, install and maintain.
Traditional T1 frame relay and private line services are considerably more
costly than a DSL service, as are heavily used ISDN services that are priced
based on usage. Consumer class DSL services generally are priced competitively
with cable modem services.
Because DSL technology uses existing copper telephone lines, a broad network
deployment can be implemented rapidly and requires a lower initial fixed
investment than some existing alternative technologies, such as fiber, cable
modems, wireless data and satellite data communications systems. A significant
portion of the cost of building a DSL network is directly related to the demand
of paying subscribers, resulting in a success-based deployment of capital.
Packet-based networks often are more efficient than traditional
point-to-point networks, and allow end users to connect to any location that can
be assigned an Internet Protocol address. Traditional point-to-point networks,
including the traditional telephone networks and private line networks, are less
efficient because they require a dedicated connection between two locations.
Packet-based networks allow multiple users to share connections between
locations.
FAVORABLE REGULATORY ENVIRONMENT EXISTS FOR NEW BROADBAND LOCAL ACCESS
COMMUNICATION PROVIDERS
The 1996 Telecommunications Act allows competitive carriers to leverage the
existing incumbent carrier infrastructure, as opposed to building a competing
infrastructure at significant cost. The 1996 Telecommunications Act was designed
to create an incentive for incumbent local exchange carriers that were formerly
part of the Bell system to cooperate with competitive carriers. These incumbent
local exchange carriers cannot provide long distance service until regulators
determine that the incumbent local exchange carrier has met a "checklist" test
showing that it is meeting the Act's requirements in opening its network and
markets to competition. The 1996 Telecommunications Act requires traditional
telephone companies, among other things:
- to allow competitive telecommunications companies to lease copper
telephone wires on a line-by-line basis;
- to provide central office space for the competitive telecommunications
companies' DSL and other equipment used to connect to the leased copper
telephone wires;
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<PAGE>
- to lease access on their central office fiber backbone to link the
competitive telecommunications companies' equipment; and
- to allow competitive telecommunications companies to use their operational
support systems to place orders and access their databases.
The FCC, in interpreting the 1996 Telecommunications Act, has emphasized the
need for competition-driven innovation in the deployment of advanced
telecommunications services, such as DSL services.
OUR COMPETITIVE STRENGTHS
WE OFFER AN ATTRACTIVE VALUE PROPOSITION COMPARED TO ALTERNATIVE LOCAL
ACCESS COMMUNICATIONS SERVICES
For end users that subscribe at the 7.1 Mbps rate, our network provides
transfer speeds over 55 times the speed of ISDN lines at monthly rates similar
to or lower than those for heavily used ISDN lines, and over four times the
speed of T1 private lines and frame relay circuits at a substantially lower
price. Because we use dedicated connections from each end user to the network of
our broadband service providers and business customers, end users can receive
dependable data transfer rates and reduce the risk of unauthorized access.
Unlike dial-up modems and ISDN lines, the DSL solution is "always on," and
provides 24 hour continuous connection. Users are not required to dial-up to
connect to the Internet or their local area network for each use. In addition,
our DSL network has been designed to allow us, for certain customers and
services, to proactively and continuously monitor our network to the end user's
DSL modem or router, eliminating the need for the end user to initiate a report
of network malfunctions, as is the case with dial-up modems or ISDN lines.
OUR NETWORK HAS BEEN DESIGNED TO BE FLEXIBLE AND EASILY UPGRADEABLE TO
SUPPORT NEW NETWORK FEATURES AND APPLICATIONS
Our network has been designed from the outset to be flexible and upgradeable
to support new network features and applications. Because our network utilizes
multiple technology platforms, we can provide higher end user speeds than other
national providers, a broad range of IP internetworking capabilities in addition
to traditional virtual point-to-point connectivity and various types of network
traffic, including data, voice and video.
The quality and characteristics of each end user's copper telephone wire are
different. Because we use a variety of technologies we are able to select a
solution that provides the highest speed available for each end user. As a
result, as of March 31, 2000, users on our network were capable of receiving
average data transfer rates of nearly 1.7 Mbps.
Our network supports traditional transmission protocols such as Asynchronous
Transfer Mode and frame relay, as well as the rapidly growing IP transmission
protocol. Our IP over DSL network capability allows us to provide a broad range
of IP internetworking capabilities in a simpler, more cost-effective manner
compared to traditional protocols. For example, our network can give each user
simultaneous access to the Internet and private networks using a single
connection, the ability to take advantage of distributed content caching
services in an internetworked environment, and the ability to add other emerging
IP services such as voice-over-IP using their existing connection.
Our network has also been designed to support multiple types of network
traffic, starting with data and expanding to voice applications, including a
variety of voice-over-DSL technologies, and video applications, including
conferencing and streaming. Our network can also be easily upgraded, as it has
been designed to incorporate new applications and features, thereby avoiding
costly and time consuming network upgrades.
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WE HAVE LEVERAGED OUR EARLY MOVER ADVANTAGE TO RAPIDLY EXPAND OUR DENSE,
NATIONAL NETWORK AND GROW OUR NUMBER OF LINES IN SERVICE
We were among the first to widely roll out national DSL services, offering
commercial services in our first market in April 1998. This early start enabled
us to rapidly expand our network to our targeted markets and develop early
relationships with customers requiring a dense, national footprint. Because our
initial network footprint in each market or MSA is extensive in coverage, we
typically are able to make our services available to at least 70% of our
customers' end user homes and businesses.
WE HAVE BEEN ABLE TO ESTABLISH CUSTOMER RELATIONSHIPS WITH RECOGNIZED
LEADERS IN THE NETWORKING INDUSTRY
We currently have strategic and/or customer relationships with many of the
major interexchange carriers and fiber backbone providers including MCI
WorldCom, AT&T, Qwest, Level 3 Communications, and Williams Communications. We
also have customer relationships with many of the leading national business and
consumer ISPs, including UUNET, Microsoft Network, PSINet, SAVVIS, Flashcom,
Telocity and Phoenix Networks. MCI WorldCom has designated us as their preferred
provider in its alternative carrier access provisioning system for DSL services
in certain circumstances. MCI WorldCom and Qwest together have committed to
purchase an aggregate 200,000 lines over a seven year period subject to
penalties for failure to reach target commitments. Under the terms of our
strategic partnership with Cisco, Cisco has agreed to jointly market and sell
our networking solutions to its customer base in conjunction with our
telecommunications carrier customers and engage in joint development projects
with us, including voice-over-DSL and video streaming applications.
OUR MANAGEMENT TEAM HAS EXTENSIVE EXPERIENCE
Our senior management team has extensive experience in developing next
generation networking businesses, including:
- Catherine Hapka, Chairman of the Board and Chief Executive Officer (former
Executive Vice President, Markets at U S WEST Communications, Inc. and
founder, President and Chief Operating Officer, !NTERPRISE Networking
Services--U S WEST's data networking business),
- Steve Stringer, President and Chief Operating Officer (former Global Chief
Operating Officer, GE Capital IT Solutions),
- John (Jay) W. Braukman, Chief Financial Officer (former Senior Vice
President of Global Finance, GE Capital IT Solutions),
- Scott Chandler, Senior Vice President, Global Business Development (former
President and CEO, C-COR.net),
- Richard H. Johnston, Chief Sales Officer (former Executive Vice President
of Sales, GE Capital IT Solutions),
- Rand Kennedy, Senior Vice President Networks (former Principal Network
Architect, CompuServe Incorporated),
- B.P. Rick Adams Jr., Chief Marketing Officer (former Group Vice President,
Marketing, MicroAge, Inc.) and
- Michael S. Lanier, Chief Information Officer (former President of
Technology Extension Corporation, L.L.C.)
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OUR BUSINESS STRATEGY
Our goal is to become the leading national service provider of high
performance networking solutions for broadband service providers and businesses.
We intend to implement the following strategies to achieve our goal:
COMPLETE OUR DENSE, NATIONAL NETWORK BUILD-OUT IN OUR TARGET MARKETS AND
MSAS
As of March 31, 2000, we offered service in 46 markets and 83 of the largest
MSAs in the United States. When our initial network build-out is completed,
which we expect to be by the end of 2000, our services will be offered in 70
markets and 108 MSAs, and our network will pass a total of 51 million homes and
businesses, representing approximately 45% of homes and 50% of businesses in the
United States.
Network installation on this scale requires significant time and resources.
Therefore, we believe our progress to date provides us a significant
time-to-market advantage over our present and future competitors. We have gained
significant build-out experience, which we believe will streamline our further
expansion both in the United States and select international markets.
In addition to our planned footprint covering 108 of the largest MSAs, our
initial footprint in each market is dense, and covers a substantial majority of
the central offices in each market that we enter. This is important, since our
Internet service provider customers, telecommunications carrier and broadband
communication services reseller customers desire to market their services
broadly in each market. Enterprise customers also require a dense footprint in
order to provide all employees remote access to the corporate network
irrespective of where they reside. Typically, our initial footprint in each
market serves a minimum of 70% of our target market. When sufficient demand
materializes in those central offices that were not a part of our original plan,
we intend to expand our build-out to include that central office.
MAINTAIN AND BUILD OUR SALES AND MARKETING RELATIONSHIPS WITH LEADING
BROADBAND SERVICE PROVIDER CUSTOMERS
We principally target Internet service providers, telecommunications
carriers and other broadband communications services resellers that can offer
their end user customers cost and performance advantages for Internet access or
private networks using our services. Our objectives in using these channels of
distribution is to increase our volume and reduce our costs by serving multiple
resellers and leveraging their selling efforts.
We currently serve the large business market through our relationships with
MCI WorldCom, AT&T and Qwest. We have fielded a direct applications and
technical support force to support our partners' solutions-based selling effort
in these large enterprises. In addition, as part of our alliance with Cisco,
Cisco has agreed to jointly market and sell our services to large businesses on
our behalf and on behalf of our telecommunications carrier customers. We believe
our investment in a direct applications and technical support force will lead to
a higher success rate for our telecommunications carrier customers, and a
preference for our services.
We primarily serve the small and medium business market through a number of
national and regional Internet service providers, including the affiliates of
our major telecommunications carrier customers. Currently, we have distribution
relationships with many of the major national Internet service providers
including UUNET, AT&T Internet Services (AIS), Qwest Internet Services, PSINet,
Intermedia Communications and SAVVIS Communications, and a growing number of
regional Internet service providers. In the future, we intend to continue to
build the number of relationships we have with these Internet service providers.
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We also market our broadband communications services to small and medium
businesses through our telemarketing and telesales division in markets where we
do not have Internet service providers reselling our services. In markets where
we have such Internet service provider relationships, we use our telemarketing
and telesales division to generate leads on behalf of our broadband service
providers.
We expect to continue to build relationships with the growing number of new
broadband communication service resellers who wish to resell our services as
part of their Internet-based or content services, such as our relationship with
iPhysicianNet.
In December 1999, we announced the availability of a consumer Internet
access service. Our consumer service is offered through Internet service
providers such as Flashcom, Telocity, DSLnetworks and Phoenix Networks. We plan
to add additional Internet service provider relationships in the future.
EXPAND THE NUMBER OF NETWORK FEATURES AND APPLICATIONS WE OFFER
We seek to have our network support multiple features and applications that
are enhanced and enabled by our broadband local access communications network.
Our objective is to offer multiple features and applications to our customers
that increase the value of our offering to their end users, thereby increasing
the number of subscribers on our network and the revenue we receive for each
network user. Network features and applications under development include
voice-over-DSL and frame relay over DSL.
In pursuing this objective, we intend to continue to collaborate with
leading industry broadband application service providers such as Digital
Island/Sandpiper Networks, as well as telecommunications carrier customers such
as MCI WorldCom, and leading networking equipment and software providers such as
Cisco and Microsoft to build our portfolio of network features and applications.
For example, in June 1999, MCI WorldCom and we, in conjunction with Cisco and
Jetstream Communications, successfully demonstrated multiple toll quality voice
and high-speed data communications over a single copper line utilizing DSL
technology. In addition, we are testing frame relay over DSL services with MCI
WorldCom and Intermedia Communications, and we are currently participating in
Microsoft's Windows Media Division's Broadband Jumpstart program to hold trials
of streaming media video technology.
LEAD THE INDUSTRY IN CUSTOMER SERVICE AND BUILD A REPUTATION FOR BEING A
DESIRABLE BUSINESS PARTNER
As part of our strategy to provide a high level of customer satisfaction to
obtain and retain customers and accelerate the adoption of our services, we
intend to continue to enhance our efforts to provide superior service and
customer care. Accordingly, we have developed a systematic approach to fully
integrate our operations with our broadband service provider customers'
operations to support functions such as order qualification, order entry,
customer service, installation, service assurance and billing. In addition, we
have invested and will continue to invest significant resources in process
improvement and fully automated customer support systems. Our Network Operations
Center is available to support our customers 24 hours a day, seven days a week.
For certain customers and services, we will guarantee high quality service by
providing carrier-class networking solutions including end-to-end proactive
network monitoring and management through our Network Operations Center, as well
as a full range of service level agreements. In addition, our network offers
multiple security features, and has been designed so that we can scale and
expand our network to meet demand.
CAPITALIZE ON NEW REGULATORY DEVELOPMENTS TO ADVANCE OUR BUSINESS
The Federal Communications Commission (FCC) mandated "line sharing" in a
November 1999 decision that becomes effective in mid 2000. Some details of
implementation of this mandate may be reconsidered by the FCC. Line sharing
requires existing incumbent local exchange carriers to permit competitive local
exchange carriers to add data services existing copper telephone lines to
provide
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services to the end-user. The Minnesota Public Utility Commission ordered line
sharing as a matter of state law in December 1999. The California Public Utility
Commission also ordered implementation of the FCC's order on line sharing and
called for a shorter implementation time frame in February 2000. In
February 2000, we successfully installed our first line sharing customer in
Minnesota.
Line sharing, where available, will allow us to provide our asymmetric DSL
service on the existing copper telephone lines as the existing incumbent local
exchange carrier user to provide their voice service until the FCC's line
sharing decision, we were required in every case to provision our asymmetric DSL
services over a separate copper telephone wire from that used by the incumbent
to provide its voice service, to the same customer, which required the
installation of an additional copper wire to the customer's location. Most, if
not all, of the traditional telephone companies provide their own asymmetric DSL
services on the same line as existing voice services.
We believe line sharing is an extremely important opportunity for us to
enhance customer service and reduce cost. First, line sharing should
significantly reduce the time it takes incumbent local exchange carriers to make
their copper telephone wires available for our use. Second, line sharing should
significantly reduce the one time installation cost in those cases where we do
not need to send a technician to the customer site to install the service.
Third, the monthly recurring charge we pay to the incumbent local exchange
carrier for the use of the copper telephone wire should decline since the
incumbent local exchange carrier does not incur a separate monthly charge for
the use of the copper telephone line for its own DSL service.
EVALUATE AND SELECTIVELY PURSUE ATTRACTIVE INTERNATIONAL MARKETS
In the future, we intend to replicate our network build-out, customer
acquisition and operational knowledge in selected, attractive international
market. In January 2000, we created a 50% owned joint venture with Optel
Communications Corporation, known as Rhythms Canada. Rhythms Canada is expected
to develop a Canadian DSL network and offer dedicated high-speed DSL services to
enterprise customers and telecommunications carriers throughout Canada. We will
continue to evaluate the merits of entering other international markets, as well
as the best way for us to enter into optimal business entry structure for each
market.
STRATEGIC PARTNERSHIPS
MCI WORLDCOM
In March 1999, we started a strategic partnership with MCI WorldCom in which
MCI WorldCom invested $30.0 million in us. Please see "Certain Relationships and
Related Transactions--Series C Purchase Agreement; Other Agreements with MCI
WorldCom."
- PROVIDING DSL SERVICES TO MCI WORLDCOM. We have been designated MCI
WorldCom's first choice in its alternative carrier access provisioning
system for DSL services in areas where we deploy our network for all new
DSL services, except for services to certain subsidiaries and in locations
where MCI WorldCom deploys its own DSL equipment. In addition, MCI
WorldCom has committed to sell a minimum of 100,000 business quality DSL
lines, subject to penalties for failure to reach target commitments. MCI
WorldCom will have 60 months to place orders for these lines, starting on
the date when we have 1,250 collocations in commercial service in at least
29 metropolitan statistical areas. As part of our agreement, we must
provide specified service levels and have available capacity.
- OBTAINING NETWORK SERVICES FROM MCI WORLDCOM. We have designated MCI
WorldCom as our preferred provider of network services, including
metropolitan area network services and long-haul backbone services. MCI
WorldCom has a right of first refusal to provide all of these services to
us at market competitive terms.
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- COLLABORATION. We are jointly developing voice and data applications over
a single DSL connection. For instance, in June 1999, MCI WorldCom and we,
in conjunction with Cisco and Jetstream Communications, successfully
demonstrated toll quality voice and high-speed data communications over a
single copper line utilizing DSL technology. We have also formed a working
group with MCI WorldCom to develop and implement the systems and
procedures necessary to jointly deploy DSL service nationwide. We will
collaborate with MCI WorldCom in selecting technologies and vendors to
support our network deployments.
MICROSOFT
In March 1999, we entered into a strategic partnership with Microsoft, in
which Microsoft invested $30.0 million in us. We are working with Microsoft to
trial a multiple feature consumer offering in Boston including high-speed
Internet access, Internet services, Microsoft Network connectivity and streaming
media. In conjunction with this trial, we are currently participating in
Microsoft's Windows Media Division's Broadband Jumpstart program to hold trials
of streaming media video technology.
QWEST
In April 1999, we entered into a customer relationship with Qwest, in which
Qwest invested $15.0 million in us. Pursuant to this relationship, among other
things, Qwest has committed to purchase from us performance class DSL services
for sale to its customers. In return, we have agreed to use Qwest's network and
application hosting services in certain situations. The combined DSL line
commitment from Qwest and MCI WorldCom totals 200,000 lines over several years.
Please see "Certain Relationships and Related Transactions--Series C Purchase
Agreement and Series D Purchase Agreement; Other Agreements with Qwest."
CISCO
In October 1998, we entered into a strategic partnership with Cisco, in
which Cisco agreed to work jointly with us to sell our services to its customers
including providing compensation to its sales representatives for selling our
services. In addition, Cisco has committed to a joint marketing program with us
to increase our market recognition among businesses and consumers. We have also
contracted with Cisco to manage and upgrade its remote access program for 8,500
teleworkers nationwide.
OUR SERVICE OFFERINGS
We offer our customers solutions that address many of their broadband access
networking needs. Our local connection services use a variety of DSL
technologies to deliver high-speed, "always on" local access. We also aggregate
traffic within metropolitan areas and route or switch the traffic to our
broadband service provider customers, or to a corporate network within the same
metropolitan area or another metropolitan area using our inter-network
connections. In addition to local connections and metropolitan and wide area
inter-network connections, we offer a growing suite of network features and
applications that bring additional value-added services to our customers.
LOCAL CONNECTION SERVICES
Our local connection services connect individual users or multiple users on
a local area network through our metropolitan network to our national network,
the Internet or a telecommunications carrier network using DSL technology over
traditional telephone lines. Our network is capable of data transfer rates
ranging from 128 kbps to 7.1 Mbps. Unlike dial-up modems and ISDN lines, our DSL
solution is "always on"; it does not require users to dial-up to connect to the
Internet or their local area network for each use.
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We place DSL equipment both at the customer premises -- a residence or
business -- and in the central office that services that specific customer
premises. There are typically many incumbent carrier central offices in each
metropolitan area. We connect the DSL equipment in each central office to one of
our Metro Service Centers so that we can route or switch network traffic to
either a local destination, a national destination, or the Internet.
For our local connection services, the speed and effectiveness of the DSL
connection will vary based on a number of factors, including the distance of the
end user from the central office and the condition of the copper telephone line
that connects the end user to the central office. The specific number of
potential users who will qualify for higher speeds will vary by central office
and will be affected by line quality. In the future, we intend to examine adding
additional high-speed local access technologies to our offering as they are
developed, including emerging wireless technologies. The chart below compares
the performance and range of our local connection services as of March 31, 2000.
<TABLE>
<CAPTION>
SPEED TO SPEED FROM RANGE*
END USER END USER (FEET) TECHNOLOGY**
- -------- ----------- -------- ------------
<C> <S> <C> <C>
144 kbps 144 kbps*** 50,000 IDSL****
256 kbps 256 kbps 18,000 SDSL****
384 kbps 384 kbps 15,000 RADSL
512 kbps 512 kbps 14,000 RADSL
768 kbps 768 kbps 12,000 RADSL
1 Mbps 1 Mbps 12,000 RADSL
1.5 Mbps 1.5 Mbps 8,000 SDSL****
3 Mbps 1 Mbps 10,700 RADSL
5 Mbps 1 Mbps 9,000 RADSL
7.1 Mbps 1.1 Mbps 7,800 RADSL
</TABLE>
- ------------------------
* Estimated maximum distance from the central office to the end user.
** The technologies listed below are more fully described in "--DSL
Technologies" below.
*** May be 128 kbps under some circumstances.
**** Cannot be used with line-sharing.
We offer three classes of broadband local access communication services, all
of which are available up to 50,000 feet from the central office which serves
the end user:
SELECT LINKS. Our Select Links offer is available in the following range of
speeds: 128 kbps x 128 kbps, 256 kbps x 256 kbps, 384 kbps x 384 kbps, 512 kbps
x 512 kbps, 768 kbps x 768 kbps, 1 Mbps x 1 Mbps and 1.5 Mbps x 1.5 Mbps. We
plan to make this service available soon in a range of additional speeds,
including 3 Mbps x 1 Mbps, 5 Mbps x 1 Mbps and 7.1 Mbps x 1.1 Mbps.
Our Select Links services are sold through Internet service providers,
telecommunications carrier customers and broadband communication services
resellers, and are primarily used by small and medium businesses for high-speed
Internet access.
Basic installation for our Select Links offering includes our standard
inside wiring service, installation and basic configuration of the fully
featured DSL router and service activation. Installation charges consist of a
one-time charge and may be discounted for large volume commitments, long term
end user contracts, and promotions.
COMPLETE LINKS. Our Complete Links service offers a fully managed Internet
Protocol (IP) over DSL service, which is available in all of our symmetric and
asymmetric speeds. Our Complete Links services are sold though Internet service
providers, broadband communications services resellers, and our internal sales
and marketing division, called the Channel Development Organization, in those
markets which are not otherwise served by our Internet service provider
customers. Our Complete Links services are primarily used by small and medium
businesses for high-speed Internet access, and enterprises for telework and
branch office connectivity.
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We offer a premium installation for our Complete Links offering that
includes our standard inside wiring service, installation and basic
configuration of the fully featured DSL router or modem, end-to-end service
activation and management, maintenance and support of the DSL router or modem.
Installation charges consist of a one-time charge and may be discounted for
large volume commitments and/or long term end user contracts and promotions.
CONSUMER LINKS. Our Consumer Links services are available at the following
speeds: 144 kbps x 144 kbps, 208 kbps x 208 kbps, 384 kbps x 272 kbps, 408 kbps
x 384 kbps, 768 kbps x 408 kbps, 1.6 Mbps x 408 kbps, 3 Mbps x 1 Mbps and 7.1
Mbps x 1.1 Mbps. Our Consumer Links services are sold though Internet service
providers and broadband communications services resellers, and are primarily
used for Internet access.
Basic installation for our Consumer Links offering includes our standard
inside wiring service, installation and configuration of a basic DSL modem, and
service activation. We also offer our premium installation option.
Prices for our broadband local access services vary depending upon the
performance level of the service. For example, a 144 kbps service is our lowest
priced service and our 7.1 Mbps is our highest priced service.
METROPOLITAN AREA AND WIDE AREA INTER-NETWORK CONNECTION SERVICES
For our broadband service provider and business customers, we offer two
high-speed connection services both within and among metropolitan areas.
METROPOLITAN LAN. Our metropolitan area inter-network connection service
allows us to aggregate traffic from each of the central offices within a
metropolitan area to an Internet service provider, telecommunications services
carrier, broadband communications services reseller or an enterprise customer
site within that same metropolitan area. We offer our Metropolitan LAN services
in two speeds. Our 1.544 Mbps service (DS-1) is suitable for small broadband
service providers and business customers, and is available in both asynchronous
transfer mode and Internet protocols. Our 45 Mbps service (DS-3) is intended for
large broadband service providers, and business customers, and is available in
two protocols--asynchronous transfer mode and Internet protocol. In addition to
monthly service charges, we impose nonrecurring order setup charges for
inter-network connection services.
U.S. LAN. Our wide area inter-network connection service currently operates
between each of the metropolitan areas in which we provide service, and allows
our Internet service provider customers the ability to quickly and
cost-effectively offer services in new markets, and our enterprise customers the
ability to connect affiliate offices and teleworkers nationwide. Our monthly
service charge varies depending on the number of local access connections and
the data transfer rate required by the customer.
NETWORK FEATURES AND APPLICATIONS
We intend to continue to add further network features and applications to
add additional value to our offering. We believe our strategy to provide
additional network features and applications will increase our revenue by
expanding the size of our addressable market, increasing the speeds required by
our customers and allowing us to receive additional recurring monthly revenue
from certain of our customers.
The features and applications that our network currently offers or enables
are listed below:
- INTERNET SERVICES. We bundle high-speed DSL-based local access with
Internet access services for small and medium business customers in
markets that are not otherwise served by our broadband service provider
customers. Our basic Internet services include Internet access using
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our Complete Links services, e-mail accounts and IP addresses. Optional
features include domain name transfer and registration, Web hosting
services, collocation services and virtual private network over DSL
capability. These services are provided in cooperation with Epoch
Internet.
- SERVICE SELECTION. We have implemented a service selection feature within
our network that enables end users to access multiple destinations,
including the corporate local area network, the corporate telephone
system, the Internet, customers, suppliers and partners, using the same
DSL access line. This feature alleviates the corporate network from
servicing Internet traffic to a teleworker.
- DYNAMIC HOST CONFIGURATION PROTOCOL FUNCTIONALITY. This feature relieves
network administrators from the burden of notifying each teleworker of
network configuration changes. The use of this protocol ensures that once
teleworkers start up their computers, the customer's server automatically
downloads all of his or her network configuration parameters.
- COLLOCATION SERVICES. We have announced plans to offer certain broadband
application service providers the ability to collocate their equipment in
our network. Collocation allows these providers to take advantage of our
distributed, fully routed IP network by placing their caching and hosting
equipment in our markets in order to seamlessly and cost-effectively
extend their network optimization services to their customers' end users
using our broadband communications access services.
- VIRTUAL PRIVATE NETWORK (VPN) OVER DSL. This service uses the public
Internet backbone or our private data networks in conjunction with our
high-speed DSL access connections, to create a channel for sharing
information and applications within a closed user group in different
locations. Our private VPN service is available for remote or branch
offices that require high-speed interoffice connectivity across multiple
locations and for teleworkers and other remote users who want secure
access to their corporate network and the Internet from home.
- VOICE OVER IP. Utilizing the IP over DSL capability of our network, we
enable or support our customers' implementation of voice over DSL services
through the addition of customer premises equipment and software. This
feature allows our business customers to extend the functionality of the
corporate telephone system directly into a teleworker's home. Benefits to
our business customers include increased worker productivity, reduced
second line expenses for voice service and the ability to aggregate and
control long distance charges.
- STREAMING. Our network supports streaming media services. For certain
customers and services, we provide guaranteed data transfer rates through
service level agreements. For example, we are working with iBEAM
Broadcasting Corporation to provide a business-class video streaming
service. In addition, we are currently participating in Microsoft's
Windows Media Division's Broadband Jumpstart program to hold trials of
streaming media video technology for consumers.
In the future, we plan to continue to expand our network features and
applications by working closely with leading broadband applications service
providers, networking equipment companies, and our telecommunications carrier
customers. Future development efforts include frame relay-over-DSL.
Our expected development of voice-over-DSL will allow our broadband service
provider customers to provide a full range of local and long distance voice
services in addition to high-speed Internet and private networking services to
their end user customers over a single DSL connection. We are currently
conducting trials for a voice-over-DSL service with MCI WorldCom and Intermedia.
If we develop frame relay-over-DSL, it would allow our telecommunications
carrier customers to replace expensive, low-speed, local access frame relay
connections currently purchased from the incumbent local exchange carrier with
affordable, high-speed DSL connections that utilize the frame
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relay protocol. We are currently conducting frame relay-over-DSL trials with MCI
WorldCom and other telecommunications carriers.
CUSTOMERS, SALES AND MARKETING
We offer our services to broadband service providers and businesses not
otherwise served by our broadband service providers. As of March 31, 2000, we
were providing services to approximately 3,400 broadband service providers and
business customers, and had approximately 20,000 DSL lines in service. The
following is a list of selected Internet service provider, telecommunications
carrier and enterprise customers:
<TABLE>
<S> <C> <C>
SELECT INTERNET SERVICE SELECT TELECOMMUNICATIONS SELECT ENTERPRISE CUSTOMERS
PROVIDER CUSTOMERS CARRIERS
UUNET MCI WorldCom Cisco
Microsoft Network AT&T Ford Motor Company
PSINet Qwest QUALCOMM
Digex Level 3 Communications SGI
SAVVIS Williams Communications
CAIS Internet Intermedia Communications
Flashcom
Telocity
Phoenix Networks
DSLnetworks
</TABLE>
INTERNET SERVICE PROVIDERS
Our business-focused Internet service provider customers resell our
services, typically to small and medium businesses, and our consumer-focused
Internet service providers, including Telocity, Flashcom and Microsoft Network,
resell our services to consumers. We offer our business-focused Internet service
providers our Select Links services or our Complete Links services, and our
consumer-focused Internet service providers our Consumer Links services. We also
offer our Internet service provider customers our metropolitan area and wide
area inter-network connection services. Our Internet service provider customers
can then combine our services with their own services to offer a total solution
to their customers.
TELECOMMUNICATIONS CARRIER CUSTOMERS
A key element of our strategy is to enter into relationships with leading
telecommunications carriers, including interexchange carriers and competitive
telecommunications carriers in order that they may resell our services to their
customers. For example, we have entered into commercial agreements with each of
MCI WorldCom, AT&T, Qwest, Level 3 Communications, Williams Communications and
Intermedia providing for the resale of our services, primarily to their carrier,
Internet service provider, broadband communication services resellers,
enterprise and small business customers.
In order to advance our telecommunications carrier customers' sales effort
to enterprises, and develop preference for the Rhythms solution, we have fielded
a carrier applications and technical support force to support our customers'
solutions-based selling efforts. We reinforce our applications and technical
support force through our alliance with Cisco. Cisco has agreed to assist us and
certain of our telecommunications carrier customers in marketing and selling our
broadband local access communications services.
We supplement our carrier applications and technical support efforts by
offering sales support services that may include training, joint proposal
development, lead generation, joint participation in
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national and regional customer events and seminars, and press announcements.
Additionally, we support our carrier customers' efforts through dedicated
support teams and complete operations integration including qualifying potential
end users for our service, ordering connections, installing equipment on the
customer premises, turning up the service, monitoring the network and invoicing
our carrier customer on a single bill.
BROADBAND COMMUNICATIONS SERVICES RESELLERS
An emerging component of our strategy is to enter into relationships with
broadband communications services resellers that include firms with existing
Web-based customer relationships that wish to resell broadband applications and
access services to their customers. It also includes a number of emerging
integrators of broadband communications infrastructure and applications services
to serve a specialized or vertical market need. For example, in January 2000 we
entered into a relationship with iPhysicianNet to provide its physician
customers with Web-based multimedia and fully IP internetworked broadband local
access services. We believe that this channel will enable us to penetrate our
target markets more rapidly.
CHANNEL DEVELOPMENT ORGANIZATION
In markets where we do not have established indirect channels, we market our
services directly to business customers through our Channel Development
Organization. Our Channel Development Organization seeks to sell Internet
access, telework and remote branch connectivity solutions to small and medium
sized businesses, through direct marketing and consultative selling over the
phone. As of March 31, 2000, we had roughly 120 persons dedicated to this
effort. Our contracts are typically one to two years in length, and we receive
an average revenue per line per month that is higher than what we receive
through our broadband service provider channels. Once we have established
indirect channels in a market, our Channel Development Organization will provide
direct marketing, lead generation and telesales support services for our
customers.
CUSTOMER SUPPORT
We supplement certain of our Internet service providers' and broadband
communication services resellers' sales efforts by offering sales tools and
marketing programs that may include market development funds, promotions and
incentives, launch programs, sales collateral, joint participation in national
and regional customer events and training. Through our Channel Development
Organization, we will also provide direct marketing, lead generation and
telesales support services.
We support our customers through sales and marketing personnel dedicated to
each type of channel and to each of our largest broadband service provider
customers. Additionally, we support our broadband service provider customers
through complete operational integration including qualifying potential end
users for service, ordering connections, installing equipment on the customer
premises, turning up the service, monitoring the network and invoicing the
customer on a single bill.
Our agreements with our broadband service providers vary widely. Generally,
our agreements have a one to three year term, and are based on negotiated prices
that decline with increasing levels of volume achievement. Certain of our
broadband service provider customers have committed to sell specified quantities
of DSL lines, subject to penalties for failure to reach these target
commitments. In many cases, our broadband service providers have selected one or
two, and perhaps as many as three, DSL service providers as suppliers in each
market.
Our goal is to be selected as the preferred supplier or one of the preferred
suppliers by broadband service providers in each metropolitan area where we
operate. When we are selected as a preferred supplier within a given market, we
may enter into nonstandard joint marketing arrangements to promote our DSL
services. We may also offer additional price discounts in return for our
selection as a
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preferred supplier with first right of refusal on orders. See "Risk Factors--We
depend on third parties for the marketing and sales of our network services."
BRAND CAMPAIGN
In December 1999 we launched a two-phase national brand development
campaign, including television, print, radio and online advertisements. The
first phase consists of television and national print advertising, and is
intended to build awareness for our brand and educate the market about our
broadband service offering and differentiate our services. The second phase,
which focuses on product messaging, will run in local newspapers and drive-time
radio in 30 major metropolitan markets, and is designed to generate demand for
our broadband services.
CUSTOMER SERVICE, OPERATIONS AND SUPPORT SYSTEMS
We offer our broadband service provider and business customers a one-stop
broadband service solution including network implementation, customer service,
technical support and ongoing network monitoring and billing. For major
broadband service providers and businesses, we establish dedicated teams to work
with the account to develop and implement a complete, fully automated operations
integration plan in order to ensure that our service implementation, maintenance
and billing proceeds smoothly.
NETWORK IMPLEMENTATION
Working with a broadband service provider or business customer we connect
our customer's premises and their end users to our network by ordering circuits
from the incumbent local exchange carrier or a competitive telecommunications
company, connecting our customer's premises and end users to our network,
testing the connections, configuring our customers' end users' endpoints,
connecting to our customers' routers or switches and monitoring the connections
from our Network Operations Center.
We are implementing fully automated, Web-based, service qualification and
order entry tools using standard industry interfaces. For large customers, we
develop and implement a personalized, fully automated, private extranet site for
service qualification and order entry. Orders can be placed individually, in
real time through our Web site, or in bulk through our customers' private
extranet sites.
We are installing systems to ensure that our customers' orders automatically
flow through to the incumbent local exchange carriers' order entry systems. In
October 1999, we announced our selection of NightFire SupplierExpress-TM- from
NightFire Software to automate our process for pre-ordering, ordering and
provisioning unbundled local loops from the incumbent local exchange carrier.
We outsource field service personnel and, to a more limited extent, use our
own field service personnel to perform any necessary inside wiring, install and
configure the endpoint and, if required, install a network interface card and
configure the end user's PC or laptop. Currently, we offer two types of
installation service. Our basic installation service includes a standard inside
wiring service, endpoint installation and configuration, and line test. Our
premium installation service also includes installing one network interface card
in the end user's computer, configuring one computer and a complete end-to-end
service test.
CUSTOMER SERVICE, TECHNICAL SUPPORT, AND NETWORK MONITORING
Our Network Operations Center in Denver provides network surveillance
through standard Simple Network Management Protocol tools for all equipment in
our network. Because we have complete end-to-end visibility of our network, we
are able to proactively detect and correct the majority of our customers'
maintenance problems remotely for certain customers and services. Our goal is to
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proactively detect and repair 90% of our customer's maintenance problems before
our customers become aware of a problem.
Customer initiated maintenance and repair requests are managed and resolved
primarily through our customer advocacy team in our Network Operations Center.
We provide support to our customers 24 hours a day, seven days a week. Our
broadband service provider and business customers typically serve as the initial
contact for service and technical support while we provide the second level of
support.
We utilize a trouble ticket management system to communicate customer
maintenance problems from the customer advocacy team to our Network Operations
Center engineers and the field service engineers. Because our Network Operations
Center is fully staffed 24 hours a day, seven days a week, we believe our
ability to provide superior proactive maintenance is significantly enhanced.
BILLING
Customer bills are currently issued on a monthly basis through an internal
billing system. In the future, we expect our billing system to electronically
interface with our customers and support a broad array of billing options. Our
Customer Service Center manages customer billing inquiries. In the future,
billing inquiries will also be supported through our Web-based interfaces. In
November 1999 we announced our intention to utilize Portal Software's
Infranet-TM- customer management and billing software.
OPERATIONAL SUPPORT SYSTEMS
We are implementing what we believe to be industry leading operational
support systems for DSL broadband access services. We are installing complete
flow through order management and provisioning systems with system-to-system
interfaces. These systems will allow us to scale our business rapidly because
they will eliminate many manual processes such as order taking and verification,
line ordering, receipt and testing, network path configuration, equipment
configuration and billing.
Our system architecture is designed to enable rapid order fulfillment and
reduce the cost of customer support. We use a set of standard, off-the-shelf
systems to support our business processes. All business functions, including
sales, ordering, provisioning, maintenance and repair, billing, accounting and
decision support use a single database management system from Oracle. Complete
systems integration is accomplished through the use of Vitria middleware to
ensure rapid scaling of all business functions and uninterrupted growth.
NETWORK ARCHITECTURE
The network design features that we believe are important to our customers
are:
CARRIER-CLASS NETWORK MANAGEMENT
Our network is designed to be carrier-class throughout. For example, it has
been designed with redundant network electronics and transmission paths. We have
the ability to electronically view our entire network including the DSL modem
located at the end user's premise from our Network Operations Center in Denver.
Because we proactively monitor and manage the network at all times for certain
customers and services, we can identify and address network problems quickly. In
addition, for those customers that choose our Internet Protocol-over-DSL
capability, we are able to monitor and manage Internet Protocol applications all
the way to the end user location.
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SCALEABLE NETWORK PERFORMANCE
We anticipate significant volume on our network over time. Accordingly, we
have designed our network for scalability and consistently high performance as
network usage grows. Our local access network is designed so that each line in
service is a dedicated connection, and as such, does not contend for bandwidth
or capacity with other users as they are added to the network. Our metropolitan
and wide area inter-networking services have been designed to support a wide
array of service level agreements that guarantee specific levels of network
performance to our broadband service provider and business customers.
We believe that our network is unique in that we support Internet Protocol
routing as well as Asynchronous Transfer Mode switching equipment in our
network. IP networks allow our customers' end users to easily access thousands
of Internet or private network destinations without the need to establish
physical permanent virtual connections for each destination, creating a much
less complex, cost-effective, easily scalable network for our customers and
their end users.
Our network support systems are also scaleable. We use industry standard,
off-the-shelf software to support network provisioning, installation, testing,
monitoring and trouble management. We have implemented and are continually
enhancing these systems using Web-based, distributed client-server systems
architecture. This approach will allow us to grow our customer support and
network management capabilities as customer demand increases.
NETWORK SECURITY
Non-dedicated access, such as dial-up modem or ISDN lines, or dedicated
access to the public Internet, represents security risks for business networks.
These security risks are mitigated through the use of virtual private network
technologies such as authentication, tunneling, encryption and through the use
of permanent virtual circuits that define a logical dedicated connection between
the end user and the corporate network. Our network enables businesses to fully
employ these virtual private network technologies by using their own equipment
at the edges of our network, or optionally purchasing virtual private networking
services from us. For our IP-over-DSL network implementation, we have added
several layers of security for our customers including Multi-Protocol Label
Switching (MPLS), policy routing, network segmentation by customer and the
implementation of access control at the end user's DSL router.
MULTIPLE NETWORK FEATURES AND APPLICATIONS CAPABILITY
Our network has been designed from the outset to be flexible and upgradeable
to support new network features and applications. Because our network utilizes
multiple technology platforms, we can provide higher end user speeds than other
national providers, a broad range of IP internetworking capabilities in addition
to traditional virtual point-to-point connectivity, and various types of network
traffic starting with data, but expanding to voice and video as well. Our use of
multiple technology platforms, also allows us to leverage the research and
development capabilities of several different equipment manufacturers to provide
a growing number of network features and applications in our offering.
Because the quality and characteristics of each end user's telephone wire is
different, we are able to select a technology solution that provides the highest
speed available for each end user. As of March 31, 2000, users on our network
were capable of receiving average data transfer rates of 1.7 Mbps.
Our network supports traditional transmission protocols such as Asynchronous
Transfer Mode and Frame Relay, as well as the rapidly growing IP transmission
protocol. Our IP-over-DSL network capability allows us to provide a broad range
of IP internetworking capabilities in a simpler, more cost-
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effective manner than by using more traditional protocols. For example, our
network can give each user simultaneous access to the Internet and private
networks using a single connection, the ability to take advantage of distributed
content caching services in an internetworked environment and the ability to add
other emerging IP services such as voice over IP using their existing
connection.
Our network has also been designed to support multiple types of network
traffic, starting with data but expanding to voice applications, such as voice
over DSL and video applications such as conferencing and streaming. Our network
is also easily upgradeable in that it has been designed to incorporate new
applications and features with customer premises equipment and software alone,
avoiding costly, time consuming network upgrades.
Our network is an overlay network; we place our network electronics on an
already existing physical network that we lease from existing transport services
providers -- local access telephone wires from incumbent local exchange
carriers, metropolitan fiber from incumbent local exchange carriers or
competitive telecommunications carriers and long-distance backbone fiber from
long distance (interexchange) carriers. The primary components of our network
are customer endpoint devices, local transport, our connection points,
high-speed metropolitan area network, our Metro Service Centers, our backbone
and our Network Operations Center.
CUSTOMER ENDPOINT DEVICES
Depending upon the wishes of our broadband service provider customer, we
will either include the end user endpoint device -- the DSL modem or router --
as part of our complete service offering, or buy our DSL endpoints from our
suppliers for resale to our service provider for use by their end users. For our
business customers, we always include the end user endpoint device as part of
our complete service offering. We configure and install these modems on the end
user's premises along with any basic on-site wiring needed to connect the modem
to the copper telephone line leased from the incumbent carrier. Currently,
almost all of the DSL modem and central office-based DSL multiplexing equipment
we use for a single connection over a copper telephone line must come from the
same vendor since there are no existing interoperability standards for the
equipment used in our higher speed services.
LOCAL TRANSPORT
Our local transport connects customer endpoint devices to our network using
a DSL-capable copper telephone wire leased by us from the incumbent local
exchange carrier under terms specified in our interconnection agreements. In
many cases, DSL-capable lines result from modification of voice grade lines to
carry digital signals, at times involving an additional one-time or monthly
charge relative to voice grade lines. For private line access, the transport is
leased copper or fiber trunks provided by the incumbent local exchange carrier
or a competitive telecommunications carrier.
CONNECTION POINTS
Through our interconnection agreements with the incumbent local exchange
carriers, we secure collocation space in central offices where we intend to
offer our services. In each of these connection points, we connect our end
users' DSL endpoint equipped copper telephone lines to our DSL multiplexing
equipment (DSLAMs) to provide high-speed DSL signals to them. Each of our
connection points is designed to offer the same high reliability and
availability standards as the incumbent carrier's own central office space. We
expect to place our equipment in certain of the central offices in any
metropolitan area that we enter. As of March 31, 2000, we had connection points
in over 1,350 central offices. Although we expect that many connection points
will be physically located within the central office, we have placed and will
continue to place our connection points in locations immediately adjacent to
central offices, when collocation space within the central office is not
available.
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HIGH-SPEED METROPOLITAN AREA NETWORK
In each of our targeted metropolitan area markets, we operate a private
metropolitan area network. The network consists of high-speed Asynchronous
Transfer Mode communications circuits that we lease from competitive carriers or
incumbent local exchange carriers to connect our connection points to the Metro
Service Center. The metropolitan area network operates at 45 Mbps (DS-3) today,
and can be upgraded to 155 Mbps (OC-3) and 622 Mbps (OC-12) in the future. We
lease a substantial portion of this capacity from MCI WorldCom, as described in
"--Strategic Partnerships."
METRO SERVICE CENTERS
The Metro Service Center is a physical point of presence within a
metropolitan area where local access traffic is aggregated from the connection
points over our high-speed metropolitan area network. Although we generally
expect to have one Metro Service Center in each of our targeted metropolitan
areas, in larger metropolitan areas, we may have two. The Metro Service Center
houses our Asynchronous Transfer Mode switches and Internet Protocol routers. We
design our Metro Service Centers for high availability including battery backup
power, redundant equipment and active network monitoring.
BACKBONE
Our backbone interconnects our Metro Service Centers so that communications
traffic can be transported among different metropolitan areas. We currently
lease frame relay backbone and Asynchronous Transfer Mode backbone capacity from
a number of long distance carriers. We have almost completed upgrading our
nationwide network to two protocols -- Asynchronous Transfer Mode and Internet
Protocol.
NETWORK OPERATIONS CENTER
Our entire network is managed from the Network Operations Center located in
Denver. From these centers, we provide end-to-end network monitoring and
management using advanced network management tools 24 hours a day, seven days a
week. This enhances our ability to address performance or connection issues
before they affect our end user's experience. From the Network Operations
Center, we monitor the equipment and circuits in each Metro Service Center, each
metropolitan area network, each connection point, individual end user lines and
endpoints. A second Network Operations Center is under construction. Please see
"Risk Factors--A system failure or breach of network security could cause delays
or interruptions of service to our customers."
We are pursuing a program of ongoing network development. Our engineering
efforts focus on the design and development of new technologies and services to
increase the speed, efficiency, reliability and security of our network and to
enable network features and applications developed by us or by third parties.
Please see "Risk Factors--We may be unable to effectively expand our network
services and provide high performance to a substantial number of end users."
DSL TECHNOLOGIES
We utilize various DSL equipment and technologies from different vendors.
The various DSL technologies allow us to offer a range of connection speeds and
value-added network features and applications. Actual speeds that can be
provided over a particular line are a function of the distance from the end user
or local area network to the central office and the quality of the copper
telephone line. The basic features and the market positioning of our primary DSL
technologies include:
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RATE ADAPTIVE DIGITAL SUBSCRIBER LINE (RADSL)
RADSL technology allows each end user or local area network to utilize the
full digital capability of the underlying telephone line. Speeds reach up to 7.1
Mbps downstream and up to 1.1 Mbps upstream if the end user or local area
network is within 7,800 feet from the central office. We use this technology for
end users or local area networks needing very high access speeds. Our target
customers for RADSL connections consist of small and medium businesses and
branch offices of large businesses needing T-1 or higher speeds. We believe that
these businesses often find the cost of dedicated private line or frame relay
services to be prohibitive. Our RADSL connection competes favorably on a price
and performance basis relative to traditional fractional T-1 and frame relay
services.
Our RADSL service also provides the highest speed of any of our DSL services
for bandwidth intensive applications, and is necessary to support line sharing,
which we believe will offer us significant customer service and cost advantages
when implemented.
SYMMETRIC DIGITAL SUBSCRIBER LINE (SDSL)
Our SDSL technology allows end users and local area network to achieve up to
1.5 Mbps speeds both downstream and upstream. Depending on the quality of the
copper telephone line, 1.5 Mbps can typically be achieved if the end user or
local area network is within 8,000 feet, or approximately 1.5 miles, from the
central office.
INTEGRATED DIGITAL SUBSCRIBER LINE (IDSL)
IDSL technology allows us to reach all end users or local area networks
within a central office serving area within 50,000 feet of the end user or local
area network distance from the central office. Our IDSL service operates at up
to 144 kbps in each direction. This service can use existing integrated services
digital network (ISDN) equipment at the end user site, and is targeted at the
integrated services digital network (ISDN) replacement market. For information
intensive users, we believe that IDSL compares favorably with integrated
services digital network (ISDN) on a price/performance basis when the monthly
flat rate IDSL charge is compared with the per minute integrated services
digital network (ISDN) charge. We also offer IDSL to end users that have lines
that do not consist of continuous copper, such as digital line carrier equipped
lines that are partially copper and partially fiber.
COMPETITION
The markets for broadband service provider and business broadband access
services are extremely intense. We face competition from many competitors with
significantly greater financial resources, well-established brand names and
large, existing installed customer bases. Moreover, we expect the level of
competition to intensify in the future. We expect significant competition from:
INCUMBENT LOCAL EXCHANGE CARRIERS. All of the largest incumbent local
exchange carriers in our target markets have begun offering DSL services or have
announced their intention to provide DSL services in the near term. As a result,
the incumbent local exchange carriers represent strong competition in all of our
markets, and we expect this competition to intensify. The incumbent local
exchange carriers have well-established brand names and reputation, for high
quality service in their regions, possess sufficient capital to deploy a DSL
network rapidly and own the central offices and copper telephone wires.
Importantly, they can offer both digital data services until line sharing is
widely implemented and their existing voice services over a single line to
achieve a lower cost per line per month than we can. Certain of the incumbent
local exchange carriers have priced their consumer DSL services as low as
$19-$29 per line per month, placing very high pricing pressure on our Consumer
Links services.
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TRADITIONAL INTEREXCHANGE CARRIERS. Many of the leading traditional
interexchange carriers, such as AT&T, MCI WorldCom and Sprint, are rapidly
expanding their networks to include high-speed, local access services, and/or
acquiring other companies with high-speed local access capabilities, including
cable modem (such as AT&T's acquisition of TCI and its pending acquisition of
MediaOne, both of which can offer cable modem service). They also have
interconnection agreements with the incumbent local exchange carriers and have
secured collocation spaces from which they have begun to offer competitive DSL
services. When combined with their extensive, existing metropolitan and wide
area networks, and full range of Internet and private networking services, they
are able to provide their customers with a complete broadband communications
offer capable of voice, data and video solutions. Because these competitors have
significantly greater financial resources, enjoy strong brand recognition, and
have large, existing business and consumer franchises, they represent
significant competition.
NEWER INTEREXCHANGE CARRIERS. The newer interexchange carriers, such as
Williams Communications, Qwest and Level 3 Communications, are building and
managing high bandwidth, packet-based metropolitan and wide area networks
nationwide. Additionally, they are constructing large hosting centers in major
metropolitan areas and partnering with broadband applications services providers
to provide a full range of broadband communications services to their Internet
service providers, telecommunications carriers, broadband communications
services resellers, and in some cases their business and consumer customers.
Some carriers also have interconnection agreements with the incumbent local
exchange carriers and have secured collocation spaces from which they could
begin to offer competitive DSL services. Because they could extend their
existing fiber networks to include high-speed, local access services using DSL,
either alone, or in partnership with others, they represent a significant
competitive threat.
CABLE MODEM SERVICE PROVIDERS. Cable modem service providers, like
Excite@Home, AT&T (through its acquisition of TCI and pending acquisitions of
MediaOne) and AOL, and their cable partners, are offering offering high-speed
Internet access over hybrid fiber coaxial cable networks to consumers, and
increasingly, businesses. Similar networks are being deployed in some areas by
the electric power company, by itself or in partnership with other service
providers. Where deployed, these networks provide Internet access services
similar to our services, and in some cases at higher speeds. In certain cases
cable modem services are priced lower than our services, partly because
operators share the bandwidth available on their cable networks among multiple
end users.
WIRELESS AND SATELLITE DATA SERVICE PROVIDERS. Wireless and satellite data
service providers are developing wireless and satellite-based Internet and
private network connectivity. We may face competition from terrestrial wireless
services, including two Gigahertz (Ghz) and 28 Ghz wireless cable systems
(Multi-channel Multipoint Distribution System (MMDS) and Local Multipoint
Distribution System (LMDS)), and 18 Ghz and 39 Ghz point-to-point microwave
systems. For example, the FCC has recently revised its rules to permit ITFS and
MMDS licensees to use their systems to offer two-way services, including
high-speed data, rather than solely to provide one-way video services. The FCC
also recently auctioned spectrum for LMDS services in all markets, and later
this year will auction spectrum in the 700 MHz range, currently being used for
television channels 60-69. This spectrum is expected to be used for wireless
cable and telephony services, including high-speed digital services, to both
businesses and individual consumers. In addition, companies such as Teligent,
Advanced Radio Telecom and WinStar Communications hold point-to-point microwave
licenses to provide fixed wireless services such as voice, data and video
conferencing.
We also may face increasing competition from satellite-based systems.
Motorola Satellite Systems, Inc., Hughes Space Communications (a subsidiary of
General Motors Corporation), Teledesic LLC, and others have filed applications
with the FCC for global satellite networks which can be used to provide
broadband voice and data services, and in some cases have begun providing such
services. The FCC has
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authorized several of these applicants to operate their proposed networks, and
some are providing commerical service.
INTERNET SERVICE PROVIDERS. Internet service providers provide Internet
access to residential and business customers. These companies generally provide
such Internet access over the incumbent carriers' circuit switched networks at
integrated services digital network (ISDN) speeds (either 64 kbps or 128 kbps)
or below. However, some Internet service providers have begun offering DSL-based
access using their own DSL services such as HarvardNet and InterAccess, or DSL
services offered by the incumbent local exchange carrier or other DSL-based
competitive local exchange carriers. Because certain large, national Internet
service providers, such as Verio and Concentric, have made investments in our
competitors, and entered into joint marketing arrangements nationwide, it is
difficult for us to recruit these Internet service partners as customers, and as
a result, they represent important competitors.
ONLINE SERVICE PROVIDERS. Online service providers include companies such
as AOL, and the Microsoft Network (MSN) that provide, over the Internet and on
proprietary online services and networks, content and applications ranging from
news and sports to consumer video conferencing. These services are designed for
broad consumer access over telecommunications-based transmission media, which
enable the provision of digital services to the significant number of consumers
who have personal computers with modems. In addition, they provide Internet
connectivity, ease-of-use and consistency of environment. Many of these online
service providers have developed their own access networks for modem
connections. If these online service providers were to extend their access
networks to include DSL or other high-speed service technologies, they would
become competitors of ours.
COMPETITIVE LOCAL EXCHANGE CARRIERS. Certain competitive carriers,
including Covad Communications Group and NorthPoint Communications, offer
DSL-based broadband access services using a business strategy similar to ours.
In addition, regional competitive carriers, including HarvardNet, Network Access
Solutions Corp. Blue Star and DSL.net, offer DSL-based access services that
compete with the services we offer. Other voice competitive local exchange
carriers, such as NEXTLINK Communications, Allegiance Communications and MGC
Communications, have also announced that they have or will deploy DSL-based
broadband access services. Conditions attached to the merger between SBC and
Ameritech may make entry and operation in affected regions easier for our
competitors. The 1996 Telecommunications Act specifically grants competitive
carriers the right to negotiate interconnection agreements with incumbent
carriers, including interconnection agreements that may be identical in all
respects to our agreements.
Many of these competitors are offering, or may soon offer, technologies and
services that will directly compete with some or all of our service offerings.
Such technologies include integrated services digital network (ISDN), DSL,
wireless and satellite data and cable modems. Please see "Risk Factors:--The
market in which we operate is highly competitive, and we may not be able to
compete effectively, especially against established industry competitors with
significantly greater financial resources, for more details about this risk."
Some of the competitive factors we face include:
- transmission speed,
- reliability of service,
- breadth of service availability,
- price/performance,
- network security,
- ease of access and use,
- content bundling,
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- customer support,
- brand recognition,
- operating experience,
- ability to scale,
- capital availability and
- exclusive contracts.
INTERCONNECTION AGREEMENTS WITH INCUMBENT CARRIERS
Interconnection agreements with incumbent carriers are critical to our
business. These agreements cover a number of aspects of our relationships with
incumbent carriers, including:
- the price we pay to lease and the access we have to the incumbent
carrier's copper lines;
- the removal by the incumbent carrier of equipment or electronics from
lines to enable these lines to transmit DSL signals;
- the price and terms for collocation of our equipment in the incumbent
carrier central offices;
- the price we pay and the access we have to the incumbent carrier's
transport facilities;
- the ability we have to access conduits and other rights of way the
incumbent carrier uses to construct its own network facilities;
- the operational support systems and interfaces that we can use to place
orders and report and monitor the incumbent carrier's response to our
requests;
- the dispute resolution process we use with the incumbent carrier to
resolve disagreements on the terms of the interconnection contract; and
- the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of our
relationship with the incumbent carrier.
We have signed interconnection agreements with eight different major
incumbent carriers covering 36 states and the District of Columbia. In many
cases, incumbent carriers do not agree to the provisions in interconnection
agreements that we request, and we have not consistently prevailed in obtaining
all of the provisions we desire. We may be unable to continue to sign
interconnection agreements with incumbent carriers. If we are unable to enter
into, or experience delay in obtaining, interconnection agreements, this
inability or delay may materially and adversely affect our business and
financial prospects. The incumbent carriers are also permitting competitive
carriers to adopt previously signed interconnection agreements.
Our interconnection agreements have a maximum term of three years, requiring
us to renegotiate the existing terms in the future. We may be unable to extend
our existing interconnection agreements or renegotiate new agreements on
favorable or any terms. In addition, our interconnection agreements are subject
to state commission, Federal Communications Commission and judicial oversight.
These bodies may modify the terms or prices of our interconnection agreements in
ways that would adversely affect our business and financial prospects.
GOVERNMENT REGULATION
A significant portion of the services that we offer, particularly through
our wholly owned subsidiaries, Rhythms Links Inc., formerly ACI Corp., and
Rhythms Links Inc.--Virginia, formerly ACI Corp.--Virginia, may be subject to
regulation at the federal, state and/or local levels. Future federal or
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state regulations and legislation may be less favorable to us than current
regulation and legislation and therefore have a material and adverse impact on
our business and financial prospects. In addition, we may expend significant
financial and managerial resources to participate in proceedings setting rules
at either the federal or state level, without achieving a favorable result.
FEDERAL LEGISLATION AND REGULATION
The 1996 Telecommunications Act, enacted on February 8, 1996, substantially
departs from prior legislation in the telecommunications industry by
establishing local exchange competition as a national policy. This act removes
state regulatory barriers to competition and preempts laws restricting
competition in the local exchange market.
The 1996 Telecommunications Act in some sections is self-executing, but in
addition, the Federal Communications Commission issues regulations that identify
specific requirements upon which we and our competitors rely in implementing the
changes it prescribes. The outcome of these various ongoing Federal
Communications Commission rulemaking proceedings or judicial appeals of such
proceedings could materially affect our business and financial prospects.
The 1996 Telecommunications Act, and the Federal Communications Commission's
initial rules interpreting such act, encouraged increased local competition. The
federal appeals court for the Eighth Circuit reviewed some of the initial rules,
and overruled some of its provisions, including some rules on pricing and
nondiscrimination. In January, 1999, the United States Supreme Court reversed
elements of the Eighth Circuit's ruling, finding that the Federal Communications
Commission has broad authority to interpret the 1996 Telecommunications Act and
issue rules for its implementation, specifically including authority over
pricing methodology. The Supreme Court upheld the Federal Communications
Commission's orders to the incumbent carriers to combine unbundled elements for
competitors, and to allow competitors to pick and choose among provisions in
existing interconnection agreements. The Supreme Court also found that the
Federal Communications Commission's interpretation of the rules for establishing
unbundled elements was not consistent with the 1996 Telecommunications Act, and
required the Federal Communications Commission to reconsider its delineation of
unbundled elements. The Federal Communications Commission's replacement decision
on unbundled elements reaffirmed the right of CLECs like Rhythms to obtain
access to the necessary unbundled elements in the incumbent network. This
decision remains subject to reconsideration appeal.
In November 1998, the Federal Communications Commission ruled that DSL
services provided as dedicated access services in connection with interstate
services such as Internet access are interstate services subject to the Federal
Communications Commission's jurisdiction. In November, 1999 the Federal
Communications Commission, upon further reconsideration, reiterated this
decision. On March 24, 2000 the federal court of appeals for the D.C. Circuit
vacated the Federal Communications Commissions' order with respect to dial-up
Internet traffic, without addressing the jurisdictional nature of DSL services.
In addition, in the spring of 1998, four of the regional Bell Operating
Companies petitioned the Federal Communications Commission, and they and others
have initiated legislative efforts since then, to be relieved of certain
regulatory requirements in connection with their own DSL services, including
obligations to unbundle DSL loops, but not the obligation to unbundle the loops
we purchase for our DSL services, and to resell DSL services. In October 1998,
the Federal Communications Commission ruled that DSL services are
telecommunications services subject to the requirements of the 1996
Telecommunications Act mandating that the Bell operating companies unbundle such
services and offer them for resale. In October 1998, the Federal Communications
Commission also issued a Notice of Proposed Rulemaking indicating its intention
to clarify expanded rights of competitive carriers for collocation, access to
copper loops, and various other issues of consequence to competitive carriers
deploying DSL services. The Federal Communications Commission also indicated its
intention to allow
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incumbent carriers to create separate affiliates for their DSL businesses that
would have to operate as competitive carriers and would be permitted to operate
free of the resale and unbundling obligations of the 1996 Telecommunications
Act. The final outcome of these decisions, originally scheduled to be announced
on January 28, 1999, had been postponed by the Federal Communications Commission
while it considered the impact of the Supreme Court's ruling on the 1996
Telecommunications Act. On March 31, 1999, the Federal Communications Commission
issued a decision on collocation issues which was generally favorable to the
competitive carriers. This decision has been appealed to the D.C. Circuit by
U S WEST and GTE. On March 17, 2000, the D.C. Circuit vacated and remanded
certain aspects of the Commission's decision. The Commission decision on remand
could impact the terms and conditions governing our ability to collocate. In the
same decision the Federal Communications Commission established further
proceedings to consider issues related to unbundled network elements. In
December of 1999, the Federal Communications Commission determined that by
June of 2000, incumbents must allow data carriers to provide service over the
same line that the incumbent provides its own voice services--otherwise known as
"line sharing". These decisions are subject to reconsideration and appeal. In
addition, state commission determination of the prices for these new elements
could significantly impact our business interest.
STATE REGULATION
Some of our services, particularly those of our subsidiaries, Rhythms Links
Inc. and Rhythms Links Inc.--Virginia, may be classified as intrastate services
subject to state regulation. All of the states where we operate, or will
operate, require some degree of state regulatory commission approval to provide
certain intrastate services. In most states, intrastate tariffs are also
required for various intrastate services, although we are not typically subject
to price or rate of return regulation for tariffed intrastate services. Actions
by state public utility commissions could cause us to incur substantial legal
and administrative expenses.
Under the 1996 Telecommunications Act, if we so request, incumbent carriers
have a statutory duty to negotiate in good faith with us for agreements for
interconnection and access to unbundled network elements. These negotiations are
conducted on a region-wide basis, and individual agreements are then signed for
each of the states in the region for which we have made a request. We have
signed interconnection agreements with SBC Communications, Bell Atlantic,
BellSouth, GTE, Pacific Bell, U S WEST, Cincinnati Bell and Sprint. We have
signed an interconnection agreement with Cincinnati Bell for Ohio and Kentucky.
We have signed agreements with SBC Communications for Illinois, Michigan,
Indiana, Ohio, Wisconsin (formerly Ameritech) and California (formerly Pacific
Bell). We have signed agreements with Bell Atlantic for the District of
Columbia, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Virginia,
Connecticut, Delaware, New Hampshire and Rhode Island. We are currently
negotiating an agreement for each of those Bell Atlantic states and are
simultaneously negotiating an agreement for West Virginia. We have signed
agreements with BellSouth for Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina and Tennessee. We have signed
agreements with GTE for California, Florida, North Carolina, Washington and
Texas and are currently completing agreements for Ohio, Oregon and Virginia. We
have signed agreements with U S WEST for Arizona, Colorado, Minnesota, Oregon,
Washington, Iowa, Nebraska, New Mexico, North Dakota, Montana and Utah. In
addition, we have signed an arbitrated agreement with SBC for Texas, and are
currently negotiating for Kansas and Missouri. We have signed agreements with
Sprint for Florida, Minnesota, Nevada, New Jersey, North Carolina, Ohio,
Pennsylvania, Tennessee and Virginia and with the Southern New England Telephone
Company for Connecticut and with Frontier Telephone of Rochester, Inc. for
service in upstate New York. We have also signed amendments to interconnection
agreements with Bell Atlantic and U S WEST to govern line sharing, and are
negotiating line sharing amendments with BellSouth, GTE, Sprint, Cincinnati Bell
and Frontier.
During these negotiations, either the incumbent carrier or we may submit
disputes to the state regulatory commissions for mediation and, after the
expiration of the statutory negotiation period set
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forth in the 1996 Telecommunications Act, we may submit outstanding disputes to
the states for arbitration. We arbitrated with SBC Communications Inc. in Texas
the terms of our interconnection agreement with Southwestern Bell for Texas. On
November 30, 1999 the Texas Public Utilities Commission Arbitrators issued an
Award deciding most issues in favor of Rhythms' positions, and ordered the
parties to conclude the negotiations by adopting language consistent with the
Award. On February 7, 2000, the full Commission approved the interconnection
agreement proposed by the Parties implementing the Arbitrator's Award, and
rejected requests by SBC for rehearing of the Arbitrator's Award. This Order
remains subject to additional requests for rehearing or appeal. We are presently
pursuing public utility commission arbitrations in order to establish the terms
and conditions of line sharing, against Bell Atlantic in New York, Pennsylvania,
and Maryland, against SBC in California, Texas, and Illinois, against BellSouth
in Georgia and Florida, and against GTE in California, Texas and Florida. These
interconnection agreements and the results of any arbitrations may not be on
terms that are entirely satisfactory to us.
Under the 1996 Telecommunications Act, states have begun and, in a number of
cases, completed regulatory proceedings to determine the pricing of unbundled
network elements and services, and the results of these proceedings will
determine the price we pay for, and whether it is economically attractive for us
to use, these elements and services.
We are subject to requirements in some states to obtain prior approval for,
or notify the state commission of, any transfers of control, sales of assets,
corporate reorganizations, issuances of stock or debt instruments and related
transactions. Although we believe such authorizations could be obtained, there
can be no assurance that the state commissions would grant us authority to
complete any transactions.
LOCAL GOVERNMENT REGULATION
Should we in the future decide to operate our own transport facilities over
public rights-of-way, we may be required to obtain various permits and
authorizations from municipalities in which we operate such facilities. Some
municipalities may seek to impose similar requirements on users of transmission
facilities, even though they do not own such facilities. If municipal
governments impose conditions on granting permits or other authorizations or if
they fail to act in granting such permits or other authorizations, our business
could be adversely affected.
EMPLOYEES
As of March 31, 2000, we had approximately 1,400 employees. We believe that
our future success will depend in part on our continued ability to attract, hire
and retain qualified personnel. Competition for such personnel is intense, and
we may be unable to identify, attract and retain such personnel in the future.
None of our employees are represented by a labor union or are the subject of a
collective bargaining agreement. We have never experienced a work stoppage and
believe that our employee relations are good.
PROPERTIES
Our headquarters are located in facilities consisting of approximately
240,000 square feet in Englewood, Colorado, which we occupy under various leases
that expire in January 2002, 2004 and 2008. These leases may be extended. We
also lease space for network equipment installations and business offices in a
number of other locations.
LEGAL PROCEEDINGS
On February 18, 1999, we filed a complaint for declaratory relief in San
Diego County Superior Court, North County against Thomas R. Lafleur.
Mr. Lafleur is a former employee of the Company.
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After he left, he was sent a check for the repurchase or buy-back of his
unvested shares. Mr. Lafleur refused to cash this check. The declaratory relief
action is to determine that his shares were unvested and thus properly
repurchased. We have amended our complaint to allege additional causes of
action, including fraud, breach of contract and interference with prospective
economic advantage. On or about March 26, 1999, Mr. Lafleur filed an answer to
the complaint and also filed a cross-complaint against us. The cross-complaint
has been amended a number of times and seeks compensatory and punitive damages.
The trial for this matter began on May 5, 2000. We are in negotiations to
resolve this matter. If such negotiations are not successful, we intend to
continue to vigorously defend against the amended cross-complaint. We are
currently accounting for these 438,115 shares as treasury stock.
We are aware of the filing of a legal action by i2 Technologies, Inc. in the
United States District Court in the Northern District of Texas on January 7,
2000 challenging our use of the name "Rhythms" on various grounds and alleging
that our use of that name infringes certain trademarks owned by i2 Technologies.
We deny that it infringes any legitimate trademark rights of i2 Technologies, in
part on the grounds that we have priority in the Rhythms name with respect to
the goods and services provided by us and that our use of those marks is not
likely to cause confusion among the consumers of our services, and the services
provided by i2 Technologies, respectively. We intend to vigorously defend the
continued use of our name in the manner in which we have used it in the past and
our interests in the name "Rhythms".
In addition, we are subject to state commission, Federal Communications
Commission and court decisions as they relate to the interpretation and
implementation of the 1996 Telecommunications Act, the interpretation of
competitive carrier interconnection agreements in general and our
interconnection agreements in particular. In some cases, we may be deemed to be
bound by the results of ongoing proceedings of these bodies. We therefore may
participate in proceedings before these regulatory agencies or judicial bodies
that affect, and allow us to advance, our business plans.
We are presently pursuing public utility commission arbitrations in order to
establish the terms and conditions of line sharing, against Bell Atlantic in New
York, Pennsylvania, and Maryland, against SBC in California, Texas, and
Illinois, against BellSouth in Georgia and Florida, and against GTE in
California, Texas and Florida. These interconnection agreements and the results
of any arbitrations may not be on terms that are entirely satisfactory to us.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table shows the names, ages and positions of our executive
officers, directors and key employees. Their respective backgrounds are
described below.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- -------- -----------
<S> <C> <C>
Catherine M. Hapka........................ 45 Chief Executive Officer and Chairman
Steve Stringer............................ 45 President and Chief Operating Officer
John (Jay) W. Braukman.................... 46 Chief Financial Officer
B.P. Rick Adams, Jr....................... 62 Chief Marketing Officer
Scott C. Chandler......................... 38 Senior Vice President, Global Business
Development
Rand A. Kennedy........................... 42 Senior Vice President, Networks
Michael S. Lanier......................... 56 Chief Information Officer
Richard H. Johnston....................... 58 Chief Sales Officer
Jeffrey Blumenfeld........................ 52 Chief Legal Officer and General Counsel
David J. Shimp............................ 54 Senior Vice President, Human Resources
Kevin R. Compton.......................... 41 Director
Keith B. Geeslin.......................... 47 Director
Michael Levitt............................ 41 Director
Susan Mayer............................... 50 Director
William R. Stensrud....................... 49 Director
John L. Walecka........................... 40 Director
Edward J. Zander.......................... 53 Director
</TABLE>
All the officers identified above serve at the discretion of our Board of
Directors. There are no family relationships between any persons identified
above. The following are brief biographies of the persons identified above.
CATHERINE M. HAPKA has been our Chief Executive Officer and a director since
June 1997. In addition, she was elected chairman of our board of directors in
June 1999. Prior to joining us, Ms. Hapka served as President of NETS, Inc., an
electronic commerce software company, from March 1997 to May 1997. NETS, Inc.
filed a bankruptcy petition in May 1997. Prior to joining NETS, Inc., Ms. Hapka
served as Executive Vice President, Markets, for U S WEST Communications, Inc.
from January 1995 to October 1996. In this capacity, Ms. Hapka led business and
consumer telecommunications units responsible for the voice, data, wireless,
video and long distance businesses. From 1991 to 1994, Ms. Hapka served as
founder, President and Chief Operating Officer of the !NTERPRISE Networking
Services Unit of U S WEST. Prior to joining U S WEST, Ms. Hapka held general
management positions with General Electric and McKinsey & Co., Inc.
STEVE STRINGER has been our President and Chief Operating Officer since May
1999. Prior to joining us, Mr. Stringer served in various positions at GE
Capital from 1991 to May 1999, most recently as Global Chief Operating Officer
of GE Capital IT Solutions. At GE Capital, Mr. Stringer also held the position
of President and CEO of the United States Division, President of the Midwest and
Atlantic regions and CEO of GE Capital's Federal Systems group.
JOHN (JAY) W. BRAUKMAN became our Chief Financial Officer in April 2000.
Prior to joining us, Mr. Braukman served in various positions at GE for nearly
25 years. Mr. Braukman's career with GE spanned 9 different business divisions
including GE Motors, Transportation & Power Systems along with GE Capital. Most
recently, Mr. Braukman was Senior Vice President of Global Finance at GE Capital
IT Solutions.
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B.P. RICK ADAMS, JR. became our Chief Marketing Officer in June 1999. From
September 1998 until he joined us in June 1999, Mr. Adams was President of Adams
Consulting Group, a consulting practice specializing in marketing, strategic
planning, sales and communications. From December 1996 to April 1998, Mr. Adams
served as Group Vice President, Marketing at MicroAge, Inc. From April 1990 to
November 1996, Mr. Adams held various management positions at AT&T where he
served as Vice President, Sales Support for the Americas and Vice President,
Marketing and Business Development at AT&T-NCR, and as Marketing Vice President
for AT&T Global Business Communications Systems.
SCOTT C. CHANDLER has served as our Senior Vice President, Global Business
Development since April 2000 and prior to that, Chief Financial Officer since
April 1998. From August 1996 to April 1998, Mr. Chandler served as President and
Chief Executive Officer of C-COR.net, a manufacturer of broadband
telecommunications equipment. From June 1990 to August 1996, Mr. Chandler served
in various positions at U S WEST and its subsidiaries, most recently as Vice
President and General Manager of U S WEST Cable and Multimedia from September
1995 to August 1996. While at U S WEST, Mr. Chandler also served as Vice
President and General Manager of the U S WEST subsidiary, !NTERPRISE AMERICA,
from January 1994 to August 1995 and as Director of Vendor Relations and Channel
Support of !NTERPRISE Networking Services from January 1992 to December 1993.
RAND A. KENNEDY, has been our Senior Vice President, Networks since October
1999. Prior to that, Mr. Kennedy was our Vice President, Network Engineering.
Mr. Kennedy oversees the design, engineering, construction and management of our
networks nationwide, as well as driving the design, implementation and
management of the Network Operations Center in Denver. Mr. Kennedy was
previously Principal Network Architect for CompuServe Incorporated. From 1995 to
1996, he directed the engineering of CompuServe's global 500+ Points of Presence
(POP) network. While at CompuServe, Mr. Kennedy was awarded a United States
Patent for communications technology involving financial card authorization.
Mr. Kennedy has over 17 years of experience designing and implementing
next-generation network architectures for CompuServe, including frame relay, ATM
and IP.
MICHAEL S. LANIER has been our Chief Information Officer since May 1999.
Prior to joining us, Mr. Lanier was most recently President and CEO of the
Technology Extension Corporation, L.L.C., a consulting firm specializing in
business systems architecture and design, a position he held from March 1996 to
April 1999. Prior to that Mr. Lanier served as Chief Information Officer at
Intelligent Electronics, Inc. from May 1993 to May 1996. In addition,
Mr. Lanier held various information technology positions with companies such as
Bank of America, Charles Schwab and DHL Worldwide Express.
RICHARD H. JOHNSTON has been our Chief Sales Officer since November 1999.
Prior to that, he served as our Chief Sales Officer--Channels, beginning
July 1999. Mr. Johnston has over 30 years in the technology business, primarily
in sales and sales management positions with IBM. Before retiring from IBM in
1992, he spent seven years in channel management. Prior to joining us, he was
Vice President of Sales for Access Graphics, a GE Capital company. As a member
of GE Capital's IT Solutions group, Mr. Johnston served as Executive Vice
President of Sales until January 1999.
JEFFREY BLUMENFELD has been our Chief Legal Officer and General Counsel
since August 1997, and has been a partner in the Washington, D.C. law firm of
Blumenfeld & Cohen since 1984, which specializes in pro-competition advocacy for
technology-intensive companies. Since 1995, Mr. Blumenfeld has served as senior
trial counsel to the Antitrust Division of the U.S. Department of Justice in
several matters. Before starting Blumenfeld & Cohen in 1984, Mr. Blumenfeld held
positions with the U.S. Department of Justice from 1973 to 1984, most recently
as Chief of the U.S. v. AT&T staff of the Antitrust Division. Mr. Blumenfeld is
an adjunct professor of communications law at the Georgetown University Law
Center. Under his employment agreement, Mr. Blumenfeld has agreed to expend a
minimum of approximately 24 hours a week in his capacity as one of our officers.
For more
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information on Mr. Blumenfeld's relationship with us, please see "Certain
Relationships and Related Transactions--Legal Services."
DAVID J. SHIMP has served as our Senior Vice President, Human Resources,
since June 1999, and prior to that, served as our Chief Marketing Officer
beginning October 1998. Prior to joining us, Mr. Shimp was a partner at LAI Ward
Howell, Inc., a professional services firm, where he implemented that firm's
first systems group and was a leader in the technology practice during his
tenure from January 1991 to October 1998. Previously, Mr. Shimp held management
positions at McKinsey & Co.
KEVIN R. COMPTON has been a director since July 1997. Since 1990,
Mr. Compton has served as a general partner of Kleiner Perkins Caufield & Byers,
a venture capital investment firm. Mr. Compton is a director of Citrix Systems,
Inc., Global Village Communication, Inc., OneWorld Systems, Inc., Verisign, Inc.
and Corsair Communications, Inc., and is also a director of several privately
held companies. Mr. Compton was elected a director as the nominee of Kleiner
Perkins Caufield & Byers, under the terms of a voting agreement which has
subsequently been terminated.
KEITH B. GEESLIN has been a director since July 1997. Since 1988,
Mr. Geeslin has served as a general partner of The Sprout Group, a venture
capital investment firm. Mr. Geeslin is a director of Actel Corporation, Quintus
Corporation, GlobeSpan Corporation, SDL, Inc. and Paradyne Corporation, a DSL
equipment manufacturer and supplier to us, and is also a director of several
privately held companies. For more details about Mr. Geeslin's director
positions, please see "Certain Relationships and Related Transactions--Director
Relationships." Mr. Geeslin was elected a director as the nominee of The Sprout
Group, pursuant to the terms of a voting agreement which has subsequently been
terminated.
MICHAEL LEVITT has been a director since March 2000. Mr. Levitt is a partner
of Hicks, Muse, Tate & Furst Incorporated and is involved in originating,
structuring and monitoring Hicks Muse's investments and is building
relationships with investment banks and commercial banking firms worldwide
Mr. Levitt serves as a director of AMFM Corp., AMFM: Corp., Awards.com, El
Sitio, Inc., G.H. Mumm/Perrier Jouet & Cie., International Home Foods, Inc.,
Peoplelink, Inc., RCN Corporation, RealPulse.com STC Broadcasting, Inc.
Mr. Levitt was elected a director by the holders of the Series E preferred
stock, pursuant to the terms of the Series E preferred stock purchase agreement.
Please see "Certain Relationships and Related Transactions."
SUSAN MAYER has been a director since March 1999. Ms. Mayer is the President
of the MCI WorldCom Venture Fund and a Senior Vice President of MCI WorldCom
Inc. Previously, she was Senior Vice President of MCI Communications Corporation
from 1994 to 1998. From 1996 to 1997, Ms. Mayer was also President and Chief
Operating Officer of Sky MCI. From 1993 to 1994, Ms. Mayer was Vice President of
MCI Communications Corporation.
WILLIAM R. STENSRUD has been a director since our inception in
February 1997 and also served as our President and Chief Executive Officer from
February 1997 to June 1997. Mr. Stensrud has been a general partner at the
venture capital investment firm of Enterprise Partners since January 1997. From
June 1996 through December 1996, Mr. Stensrud served as President of Paradyne
Corporation. Previously, from February 1992 to March 1996, Mr. Stensrud served
as President and Chief Executive Officer of Primary Access Corporation.
Mr. Stensrud is a director of Juniper Networks and Paradyne Corporation, a DSL
equipment manufacturer and supplier to us, and of several privately held
companies. For more details about Mr. Stensrud's director positions, please see
"Certain Relationships and Related Transactions--Director Relationships."
Mr. Stensrud was elected a director as the nominee of Enterprise Partners, under
the terms of a voting agreement which has subsequently been terminated.
JOHN L. WALECKA has been a director since July 1997. Mr. Walecka is a
founding partner of Redpoint Ventures, formed in October 1999. Redpoint is a
technology-focused venture capital investment firm. From 1984 to 1999,
Mr. Walecka had been at Brentwood Venture Capital, a venture capital investment
firm, and has been a general partner since 1990. Mr. Walecka is a director of
several privately held companies. Fore more details about Mr. Walecka's director
positions, please see "Certain
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Relationships and Related Transactions--Director Relationships." Mr. Walecka was
elected a director as the nominee of Brentwood Venture Capital, under the terms
of a voting agreement which has subsequently been terminated.
EDWARD J. ZANDER has been a director since March 1999. Since 1987,
Mr. Zander has held various management positions at Sun Microsystems, Inc.,
where he currently serves as its Chief Operating Officer, a position he has held
since February 1998. Mr. Zander is a director of Documentum, Inc. and one
privately held company.
All of our executive officers are appointed annually by and serve at the
discretion of the Board of Directors. All of our executive officers are at-will
employees.
CLASSIFIED BOARD
Our board of directors is divided into three classes. The term of office and
directors consisting of each class is as follows:
<TABLE>
<CAPTION>
CLASS DIRECTORS TERM OF OFFICE
- ----- --------- --------------
<S> <C> <C>
Class I.............. Keith B. Geeslin expires at the annual meeting of stockholders in
Edward J. Zander 2003 and at each third succeeding annual meeting
thereafter
Class II............. Susan Mayer expires at the annual meeting of stockholders in
William R. Stensrud 2001 and at each third succeeding annual meeting
John L. Walecka thereafter
Class III............ Catherine M. Hapka expires at the annual meeting of stockholders in
Kevin R. Compton 2002 and at each third succeeding annual meeting
thereafter
</TABLE>
The classification of directors has the effect of making it more difficult
to change the composition of the board of directors.
Michael Levitt was elected to the Board by the holders of the Series E
preferred stock pursuant to the term of the Series E preferred stock purchase
agreement and serves at the discretion of the holders of the Series E preferred
stock. Hicks Muse has the right to appoint one representative to our Board of
Directors provided that they continue to hold 40% of the Series E Preferred
Stock purchased by them or the underlying common stock or any combination
thereof.
COMMITTEES OF THE BOARD OF DIRECTORS
We have a standing compensation committee currently composed of Messrs.
Stensrud, Walecka and Zander. The compensation committee reviews and acts on
matters relating to compensation levels and benefit plans for our executive
officers and key employees, including salary and stock options. The compensation
committee is also responsible for granting stock awards, stock options and stock
appreciation rights and other awards to be made under our existing incentive
compensation plans.
We also have a standing audit committee composed of Ms. Mayer and
Messrs. Compton and Geeslin. The audit committee is primarily responsible for
approving the service performed by the Company's independent auditors and
reviewing their reports regarding the Company's practices and systems of
internal accounting controls.
DIRECTOR COMPENSATION
Directors do not receive compensation for services provided as a director or
for participation on any committee of our Board of Directors. All directors are
reimbursed for their out-of-pocket expenses in serving on our Board of Directors
or any of the Board's committees.
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EXECUTIVE COMPENSATION
The following table shows information about the compensation awarded to,
earned by or paid to our current Chief Executive Officer and our four other most
highly compensated executive officers during 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS OPTIONS(#) COMPENSATION
- ------------------------------ -------- -------- ----------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Catherine M. Hapka(1)............ 1999 $350,000 $178,838 240,000(2) $ --
Chairman and Chief Executive 1998 339,583 134,584 -- --
Officer 1997 163,654 50,000 4,381,131(3) --
Steve Stringer(4)................ 1999 157,690 150,000 720,252(5) 65,654(6)
President and Chief Operating 1998 -- -- -- --
Officer 1997 -- -- -- --
Michael S. Lanier(7)............. 1999 186,538 99,433(8) 300,000(5) --
Chief Information Officer 1998 -- -- -- --
1997 -- -- -- --
David J. Shimp(9)................ 1999 175,935 46,375 -- 62,428(6)
Senior Vice President, Human 1998 33,205 36,902 300,000(2) --
Resources 1997 -- -- -- --
Scott C. Chandler(10)............ 1999 180,962 44,509 96,000(2) 55,299(6)
Chief Financial Officer 1998 129,577 28,746 384,000(2) --
1997 -- -- -- --
</TABLE>
- ------------------------
(1) Ms. Hapka has been employed by us since June 1997, and the amount listed
sets forth her compensation since such date.
(2) Represents the number of shares of common stock purchased upon the exercise
of options.
(3) Represents 3,504,905 shares of common stock issued upon the exercise of
options and 876,226 shares of common stock issued upon the automatic
conversion at the initial public offering of 365,094 shares of Series A
preferred stock purchased by Ms. Hapka in 1998.
(4) Mr. Stringer has been employed by us since May 1999, and the amount listed
sets forth his compensation since such date.
(5) Represents the number of shares of common stock that may be issued upon the
exercise of options.
(6) Represents actual costs related to living expenses and/or relocation.
(7) Mr. Lanier has been employed by us since May 1999, and the amount listed
sets forth his compensation since such date.
(8) Includes an initial signing bonus of $50,000.
(9) Mr. Shimp has been employed by us since October 1998, and the amount listed
sets forth his compensation since such date.
(10) Mr. Chandler has been employed by us since April 1998, and the amount
listed sets forth his compensation since such date.
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OPTION GRANTS IN 1999
The following table shows information with respect to stock options granted
to our Chief Executive Officer and each of our four other most highly
compensated executive officers during 1999. Except where rated, all the grants
were made under the Company's 1999 Stock Incentive Plan. We did not grant any
stock appreciation rights to these officers during 1999.
When reading the Option Grants table, you should understand the following:
- We granted options to purchase an aggregate of 7,816,896 shares of common
stock during 1999.
- Amounts in the column "Potential Realizable Value at Assumed Annual Rates
of Stock Appreciation for Option Term" represent the potential realizable
value of option grants, assuming that our common stock appreciates at the
annual rate shown, compounded annually, from the date of grant until
expiration of the granted options. These amounts are calculated based on
Securities and Exchange Commission requirements and do not reflect our
projection or estimate of future stock price growth. Actual gains, if any,
on stock option exercises are dependent on the future performance of our
common stock. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from those option grants which
were made with an exercise price equal to the fair market value of the
option shares on the grant date.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM
GRANTED EMPLOYEES PRICE PER -------------------------
NAME (#) IN 1999 SHARE(2) EXPIRATION DATE(3) 5% 10%
- ---- ---------- ---------- --------- ------------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Catherine M. Hapka... 240,000 3.0% $ 3.33 January 20, 2009 $ 503,000 $ 1,274,000
Steve Stringer....... 350,000 4.5% 56.94 June 9, 2009 12,533,000 31,762,000
70,252(1) .9% 14.23 June 9, 2009 629,000 1,593,000
300,000 3.8% 26.69 November 2, 2009 5,036,000 12,761,000
Michael S. Lanier.... 300,000 3.8% 16.00 April 5, 2009 3,019,000 7,650,000
David J. Shimp....... -- -- -- -- -- --
Scott C. Chandler.... 96,000 1.2% 3.33 January 20, 2009 201,000 509,000
</TABLE>
- ------------------------
(1) These options were granted to Mr. Stringer pursuant to an option agreement
outside our 1999 Stock Incentive Plan. The market price of the shares of
common stock underlying these options was $56.94 on the date of grant.
(2) The exercise price may be paid in cash or in shares of Common Stock valued
at fair market value on the exercise date. Alternatively, the option may be
exercised through a cashless exercise procedure pursuant to which the
optionee provides irrevocable instructions to a brokerage firm to sell the
purchased shares and to remit to the Company, out of the sale proceeds, an
amount equal to the exercise price plus all applicable withholding taxes.
The Compensation Committee may also assist an optionee in the exercise of an
option by (i) authorizing a loan from the Company in a principal amount not
to exceed the aggregate exercise price plus any tax liability incurred in
connection with the exercise or (ii) permitting the optionee to pay the
option price in installments over a period of years upon terms established
by the Compensation Committee.
(3) The options will become exercisable for 25% of the shares upon the
optionee's completion of one year of service measured from the grant date
and will become exercisable for the balance of the shares in 36 successive
equal monthly installments upon his or her completion of each additional
month of service thereafter. The option will become exercisable on an
accelerated basis upon a liquidation or dissolution of the Company or a
merger or consolidation in which there is a change
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in ownership of securities possessing more than 50% of the total combined
voting power of the Company's outstanding securities, unless the option is
assumed by the surviving entity. In addition, the Compensation Committee of
the Board of Directors may accelerate the vesting of the option in the event
(i) there is a change in the composition of the Board of Directors over a
period of two years or less such that those individuals serving as Board
members at the beginning of the period cease to represent a majority of the
Board or (ii) change of ownership of securities possessing more than 50% of
the total combined voting power of the Company's outstanding securities
pursuant to a hostile tender offer.
FISCAL YEAR-END 1999 OPTION VALUES
The following table provides information with respect to our Chief Executive
Officer and each of our four other most highly compensated executive officers,
concerning the exercise of common stock options during 1999 and unexercised
options held by them at the end of 1999. None of the named executive officers
exercised any stock appreciation rights during the 1999 fiscal year and no stock
appreciation rights were held by them at the end of such year. When reading the
Option Values table, you should understand the following:
- The value of unexercised in-the-money options at December 31, 1999 is
based on the fair market value of our common stock on December 31, 1999,
less the exercise price payable for such shares.
- The shares of common stock acquired on exercise as shown in the following
table were deposited in escrow with our corporate secretary where they
continue to vest in accordance with the applicable vesting provisions.
- The amount in the value realized column is based on the fair market value
of our common stock on the exercise date for such shares, less the
exercise price paid for such shares.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED ON VALUE --------------------------- ----------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Catherine M. Hapka...... 240,000 $ 728,000 -- -- $ -- $ --
Steve Stringer.......... -- -- 23,416 696,836 726,000 10,752,000
Michael S. Lanier....... -- -- -- 300,000 -- 9,300,000
David J. Shimp.......... 300,000 1,410,000 -- -- -- --
Scott C. Chandler....... 480,000 2,074,000 -- -- -- --
</TABLE>
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
None of our employees are employed for a specified term, and each employee's
employment with us is subject to termination at any time by either party for any
reason, with or without cause.
Ms. Hapka's employment agreement provides for a salary of $350,000 per year,
subject to periodic increases by the Board of Directors at its discretion. In
addition, she will be entitled to bonuses as approved by the Board of Directors.
In connection with her employment in June 1997, Ms. Hapka was granted an option
to purchase 3,504,905 shares of common stock at an exercise price of $0.04 per
share under the 1997 Stock Option/Stock Issuance Plan. In connection with her
employment, Ms. Hapka was also given the right to purchase up to 365,094 shares
of Series A preferred stock at $0.80 per share, which converted into 876,226
shares of our common stock at the date of our initial public offering. In the
event Ms. Hapka's employment is terminated involuntarily and without cause, Ms.
Hapka will be entitled to receive a lump sum payment in an amount equal to her
then current annual salary.
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Mr. Stringer's employment agreement provides for a salary of $300,000 per
year, payable in accordance with our regular pay period practices, and subject
to periodic increases by the Board of Directors at its discretion. It also
provides for guaranteed bonus compensation during the first year of employment
of $200,000, payable in quarterly installments. For any future years of
performance, Mr. Stringer's bonus will be consistent with the bonus plan
applicable to other members of the Rhythms management team, as approved by the
Board of Directors. In connection with his employment, Mr. Stringer was granted
options to purchase 350,000 shares of common stock at an exercise price equal to
the common stock's fair market value on the date of the grant. In addition,
Mr. Stringer was also granted an option to purchase 70,252 shares of common
stock at an exercise price of $14.23 per share. In the event Mr. Stringer's
employment is terminated without cause, he will be eligible to receive monthly
payments at his then applicable monthly base salary for a period of 12 months
from the date of termination of his employment.
Mr. Lanier's employment agreement provides for a salary of $250,000 per
year, subject to periodic increases by the Board of Directors at its discretion.
In addition, the agreement provides for an annual bonus of up to 25% of his
annual salary. Mr. Lanier also received, as part of the acceptance of his
employment, a hiring bonus of $50,000. In connection with his employment,
Mr. Lanier was granted options to purchase 300,000 shares of common stock at an
exercise price equal to the fair market price of the common stock on the date of
the grant.
Mr. Shimp's employment agreement provides for a salary of $175,000 per year.
In addition, the agreement provides for an annual bonus of up to 25% of his
annual salary. In connection with his employment, Mr. Shimp was granted options
to purchase 300,000 shares of common stock at an exercise price of $1.67 per
share.
Mr. Chandler's employment agreement provides for a salary of $180,000 per
year. In addition, the agreement provides for an annual bonus of up to 40% of
his annual salary. Mr. Chandler was also eligible to receive up to $85,000 in
relocation expenses. In connection with his employment, Mr. Chandler was granted
options to purchase 384,000 shares of common stock at an exercise price of $0.21
per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors currently has a compensation committee that reviews
and approves the compensation and benefits to be provided to our executive
officers and other key employees. In addition, the compensation committee
administers the 1999 Stock Incentive Plan. The compensation committee currently
consists of Messrs. Stensrud, Walecka and Zander.
BENEFIT PLANS
1999 STOCK INCENTIVE PLAN
Our 1999 Stock Incentive Plan is the successor equity incentive program to
the 1997 Stock Option/ Stock Issuance Plan. The 1999 Stock Incentive Plan was
adopted by the board on March 16, 1999 and became effective in April 1999. All
outstanding options under the 1997 Stock Option/Stock Issuance Plan were at that
time incorporated into the 1999 Stock Incentive Plan, and no further option
grants may be made under the 1997 Stock Option/Stock Issuance Plan. The
incorporated options will continue to be governed by their existing terms,
unless the plan administrator elects to extend one or more features of the 1999
Incentive Plan to those options. Except as otherwise noted below, the
incorporated options have substantially the same terms as grants made under the
Discretionary Option Grant Program of the 1999 Stock Incentive Plan.
As of January 1, 2000, we had reserved 11,041,944 shares of common stock for
issuance under the 1999 Stock Incentive Plan. The number of shares of common
stock reserved for issuance under the 1999 Stock Incentive Plan will
automatically increase on the first trading day in January each calendar year,
beginning in calendar year 2000, by an amount equal to four percent (4%) of the
total number of
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shares of common stock outstanding on the last trading day in December in the
preceding calendar year, but in no event will this annual increase exceed
2,880,000 shares. In addition, no participant in the 1999 Stock Incentive Plan
may be granted stock options, separately exercisable stock appreciation rights
and direct stock issuances for more than 900,000 shares of common stock in the
aggregate per calendar year.
The 1999 Stock Incentive Plan is divided into five separate components:
- the Discretionary Option Grant Program, under which eligible individuals
in our employ or service (including officers, non-employee board members
and consultants) may, at the discretion of the plan administrator, be
granted options to purchase shares of common stock at an exercise price
not less than 100% of the fair market value of those shares on the grant
date;
- the Stock Issuance Program under which eligible individuals may, in the
plan administrator's discretion, be issued shares of common stock
directly, upon the attainment of designated performance milestones or upon
the completion of a specified service requirement or as a bonus for past
services;
- the Salary Investment Option Grant Program, which may, at the plan
administrator's sole discretion, be activated for one or more calendar
years and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to apply a portion of their base
salary each year to the acquisition of special below-market stock option
grants;
- the Automatic Option Grant Program, under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members to purchase shares of common stock at an exercise price equal to
100% of the fair market value of those shares on the grant date; and
- the Director Fee Option Grant Program, which may, in the plan
administrator's sole discretion, be activated for one or more calendar
years and, if so activated, will allow non-employee board members the
opportunity to apply a portion of the annual retainer fee otherwise
payable to them in cash each year to the acquisition of special
below-market option grants.
The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the compensation committee. The compensation committee as plan
administrator has complete discretion to determine which eligible individuals
are to receive option grants or stock issuances under those programs, the time
or times when the grants or issuances are to be made, the number of shares
subject to each grant or issuance, the status of any granted option as either an
incentive stock option or a non-statutory stock option under the Federal tax
laws, the vesting schedule to be in effect for the option grant or stock
issuance and the maximum term for which any granted option is to remain
outstanding. However, the board acting by disinterested majority has the
exclusive authority to make any discretionary option grants or stock issuances
to members of the compensation committee. The compensation committee also has
the exclusive authority to select the executive officers and other highly
compensated employees who may participate in the Salary Investment Option Grant
Program in the event that program is activated for one or more calendar years.
Neither the compensation committee nor the board may exercise any administrative
discretion with respect to option grants under the Salary Investment Option
Grant Program or under the Automatic Option Grant or Director Fee Option Grant
Program for the non-employee board members. All grants under those latter three
programs shall be made in strict compliance with the express provisions of each
program.
The exercise price for the shares of common stock subject to option grants
made under the 1999 Stock Incentive Plan may be paid in cash or in shares of
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by the
optionee.
The plan administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the 1997 Stock Option/ Stock Issuance Plan) in return
for the grant of new options for the same or different number of option
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shares with an exercise price per share based upon the fair market value of the
common stock on the new grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program. These rights provide the holders with the
election to surrender their outstanding options for an appreciation distribution
from us equal to the excess of (i) the fair market value of the vested shares of
common stock subject to the surrendered option over (ii) the aggregate exercise
price payable for those shares. Such appreciation distribution may be made in
cash or in shares of common stock. None of the incorporated options from the
1997 Stock Option/Stock Issuance Plan contain any stock appreciation rights.
In the event that we are acquired by merger or asset sale, each outstanding
option under the Discretionary Option Grant Program which is not to be assumed
by the successor corporation will automatically accelerate in full, and all
unvested shares under the Discretionary Option Grant and Stock Issuance Programs
will immediately vest, except to the extent our repurchase rights with respect
to those shares are to be assigned to the successor corporation. The plan
administrator has complete discretion to grant one or more options under the
Discretionary Option Grant Program which will vest and become exercisable for
all the option shares in the event those options are assumed in the acquisition
and the optionee's service with us or the acquiring entity is terminated within
a designated period (not to exceed eighteen months) following that acquisition.
The vesting of outstanding shares under the Stock Issuance Program may be
accelerated upon similar terms and conditions.
The plan administrator is also authorized to grant options and structure
repurchase rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a change in ownership or control
(whether by successful tender offer for more than fifty percent of our
outstanding voting stock or by a change in the majority of our board through one
or more contested elections for board membership). Such accelerated vesting may
occur either at the time of such change or upon the subsequent termination of
the individual's service within a designated period (not to exceed eighteen
months) following the change.
The options incorporated from the 1997 Stock Option/Stock Issuance Plan will
immediately vest if we are acquired by merger or asset sale, unless our
repurchase rights with respect to the unvested shares subject to those options
are assigned to the successor entity. There are no other changes in control
provisions currently in effect for those options. However, the plan
administrator has the discretion to extend the acceleration provisions of the
1999 Stock Incentive Plan to any or all of the options outstanding under the
1997 Stock Option/Stock Issuance Plan.
In the event the plan administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer and
other highly compensated employee selected for participation may elect, prior to
the start of the calendar year, to reduce his or her base salary for that
calendar year by a specified dollar amount not less than $10,000 nor more than
$50,000. Each selected individual who files this timely election will
automatically be granted, on the first trading day in January of the calendar
year for which that salary reduction is to be in effect, a non-statutory option
to purchase that number of shares of common stock determined by dividing the
salary reduction amount by two-thirds of the fair market value per share of
common stock on the grant date. The option will be exercisable at a price per
share equal to one-third of the fair market value of the option shares on the
grant date. As a result, the total spread on the option shares at the time of
grant (the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the amount
of salary invested in that option. The option will vest and become exercisable
in a series of twelve equal monthly installments over the calendar year for
which the salary reduction is to be in effect.
Under the Automatic Option Grant Program, eligible non-employee board
members will receive a series of option grants over their period of board
service. Each individual who first becomes a non-employee board member at any
time at or after April 6, 1999 will receive an option grant for 28,800 shares of
common stock on the date such individual joins the board, provided such
individual has not
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been in our prior employ. In addition, on the date of each annual stockholders
meeting held after April 6, 1999, each non-employee board member who is to
continue to serve as a non-employee board member (including the individuals who
are currently serving as non-employee board members) will automatically be
granted an option to purchase 7,200 shares of common stock, provided such
individual has served on the board for at least six months. There will be no
limit on the number of such 7,200 share option grants any one eligible
non-employee Board member may receive over his or her period of continued board
service, and non-employee board members who have previously been in our employ
will be eligible to receive one or more such annual option grants over their
period of board service.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of common stock on the grant date and will have a term of
10 years, subject to earlier termination following the optionee's cessation of
board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by us, at the exercise price paid per share, should the
optionee cease to serve on the board service prior to vesting in those shares.
The shares subject to each initial 28,800-share automatic option grant will vest
in a series of six successive equal semi-annual installments upon the optionee's
completion of each six-month period of board service over the thirty-six-month
period measured from the grant date. The shares subject to each annual
7,200-share automatic grant will vest upon in two successive equal semi-annual
installments upon the optionee's completion of each six-month period of board
service measured from the grant date. However, the shares will immediately vest
in full upon certain changes in control or ownership or upon the optionee's
death or disability while a board member. Following the optionee's cessation of
board service for any reason, each option will remain exercisable for a 12-month
period and may be exercised during that time for any or all shares in which the
optionee is vested at the time of such cessation of service.
If the Director Fee Option Grant Program is activated in the future, each
non-employee board member will have the opportunity to apply all or a portion of
any annual retainer fee otherwise payable in cash to the acquisition of a
below-market option grant. The option grant will automatically be made on the
first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of common stock on the grant date. As a result,
the total spread on the option (the fair market value of the option shares on
the grant date less the aggregate exercise price payable for those shares) will
be equal to the portion of the retainer fee invested in that option. The option
will vest and become exercisable for the option shares in a series of twelve
equal monthly installments over the calendar year for which the election is to
be in effect. However, the option will become immediately exercisable and vested
for all the option shares upon (i) certain changes in the ownership or control
or (ii) the death or disability of the optionee while serving as a board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of us by merger or asset sale or (ii) the
successful completion of a tender offer for more than 50% of our outstanding
voting stock or a change in the majority of our board effected through one or
more contested elections for board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers as part of their option grants under the Discretionary Option Grant
Program. Options with this limited stock appreciation right may be surrendered
to us upon the successful completion of a hostile tender offer for more than 50%
of our outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount per
surrendered option share equal to the excess of (i) the highest
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price per share of common stock paid in connection with the tender offer over
(ii) the exercise price payable for such share.
The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive Plan will
terminate on the earliest of (i) February 28, 2009, (ii) the date on which all
shares available for issuance under the 1999 Stock Incentive Plan have been
issued as fully-vested shares or (iii) the termination of all outstanding
options in connection with certain changes in control or ownership of us.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan was adopted by the board on March 16,
1999 and became effective in April 1999. The plan is designed to allow our
eligible employees and those of our participating subsidiaries to purchase
shares of common stock, at semi-annual intervals, through their periodic payroll
deductions under the plan.
One million two hundred thousand shares (1,200,000) of common stock have
been reserved for issuance under the plan. The reserve will automatically
increase on the first trading in January each year, beginning with calendar year
2000, by an amount equal to one percent of the total number of outstanding
shares of our common stock on the last trading day in December in the
immediately preceding calendar year, but in no event will any such annual
increase exceed 780,000 shares.
The plan will be implemented in a series of successive offering periods,
each with a maximum duration of 24 months. However, the initial offering period
began on April 6, 1999 and will end on the last business day in April 2001. The
next offering period will commence on the first business day in May 2001, and
subsequent offering periods will commence as designated by the plan
administrator.
Individuals who are eligible employees (scheduled to work more than 20 hours
per week for more than five calendar months per year) on the start date of any
offering period may enter the plan on that start date or on any subsequent
semi-annual entry date (the first business day of May or November each year).
Individuals who become eligible employees after the start date of the offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll deductions may not exceed 15% of the participant's cash earnings,
and the accumulated payroll deductions of each participant will be applied to
the purchase of shares on his or her behalf on each semi-annual purchase date
(the last business day in April and October each year) at a purchase price per
share equal to 85% of the lower of (i) the fair market value of the common stock
on the participant's entry date into the offering period or (ii) the fair market
value on the semi-annual purchase date. In no event, however, may any
participant purchase more than 900 shares on any semi-annual purchase date, nor
may all participants in the aggregate purchase more than 300,000 shares on any
semi-annual purchase date.
If the fair market value per share of our common stock on any purchase date
is less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.
Should we be acquired by merger, sale of substantially all our assets or
sale of securities possessing more than fifty percent of the total combined
voting power of our outstanding securities, then all outstanding purchase rights
will automatically be exercised immediately prior to the effective date of an
acquisition. The purchase price will be equal to 85% of the lower of (i) the
fair market value per share of common stock on the participant's entry date into
the offering period in which an acquisition occurs or (ii) the fair market value
per share of common stock immediately prior to an acquisition. The limitation on
the maximum number of shares purchasable in the aggregate on any one purchase
date will not be in effect for any purchase date attributable to such an
acquisition.
The plan will terminate on the earlier of (i) the last business day of April
2009, (ii) the date on which all shares available for issuance under the plan
shall have been sold pursuant to purchase rights
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exercised thereunder or (iii) the date on which all purchase rights are
exercised in connection with an acquisition of us by merger or asset sale.
The board may at any time alter, suspend or discontinue the plan. However,
certain amendments may require stockholder approval.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. In addition, our bylaws require us to
indemnify our directors and officers, and allow us to indemnify our other
employees and agents, to the fullest extent permitted by law. We have also
entered into agreements to indemnify our directors and certain executive
officers. We believe that these provisions and agreements are necessary to
attract and retain qualified directors and executive officers. At present, there
is no pending litigation or proceeding involving any director, officer, employee
or agent where indemnification will be required or permitted. We are not aware
of any threatened litigation or proceeding that might result in a claim for such
indemnification. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
our company pursuant to the foregoing provisions, we have been informed that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES A PURCHASE AGREEMENT
On July 3, 1997, we entered into a Series A Preferred Stock Purchase
Agreement with Enterprise Partners, Brentwood Venture Capital, Kleiner Perkins
Caufield & Byers, The Sprout Group and certain other investors. In a series of
three closings, these investors purchased in the aggregate 12,280,000 shares of
our Series A preferred stock for an aggregate purchase price of $12.3 million,
which converted into 29,472,000 shares of common stock upon the closing of the
initial public offering of our common stock in April 1999. Also, under a
Subsequent Closing Purchase Agreement dated as of December 23, 1997, we sold an
additional 210,000 shares of our Series A preferred stock to other investors for
an aggregate purchase price of $210,000, which converted into 504,000 shares of
common stock upon the closing of the initial public offering of our common stock
in April 1999. In connection with these sales, we entered into an Investors'
Rights Agreement and Addendum with these investors which provided them with
demand and piggyback registration rights, and rights of first offer in the event
we propose to offer for sale certain of our securities. This investors' rights
agreement and addendum has been superseded by the 1999 Investors' Rights
Agreement from the Qwest investment. For more details about the Qwest
investment, please see "--Investors' Rights Agreement."
In connection with an employment agreement between us and Catherine Hapka,
we issued 365,094 shares of Series A preferred stock at a purchase price of
$0.80 per share to Ms. Hapka, which converted into 876,226 shares of common
stock upon the closing of the initial public offering of our common stock in
April 1999. Please see "Management--Employment Agreements and Change in Control
Arrangements."
SERIES B PURCHASE AGREEMENT
On March 12, 1998, we entered into a Series B Preferred Stock Purchase
Agreement with some of the purchasers of our Series A preferred stock and Enron.
Under this agreement, these investors acquired an aggregate of 4,044,943 shares
of our Series B preferred stock for an aggregate purchase price of
$18.0 million, which converted into 9,707,863 shares of common stock upon the
closing of the initial public offering of our common stock in April 1999. In
connection with the Series B Preferred Stock Purchase Agreement, we entered into
an Amended and Restated Investors' Rights Agreement with the purchasers of our
Series A and Series B preferred stock on March 12, 1998. This agreement replaced
the investors' rights agreement and addendum from the Series A preferred stock
financing and has been superseded by the 1999 Investors' Rights Agreement from
the Qwest investment. For more details about the Qwest Investment, please see
"--Investors' Rights Agreement."
SERIES C PURCHASE AGREEMENT; OTHER AGREEMENTS WITH MCI WORLDCOM
In March 1999, we entered into a Series C Preferred Stock and Warrant
Purchase Agreement with MCI WorldCom's investment fund, under which the fund
acquired, for an aggregate purchase price of $30.0 million, 3,731,410 shares of
Series C preferred stock, which converted into 4,477,692 shares of common stock
upon the closing of the initial public offering of our common stock in
April 1999, and a warrant to purchase an aggregate of 720,000 shares of our
common stock at $6.70 per share. In April 1999, we issued to MCI WorldCom's
investment fund a warrant to purchase an additional 136,996 shares of common
stock at $21.00 per share. In connection with this purchase agreement, we
entered into an Amended and Restated Investors' Rights Agreement, which replaced
the investors' rights agreement from the Series B preferred stock financing and
has been superseded by the 1999 Investors' Rights Agreement from the Qwest
investment. For more details about the Qwest Investment, please see
"--Investors' Rights Agreement."
The MCI WorldCom investment was part of a broader strategic arrangement
between us and MCI WorldCom. As part of this strategic arrangement, we also
entered into an agreement with MCI
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WorldCom which designates us as the first choice in its alternative access
provisioning system for DSL services in certain circumstances, and which
provides that MCI WorldCom is committed to sell at least 100,000 of our DSL
lines over a period of five years, subject to penalties for failure to reach
target commitments. In turn, we have designated MCI WorldCom as our preferred
provider of network services. For more details about our arrangement with MCI
WorldCom, please see "Business--Strategic Partnerships."
SERIES C PURCHASE AGREEMENT; OTHER AGREEMENTS WITH MICROSOFT
In March 1999, we entered into a Series C Preferred Stock and Warrant
Purchase Agreement with Microsoft, under which Microsoft acquired, for an
aggregate purchase price of $30.0 million, 3,731,409 shares of our Series C
preferred stock, which converted into 4,477,691 shares of common stock upon the
closing of the initial public offering of our common stock in April 1999, and a
warrant to purchase an aggregate of 720,000 shares of our common stock at a
purchase price of $6.70 per share. In connection with this purchase agreement,
we entered into an Amended and Restated Investors' Rights Agreement dated
March 16, 1999 which replaced the investors' rights agreement from the MCI
WorldCom investment and has been superseded by the 1999 Investors' Rights
Agreement from the Qwest investment. For more details about the Qwest
Investment, please see "--Investors' Rights Agreement."
The Microsoft investment was also part of a broader strategic arrangement.
As part of the Microsoft arrangement, we entered into an agreement in which
Microsoft agreed to jointly distribute with us a co-branded DSL version of the
Microsoft Network service focused on our small business customers. For more
details about our arrangement with Microsoft, please see "Business--Strategic
Partnerships."
SERIES C PURCHASE AGREEMENT AND SERIES D PURCHASE AGREEMENT; OTHER AGREEMENTS
WITH QWEST
In connection with a broader customer relationship between us and Qwest, in
April 1999 we entered into a Series C Preferred Stock and Warrant Purchase
Agreement and a Series D Preferred Stock Purchase Agreement with U.S.
Telesource, Qwest's wholly owned subsidiary. Under these agreements it acquired,
for an aggregate purchase price of approximately $15 million, 932,836 shares of
Series C preferred stock, which converted into 1,119,403 shares of common stock
upon the closing of the initial public offering of our common stock in April
1999, 441,176 shares of Series D preferred stock, which converted into 441,176
shares of common stock upon the closing of the initial public offering of our
common stock in April 1999, and a warrant to purchase an aggregate of 180,000
shares of our common stock at a purchase price of $6.70 per share. In connection
with these purchase agreements, we entered into an Amended and Restated
Investors' Rights Agreement, that replaced the investors' rights agreement from
the Microsoft investment. For more details about this agreement, please see
"--Investors' Rights Agreement."
The Qwest investment was also part of a broader strategic arrangement
between us and Qwest. As part of the Qwest relationship, Qwest has committed to
purchase from us performance class DSL services for re-sale to its customers. In
return, we have agreed to use Qwest's network and application hosting services
in certain situations.
INVESTORS' RIGHTS AGREEMENT
Under the terms of the 1999 Investors' Rights Agreement, the former holders
of preferred stock acquired registration rights with respect to our common
stock. At any time after October 6, 1999:
- holders of 60% or more of the registrable securities, as defined in the
1999 Investors' Rights Agreement, may require us to register for public
sale no less than 20% of their shares then outstanding; or
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- Enron may require us to register for public sale no less than 20% of our
shares it then holds; or
- MCI WorldCom's investment fund may require us to register for public sale
no less than 20% of our shares it then holds.
In addition, if certain competitors of MCI WorldCom or Qwest acquire greater
than 5% of our common stock, then MCI WorldCom's investment fund or Qwest's
wholly owned subsidiary, as the case may be, may require us to register for
public sale all of its shares of our stock. We sometimes refer to these rights
as contingent demands for registration.
Our Board of Directors may defer any of the above demands for registration
for a period up to 120 days. We are obligated to effect only:
- two such registrations at the request of holders of 60% or more of the
registrable securities,
- one such registration at the request of Enron,
- one such registration at the request of MCI WorldCom's investment fund,
- one contingent demand for registration at the request of MCI WorldCom's
investment fund, and
- one contingent demand for registration at the request of Qwest's
subsidiary.
In addition, if we propose to register securities under the Securities Act
of 1933, with some exceptions, then any of the parties to our 1999 Investors'
Rights Agreement has a right to request that we register such holder's
registrable securities, subject to quantity limitations determined by
underwriters if the offering involves an underwriting. All registration expenses
incurred in connection with the registrations described above and all piggyback
registrations will be borne by us. The participating stockholders will pay for
underwriting discounts and commissions incurred in connection with any such
registrations. We have agreed to indemnify the parties to the agreement against
certain liabilities in connection with any registration effected pursuant to the
1999 Investors' Rights Agreement, including Securities Act liabilities. Further,
the holders of 40% or more of the registrable securities may require us to
register all or a portion of our registrable securities on Form S-3 when we
qualify to file on such form, provided that the aggregate proceeds of each such
registration are at least $5.0 million and subject to other conditions and
limitations, including our ability to defer the filing of the Form S-3
registration for a period of not more than 120 days in some circumstances. All
expenses incurred in connection with such a Form S-3 registration shall be borne
pro rata by the stockholders participating in the Form S-3 registration. All
registration rights will terminate no later than April 12, 2004. We have agreed
to indemnify the stockholders against certain liabilities in connection with any
registration effected pursuant to the 1999 Investors' Rights Agreement,
including liabilities under the Securities Act of 1933.
SERIES E PURCHASE AGREEMENT AND OTHER AGREEMENTS WITH HICKS MUSE
In March 2000, we entered into a Preferred Stock and Warrant Purchase
Agreement with Hicks Muse. Under this purchase agreement, Hicks Muse acquired,
for an aggregate purchase price of $250.0 million, 250,000 shares of 8 1/4%
Series E preferred stock which is immediately convertible into one share of
common stock at a conversion price of $37.50 per share, subject to adjustment.
In addition, Hicks Muse acquired warrants to purchase 1,875,000 shares of common
stock at an exercise price of $45.00 per share, exercisable for three years;
1,875,000 shares of common stock at an exercise price of $50.00 per share,
exercisable for five years; and 1,875,000 shares of common stock at an exercise
price of $55.00 per share, exercisable for seven years.
In connection with this purchase agreement, we entered into a Registration
Rights Agreement. Under this registration rights agreement, holders of
registrable securities, as defined in the registration rights agreement, may
require us to register for public sale shares held by them. Holders of a
majority
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of the registrable shares may require us to complete such a registration four
times, subject to certain limitations, including, but not limited to, the fair
market value of each offering must exceed $50,000,000 and only one registration
may be required within any 120 day period. In addition, if we propose to
register securities under the Securities Act of 1933, then the holders may
request that we register such holder's registrable securities, such to quantity
limitations determined by the underwriters if the offering involves an
underwriting, provided however, that the number of shares held by the holders to
be included in the offering will not, except in certain circumstances, be
reduced below 30% of the total number of shares to be included in the offering.
Further, holders of a majority of the registrable securities may require us to
register a portion of their registrable securities on Form S-3 when we qualify
to file on such form, subject to certain limitations. All registration expenses
incurred in connection with the with the registrations described above and all
piggyback registrations will be borne by us. The participating holders will pay
for underwriting discounts and commissions incurred in connection with any such
registrations. We have agreed to indemnify the parties to the rights agreement
against certain liabilities in connection with any registration effected
pursuant to the rights agreement, including Securities Act liabilities. All
registration rights will terminate no later than March 31, 2015.
DIRECTOR RELATIONSHIPS
William R. Stensrud, a member of our Board of Directors, also served as our
President and Chief Executive Officer from February 1997 through June 1997.
Mr. Stensrud and Mr. Geeslin, also members of our Board of Directors, both serve
as directors for Paradyne Corporation, one of our vendors. Additionally, from
June 1996 through December 1996, Mr. Stensrud served as President of Paradyne
Corporation. John L. Walecka, a member of our Board of Directors, served until
July 1999 as a director for Xylan Corporation, an indirect vendor to us. For the
years ended December 31, 1998 and 1999, we made purchases totaling approximately
$13.0 million and $54.0 million, respectively, from Paradyne Corporation. We do
not purchase any products directly from Xylan Corporation; rather, our purchase
of Xylan Corporation products is sourced through Paradyne Corporation. We
believe that our transactions with Paradyne Corporation and Xylan Corporation
were completed at rates similar to those available from alternative vendors.
Susan Mayer, a member of our Board of Directors, also serves as President of
MCI WorldCom's investment fund and a Senior Vice President of MCI WorldCom, Inc.
In March 1999, we entered into a strategic arrangement with MCI WorldCom, Inc.
As part of this strategic arrangement, MCI WorldCom's investment fund invested
$30.0 million in us.
Michael Levitt was elected to the Board of Directors by Hicks Muse pursuant
to the terms of the Series E purchase agreement and serves at the discretion of
Hicks Muse. Hicks Muse has the right to appoint one representative to our Board
provided that it continues to hold 40% of the Series E preferred stock purchased
by them or the underlying common stock or any combination thereof.
LEGAL SERVICES
Jeffrey Blumenfeld, our Chief Legal Officer and General Counsel, also serves
as a partner of Blumenfeld & Cohen, a law firm which performs legal services for
us. In connection with Mr. Blumenfeld's employment with us, we issued to him
options to purchase 438,115 shares of common stock at an exercise price of $0.04
per share, which were exercised in January 1998. In addition, Mr. Blumenfeld and
certain other partners of Blumenfeld & Cohen purchased an aggregate of 140,000
shares of Series A preferred stock at $1.00 per share, which converted into
336,000 shares of common stock upon the closing of the initial public offering
of our common stock in April 1999. For the years ended December 31, 1998 and
1999, we incurred expenses for legal fees to Blumenfeld & Cohen of approximately
$1.3 million and $2.4 million, respectively.
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Under the terms of a written employment agreement with Mr. Blumenfeld, we
have agreed to employ him as Chief Legal Officer and General Counsel at an
annual salary of $110,000 for a minimum time commitment by Mr. Blumenfeld of
24 hours a week. Under the terms of such agreement, Blumenfeld & Cohen has
agreed to charge us at a discount from its regular rates for legal services,
including Mr. Blumenfeld's time in excess of his minimum time commitment.
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PRINCIPAL STOCKHOLDERS
The following table shows information as of March 31, 2000 with respect to
the beneficial ownership of our common stock by:
- each person known by us to own beneficially more than five percent, in the
aggregate, of the outstanding shares of our common stock,
- our directors, our Chief Executive Officer and our four other most highly
compensated executive officers, and
- all executive officers and directors as a group.
Stock ownership in each case includes shares of common stock issuable upon
exercise of outstanding options and warrants that are exercisable within
60 days of March 31, 2000 as described in the footnotes below. Percentage
ownership is calculated pursuant to SEC Rule 13d-3(d)(1). Unless otherwise
indicated, the address for each stockholder is c/o Rhythms NetConnections Inc.,
6933 South Revere Parkway, Englewood, Colorado 80112.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
BENEFICIAL OWNER (1) BENEFICIALLY OWNED BENEFICIALLY OWNED
- -------------------- ------------------ ------------------
<S> <C> <C>
FIVE PERCENT STOCKHOLDERS:
Brentwood Venture Capital (2)............................. 4,678,651 6.0%
Hicks, Muse, Tate, & Furst Incorporated (3)............... 12,291,667 13.5%
Kleiner Perkins Caufield & Byers (4)...................... 6,208,988 7.9%
MCI WorldCom Venture Fund, Inc. (5)....................... 5,334,692 6.7%
Microsoft Corporation (6)................................. 5,197,691 6.6%
DIRECTORS AND EXECUTIVE OFFICERS:
Catherine M. Hapka (7).................................... 4,221,131 5.4%
Steve Stringer............................................ 38,051 *
Michael S. Lanier......................................... 81,250 *
David J. Shimp (8)........................................ 300,000 *
Scott C. Chandler (9)..................................... 450,000 *
Kevin R. Compton (10)..................................... 83,800 *
Keith B. Geeslin (11)..................................... 90,700 *
Susan Mayer (12).......................................... -- --
William R. Stensrud (13).................................. 235,586 *
John L. Walecka (14)...................................... 151,700 *
Edward J. Zander (15)..................................... 60,000 *
Michael Levitt (16)....................................... -- --
All directors and executive officers as a group (18
persons) (17)........................................... 6,455,259 8.2%
</TABLE>
- --------------------------
* Represents beneficial ownership of less than one percent of the outstanding
shares of our common stock.
(1) Except as indicated by footnote, we understand that the persons named in
the table above have sole voting and investment power with respect to all
shares shown as beneficially owned by them, subject to community property
laws where applicable.
(2) Consists of 187,145 shares held by Brentwood Affiliates Fund, L.P. and
4,491,506 held by Brentwood Associates VII, L.P., of which Brentwood VII
Ventures, L.P. is the general partner (collectively, the "Brentwood
Entities"). The address for the Brentwood Entities is 3000 Sand Hill Road,
Building 1, Suite 260, Menlo Park, California 94025.
(3) Consists of 12,291,667 shares issuable upon conversion of Series E
preferred stock and exercise of warrants that are convertible or
exercisable within 60 days of March 31, 2000. HM4 Rhythms Qualified
Fund, LLC owns 113,743 shares of Series E preferred stock and 2,559,231
warrants; HM4 Rhythms Private Fund, LLC owns 806 shares of Series E
preferred stock and 18,129 warrants; HM PG-IV Rhythms, LLC owns 6,056
shares of Series E preferred stock and 136,248 warrants; HM 4-EQ Rhythm
Coinvestors LLC owns 1,671 shares of Series E preferred stock and 37,605
warrants; HM 4-SBS Rhythms Coinvestors, LLC owns 2,724 shares of Series E
preferred stock and 61,287 warrants; HMTF Bridge RHY, LLC owns 125,000
shares of Series E preferred stock and 2,812,500 warrants (collectively,
the "Hicks Muse Entities"). The address for each of the Hicks Muse Entities
is 200 Crescent Court, Suite 1600, Dallas, Texas 75201.
(4) Consists of 5,650,391 shares held by Kleiner Perkins Caufield & Byers VIII,
441,631 shares held by KPCB VIII Founders Fund and 116,966 shares held by
KPCB VIII Information Sciences Zaibatsu Fund II
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(collectively, the "KPCB Entities"). The address for each of the KPCB
Entities is 2750 Sand Hill Road, Menlo Park, California 94025.
(5) Includes 856,996 shares issuable upon exercise of warrants exercisable
within 60 days of March 31, 2000. The address for MCI WorldCom Venture
Fund, Inc., c/o MCI WorldCom Inc., is 1801 Pennsylvania Avenue, Washington,
D.C. 20006.
(6) Includes 720,000 shares issuable upon exercise of a warrant exercisable
within 60 days of March 31, 2000. The address for Microsoft Corporation is
One Microsoft Way, Redmond, Washington 98052.
(7) Includes shares held by Ms. Hapka's children, Christopher H. Safaya and
Catherine A. Safaya, in the amount of 5,333 shares each and shares held by
Christopher H. Safaya 1999 Trust and Catherine A. Safaya 1999 Trust in the
amount of 132,480 shares each. Includes 1,265,272 shares from option
exercises subject to repurchase by us.
(8) Includes 193,750 shares from option exercises subject to repurchase by us.
(9) Includes 268,000 shares from option exercises subject to repurchase by us.
(10) Excludes shares held by the KPCB Entities. Mr. Compton, as a General
Partner of KPCB, may be deemed to have voting and investment power over
the shares held by the KPCB Entities. Mr. Compton disclaims beneficial
interest in such shares, except to the extent of his pecuniary interest
therein.
(11) Excludes shares beneficially owned by DLJ Capital Corporation, DLJ First
ESC L.L.C., Sprout Capital VII, L.P. and The Sprout CEO Fund, L.P.
(collectively, the "Sprout Entities"). Mr. Geeslin, as a General Partner
of The Sprout Group, may be deemed to have voting and investment power
over the shares held by the Sprout Entities. Mr. Geeslin disclaims
beneficial interest in such shares, except to the extent of his pecuniary
interest therein.
(12) Excludes shares held by MCI WorldCom Venture Fund ("MCI WorldCom").
Ms. Mayer, as President of MCI WorldCom, may be deemed to have voting and
investment power over the shares held by such fund. Ms. Mayer disclaims
beneficial interest of such shares, except to the extent of her pecuniary
interest therein.
(13) Includes 200,015 shares held by Blue Goose, Ltd., of which the Stensrud
Family Trust UTA 9-16-93 (the "Stensrud Trust") is a General and Limited
Partner. Also includes 35,571 shares held by the Stensrud Trust.
Mr. Stensrud is a trustee and one of the beneficiaries of the Stensrud
Trust. Mr. Stensrud disclaims beneficial ownership of these shares except
to the extent of his pecuniary interest therein.
(14) Excludes shares held by the Brentwood Entities. Mr. Walecka, as a General
Partner of Brentwood Venture Capital, may be deemed to have voting and
investment power over the shares held by the Brentwood Entities.
Mr. Walecka disclaims beneficial interest in such shares, except to the
extent of his pecuniary interest therein. Includes 31,905 shares held in
trust, of which Mr. Walecka is the trustee and beneficiary. Mr. Walecka
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest therein.
(15) Consists of shares issuable upon exercisable within 60 days of March 31,
2000.
(16) Mr. Levitt has disclaimed beneficial ownership of all shares held by the
Hicks Muse Entities.
(17) Includes 119,301 shares issuable upon exercise of options or warrants
exercisable within 60 days of March 31, 2000 and 2,011,149 shares from
option exercises subject to repurchase by us. Excludes shares held by the
Brentwood Entities, the KPCB Entities, MCI WorldCom Venture Fund, the
Enron Entities and Microsoft Corporation.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
We issued the old notes on February 23, 2000 in a private placement. In
connection with this issuance, we entered into the indenture and the
registration rights agreement. These agreements require that we file a
registration statement under the Securities Act for the new notes, the
registered notes to be issued in the exchange offer and, upon the effectiveness
of the registration statement, offer to you the opportunity to exchange your old
notes for a like principal amount of new notes. The new notes will be issued
without a restrictive legend and, except as set forth below, may be reoffered
and resold by you without registration under the Securities Act. After we
complete the exchange offer, our obligations with respect to the registration of
the old notes will terminate, except as provided in the last paragraph of this
section. A copy of the indenture and the registration rights agreement have been
filed as exhibits to the registration statement of which this prospectus is
part.
Based upon the interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, if you are not our "affiliate" within
the meaning of Rule 405 under the Securities Act or a broker-dealer referred to
in the next paragraph, we believe that new notes to be issued to you in the
exchange offer may be offered for resale, resold and otherwise transferred by
you, without compliance with the registration and prospectus delivery provisions
of the Securities Act. We have not received our own no-action letter to this
interpretation. This interpretation, however, is based on your representation to
us that:
- the new notes to be issued to you in the exchange offer are acquired in
the ordinary course of your business; and
- you are not engaging in and do not intend to engage in a distribution of
the new notes to be issued to you in the exchange offer; and
- you have no arrangement or understanding with any person to participate in
the distribution of the new notes to be issued to you in the exchange
offer.
If you tender in the exchange offer for the purpose of participating in a
distribution of the new notes to be issued to you in the exchange offer, you
cannot rely on this interpretation by the staff of the Commission. Under those
circumstances, you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Each broker-dealer that receives new notes in the exchange offer
for its own account, in exchange for old notes that were acquired by the
broker-dealer as a result of the market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of those new
notes. See "Plan of Distribution."
If you will not receive freely tradeable registered notes in the exchange
offer or are not eligible to participate in the exchange offer, you can elect,
by indicating on the letter of transmittal and providing certain additional
necessary information, to have your old notes registered in a "shelf"
registration statement on an appropriate form pursuant to Rule 415 under the
Securities Act. In the event that we are obligated to file a shelf registration
statement, we will be required to keep the shelf registration statement
effective for a period of two years or such shorter period that will terminate
when all of the old notes covered by the shelf registration statement have been
sold pursuant to the shelf registration statement other than as set forth in
this paragraph, you will not have the right to require us to register your old
notes under the Securities Act. See "--Procedures for Tendering."
CONSEQUENCES OF FAILURE TO EXCHANGE
After we complete the exchange offer, if you have not tendered your old
notes, you will not have any further registration rights, except as set forth
above. Your old notes will continue to be subject to
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certain restrictions on transfer. Therefore, the liquidity of the market for
your old notes could be adversely affected upon completion of the exchange offer
if you do not participate in the exchange offer. If the liquidity of the trading
market for the old notes is adversely affected, you may be unable to sell or
transfer your old notes and the value of your old notes may decline.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date. We will issue $1,000 principal amount of new notes in exchange
for each $1,000 principal amount of old notes accepted in the exchange offer.
You may tender some or all of your old notes in the exchange offer. However, old
notes may be tendered only in integral multiples of $1,000 in principal amount.
The form and terms of the new notes are substantially the same as the form
and terms of the old notes, except that the new notes to be issued in the
exchange offer will have been registered under the Securities Act and will not
bear legends restricting their transfer. The new notes will be issued pursuant
to, and entitled to the benefits of, the indenture. The indenture also governs
the old notes. The new notes and the old notes will be deemed one issue of notes
under the indenture.
As of the date of this prospectus, $300 million aggregate principal amount
of the old notes were outstanding. This prospectus, together with the letter of
transmittal, is being sent to all registered holders of old notes as of ,
2000 and to others believed to have beneficial interests in the old notes. You
do not have any appraisal or dissenters, rights in connection with the exchange
offer under the General Corporation Law of the State of Delaware or the
indenture. We intend to conduct the exchange offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of the
Commission promulgated under the Exchange Act.
We will be deemed to have accepted validly tendered old notes when, as, and
if we have given oral or written notice of our acceptance to the exchange agent.
The exchange agent will act as our agent for the tendering holders for the
purpose of receiving the new notes from us. If we do not accept any tendered
notes because of an invalid tender, the occurrence of certain other events set
forth in this prospectus or otherwise, we will return certificates for any
unaccepted old notes without expense to the tendering holder as promptly as
practicable after the expiration date.
You will not be required to pay brokerage commissions or fees or, except as
set forth below under "--Transfer taxes," transfer taxes with respect to the
exchange of your old notes in the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See "--Fees and expenses" below.
EXPIRATION DATE; AMENDMENT
The exchange offer will expire at 5:00 p.m., New York City time, on
2000, unless we determine, in our sole discretion, to extend the date
and time to which it is extended. We do not intend to extend the exchange offer,
although we reserve the right to do so. If we extend the exchange offer, we will
give oral or written notice of the extension to the exchange agent and give each
registered holder notice by means of a press release or other public
announcement of any extension prior to 9:00 a.m., New York City time, on the
next business day after the scheduled expiration date.
We also reserve the right, in our sole discretion,
- to delay accepting any old notes or, if any of the conditions set forth
below under "--Conditions" have not been satisfied or waived, to terminate
the exchange offer or
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- to amend the terms of the exchange offer in any manner, by giving oral or
written notice of such delay or termination to the exchange agent, and by
complying with Rule 14e-1(d) under the Exchange Act to the extent that
rule applies.
We acknowledge and undertake to comply with the provisions of Rule 14e-1(c)
under the Exchange Act, which requires us to pay the consideration offered, or
return the old notes surrendered for exchange, promptly after the termination or
withdrawal of the exchange offer. We will notify you as promptly as we can of
any extension, termination or amendment.
INTEREST ON THE NOTES
The old notes will continue to accrue interest through (but not including)
the date of issuance of the new notes. Any old notes not tendered or accepted
for exchange will continue to accrue interest at the rate of 14% per annum in
accordance with their terms. From and after the date of issuance of the new
notes, the new notes will accrue interest at the rate of 14% per annum, payable
in arrears on February 15 and August 15 of each year, commencing on August 15,
2000.
PROCEDURES FOR TENDERING
To tender in the exchange offer, you must follow these steps:
(a) complete, sign and date the letter of transmittal, or a facsimile of
it;
(b) have the signatures on the letter guaranteed if required by
Instruction 3 of the letter of transmittal; and
(c) mail or otherwise deliver such letter of transmittal or such
facsimile, together with the old notes and any other required documents, to
the Exchange Agent before to 5:00 p.m., New York City time, on the
Expiration Date.
If delivery of the old notes is to be made through book-entry transfer into
the Exchange Agent's account at DTC, you must tender the old notes in accordance
with DTC's Automated Tender Offer Program ("ATOP") procedures. See "--Book-Entry
Transfer; Delivery and Form."
Your tender of old notes will constitute an agreement between us in
accordance with the terms and subject to the conditions set forth in this
Prospectus and in the letter of transmittal.
You must deliver all documents for tender to the Exchange Agent at its
address set forth below. You may also request your brokers, dealers, commercial
banks, trust companies or nominees to effect the above transactions for you.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS, IS AT YOUR OPTION AND YOUR SOLE RISK. DOCUMENTS ARE
DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY
MAIL, WE RECOMMEND REGISTERED MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED,
OR AN OVERNIGHT DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME
TO INSURE TIMELY DELIVERY.
Only a Holder of old notes may tender such old notes in the exchange offer.
The term "Holder" with respect to the exchange offer means any person in whose
name old notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered Holder.
If your old notes are registered in the name of your broker, dealer,
commercial bank, trust company or other nominee and you wish to tender, you
should contact such registered Holder promptly and instruct such registered
Holder to tender on your behalf. If your old notes are so registered and you
wish to tender on your own behalf, you must, prior to completing and executing
the letter of
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transmittal and delivering your old notes, either make appropriate arrangements
to register ownership of the old notes in your name or obtain a properly
completed bond power from the registered Holder. The transfer of record
ownership may take considerable time.
Signatures on a letter of transmittal or notice of withdrawal must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., or a commercial bank or
trust company having an office or correspondent in the U.S. (an "Eligible
Institution"). Signatures do not need to be guaranteed if the old notes are
tendered (i) by a registered Holder who has not completed the box entitled
"Special Payment Instructions" or "Special Delivery Instructions" on the letter
of transmittal or (ii) for the account of an Eligible Institution.
If the letter of transmittal is signed by a person other than the registered
Holder of any old notes listed on the letter, such old notes must be endorsed or
accompanied by appropriate bond powers signed as the name of the registered
Holder or Holders appears on the old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons must indicate their capacity when signing. Unless waived by the Company,
you must then submit evidence satisfactory to us of their authority to so act
with the letter of transmittal.
We will determine in our sole discretion all questions as to the validity,
form, eligibility (including time of receipt) and acceptance of tendered old
notes and withdrawal of tendered old notes. Our determination will be final and
binding. We reserve the absolute right to reject any and all old notes not
properly tendered or any old notes of which would, in the opinion of our
counsel, be unlawful for us to accept. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer (including the
instructions in the letter of transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes must be cured within such time as we determine. No one is under any
duty to give notification of defects or irregularities with respect to tenders
of old notes, nor will any person incur any liability for failure to give such
notification. Old notes are not properly tendered until such irregularities have
been cured or waived. Any old notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders
of old notes, unless otherwise provided in the letter of transmittal, as soon as
practicable after the Expiration Date.
In addition, we reserve the right in our sole discretion:
- to purchase or make offers for any old notes that remain outstanding after
the Expiration Date;
- to terminate the exchange offer as described in "--Conditions"; and
- to the extent permitted by applicable law, purchase old notes in the open
market, in privately negotiated transactions or otherwise. The terms of
any such purchases or offers could differ from the terms of the exchange
offer.
By tendering, you will represent to us, among other things, that:
- the new notes you acquire in the exchange offer are being obtained in the
ordinary course of your business;
- you have no arrangement with any person to participate in the distribution
of such new notes; and
- you are not an "affiliate," as defined under Rule 405 of the Securities
Act, of us.
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If you are a Participating Broker-Dealer that will receive new notes for
your own account in exchange for old notes that were not acquired directly from
the Company, by tendering you will acknowledge that you will deliver a
prospectus in connection with any resale of such new notes. See "Plan of
Distribution."
BOOK-ENTRY TRANSFER; DELIVERY AND FORM
The old notes were initially represented by a global old note in fully
registered form, registered in the name of a nominee of the DTC.
The new notes exchange for the old notes by the global old note will be
represented by a global new note in fully registered form, registered in the
name of the nominee of DTC.
The global new note will be exchangeable for definitive new notes in
registered form, in denominations of $1,000 principal amount at maturity and
integral multiples of $1,000. The new note in global form will trade in The
Depository Trust Company's Same-Day Funds Settlement System, and secondary
market trading activity in such new notes will therefore settle in immediately
available funds.
We understand that the Exchange Agent will make a request promptly after the
date of this prospectus to establish an account with respect to the old notes,
at DTC for the purpose of facilitating the exchange offer. Subject to the
establishment of this account, any financial institution that is a participant
in DTC's system may make book-entry delivery of old notes by causing DTC to
transfer such old notes into the Exchange Agent's account with respect to the
old notes in accordance with DTC's ATOP procedures for such book-entry
transfers. Although delivery of the old notes may be effected through book-entry
transfer into the Exchange Agent's account at DTC, the exchange for old notes so
tendered will be made only after two conditions are met. First, the DTC must
timely confirm (a "Book-Entry Confirmation") such book-entry transfer of the old
notes into the Exchange Agent's account. Second, the Exchange Agent must timely
receive a Book-Entry Confirmation with a message, transmitted by DTC and
received by the Exchange Agent and forming part of the Book-Entry Confirmation,
which states that DTC has received express acknowledgment from a participant
tendering old notes that such participant has received and agrees to be bound by
the terms of the letter of transmittal, and that such agreement may be enforced
against such participant.
GUARANTEED DELIVERY PROCEDURES
If your old notes are not immediately available or if you cannot deliver
your old notes, the letter of transmittal or any other required documents to the
Exchange Agent prior to the Expiration Date, you may effect a tender if:
(1) the tender is made through an Eligible Institution;
(2) before the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the old notes, the
certificate number or numbers of such old notes and the principal amount at
maturity of old notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three New York Stock Exchange trading
days after the Expiration Date, the letter of transmittal (or facsimile of
such letter) together with the certificate(s) representing the old notes to
be tendered in proper form for transfer and any other documents required by
the letter of transmittal, or a Book-Entry Confirmation, as the case may be,
will be delivered by the Eligible Institution to the Exchange Agent; and
(3) such properly completed and executed letter of transmittal (or
facsimile of such letter), as well as the certificate(s) representing all
tendered old notes in proper form for transfer and all other documents
required by the letter of transmittal, or a Book-Entry Confirmation, as the
case
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may be, are received by the Exchange Agent within three New York Stock
Exchange trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise described in this prospectus, tenders of old notes may
be withdrawn at any time before 5:00 p.m., New York City time, on the Expiration
Date. To withdraw a tender of old notes in the Exchange Offer, the Exchange
Agent must receive a written or facsimile transmission notice of withdrawal at
its address set forth in this prospectus before 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must:
(1) specify the name of the person having deposited the old notes to be
withdrawn (the "Depositor");
(2) identify the old notes to be withdrawn (including the certificate
number or numbers and principal amount at maturity of such old notes);
(3) be signed by the Holder in the same manner as the original signature
on the Letter of Transmittal by which such old notes were tendered
(including any required signature guarantees) or be accompanied by documents
of transfer sufficient to have the Trustee with respect to the old notes
register the transfer of such old notes into the name of the person
withdrawing the tender; and
(4) specify the name in which any such old notes are to be registered,
if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by us. Our determination will be
final and binding on all parties. Any old notes so withdrawn will be deemed not
to have been validly tendered for purposes of the exchange offer and no new
notes will be issued with respect thereto unless the old notes so withdrawn are
validly retendered. Any old notes which have been tendered but which are not
accepted for exchange will be returned to their Holder without cost to such
Holder as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures, described above under
"--Procedures for Tendering" at any time before the Expiration Date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange new notes for, any old notes not
accepted for exchange, and may terminate or amend the exchange offer as provided
in this prospectus before the acceptance of such old notes, if any of the
following conditions exist:
(1) the exchange offer, or the making of any exchange by a Holder,
violates applicable law or any applicable interpretation of the SEC;
(2) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the exchange offer
which, in our sole judgment, might impair our ability to proceed with the
exchange offer;
(3) any law, statute, rule or regulation is adopted or enacted which, in
our sole judgment, might materially impair our ability to proceed with the
exchange offer;
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(4) a banking moratorium is declared by U.S. federal or California or
New York state authorities which, in our judgment, would reasonably be
expected to impair our ability to proceed with the exchange offer;
(5) trading on the New York Stock Exchange or generally in the U.S.
over-the-counter market is suspended by order of the SEC or any other
governmental authority which, in our judgment, would reasonably be expected
to impair our ability to proceed with the exchange offer; or
(6) a stop order is issued by the SEC or any state securities authority
suspending the effectiveness of the Registration Statement or proceedings
are initiated or, to our knowledge, threatened for that purpose.
If any such conditions exist, we may
- refuse to accept any old notes and return all tendered old notes to
exchanging Holders;
- extend the exchange offer and retain all old notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
Holders to withdraw such old notes (see "--Withdrawal of Tenders"); or
- waive certain of such conditions with respect to the exchange offer and
accept all properly tendered old notes which have not been withdrawn or
revoked.
If such waiver constitutes a material change to the exchange offer, we will
promptly disclose such waiver in a manner reasonably calculated to inform
Holders of old notes of such waiver.
The conditions described above are for our sole benefit. We may assert any
condition regardless of the circumstances giving rise to any such condition. We
may waive any condition in whole or in part at any time and from time to time in
our sole discretion. We are not waiving these rights by failing to exercise
them. These rights are ongoing and may be asserted at any time and from time to
time.
EXCHANGE AGENT
We appointed the State Street Bank & Trust Company of California, N.A. as
Exchange Agent for the exchange offer. Send letters of transmittal and Notices
of Guaranteed Delivery to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Overnight Courier:
By Registered or Certified Mail: Attention:
State Street Bank and Trust Company of State Street Bank and Trust Company of
California, N.A California, N.A
c/o State Street Bank and Trust Company c/o State Street Bank and Trust Company
2 Avenue de Lafayette 2 Avenue de Lafayette
Boston, MA 02111-1724 Boston, MA 02111-1724
Attention: Ralph Jones Attention: Ralph Jones
By Hand:
Attention:
State Street Bank and Trust Company of
California, N.A
c/o State Street Bank and Trust Company Facsimile Information
2 Avenue de Lafayette Attention: Ralph Jones
Boston, MA 02111-1724 Facsimile: 617-662-1452
Attention: Ralph Jones Phone: 617-662-1548
</TABLE>
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FEES AND EXPENSES
We will pay the expenses of soliciting tenders. The principal solicitation
is being made by mail. Additional solicitation may be made by telegraph,
telephone or in person by officers and regular employees of the Company and its
affiliates.
We will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. We may also pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Prospectus and related
documents to the beneficial owners of the old notes, and in handling or
forwarding tenders for exchange.
We will pay the cash expenses to be incurred in connection with the exchange
offer. We estimate these cash expenses will aggregate approximately $ ,
including fees and expenses of the exchange agent and the Trustee under the
indenture and accounting and legal fees.
We will pay all transfer taxes, if any, applicable to the exchange of old
notes in the exchange offer. The amount of any such transfer taxes (whether
imposed on the registered Holder or any other persons) will be payable by the
tendering Holder if:
(1) certificates representing new notes or old notes for principal
amounts at maturity no tendered or accepted for exchange are to be delivered
to, or are to be registered in the name of, any person other than the
registered Holder of the old notes tendered;
(2) tendered old notes are registered in the name of any person other
than the person signing the Letter of Transmittal; or
(3) a transfer tax is imposed for any reason other than the exchange of
old notes in the Exchange Offer.
In such circumstances, you must submit satisfactory evidence of payment of
such taxes or exception from such taxes with the Letter of Transmittal or the
amount of such transfer taxes will be billed directly to you.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the old notes,
which is face value as reflected in the Company's accounting records on the date
of the exchange offer. Accordingly, no gain or loss for accounting purposes will
be recognized upon completion of the exchange offer. The issuance costs incurred
in connection with the exchange offer will be capitalized and amortized over the
term of the new notes.
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CERTAIN TERMS OF THE NEW NOTES
The terms of the new notes will be identical in all material respects to
those of the old notes described below, except that the new notes (i) will have
been registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the old notes and (ii) will not
be entitled to certain registration rights under the registration rights
agreement, including the provision for Additional Interest of up to 2.00% on the
old notes. Holders of old notes should review the information set forth below in
this section for terms common to the new notes and the old notes.
Upon consummation of the exchange offer, the Company will have no further
obligation to register the old notes. Thereafter, any holder of old notes who
does not tender its old notes in the exchange offer, including any holder which
is an "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company which cannot tender its old notes in the exchange offer, will
continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of securities,
provided that an opinion of counsel is furnished that such an exemption is
available.
The new notes are 14% Senior Notes and have a principal amount up to $300.0
million. The new notes will mature on February 15, 2010. The new notes will pay
interest in cash at the rate of 14% per annum, payable on February 15 and
August 15 of each year, commencing August 15, 2000.
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DESCRIPTION OF THE NOTES
The old notes were issued and the new notes will be issued under an
Indenture (the "Indenture") dated as of February 23, 2000 between Rhythms
NetConnections Inc. (the "Company") and State Street Bank and Trust Company of
California, N.A., as Trustee. Upon the issuance of the new notes, if any, or the
effectiveness of a Shelf Registration Statement with respect to the old notes,
the Indenture will be subject to and governed by the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The following summary of certain
provisions of the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Trust Indenture Act and to
all of the provisions of the Indenture, including the definitions of certain
terms therein and those terms made a part of the Indenture by reference to the
Trust Indenture Act, as in effect on the date of the Indenture. The definitions
of certain capitalized terms used in the following summary are set forth below
under "--Certain Definitions."
The new notes and the old notes are collectively referred to as the "Notes."
GENERAL
The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 principal amount and integral multiples thereof.
Principal of, premium, if any, and interest on the Notes are payable, and the
Notes are exchangeable and transferable, at the office or agency of the Company
in the City of New York maintained for such purposes (which initially will be
the corporate trust office of the Trustee). See "--Book-Entry; Delivery and
Form." No service charge will be made for any registration of transfer, exchange
or redemption of the Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Notes are our general unsecured obligations, limited to $300.0 million
aggregate principal amount, and will mature on February 15, 2010. Cash interest
on the Notes accrues at a rate of 14% per annum, and is payable semi-annually in
arrears on each February 15 and August 15 to registered holders of Notes on the
February 1 or August 1, as the case may be, immediately preceding such interest
payment date, commencing August 15, 2000. Interest on the Notes accrues from the
most recent interest payment date to which interest has been paid or duly
provided for, or, if no interest has been paid or duly provided for, from
February 23, 2000. Interest is computed on the basis of a 360-day year of twelve
30-day months. If the Company defaults on any payment of principal (whether at
maturity, upon redemption or otherwise), cash interest will continue to accrue
and, to the extent permitted by law, cash interest will accrue on overdue
installments of interest at the rate of interest borne by the Notes.
REDEMPTION
OPTIONAL REDEMPTION. The Notes will be redeemable, at the option of the
Company, in whole or in part, at any time on or after February 15, 2005, upon
not less than 30 nor more than 60 days' written notice at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest thereon, if any, and liquidated damages, if any, to the
applicable
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redemption date, if redeemed during the twelve-month period beginning on
February 15 of each of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2005........................................................ 107.000%
2006........................................................ 104.666%
2007........................................................ 102.333%
2008 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time on or prior to February 15, 2003, the Company may,
other than in any circumstances resulting in a Change of Control, redeem, at its
option, up to a maximum of 35% of the originally-issued aggregate principal
amount of Notes at a redemption price (determined at the applicable redemption
date) equal to 114% of the principal amount of the Notes so redeemed plus
accrued and unpaid interest, if any, and liquidated damages, if any, with the
net cash proceeds of (a) one or more Public Equity Offerings and/or (b) the
sale, subsequent to the Issue Date, of Capital Stock (other than Disqualified
Stock) in one or more transactions not constituting a Public Equity Offering to
Strategic Equity Investors, resulting in gross cash proceeds to the Company of
at least $25.0 million in the aggregate; PROVIDED that not less than 65% of the
originally-issued aggregate principal amount of Notes is outstanding immediately
following such redemption. Any such redemption must be effected upon not less
than 30 nor more than 60 days' notice given within 30 days after the
consummation of a Public Equity Offering or sale to one or more Strategic Equity
Investors, the net proceeds from which, together with any net proceeds from any
prior Public Equity Offerings or sales to Strategic Equity Investors, are to be
used to effect an optional redemption in accordance with this paragraph.
MANDATORY REDEMPTION. The Company will not be required to repurchase the
Notes or make any mandatory redemption or sinking fund payments in respect of
the Notes. However, (i) following the occurrence of a Change of Control, the
Company will be required to make an offer to purchase all outstanding Notes at a
price equal to 101% of the principal amount thereof, and (ii) following the
occurrence of an Asset Sale, the Company may be obligated to make an offer to
purchase all or a portion of the outstanding Notes at a price equal to 100% of
the principal amount thereof, in each case plus accrued and unpaid interest, if
any, and liquidated damages, if any, to the date of purchase. See "--Certain
Covenants--CHANGE OF CONTROL" and "--DISPOSITION OF PROCEEDS OF ASSET SALES,"
respectively.
SELECTION; EFFECT OF REDEMPTION NOTICE. In the case of a partial
redemption, selection of the Notes for redemption will be made pro rata, by lot
or such other method as the Trustee in its sole discretion deems appropriate and
just; provided that any redemption pursuant to the provisions relating to
redemptions from the proceeds of one or more Public Equity Offerings or sales to
one or more Strategic Equity Investors shall be made on a pro rata basis or on
as nearly a pro rata basis as practicable (subject to DTC procedures). No Notes
of a principal amount of $1,000 or less shall be redeemed in part. Notice of
redemption shall be mailed by first-class mail at least 30 but not more than
60 days before the redemption date to each holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
surrender for cancellation of the original Note. Upon giving of a redemption
notice, interest on Notes called for redemption will cease to accrue from and
after the date fixed for redemption (unless the Company defaults in providing
the funds for such redemption) and such Notes will cease to be outstanding.
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RANKING
The Indebtedness of the Company evidenced by the Notes will rank senior in
right of payment to all Subordinated Indebtedness of the Company and PARI PASSU
in right of payment with all existing and future unsecured and unsubordinated
Indebtedness of the Company. The Notes will be effectively subordinated in right
of payment to all secured Indebtedness of the Company to the extent of the value
of the assets securing such Indebtedness. Assuming the Notes had been issued on
September 30, 1999, the Company would have had outstanding at that date
Indebtedness of approximately $800.1 million, of which approximately
$0.5 million is secured Indebtedness (consisting of bank Indebtedness), which
would have been effectively senior in right of payment to the Notes, and
approximately $799.6 million is unsecured and unsubordinated Indebtedness
(including the 1998 Notes, which will accrete to $290 million in 2003 if not
earlier repurchased or redeemed, the 1999 Notes and the Notes offered hereby),
which would have been PARI PASSU in right of payment with the Notes. The Notes
will also be structurally subordinated to all existing and future Indebtedness
of any Subsidiary of the Company. As of September 30, 1999, the Company's
Subsidiaries had no outstanding Indebtedness.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company or its Restricted Subsidiaries may incur, under
certain circumstances the amount of such Indebtedness could be substantial. See
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS" below. If the
Company becomes insolvent or is liquidated, or if payment under any secured
Indebtedness is accelerated, the lenders under such Indebtedness would be
entitled to exercise the remedies available to a secured lender under applicable
law pursuant to the terms of the applicable financing agreements. Accordingly,
any claims of such lenders with respect to assets secured in their favor will be
prior to any claims of the holders of the Notes with respect to such assets.
CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture.
LIMITATION ON ADDITIONAL INDEBTEDNESS. The Indenture will provide that the
Company will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume, issue, Guarantee or in any manner become
directly or indirectly liable for or with respect to, contingently or otherwise,
the payment of (collectively, to "incur") any Indebtedness (including any
Acquired Indebtedness), except for Permitted Indebtedness (including Acquired
Indebtedness to the extent it would constitute Permitted Indebtedness); PROVIDED
(i) the Company will be permitted to incur Indebtedness (including Acquired
Indebtedness) and (ii) a Restricted Subsidiary will be permitted to incur
Acquired Indebtedness, if, in either case, after giving PRO FORMA effect to such
incurrence (including the application of the net proceeds therefrom), the
Indebtedness to EBITDA Ratio would be less than or equal to 6 to 1.
Indebtedness of any Person or any of its Subsidiaries existing at the time
such Person becomes a Restricted Subsidiary (or is merged into or consolidated
with the Company or any Restricted Subsidiary), whether or not such Indebtedness
was incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary (or being merged into or consolidated with the Company or
any Restricted Subsidiary) shall be deemed incurred at the time such Person
becomes a Restricted Subsidiary or merges into or consolidates with the Company
or any Restricted Subsidiary. In addition, pursuant to the purchase agreement to
be entered into among the Company and each of Merrill Lynch, Salomon Smith
Barney, Chase Securities Inc. and Credit Suisse First Boston, the Company will
agree that for a period of 180 days from the date of the final Offering
Memorandum, it will not, without the prior written consent of Merrill Lynch,
directly or indirectly, offer, sell, grant any option to purchase, or otherwise
dispose of, any debt security of the Company or security of the Company that is
convertible into, or exchangeable for, any debt security of the Company (other
than the new notes).
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Accrual of interest, accretion or amortization of original issue discount
and reductions in any collateral described in clause (B) of the definition of
"Indebtedness" by reason of payments of interest on the Indebtedness secured by
such collateral will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
LIMITATION ON RESTRICTED PAYMENTS. The Indenture will provide that the
Company will not, and will not permit any of the Restricted Subsidiaries to,
make, directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of or
upon giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, the
Company would be able to incur $1.00 of Indebtedness under the proviso of
the covenant "--LIMITATION ON ADDITIONAL INDEBTEDNESS"; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after the
Issue Date does not exceed an amount equal to the sum of, without
duplication, (a) 50% of the Consolidated Net Income accrued on a cumulative
basis during the period beginning on the first day of the first fiscal
quarter immediately subsequent to the Issue Date and ending on the last day
of the fiscal quarter of the Company immediately preceding the date of such
proposed Restricted Payment (or, if such cumulative Consolidated Net Income
of the Company for such period is a deficit, minus 100% of such deficit) for
which financial statements are available, in any event determined by
excluding income resulting from transfers of assets by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary, PLUS (b) the aggregate
net cash proceeds received by the Company either (x) as capital
contributions to the Company after May 5, 1998 or (y) from the issuance and
sale of its Capital Stock (other than Disqualified Stock) or options,
warrants or other rights to acquire its Capital Stock (other than
Disqualified Stock), in each case on or after May 5, 1998 to a Person who is
not a Subsidiary of the Company, PLUS (c) the aggregate net proceeds
received by the Company from the issuance (other than to a Subsidiary of the
Company) on or after May 5, 1998 of its Capital Stock (other than
Disqualified Stock) upon the conversion of, or in exchange for, Indebtedness
of the Company or upon the exercise of options, warrants or other rights of
the Company, PLUS (d) in the case of the disposition or repayment (in whole
or in part) of any Investment constituting a Restricted Payment made after
the Issue Date, an amount equal to the lesser of the return of capital with
respect to the applicable portion of such Investment and the cost of the
applicable portion of such Investment, in either case, less the cost of the
disposition of such Investment, PLUS (e) in the case of any Revocation with
respect to a Subsidiary of the Company that was made subject to a
Designation after the Issue Date, an amount equal to the lesser of the
Designation Amount with respect to such Subsidiary or the Fair Market Value
of the Investment of the Company and the Restricted Subsidiaries in such
Subsidiary at the time of Revocation. For purposes of the preceding
clause (b), there shall be excluded in all cases any issuance and sale of
Capital Stock in one or more Public Equity Offerings or to Strategic Equity
Investors to the extent the net cash proceeds are used, prior to
February 15, 2003, to redeem Notes as described under
"--Redemption--OPTIONAL REDEMPTION." The Company may not redeem Notes as
described under "--Redemption--OPTIONAL REDEMPTION" from net cash proceeds
received by the Company from the issuance on or after the Issue Date of its
Capital Stock if such net cash proceeds have ever been included in a
determination of the amount of Restricted Payments that may be made by the
Company pursuant to this covenant, unless the Company would have been able
to make such Restricted Payment without including such net cash proceeds in
such determination.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its Fair Market Value.
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The provisions of this covenant shall not prohibit the following (each of
which shall be given independent effect): (1) the payment of any dividend or
other distribution within 60 days after the date of declaration thereof if at
such date of declaration such payment would be permitted by the provisions of
the Indenture; (2) the purchase, redemption, retirement or other acquisition of
any shares of Capital Stock of the Company in exchange for, or out of the net
cash proceeds of the substantially concurrent issue and sale (other than to a
Subsidiary of the Company) of, shares of Capital Stock of the Company (other
than Disqualified Stock); PROVIDED that any such net cash proceeds are excluded
from clause (iii) (b) of the second preceding paragraph; (3) so long as no
Default shall have occurred and be continuing, the purchase, redemption,
retirement, defeasance or other acquisition of Subordinated Indebtedness
(A) made by exchange for, or out of the net cash proceeds of, a substantially
concurrent issue and sale (other than to a Subsidiary of the Company) of
(x) Capital Stock (other than Disqualified Stock) of the Company PROVIDED that
any such net cash proceeds are excluded from clause (iii)(b) of the second
preceding paragraph; or (y) other Subordinated Indebtedness to the extent that
(I) its stated maturity for the payment of principal thereof is not prior to the
91st day after the final stated maturity of the Notes, (II) its principal amount
does not exceed the principal amount (or, if such Subordinated Indebtedness
being refinanced provides for an amount less than the principal amount thereof
to be due and payable upon an acceleration thereof, such lesser amount) of the
Subordinated Indebtedness being refinanced, PLUS any premium required to be paid
in connection with such refinancing pursuant to the terms of such Subordinated
Indebtedness being refinanced, plus the amount of expenses of the Company
incurred in connection with such refinancing, and (III) such new Subordinated
Indebtedness is subordinated to the Notes to the same extent as the Subordinated
Indebtedness being refinanced, or (B) with Unutilized Cash Proceeds remaining
after completion of an Asset Sale pursuant to the fifth paragraph of the
covenant described under "--DISPOSITION OF PROCEEDS OF ASSET SALES"; (4) so long
as no Default shall have occurred and be continuing, purchases or redemptions of
Capital Stock (including cash settlements of stock options) held by employees,
officers or directors upon or following termination (whether by reason of death,
disability or otherwise) of their employment with the Company or one of its
Subsidiaries; PROVIDED that payments shall not exceed $500,000 in any fiscal
year in the aggregate; (5) payments or distributions to dissenting stockholders
pursuant to applicable law, pursuant to or in contemplation of merger,
consolidation or transfer of assets that complies with the provisions of the
Indenture relating to mergers, consolidations or transfers of substantially all
of the assets of the Company; (6) any purchase of any fractional share of Common
Stock of the Company in connection with an exercise of the 1998 Warrants and any
repurchase of 1998 Warrants pursuant to a Repurchase Offer (as defined in the
1998 Warrant Agreement); and (7) Restricted Payments in addition to those
otherwise permitted pursuant to this covenant in an aggregate amount not to
exceed $10.0 million.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (1), (4) and (7) above shall be
included, without duplication, as Restricted Payments.
LIMITATION ON LIENS SECURING CERTAIN INDEBTEDNESS. The Indenture will
provide that the Company will not, and will not permit any Restricted Subsidiary
to, create, incur, assume or suffer to exist any Liens of any kind against or
upon any of the property or assets of the Company or any Restricted Subsidiary,
whether now owned or hereafter acquired, or any proceeds therefrom, which secure
either (x) Subordinated Indebtedness, unless the Notes are secured by a Lien on
such property, assets or proceeds that is senior in priority to the Liens
securing such Subordinated Indebtedness or (y) Indebtedness of (A) the Company
that is not Subordinated Indebtedness or (B) any Restricted Subsidiary, unless
in each case the Notes are equally and ratably secured with the Liens securing
such other Indebtedness, except, in the case of clauses (x) and (y), for
Permitted Liens and for Liens to secure Debt Securities on cash representing the
proceeds of such Debt Securities or on Government Securities acquired with such
cash and pledged for the purpose of providing for the payment of principal of,
and/or interest on, such Debt Securities.
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CHANGE OF CONTROL. Upon the occurrence of a Change of Control (the date of
such occurrence being the "Change of Control Date"), the Company shall make an
offer to purchase (the "Change of Control Offer"), on a business day (the
"Change of Control Payment Date") not later than 60 days following the Change of
Control Date, all Notes then outstanding at a purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest thereon, if any,
and liquidated damages, if any, to such Change of Control Payment Date. Notice
of a Change of Control Offer shall be given to holders of Notes, not less than
30 days nor more than 60 days before the Change of Control Payment Date. The
Change of Control Offer is required to remain open for at least 20 business days
and until the close of business on the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction which may be highly leveraged.
Future Indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or may
require such Indebtedness to be repurchased upon a change of control (as defined
in the instruments governing such Indebtedness). Moreover, the exercise by the
Holders of their right to require the Company to repurchase the Notes could
cause a default under such Indebtedness, even if the Change of Control itself
does not.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay for all of the Notes that
might be delivered by holders of Notes seeking to accept the Change of Control
Offer. The Company's obligation to make a Change of Control Offer following a
Change of Control shall be satisfied if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer. See "Risk Factors--Risks Associated with a Change of Control."
If the Company is required to make a Change of Control Offer, the Company
shall comply with all applicable tender offer laws and regulations, including,
to the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act,
and any other applicable securities laws and regulations. To the extent that the
provisions of any such securities laws or regulations conflict with provisions
of this covenant, the Company will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
this covenant solely by virtue of such compliance.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Indenture will provide that the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
enter into or cause to become effective any encumbrance or restriction of any
kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash
or otherwise, or make any other distributions on its Capital Stock or any other
interest or participation in, or measured by, its profits to the extent owned by
the Company or any Restricted Subsidiary, (b) pay any Indebtedness owed to the
Company or any Restricted Subsidiary, (c) make any Investment in the Company or
any Restricted Subsidiary or (d) transfer any of its properties or assets to the
Company or to any Restricted Subsidiary, except for (i) any encumbrance or
restriction in existence on the Issue Date, (ii) customary non-assignment
provisions, (iii) any encumbrances or restriction pertaining to an asset subject
to a Lien to the extent set forth in the security documentation governing such
Lien, (iv) any encumbrance or restriction applicable to a Restricted Subsidiary
at the time that it becomes a Restricted Subsidiary that is not created in
contemplation thereof, (v) any encumbrance or restriction existing under any
agreement that refinances or replaces an agreement containing a restriction
permitted by clause (iv) above; PROVIDED that the terms and conditions of any
such encumbrance or restriction are not materially less favorable to the holders
of Notes than those under or pursuant to the agreement being replaced or the
agreement evidencing the Indebtedness refinanced, (vi) any encumbrance or
restriction imposed upon a Restricted Subsidiary pursuant to an agreement which
has
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been entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of such Restricted Subsidiary or any Asset Sale to the
extent limited to the Capital Stock or assets in question, and (vii) any
customary encumbrance or restriction applicable to a Restricted Subsidiary that
is contained in an agreement or instrument governing or relating to Permitted
Indebtedness contained in any Debt Securities or Permitted Credit Facility;
provided that the terms and conditions of any such encumbrance or restriction
contained in any Debt Securities are no more restrictive than those contained in
the Indenture; PROVIDED FURTHER, that (subject to customary net worth, leverage,
invested capital and other financial covenants and the absence of default under
such agreement or instrument) the provisions of such agreement or instrument
permit the payment of interest and principal and mandatory repurchases pursuant
to the terms of the Indenture and the Notes and other Indebtedness (other than
Subordinated Indebtedness) that is solely an obligation of the Company; and
PROVIDED FURTHER that such agreement or instrument may contain customary
covenants regarding the merger of or sale of all or any substantial part of the
assets of the Company or any Restricted Subsidiary, customary restrictions on
transactions with affiliates and customary subordination provisions governing
indebtedness owed to the Company or any Restricted Subsidiary.
DISPOSITION OF PROCEEDS OF ASSET SALES. The Indenture will provide that the
Company will not, and will not permit any Restricted Subsidiary to, make any
Asset Sale unless (a) the Company or such Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the shares or assets sold or otherwise disposed of and
(b) at least 75% of such consideration consists of cash or Cash Equivalents;
PROVIDED that the following shall be treated as cash for purposes of this
covenant: (x) the amount of any Indebtedness (other than Subordinated
Indebtedness) of the Company or any Restricted Subsidiary that is actually
assumed by the transferee of assets disposed of in such Asset Sale and from
which the Company and the Restricted Subsidiaries are fully released and
(y) the amount of any notes or other obligations that within 30 days of receipt
are converted into cash (to the extent of the cash (after payment of any costs
of disposition) so received). Notwithstanding the preceding sentence, the
Company and its Restricted Subsidiaries may consummate an Asset Sale without
complying with clause (b) of the immediately preceding sentence if at least 75%
of the consideration for such Asset Sale consists of any combination of cash,
Cash Equivalents and Permitted Business Assets (as defined below) (or in Capital
Stock of any Person that will become a Restricted Subsidiary as a result of such
investment if all or substantially all of the properties and assets of such
Person are Permitted Business Assets); provided that any non-cash consideration
(other than Permitted Business Assets received by the Company or any of its
Restricted Subsidiaries in connection with such Asset Sale) that is converted
into or sold or otherwise disposed of for cash or Cash Equivalents within
365 days after such Asset Sale and any Permitted Business Assets constituting
cash or Cash Equivalents received by the Company or any Restricted Subsidiary
shall constitute Net Cash Proceeds subject to the provisions set forth below.
The Company or the applicable Restricted Subsidiary, as the case may be, may
(i) apply the Net Cash Proceeds from such Asset Sale, within 365 days of the
receipt thereof, to the permanent reduction (whether by means of repayment,
release pursuant to clause (x) of the first sentence of this covenant or
otherwise) of (A) Indebtedness of any Restricted Subsidiary and/or
(B) Indebtedness of the Company ranking senior to or PARI PASSU with the Notes,
and, in each case, permanently reduce the amount of the commitments thereunder
by the amount of the Indebtedness so repaid, and/or (ii) apply such Net Cash
Proceeds, within 365 days of the receipt thereof, to an investment in properties
and assets (including leases of such properties or assets) that will be used or
are usable in the same or a related line of business as that being conducted by
the Company or any Restricted Subsidiary at the time of such Asset Sale or such
investment therein (collectively, "Permitted Business Assets") (or in Capital
Stock of any Person that will become a Restricted Subsidiary as a result of such
investment if all or substantially all of the properties and assets of such
Person are Permitted Business Assets).
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To the extent all or part of the Net Cash Proceeds of any Asset Sale are not
applied within 365 days of such Asset Sale as described in clause (i) or
(ii) of the preceding paragraph (such Net Cash Proceeds, the "Unutilized Net
Cash Proceeds"), the Company shall, within 20 days after such 365th day, make an
offer to purchase (an "Asset Sale Offer") all outstanding Notes up to a maximum
principal amount (expressed as a multiple of $1,000) equal to the Note Pro Rata
Share of Unutilized Net Cash Proceeds, at a purchase price in cash equal to 100%
of the principal amount thereof, plus accrued and unpaid interest, if any, and
liquidated damages, if any, to such purchase date; PROVIDED, HOWEVER, that an
Asset Sale Offer may be deferred by the Company until there are Unutilized Net
Cash Proceeds equal to at least $5.0 million, at which time the entire amount of
such Unutilized Net Cash Proceeds (and not just the amount in excess of
$5.0 million) shall be applied as required pursuant to this paragraph and the
next following paragraph.
If any other Indebtedness of the Company which ranks PARI PASSU with the
Notes (the "Other Indebtedness"), including the 1998 Notes and the 1999 Notes,
requires that an offer to repurchase such Indebtedness be made upon the
consummation of an Asset Sale, the Company may apply the Unutilized Net Cash
Proceeds otherwise required to be applied to an Asset Sale Offer to offer to
purchase such Other Indebtedness and to an Asset Sale Offer so long as the
amount of such Unutilized Net Cash Proceeds applied to repurchase the Notes is
not less than the Note Pro Rata Share of Unutilized Net Cash Proceeds. Any offer
to purchase such Other Indebtedness shall be made at the same time as the Asset
Sale Offer, and the purchase date in respect of any such offer to purchase and
the Asset Sale Offer shall occur on the same day.
For purposes of this covenant, "Note Pro Rata Share of Unutilized Net Cash
Proceeds" means the amount of the Unutilized Net Cash Proceeds equal to the
product of (x) the Unutilized Net Cash Proceeds and (y) a fraction, the
numerator of which is the aggregate principal amount of, and all accrued
interest thereon to the purchase date on, all Notes (or portions thereof)
validly tendered and not withdrawn pursuant to an Asset Sale Offer related to
such Unutilized Net Cash Proceeds (the "Note Amount") and the denominator of
which is the sum of the Note Amount and the lesser of (i) the aggregate
principal face amount, and all accrued interest thereon to the purchase date, or
(ii) the accreted value as of the purchase date, of all Other Indebtedness (or
portions thereof) validly tendered and not withdrawn pursuant to a concurrent
offer to purchase such Other Indebtedness made at the time of such Asset Sale
Offer.
Each Asset Sale Offer shall remain open for a period of 20 business days or
such longer period as may be required by law. To the extent that the principal
amount, plus accrued interest thereon, if any, to the payment date, of Notes
validly tendered and not withdrawn pursuant to an Asset Sale Offer is less than
the Unutilized Net Cash Proceeds or the Note Pro Rata Share of Unutilized Net
Cash Proceeds, as the case may be, the Company or any Restricted Subsidiary may
use such deficiency for general corporate purposes, including the repayment or
repurchase of Indebtedness. If the principal amount, plus accrued interest
thereon, if any, to the payment date, of Notes validly tendered and not
withdrawn by holders thereof exceeds the amount of Notes which can be purchased
with the Unutilized Net Cash Proceeds or the Note Pro Rata Share of Unutilized
Net Cash Proceeds, as the case may be, then the Notes to be purchased will be
selected on a pro rata basis. Upon completion of an Asset Sale Offer and offer
for any Other Indebtedness, the amount of Unutilized Net Cash Proceeds shall be
reset to zero.
If the Company is required to make an Asset Sale Offer, the Company shall
comply with all applicable tender offer rules, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws and regulations. To the extent that the provisions of
any such securities laws or regulations conflict with provisions of this
covenant, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under this
covenant solely by virtue of such compliance.
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LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The Indenture will provide that the Company will not sell, and
will not permit any Restricted Subsidiary, directly or indirectly, to issue or
sell, any shares of Capital Stock (or any options, warrants or other rights to
purchase such Capital Stock) of a Restricted Subsidiary, except (i) any sale or
issuance of Capital Stock to the Company or a Wholly Owned Restricted
Subsidiary, (ii) any sale or issuance of Common Stock to directors as director
qualifying shares, but only to the extent required under applicable law,
(iii) any sale or other disposition of all, but not less than all, of the issued
and outstanding Capital Stock of any Restricted Subsidiary owned by the Company
and the Restricted Subsidiaries or (iv) any sale or issuance of Capital Stock of
a Restricted Subsidiary (other than pursuant to clauses (i) or (ii)) if such
Restricted Subsidiary would no longer be a Restricted Subsidiary immediately
after such transaction and any Investment in such Person remaining after giving
effect to such sale or issuance would have been permitted to be made under the
covenant described under "--LIMITATION ON RESTRICTED PAYMENTS," and, in the case
of both (iii) and (iv), in compliance with the covenant described under
"--DISPOSITION OF PROCEEDS OF ASSET SALES."
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture will provide that
the Company shall not, and shall not permit, cause or suffer any Restricted
Subsidiary to, directly or indirectly, conduct any business, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into any contract, agreement, loan,
advance or Guarantee or engage in any other transaction (or series of related
transactions which are similar or part of a common plan) with or for the benefit
of any of their respective Affiliates or any beneficial owner of 10% or more of
the Common Stock of the Company or any officer or director of the Company or any
Subsidiary (each, an "Affiliate Transaction"), unless the terms of the Affiliate
Transaction are set forth in writing and are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than would be available in a
comparable transaction with an unaffiliated third party. Each Affiliate
Transaction (or series of related Affiliate Transactions) involving aggregate
payments and/or other consideration having Fair Market Value (i) in excess of
$1.0 million shall be approved by a majority of the Board, such approval to be
evidenced by a Board Resolution stating that the Board has determined that such
transaction or transactions comply with the foregoing provisions, (ii) in excess
of $5.0 million shall further require the approval of a majority of the
Disinterested Directors and (iii) in excess of $10.0 million shall further
require that the Company obtain a written opinion from an Independent Financial
Advisor stating that the terms of such Affiliate Transaction (or series of
related Affiliate Transactions) are fair to the Company or the Restricted
Subsidiary, as the case may be, from a financial point of view; PROVIDED that
this clause (iii) shall not apply to purchases of goods and/or services in the
ordinary course of the Company's business, and on terms no less favorable to the
Company than those customarily granted to purchasers of such goods and/or
services, from Paradyne Corporation or Xylan Corporation. For purposes of this
covenant, any Affiliate Transaction approved by a majority of the Disinterested
Directors or as to which a written opinion has been obtained from an Independent
Financial Advisor, on the basis set forth in the preceding sentence, shall be
deemed to be on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than would be available in a
comparable transaction with an unaffiliated third party and, therefore, shall be
permitted under this covenant.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among, or solely for the benefit of,
the Company and/or any of the Restricted Subsidiaries, provided that in any such
case, no officer, director or beneficial owner of 10% or more of any class of
Capital Stock of the Company shall beneficially own any Capital Stock of any
such Restricted Subsidiary, (ii) transactions pursuant to agreements and
arrangements existing on the Issue Date and specified on a schedule to the
Indenture, (iii) any Restricted Payment made in compliance with the covenant
"--LIMITATION ON RESTRICTED PAYMENTS," (iv) the payment of reasonable and
customary regular fees to directors of the Company or any Restricted Subsidiary
who are not employees of the Company or any Restricted Subsidiary,
(v) employment agreements, stock option agreements and
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indemnification arrangements entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
industry practice, (vi) the granting and performance of registration rights for
securities of the Company, (vii) loans and advances to officers, directors and
employees of the Company or any Restricted Subsidiary for travel, entertainment,
moving and other relocation expenses, in each case made in the ordinary course
of business and consistent with industry practice, and (viii) any Permitted
Investment.
BUSINESS ACTIVITIES. Pursuant to the Indenture, the Company will not, and
will not permit any Restricted Subsidiary to, engage in any business other than
the Permitted Business.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The
Indenture will prohibit the Company from permitting any Restricted Subsidiary,
directly or indirectly, to Guarantee the payment of any other Indebtedness of
the Company unless such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for the Guarantee
of the payment of the Notes by such Restricted Subsidiary, which Guarantee shall
be senior to or PARI PASSU with such Restricted Subsidiary's Guarantee of such
other Indebtedness; PROVIDED that this paragraph shall not apply to any
Guarantee of Indebtedness described in clause (h) of the definition of
"Permitted Indebtedness." Notwithstanding the foregoing, any such Guarantee by a
Restricted Subsidiary of the Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged upon (i) any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's stock in, or all or substantially all the assets of, such
Restricted Subsidiary, which sale, exchange or transfer is made in compliance
with the applicable provisions of the Indenture, (ii) the Designation of such
Restricted Subsidiary as an Unrestricted Subsidiary in compliance with the
covenant described under "--LIMITATION ON DESIGNATIONS OF UNRESTRICTED
SUBSIDIARIES" or (iii) the release of such Restricted Subsidiary from all of its
obligations under all of its Guarantees of Indebtedness of the Company. A form
of such Guarantee will be attached as an exhibit to the Indenture.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Indenture will prohibit the
Company and its Restricted Subsidiaries from, directly or indirectly, entering
into, assuming, Guaranteeing or otherwise becoming liable with respect to any
Sale/Leaseback Transaction. However, the Company or any Restricted Subsidiary
may enter into any such transaction if (i) the Company or such Restricted
Subsidiary would be permitted under the covenants described above under
"--LIMITATION ON ADDITIONAL INDEBTEDNESS" and "--LIMITATION ON LIENS SECURING
CERTAIN INDEBTEDNESS" to incur secured Indebtedness in an amount equal to the
Attributable Debt with respect to such transaction; (ii) the consideration
received by the Company or such Restricted Subsidiary from such transaction is
at least equal to the Fair Market Value of the property being transferred, and
(iii) to the extent that such transaction constitutes an Asset Sale, the Net
Cash Proceeds received by the Company or such Restricted Subsidiary from such
transaction are applied in accordance with the covenant described above under
"--DISPOSITION OF PROCEEDS OF ASSET SALES."
REPORTS. The Indenture will provide that, whether or not the Company is
subject to Section 13(a) or 15(d) of the Exchange Act or any successor provision
of law, the Company shall furnish without cost to each holder of Notes and file
with the Trustee (i) within 135 days after the end of each fiscal year of the
Company, financial information that would be required to be contained in an
annual report on Form 10-K for such year filed by the Company with the
Commission (whether or not the Company is then required to file such Form with
the Commission), including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and audited financial statements of the
Company, including a report thereon by the Company's certified public
accountants, (ii) within 60 days after the end of each of the first three fiscal
quarters of each fiscal year of the Company, financial information that would be
required to be contained in a quarterly report on Form 10-Q filed by the Company
with the Commission (whether or not the Company is then required to file such
Form with the Commission), including a "Management's Discussion and Analysis of
Financial Condition and
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Results of Operations," and (iii) on a timely basis, any information concerning
the Company or any Restricted Subsidiary required to be contained in a current
report on Form 8-K (whether or not the Company is then required to file such
Form with the Commission), and, unless such information is included or
incorporated in a Form 10-K, Form 10-Q or Form 8-K filed by the Company with the
Commission, the Company shall file a copy of all such information described in
clauses (i), (ii) and (iii) above with the Commission (if permitted by
Commission practice and applicable law and regulations). In addition, for so
long as any Notes remain outstanding, the Company shall furnish to securities
analysts and prospective investors, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act, and, to
any beneficial holder of Notes, if not obtainable from the Commission,
information of the type that would be filed with the Commission pursuant to the
foregoing provisions, upon the request of any such holder.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Indenture will
provide that the Company will not designate any Subsidiary of the Company (other
than a newly created Subsidiary in which the Company has made an Investment of
$1,000 or less) as an "Unrestricted Subsidiary" under the Indenture (a
"Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an
Investment at the time of such Designation (assuming the effectiveness of
such Designation) in an amount (the "Designation Amount") equal to the Fair
Market Value of the interest of the Company and its Restricted Subsidiaries
in such Subsidiary on such date.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"--LIMITATION ON RESTRICTED PAYMENTS" for all purposes of the Indenture in an
amount equal to the Designation Amount. The Indenture will further provide that
neither the Company nor any Restricted Subsidiary shall at any time (x) provide
a Guarantee of, or similar credit support for, or subject any of its properties
or assets (other than the Capital Stock of any Unrestricted Subsidiary) to the
satisfaction of, any Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness), (y) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary or (z) be directly or indirectly liable for any other Indebtedness
which provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon (or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity) upon the occurrence of a default
with respect to any other Indebtedness that is Indebtedness of an Unrestricted
Subsidiary (including any corresponding right to take enforcement action against
such Unrestricted Subsidiary), except in the case of clause (x) or (y) to the
extent otherwise permitted under the Indenture, including, without limitation,
under the covenant "--LIMITATION ON RESTRICTED PAYMENTS" above.
The Indenture will further provide that the Company will not revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation")
unless:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at such
time, have been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions and
officers' certificates delivered to the Trustee certifying compliance with the
foregoing provisions.
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LIMITATION ON STATUS AS INVESTMENT COMPANY. The Indenture will provide that
the Company will not, and will not permit any of its Subsidiaries or Affiliates
to, conduct its business in a fashion that would cause the Company to be
required to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act")), or
otherwise become subject to regulation under the Investment Company Act. For
purposes of establishing the Company's compliance with this provision, any
exemption that is or would become available under Section 3(c)(1) or
Section 3(c)(7) of the Investment Company Act will be disregarded.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture will provide that the Company will not (i) consolidate or
combine with or merge with or into or, directly or indirectly, sell, assign,
convey, lease, transfer or otherwise dispose of all or substantially all of its
properties and assets to any Person or Persons in a single transaction or
through a series of transactions, or (ii) permit any of the Restricted
Subsidiaries to enter into any such transaction or series of transactions if it
would result in the disposition of all or substantially all of the properties or
assets of the Company and the Restricted Subsidiaries on a consolidated basis,
unless, in the case of either (i) or (ii), (a) the Company shall be the
continuing Person or, if the Company is not the continuing Person, the
resulting, surviving or transferee Person (the "surviving entity") shall be a
company organized and existing under the laws of the United States or any State
or territory thereof; (b) the surviving entity (if other than the Company) shall
expressly assume all of the obligations of the Company under the Notes and the
Indenture, and shall execute a supplemental indenture to effect such assumption
which supplemental indenture shall be delivered to the Trustee and shall be in
form and substance reasonably satisfactory to the Trustee; (c) immediately after
giving effect to such transaction or series of transactions on a PRO FORMA basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), (I) the Company or the surviving entity (assuming such surviving
entity's assumption of the Company's obligations under the Notes and the
Indenture), as the case may be, would be able to incur $1.00 of Indebtedness
(other than Permitted Indebtedness) under the covenant described under
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS" above, and
(II) the Company or the surviving entity, as the case may be, would have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately prior to such transaction or series of transactions;
(d) immediately after giving effect to such transaction or series of
transactions on a PRO FORMA basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), no Default shall have
occurred and be continuing; and (e) the Company or the surviving entity, as the
case may be, shall have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel stating that such transaction or series of transactions and,
if a supplemental indenture is required in connection with such transaction or
series of transactions to effectuate such assumption, such supplemental
indenture, complies with this covenant and that all conditions precedent in the
Indenture relating to the transaction or series of transactions have been
satisfied.
Upon any consolidation or merger or any sale, assignment, conveyance, lease,
transfer or other disposition of all or substantially all of the assets of the
Company in accordance with the foregoing in which the Company or the Restricted
Subsidiary, as the case may be, is not the surviving corporation, then the
successor corporation formed by such a consolidation or into which the Company
or such Restricted Subsidiary is merged or to which such transfer is made, will
succeed to, and be substituted for, and may exercise every right and power of,
the Company or such Restricted Subsidiary, as the case may be, under the
Indenture with the same effect as if such successor corporation had been named
as the Company or such Restricted Subsidiary therein; and thereafter, except in
the case of (i) any lease or (ii) any sale, assignment, conveyance, transfer,
lease or other disposition to a Restricted Subsidiary of the Company, the
Company shall be discharged from all obligations and covenants under the
Indenture and the Notes.
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The Indenture will provide that, for all purposes of the Indenture
(including the provisions of this covenant and the covenants described under
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS," "--LIMITATION ON
RESTRICTED PAYMENTS" and "--LIMITATION ON LIENS SECURING CERTAIN INDEBTEDNESS")
and the Notes, Subsidiaries of any surviving entity will, upon such transaction
or series of related transactions, become Restricted Subsidiaries or
Unrestricted Subsidiaries as provided pursuant to the covenant "--Certain
Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES," and all
Indebtedness, and all Liens on property or assets, of the surviving entity and
the Restricted Subsidiaries (except Indebtedness, or Liens on property or
assets, of the Company and the Restricted Subsidiaries in existence immediately
prior to such transaction or series of related transactions) will be deemed to
have been incurred upon such transaction or series of related transactions.
The meaning of the phrase "all or substantially all" as used above varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances, there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company, and
therefore it may be unclear whether the foregoing provisions are applicable.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of interest on the Notes when it becomes due
and payable and continuance of such default for a period of 30 days or more;
or
(ii) default in the payment of the principal of, or premium, if any, on
the Notes when due at maturity, upon redemption or otherwise; or
(iii) default in the performance, or breach, of any covenant described
under "--Certain Covenants--CHANGE OF CONTROL," "--DISPOSITION OF PROCEEDS
OF ASSET SALES" or "--CONSOLIDATION, MERGER, SALE OF ASSETS, ETC."; or
(iv) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (i), (ii) or
(iii) above), and continuance of such default or breach for a period of
30 days or more after written notice to the Company by the Trustee or to the
Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Notes (in each case, when such notice is
deemed given in accordance with the Indenture); or
(v) (a) failure to pay, following any applicable grace period, any
installment of principal due (whether at maturity or otherwise) under one or
more classes or issues of Indebtedness in an aggregate principal amount of
$7.5 million or more under which the Company or any Restricted Subsidiary is
obligated or (b) failure by the Company or any Restricted Subsidiary to
perform any other term, covenant, condition or provision of one or more
classes or issues of Indebtedness in an aggregate principal amount of
$7.5 million or more under which the Company or such Restricted Subsidiary
is obligated and, in the case of this clause (b), such failure results in an
acceleration of the maturity thereof; or
(vi) one or more judgments, orders or decrees for the payment of money
of $7.5 million or more, either individually or in the aggregate, shall be
entered against the Company or any Restricted Subsidiary or any of their
respective properties and shall not be paid or discharged and there shall
have been a period of 60 consecutive days or more during which a stay of
enforcement of such judgment or order, by reason of pending appeal or
otherwise, shall not be in effect; or
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(vii) certain events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to the Company or any
Restricted Subsidiary shall have occurred; or
(viii) the Indenture or the Registration Rights Agreement ceases to be in
force and effect in all material respects (other than with respect to the
invalidity or alleged invalidity of any provision in the Registration Rights
Agreement regarding indemnification for matters arising under the federal
securities laws) or is declared null and void or the Company denies that it
has any further obligation or liability thereunder or gives notice to that
effect (other than by reason of termination or release in accordance with
the terms thereof).
If an Event of Default (other than an Event of Default specified in
clause (vii) above with respect to the Company or any Restricted Subsidiary)
occurs and is continuing, then the Trustee or the holders of at least 25% in
principal amount of the outstanding Notes may, by written notice, and the
Trustee upon the request of the holders of not less than 25% in principal amount
of the outstanding Notes shall, declare the Default Amount of all outstanding
Notes to be immediately due and payable and upon any such declaration such
amount shall become immediately due and payable. If an Event of Default
specified in clause (vii) above with respect to the Company or any Restricted
Subsidiary occurs and is continuing, then the Default Amount of all outstanding
Notes shall IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder.
After a declaration of acceleration, the holders of a majority in aggregate
principal amount of outstanding Notes may, by notice to the Trustee, rescind
such declaration of acceleration if all existing Events of Default, other than
nonpayment of the Default Amount of the Notes that has become due solely as a
result of such acceleration, have been cured or waived and if the rescission of
acceleration would not conflict with any judgment or decree. The holders of a
majority in principal amount of the outstanding Notes also have the right to
waive past defaults under the Indenture, except a default in the payment of
principal of, or any interest on, any outstanding Note, or in respect of certain
covenants or provisions that cannot be modified or amended without the consent
of all holders of Notes.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless (i) the holders of at
least 25% in principal amount of the outstanding Notes have made written
request, and offered reasonable security or indemnity, to the Trustee to
institute such proceeding as Trustee, (ii) the Trustee has failed to institute
such proceeding within 60 days after receipt of such notice, and (iii) the
Trustee has not within such 60-day period received directions inconsistent with
such written request by holders of a majority in principal amount of the
outstanding Notes. Such limitations do not apply, however, to a suit instituted
by a holder of a Note for the enforcement of the payment of the principal of, or
any accrued and unpaid interest on, such Note on or after the respective due
dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default shall occur and be continuing, the Trustee is
not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such holders
shall have offered to such Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the holders of a
majority in principal amount of the outstanding Notes have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee.
The Indenture will provide that the Trustee will, within 30 days after the
occurrence of any Default, give to the holders of the Notes notice of such
Default known to it, unless such Default shall
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have been cured or waived; PROVIDED that the Trustee shall be protected in
withholding such notice if it determines in good faith that the withholding of
such notice is in the interest of such holders.
The Company is required to furnish to the Trustee annually a statement as to
its compliance with all conditions and covenants under the Indenture.
DEFEASANCE
The Company may at any time terminate all of its obligations with respect to
the Notes ("defeasance"), except for certain obligations, including those
regarding any trust established for a defeasance and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes as required by the Indenture and to maintain agencies in respect of
Notes. The Company may at any time terminate its obligations under certain
covenants set forth in the Indenture, some of which are described under
"--Certain Covenants" above, and any omission to comply with such obligations
shall not constitute a Default or an Event of Default with respect to the Notes
("covenant defeasance"). To exercise either defeasance or covenant defeasance,
the Company must irrevocably deposit in trust, for the benefit of the holders of
the Notes, with the Trustee money (in United States dollars) or Government
Securities (denominated in United States dollars), or a combination thereof, in
such amounts as will be sufficient to pay the principal of and premium, if any,
and accrued but unpaid interest on the Notes to redemption or maturity and
comply with certain other conditions, including the delivery of a legal opinion
as to certain tax matters. The requirements for defeasance shall not be deemed
satisfied if a Default specified in clause (vii) of "--Events of Default" above
occurs on or prior to the 91st calendar day after the date of the deposit of
money or securities in the defeasance trust.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of Notes)
as to all outstanding Notes when either (a) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes that have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust) have been delivered to the
Trustee for cancellation; or (b) (i) all such Notes not theretofore delivered to
the Trustee for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee as trust funds
in trust for the purpose an amount of money sufficient to pay and discharge the
entire indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal amount, premium, if any, and accrued and unpaid
interest to the date of such deposit; (ii) the Company has paid all sums payable
by it under the Indenture; and (iii) the Company has delivered irrevocable
instructions to the Trustee to apply the deposited money toward the payment of
the Notes at maturity or on the redemption date, as the case may be. In
addition, the Company must deliver an Officers' Certificate and an Opinion of
Counsel stating that all conditions precedent to satisfaction and discharge have
been complied with.
AMENDMENT AND WAIVERS
From time to time, the Company, when authorized by resolutions of the Board,
and the Trustee, without the consent of the holders of the Notes, may amend,
waive or supplement the Indenture or the Notes for certain specified purposes,
including, among other things, curing ambiguities, defects or inconsistencies,
maintaining the qualification of the Indenture under the Trust Indenture Act or
making any change that does not adversely affect the rights of any holder. Other
amendments and modifications of the Indenture and the Notes may be made by the
Company and the Trustee by supplemental indenture with the consent of the
holders of not less than a majority of the aggregate principal amount of the
outstanding Notes; PROVIDED that no such modification or amendment may,
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without the consent of the holder of each outstanding Note affected thereby,
(i) reduce the principal amount of, change the fixed maturity of, or alter the
redemption provisions of, the Notes or amend or modify the calculation of the
Default Amount so as to reduce the amount of the Default Amount, (ii) change the
currency in which any Notes or amounts owing thereon is payable, (iii) reduce
the percentage of the aggregate principal amount of the outstanding Notes which
must consent to an amendment, supplement or waiver or consent to take any action
under the Indenture or the Notes, (iv) impair the right to institute suit for
the enforcement of any payment on or with respect to the Notes, (v) waive a
default in payment with respect to the Notes, except a rescission of
acceleration of the relevant Notes by the holders thereof as provided in the
Indenture and a waiver of the payment default that resulted from such
acceleration, (vi) reduce the rate or change the time for payment of interest on
the Notes, (vii) alter the Company's obligation to purchase the Notes following
the occurrence of a Change of Control or an Asset Sale in accordance with the
Indenture or waive any default in the performance thereof or (viii) affect the
ranking of the Notes in a manner adverse to the holder of the Notes.
Holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. Subject to certain rights
of the Trustee as provided in the Indenture, the holders of a majority in
aggregate principal amount of the Notes, on behalf of all holders, may waive any
past Default under the Indenture (including any such waiver obtained in
connection with a tender offer or exchange offer for such Notes), except a
default in the payment of principal or interest or a Default arising from
failure to purchase any Notes tendered pursuant to an offer to purchase required
to be made by any provision of the Indenture, or a Default in respect of a
provision that under the Indenture cannot be modified or amended without the
consent of the holder of each Note that is affected.
REGARDING THE TRUSTEE
State Street Bank and Trust Company of California, N.A. will serve as
Trustee under the Indenture.
GOVERNING LAW
The Indenture will provide that the Indenture and the Notes will be governed
by and construed in accordance with the laws of the State of New York, without
giving effect to principles of conflicts of law.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the Indenture.
Reference is made to the Indenture for the full definition of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"1998 Notes" means the Company's 13 1/2% Senior Discount Notes due 2008.
"1998 Warrants" means the warrants issued in connection with the Company's
1998 Notes.
"1998 Warrant Agreement" means the Warrant Agreement dated May 5, 1998,
between the Company and State Street Bank and Trust Company of California, N.A.
"1999 Notes" means the Company's 12 3/4% Senior Notes due 2009.
"Acquired Indebtedness" means Indebtedness of a Person (i) assumed in
connection with an Asset Acquisition from such Person or (ii) existing at the
time such Person is merged or consolidated with or into the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary, in each case not
incurred in connection with, or in anticipation of, such Asset Acquisition or
merger or consolidation or
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such Person becoming a Restricted Subsidiary; PROVIDED that Indebtedness of such
Person which is redeemed, defeased, retired or otherwise repaid at the time of
or immediately upon consummation of such Asset Acquisition or the transactions
by which such Person is merged or consolidated with or into the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary shall not constitute
Acquired Indebtedness.
"Affiliate" of any specified Person means (i) any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, the specified Person, (ii) any other Person that
owns, directly or indirectly, 10% or more of the specified Person's Voting Stock
or (iii) any executive officer or director of the specified Person; PROVIDED
that Donaldson, Lufkin & Jenrette, Inc. and its Affiliates shall not be deemed
to be Affiliates of the Company solely as a result of such entities holding the
1998 Notes, the 1998 Warrants or the Company's Common Stock (or any security
which is convertible into or exchangeable for any of the foregoing). For the
purposes of this definition, "control" when used with respect to any Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise, and the terms "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary in any other Person, or any acquisition or purchase of
Capital Stock of any other Person by the Company or any Restricted Subsidiary,
in either case pursuant to which such Person shall (a) become a Restricted
Subsidiary or (b) shall be merged or consolidated with or into the Company or
any Restricted Subsidiary or (ii) any acquisition by the Company or any
Restricted Subsidiary of the assets of any Person which constitute substantially
all of an operating unit or line of business of such Person or which is
otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes) or
other disposition (that is not for security purposes) (including by way of a
Sale/Leaseback Transaction) to any Person other than the Company or a Restricted
Subsidiary, in one transaction or a series of related transactions, of (i) any
Capital Stock of any Restricted Subsidiary, (ii) any assets of the Company or
any Restricted Subsidiary which constitute substantially all of an operating
unit or line of business of the Company and the Restricted Subsidiaries or
(iii) any other property or asset of the Company or any Restricted Subsidiary
outside of the ordinary course of business. For the purposes of this definition,
the term "Asset Sale" shall not include (i) any disposition of properties and
assets of the Company that is governed under "--Consolidation, Merger, Sale of
Assets, Etc." above, (ii) sales of property or equipment that have become worn
out, obsolete or damaged or otherwise unsuitable for use in connection with the
business of the Company or any Restricted Subsidiary, as the case may be, and
(iii) for purposes of the covenant "--Certain Covenants--DISPOSITION OF PROCEEDS
OF ASSET SALES," (a) sales, conveyances, transfers, leases or other dispositions
of property or assets, whether in one transaction or a series of related
transactions occurring within one year, involving assets with a Fair Market
Value not in excess of $500,000 in any 12 month period and (b) any asset of the
Company or a Restricted Subsidiary that is the subject of a Sale/Leaseback
Transaction with a Person (other than the Company or an Affiliate of the
Company) made in accordance with the covenant described under "--Certain
Covenants--LIMITATION ON SALE/ LEASEBACK TRANSACTIONS" and that was acquired by
the Company or such Restricted Subsidiary no more than 120 days prior to the
transfer to a third party in a Sale/Leaseback Transaction.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in the terms of the lease included in such Sale/Leaseback Transaction)
of the total obligations of the lessee for rental payments during the remaining
term of the lease included in such Sale/Leaseback Transaction (including any
period for which such lease has been extended).
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"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments;
PROVIDED that, in the case of any Capitalized Lease Obligation, all calculations
hereunder shall give effect to any applicable options to renew in favor of the
Company or any Restricted Subsidiary.
"Board" means the Board of Directors of the Company.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
and to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"Borrowing Base" means, as of any date, an amount equal to 85% of the book
value of the accounts, loans and other receivables (before giving effect to any
related allowances and reserves) as shown on the Company's most recent
consolidated balance sheet determined in accordance with GAAP not more than
90 days past due.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such Person's capital stock, including
Preferred Stock, whether outstanding on the Issue Date or issued after the Issue
Date, and any and all rights (other than any evidence of Indebtedness), warrants
or options exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and, for the purpose of the Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness which matures
365 days or less from the date of purchase or acquisition issued or directly and
fully guaranteed or insured by the United States Government or any agency or
instrumentality thereof (PROVIDED that the full faith and credit of the United
States Government is pledged in support thereof or such Indebtedness constitutes
a general obligation of such country); (ii) deposits, certificates of deposit or
acceptances with a maturity of 365 days or less of any financial institution
that is a member of the Federal Reserve System, in each case having combined
capital and surplus and undivided profits (or any similar capital concept) of
not less than $500.0 million and whose senior unsecured debt is rated at least
"A-1" by S&P or "P-1" by Moody's; (iii) commercial paper with a maturity of
365 days or less issued by a corporation (other than an Affiliate of the
Company) organized under the laws of the United States or any State thereof and
rated at least "A-1" by S&P or "P-1" by Moody's; (iv) repurchase agreements and
reverse repurchase agreements relating to marketable direct obligations issued
or unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States
Government maturing within 365 days from the date of acquisition; and (v) money
market funds in the United States which invest substantially all of their assets
in securities of the type described in any of the preceding clauses (i) through
(iv).
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d) or 14(d)
of the Exchange Act), excluding Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 or 13d-5 under the Exchange Act, except that a
person shall be deemed to have "beneficial ownership" of all securities that
such person has or acquires the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of all Voting
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Stock of the Company (except that the person or group shall not be deemed the
"beneficial owner" of shares tendered pursuant to a tender or exchange offer
made by that person or group or any of their Affiliates until the tendered
shares are accepted for purchase or exchange) or has, directly or indirectly,
the right to elect or designate a majority of the Board or (b) the Company
consolidates with, or merges with or into, another person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any person, or any person consolidates with, or merges with or
into, the Company, in any such event pursuant to a transaction in which the
outstanding Voting Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any such transaction where (i) the
outstanding Voting Stock of the Company is converted into or exchanged for
(1) Voting Stock (other than Disqualified Stock) of the surviving or transferee
corporation or its parent corporation and/or (2) cash, securities and other
property in any amount which could be paid by the Company as a Restricted
Payment under the Indenture, (ii) the "beneficial owners" (as so defined) of the
Voting Stock of the Company immediately before such transaction own, directly or
indirectly, immediately after such transaction, at least a majority of the
voting power of all Voting Stock of the surviving or transferee corporation or
its parent corporation immediately after such transaction, as applicable, or
(iii) immediately after such transaction, no "person" or "group" (as such terms
are defined above), excluding the Permitted Holders, is the "beneficial owner"
(as defined above), directly or indirectly, of more than 50% of the Voting Stock
of such surviving or transferee corporation or its parent corporation, as
applicable, or has, directly or indirectly, the right to elect or designate a
majority of the board of directors of the surviving or transferee corporation or
its parent corporation, as applicable, or (c) during any consecutive two-year
period, individuals who at the beginning of such period constituted the Board
(together with any new directors whose election by the Board or whose nomination
for election by the stockholders of the Company was approved by a vote of a
majority of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board then in office. The good faith determination by the Board, based upon
advice of outside counsel, of the beneficial ownership of securities of the
Company within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act shall
be conclusive, absent contrary controlling precedent or contrary written
interpretation published by the Commission. No inference shall be created that
officers or employees of the Company are acting as a "person" or "group" (as
such terms are used in Sections 13(d) or 14(d) of the Exchange Act) with the
power to designate a majority of the members of the Board solely because such
officers or employees constitute a majority of the members of the Board.
"Commission" means the United States Securities and Exchange Commission, or
any successor agency.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or rights in, or other equivalents (however designated
and whether voting and/or nonvoting) of, such Person's common stock and
includes, without limitation, all series and classes of such common stock.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for federal, state, local, foreign and other income taxes of the
Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, without
duplication, the sum of (i) the interest expense of the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Obligations (including any
amortization of discounts), (c) the interest portion of any deferred payment
obligation, (d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and similar
transactions and (e) all capitalized interest and accrued interest, (ii) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid
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or accrued by the Company and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP, (iii) the portion of
any rental obligation in respect of any Sale/Leaseback Transaction allocable to
interest expense (determined as if such were treated as a Capital Lease
Obligation), and (iv) the amount of dividends and distributions in respect of
Preferred Stock or Disqualified Stock paid by the Restricted Subsidiaries to a
Person other than the Company or a Restricted Subsidiary or by the Company
during such period.
"Consolidated Net Income" means, with respect to any period, the net income
(or loss) of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, adjusted, to the
extent included in calculating such consolidated net income (or loss), by
excluding, without duplication, (i) all extraordinary, unusual or nonrecurring
gains or losses and all gains or losses from sales or other dispositions of
assets (including Asset Sales) out of the ordinary course of business (net of
taxes, fees and expenses relating to the transaction giving rise thereto) for
such period, (ii) that portion of such net income (or loss) derived from or in
respect of Investments in Persons other than Restricted Subsidiaries, except to
the extent of any cash dividends actually received by the Company or any
Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to the
provisions of clause (vi) of this definition); (iii) any gain or loss, net of
taxes, realized upon the termination of any employee pension benefit plan during
such period, (iv) that portion of such net income (or loss) allocable to
minority interests in any Restricted Subsidiary for such period, (v) net income
(or loss) of any other Person combined with the Company or any Restricted
Subsidiary on a "pooling of interests" basis attributable to any period prior to
the date of combination and (vi) the net income of any Restricted Subsidiary for
such period to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is not at the time
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"Consolidated Net Worth" means, with respect to any Person, the consolidated
stockholders' or partners' equity of such Person reflected on the most recent
balance sheet of such Person, determined in accordance with GAAP, less any
amounts attributable to redeemable capital stock (as determined under applicable
accounting standards promulgated by the Commission) of such Person.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period (a) increased (without duplication), to
the extent deducted in arriving at such Consolidated Net Income, by the sum of
(i) Consolidated Income Tax Expense for such period; (ii) Consolidated Interest
Expense for such period; and (iii) depreciation, amortization and any other
non-cash items for such period of the Company and the Restricted Subsidiaries
(other than any non-cash item which requires the accrual of, or a reserve for,
cash charges for any future period), including, without limitation, amortization
of capitalized debt issuance costs for such period, all determined on a
consolidated basis in accordance with GAAP, and (b) decreased by any non-cash
items (including non-recurring gains and non-recurring items of income) to the
extent they increased Consolidated Net Income for such period (including any
partial or complete reversal of reserves taken in a prior period).
"covenant defeasance" has the meaning set forth under "--Defeasance."
"Debt Securities" means any debt securities issued by the Company in a
public offering or in a private placement to institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act).
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Default Amount" means the principal amount of the Notes (and any applicable
premium thereon) and any accrued and unpaid interest thereon.
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"defeasance" has the meaning set forth under "--Defeasance."
"Designation" and "Designation Amount" have the meanings set forth under
"--Certain Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES."
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the Board other than a director who (i) has
any material direct or indirect financial interest in or with respect to such
transaction or series of related transactions or (ii) is an employee or officer
of the Company or an Affiliate that is itself a party to such transaction or
series of transactions or an Affiliate of a party to such transaction or series
of related transactions.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; PROVIDED that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the final maturity date
of the Notes will not constitute Disqualified Stock so long as the "asset sale"
or "change of control" provisions applicable to such Capital Stock are no more
favorable to the holders thereof than the provisions described in "--Certain
Covenants--CHANGE OF CONTROL" and "--DISPOSITION OF PROCEEDS OF ASSET SALES" and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
provisions described in "--Certain Covenants--CHANGE OF CONTROL" and
"--DISPOSITION OF PROCEEDS OF ASSET SALES."
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Fair Market Value" means, with respect to any asset or property, the price
(after taking into account any liabilities relating to such asset or property)
that could be negotiated in an arms-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
Indenture, Fair Market Value shall be determined by the Board acting in good
faith and shall be evidenced by a Board Resolution.
"GAAP" means, as of any date of determination, generally accepted accounting
principles set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board, the
Commission or in such other statements by such other entity as may be approved
by a significant segment of the accounting profession of the United States,
which are in effect as of such date of determination and which are consistently
applied for all applicable periods.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which obligations
or guarantee the full faith and credit of the United States is pledged.
"Guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, any obligation
(A) to pay amounts drawn down by letters of credit, (B) to purchase or pay (or
advance or supply funds for the purchase or payment of) such obligation (whether
arising by virtue of partnership arrangement, agreements to keep-well, to
purchase assets,
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goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (C) entered into for purposes of assuring
in any other manner the obligee of such obligation of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Indebtedness" means, with respect to any Person, without duplication
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (i) every liability of such Person,
whether or not contingent, (A) for borrowed money, (B) evidenced by notes,
bonds, debenture or other similar instruments (whether or not negotiable),
(C) for reimbursement of amounts expended under letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person,
(D) issued or assumed as the deferred purchase price of property or services,
(E) relating to a Capitalized Lease Obligation and all Attributable Debt in
respect of Sale/Leaseback Transactions of such Person and (F) in respect of an
Interest Rate Obligation of such Person; (ii) every liability of others of the
kind described in the preceding clause (i) which such Person has Guaranteed or
which is otherwise its legal liability; or (iii) every obligation secured by a
Lien (other than (x) Permitted Liens of the types described in clauses (b),
(d) or (e) of the definition of Permitted Liens; provided that the obligations
secured would not constitute Indebtedness under clauses (i) or (ii) or (iii) of
this definition, and (y) Liens on Capital Stock or Indebtedness of any
Unrestricted Subsidiary) to which the property or assets of such Person are
subject, whether or not the obligations secured thereby shall have been assumed
by or shall otherwise be such Person's legal liability (the amount of such
obligation being deemed to be the, lesser of the Fair Market Value of such
property or asset or the amount of the obligation so secured); (iv) all
Disqualified Stock of such Person, valued at the greater of its voluntary or
involuntary maximum fixed repurchase or redemption price (plus accrued and
unpaid dividends to the date of determination); and (v) any and all deferrals,
renewals, extensions and refundings of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade
payables and accrued liabilities that are current liabilities incurred in the
ordinary course of business, excluding the current maturity of any obligation
which would otherwise constitute Indebtedness. For purposes of the covenants
described under "--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS" and
"--LIMITATION ON RESTRICTED PAYMENTS" and the definition of "Events of Default,"
in determining the principal amount of any Indebtedness to be incurred by the
Company or a Restricted Subsidiary or which is outstanding at any date, (A) the
principal amount of any Indebtedness which provides that an amount less than the
principal amount at maturity thereof shall be due upon any declaration of
acceleration thereof shall be the accreted value thereof at the date of
determination; (B) the principal amount of any Indebtedness shall be reduced by
any amount of cash, Government Securities or Cash Equivalent collateral securing
on a perfected basis, and dedicated for disbursement to the payment of principal
of or interest on, such Indebtedness; and (C) the amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability of any
Guarantees at such date.
"Indebtedness to EBITDA Ratio" means, as at any date of determination (the
"Transaction Date"), the ratio of (i) Total Consolidated Indebtedness as at the
Transaction Date to (ii) two times the Consolidated Operating Cash Flow for the
two full fiscal quarters immediately preceding the Transaction Date for which
financial statements are available (such two full fiscal quarter period being
referred to herein as the "Measurement Period"). For purposes of calculating
Consolidated Operating Cash Flow for the relevant Measurement Period prior to a
Transaction Date, (A) any Person that is a Restricted Subsidiary on the
Transaction Date (or would become a Restricted Subsidiary on such Transaction
Date in connection with the transaction that requires the calculation of such
Consolidated Operating Cash Flow) shall be deemed to have been a Restricted
Subsidiary at all times during the Measurement Period, (B) any Person that is
not a Restricted Subsidiary on such Transaction Date (or
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would cease to be a Restricted Subsidiary on such Transaction Date in connection
with the transaction that requires the calculation of Consolidated Operating
Cash Flow) will be deemed not to have been a Restricted Subsidiary at any time
during the Measurement Period, and (C) if the Company or any Restricted
Subsidiary shall have in any manner (x) acquired through an Asset Acquisition or
(y) disposed of (including by way of an Asset Sale or the termination or
discontinuance of activities constituting such operating business) any operating
business during such Measurement Period or after the end of such period and on
or prior to the Transaction Date, such calculation will be made on a PRO FORMA
basis in accordance with GAAP as if, in the case of an Asset Acquisition, such
transaction had been consummated on the first day of the Measurement Period and,
in the case of an Asset Sale or other disposition, termination or discontinuance
of activities constituting such an operating business, such transaction had been
consummated prior to the first day of the Measurement Period; PROVIDED, HOWEVER
that such PRO FORMA adjustment shall not give effect to the operating cash flow
of any Person that would become a Restricted Subsidiary on the Transaction Date
in connection with the transaction that requires the calculation of Consolidated
Operating Cash Flow to the extent that such Person's net income would be
excluded from the calculation of Consolidated Net Income pursuant to
clause (vi) of the definition of Consolidated Net Income.
"Independent Financial Advisor" means a United States investment banking
firm of national or regional standing in the United States (i) which does not,
and whose directors, officers and employees or Affiliates do not have, a direct
or indirect financial interest in the Company and (ii) which, in the judgment of
the Board, is otherwise independent and qualified to perform the task for which
it is to be engaged.
"Interest Rate Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount and shall include, without limitation, interest rate swaps, caps, floors,
collars, forward interest rate agreements and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, account receivable (other than an account receivable arising in
the ordinary course of business), or other extension of credit (including,
without limitation, by means of any Guarantee) or any capital contribution to
(by means of transfers of cash or other property or assets to others, payments
for property or services for the account or use of others, or otherwise), or any
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness of any other Person. The amount of any
Investment shall be the original cost of such Investment, plus the cost of all
additions thereto, and minus the amount of any portion of such Investment repaid
to such Person in cash as a repayment of principal or a return of capital, as
the case may be, but without any other adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment.
In determining the amount of any Investment involving a transfer of any property
or assets other than cash, such property shall be valued at its Fair Market
Value at the time of transfer.
"Issue Date" means the original date of issuance of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). A
Person shall be deemed to own subject to a Lien any property which such Person
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
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"Market Capitalization" of any Person means, as of any day of determination,
the product of (i) the average Closing Price of a share of such Person's Common
Stock over the 20 consecutive trading days immediately preceding such date and
(ii) the number of shares of such Common Stock issued and outstanding on such
date. "Closing Price" on any trading day with respect to the per share price of
any shares of Common Stock means the last reported sale price regular way or, in
case no such reported sale takes place on such day, the average of the reported
closing bid and asked prices regular way, in either case on the New York Stock
Exchange or, if such shares of Common Stock are not listed or admitted to
trading on such exchange, on the principal national securities exchange on which
such shares are listed or admitted to trading or, if not listed or admitted to
trading on any national securities exchange, on the Nasdaq National Market or,
if such shares are not listed or admitted to trading on any national securities
exchange or quoted on the Nasdaq National Market but such Person is a "Foreign
Issuer" (as defined in Rule 3b-4(b) under the Exchange Act) and the principal
securities exchange on which such shares are listed or admitted to trading is a
"designated offshore securities market" (as defined in Rule 902(b) under the
Securities Act), the average of the reported closing bid and asked prices
regular way on such principal exchange or, if such shares are not listed or
admitted to trading on any national securities exchange or quoted on the Nasdaq
National Market and such Person and any securities markets in which such
Person's Common Stock trades does not meet any of the foregoing such
requirements, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
that is selected from time to time by the Company for the purpose and is
reasonably acceptable to the Trustee.
"Maturity Date" means, with respect to any Note, the date specified in such
Note as the fixed date on which the principal of such Note is due and payable.
"Moody's" means Moody's Investors Service, Inc. (and any successor).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof received by the Company or any Restricted Subsidiary in the form of cash
(including assumed Indebtedness (other than Subordinated Indebtedness) and other
items deemed to be cash under the proviso to the first sentence of the covenant
described under "--Certain Covenants--DISPOSITION OF PROCEEDS OF ASSET SALES")
or Cash Equivalents including payments in respect of deferred payment
obligations when received in the form of cash or Cash Equivalents (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Restricted Subsidiary) net of (i) brokerage commissions and other fees,
costs and expenses (including fees and expenses of legal counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes paid or
payable as a result of such Asset Sale, (iii) amounts required to be paid to any
Person (other than the Company or any Restricted Subsidiary) owning a beneficial
interest in or having a Lien on the assets subject to the Asset Sale, (iv) with
respect to Asset Sales by Restricted Subsidiaries, the portion of such cash and
Cash Equivalents attributable to any Persons holding a minority interest in such
Restricted Subsidiary and (v) appropriate amounts to be provided by the Company
or any Restricted Subsidiary, as the case may be, as a reserve required in
accordance with GAAP against any liabilities associated with such Asset Sale and
retained by the Company or any Restricted Subsidiary, as the case may be, after
such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an Officers' Certificate delivered to the
Trustee.
"Permitted Business" means any of the following: (i) transmitting, providing
services relating to or developing network and software applications for the
transmission and management of voice, data, video or other information through
owned or leased wireline or wireless transmission facilities or over the
internet; (ii) creating, developing, constructing, installing, integrating,
repairing, maintaining or marketing communications-related systems, network
equipment and wireless and wireline transmission facilities, software and other
related products; and (iii) evaluating, owning, operating, participating in or
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pursuing any other business that is primarily related to those identified in the
foregoing clauses (i) and (ii).
"Permitted Business Assets" has the meaning set forth in the covenant
described under "--Certain Covenants--DISPOSITION OF PROCEEDS OF ASSET SALES."
"Permitted Business Investments" means an Investment in any Person the
primary business of which consists of a Permitted Business.
"Permitted Credit Facility" means any senior secured or unsecured commercial
term loan and/or revolving credit facilities (including any letter of credit
subfacility) entered into principally with commercial banks and/or other
financial institutions.
"Permitted Holders" means Brentwood Venture Capital, Enterprise Partners,
Kleiner Perkins Caulfield & Byers, The Sprout Group and Catherine M. Hapka, and
their respective Affiliates.
"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness (including Disqualified Stock) of the Company and/or
any Restricted Subsidiary outstanding, or committed but undrawn, on the
Issue Date and identified on a schedule to the Indenture (including any
increase in the accreted value thereof after the Issue Date pursuant to the
terms of the instrument governing such Indebtedness as of the Issue Date);
(c) (i) Indebtedness of any Restricted Subsidiary owed to and held by
the Company or a Wholly Owned Restricted Subsidiary and (ii) Indebtedness of
the Company, which is not secured by any Lien and is subordinated to the
Company's obligations with respect to the Notes, owed to and held by any
Restricted Subsidiary; PROVIDED that an incurrence of Indebtedness shall be
deemed to have occurred upon (x) any sale or other disposition of any
Indebtedness of the Company or a Restricted Subsidiary referred to in this
clause (c) to a Person other than the Company or a Restricted Subsidiary,
(y) any sale or other disposition of Capital Stock of a Restricted
Subsidiary which holds Indebtedness of the Company or another Restricted
Subsidiary such that such Restricted Subsidiary ceases to be a Restricted
Subsidiary or (z) the Designation of a Restricted Subsidiary which holds
Indebtedness of the Company or another Restricted Subsidiary as an
Unrestricted Subsidiary;
(d) Interest Rate Obligations of the Company and/or any Restricted
Subsidiary relating to Indebtedness of the Company and/or such Restricted
Subsidiary, as the case may be (which Indebtedness (i) bears interest at
fluctuating interest rates and (ii) is otherwise permitted to be incurred
under the "Limitation on Additional Indebtedness" covenant), but only to the
extent that the notional amount of such Interest Rate Obligations does not
exceed the principal amount of the Indebtedness (and/or Indebtedness subject
to commitments) to which such Interest Rate Obligations relate;
(e) Indebtedness of the Company and/or any Restricted Subsidiary in
respect of performance bonds of the Company or any Restricted Subsidiary or
surety bonds provided by the Company or any Restricted Subsidiary, in each
case incurred in the ordinary course of business;
(f) Indebtedness of the Company and/or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing or extension (a
"refinancing") of the Notes (during the periods for which redemption is
permitted under the terms of the Indenture) or other outstanding
Indebtedness of the Company and/or of any Restricted Subsidiary incurred or
outstanding pursuant to clause (a), (b), (g) or (h) of this definition or
the proviso in the first paragraph of the covenant described under
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS"; provided that
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(i) no Restricted Subsidiary may incur Indebtedness to refinance
Indebtedness of the Company (except for Guarantees issued in accordance with
the covenant described under "--Certain Covenants--LIMITATION ON ISSUANCES
OF GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES"); (ii) if such
Indebtedness being refinanced has an Average Life to Stated Maturity equal
to or longer than the Average Life to Stated Maturity of the Notes, any such
refinancing shall have an Average Life to Stated Maturity longer than the
Average Life to Stated Maturity of the Notes and a final stated maturity for
the payment of principal thereof later than the final stated maturity of the
Notes; (iii) if such Indebtedness being refinanced has an Average Life to
Stated Maturity shorter than the Average Life to Stated Maturity of the
Notes, any such refinancing shall have an Average Life to Stated Maturity
longer than, and a final stated maturity later than, the Indebtedness being
refinanced; (iv) any such refinancing shall not exceed the sum of the
principal amount (or, if such Indebtedness provides for a lesser amount to
be due and payable upon a declaration of acceleration thereof, an amount no
greater than such lesser amount) of the Indebtedness being refinanced, plus
the amount of accrued and unpaid interest thereon, plus the amount of any
reasonably determined prepayment premium necessary to accomplish such
refinancing and such reasonable fees and expenses incurred in connection
therewith; (v) the Notes and Indebtedness that ranks PARI PASSU with the
Notes may be refinanced only with Indebtedness that is made PARI PASSU with
or subordinate in right of payment to the Notes, and Subordinated
Indebtedness may only be refinanced with Subordinated Indebtedness; and
(vi) the refinancing Indebtedness shall be incurred by the obligor of the
Indebtedness being refinanced or by the Company;
(g) Indebtedness of the Company such that, after giving effect to the
incurrence thereof, the total aggregate principal amount of Indebtedness
incurred under this clause (g) and any refinancings thereof otherwise
incurred in compliance with the Indenture would not exceed 250% of Total
Incremental Equity;
(h) Indebtedness of the Company or any Restricted Subsidiary incurred
under any Permitted Credit Facility, and any refinancings of the foregoing
otherwise incurred in compliance with the Indenture, in an aggregate
principal amount not to exceed the greater of $200.0 million or the
Borrowing Base determined as of the date such Indebtedness is incurred, at
any time outstanding;
(i) Indebtedness of the Company or any Restricted Subsidiary that is
Purchase Money Indebtedness;
(j) Indebtedness in respect of (i) letters of credit, bankers'
acceptances or other similar instruments or obligations, issued in
connection with liabilities incurred in the ordinary course of business or
(ii) surety, judgment, appeal, performance and other similar bonds,
instruments or obligations provided in the ordinary course of business; and
(k) in addition to the items referred to in clauses (a) through
(j) above, Indebtedness of the Company having an aggregate principal amount
not to exceed $50.0 million at any time outstanding.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company or in a Person as a result of
which such Person becomes a Wholly Owned Restricted Subsidiary; (b) Investments
constituting Permitted Business Investments, the sum of which does not exceed
the greater of $40.0 million or 10% of the Company's Market Capitalization, at
any one time outstanding; (c) Cash Equivalents; (d) Investments in prepaid
expenses, negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits; (e) Interest Rate
Obligations incurred in compliance with the covenant described under "--Certain
Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS"; (f) loans and advances to
employees made in the ordinary course of business not to exceed $500,000 in the
aggregate at any one time outstanding; (g) bonds, notes, debentures or other
securities (other than Capital Stock of any Restricted Subsidiary that is not a
Wholly Owned Restricted Subsidiary) received as a result of Asset
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Sales permitted under "--Certain Covenants--DISPOSITION OF PROCEEDS OF ASSET
SALES"; (h) any Investment to the extent that the consideration therefor
consists of Capital Stock (other than Disqualified Stock) of the Company; and
(i) the extension by the Company of (x) trade credit to Subsidiaries of the
Company represented by accounts receivable, extended on usual and customary
terms in the ordinary course of business or (y) Guarantees of commitments for
the purchase of goods or services incurred in the ordinary course of business so
long as such Guarantees, to the extent constituting Indebtedness, are permitted
to be incurred under the covenant described under "--Certain
Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS."
"Permitted Liens" means (a) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such
Liens were in existence prior to the contemplation of such merger, consolidation
or acquisition and do not secure any property or assets of the Company or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation or acquisition; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens and other similar Liens
arising in the ordinary course of business that secure payment of obligations
not more than 60 days past due or that are being contested in good faith and by
appropriate proceedings; (c) Liens existing on the Issue Date (including Liens
securing Indebtedness permitted under clause (b) of the definition of Permitted
Indebtedness); (d) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted; PROVIDED
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (e) easements, rights of
way, restrictions and other similar easements, licenses, restrictions on the use
of properties, or minor imperfections of title that, in the aggregate, are not
material in amount and do not in any case materially detract from the properties
subject thereto or interfere with the ordinary conduct of the business of the
Company or the Restricted Subsidiaries; (f) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (g) Liens securing
Indebtedness incurred under a Permitted Credit Facility; provided, however, that
the incurrence of such Indebtedness is permitted by the covenant described under
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS" above; (h) Liens to
secure any refinancing of any Indebtedness secured by Liens permitted by the
Indenture, but only to the extent that such Liens do not extend to any other
property or assets (other than improvements thereto); (i) Liens to secure the
Notes and Liens created under the Indenture; (j) Liens securing Purchase Money
Indebtedness; (k) Liens on and pledges of Capital Stock of any Unrestricted
Subsidiary securing any Indebtedness of such Unrestricted Subsidiary; (l) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (m) Liens to secure Capitalized Lease Obligations
permitted to be incurred under the Indenture; (n) Liens that do not materially
detract from the value of the property subject to such Liens, that do not
materially interfere with the ordinary conduct of the business of the Company or
any of its Restricted Subsidiaries, and that are made on customary and usual
terms applicable to similar assets; (o) pledges or deposits by such Person under
workmen's compensation laws, unemployment insurance laws or similar legislation,
or good faith deposits in connection with bids, tenders, contracts (other than
for the payment of Indebtedness) or leases to which such Person is a party, or
deposits to secure public or statutory obligations of such Person, or deposits
or cash or United States government bonds to secure surety or appeal bonds to
which such Person is a party, or deposits as security for contested taxes or
import duties or for the payment of rent, in each case incurred in the ordinary
course of business; (p) Liens customary in the industry and incurred in the
ordinary course of business securing Interest Rate Obligations so long as the
related Indebtedness is, and is permitted to be under the Indenture, secured by
a Lien on the same property securing such Interest Rate
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Obligations; and (q) Liens held by the Company on the assets or property of a
Restricted Subsidiary of the Company to secure Indebtedness of such Restricted
Subsidiary owing to and held by the Company.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding, or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company for cash pursuant to an effective registration
statement filed under the Securities Act.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary (including Acquired Indebtedness and Indebtedness
represented by Capitalized Lease Obligations, Attributable Debt in respect of
Sale/Leaseback Transactions, mortgage financings and purchase money
obligations), including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, as the same may be
amended, supplemented, modified or restated from time to time, incurred at any
time for the purpose of financing all or any part of the cost of the
development, construction, expansion, installation, acquisition, lease or
improvement by the Company or any Restricted Subsidiary of any Permitted
Business Assets or not less than 66 2/3% of the outstanding Voting Stock of a
Person that becomes a Restricted Subsidiary the assets of which consist
primarily of Permitted Business Assets.
"Refinancing" has the meaning set forth in clause (f) of the definition of
"Permitted Indebtedness."
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on any Capital Stock of the
Company or any Restricted Subsidiary or any other payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Restricted Subsidiary (other than any dividends, distributions or
payments made to the Company or any Restricted Subsidiary and dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) of
the Company or in options, warrants or other rights to purchase Capital Stock
(other than Disqualified Stock) of the Company); (ii) the purchase, redemption
or other acquisition or retirement for value of any Capital Stock of the Company
or any Restricted Subsidiary (other than any such Capital Stock owned by the
Company or a Restricted Subsidiary); (iii) the purchase, redemption, defeasance
or other acquisition or retirement for value, or the making of any principal
payment on, prior to any scheduled repayment, scheduled sinking fund payment or
scheduled maturity, of any Subordinated Indebtedness (other than any
Subordinated Indebtedness held by a Wholly Owned Restricted Subsidiary); or
(iv) the making by the Company or any Restricted Subsidiary of any Investment
(other than a Permitted Investment) in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board, by a Board Resolution delivered to the Trustee, as
an Unrestricted Subsidiary pursuant to and in compliance with the covenant
described under "--Certain Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED
SUBSIDIARIES." Any such designation may be revoked by a Board Resolution
delivered to the Trustee, subject to the provisions of such covenant.
"Revocation" has the meaning set forth under "--Certain
Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES."
"S&P" means Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies (and any successor).
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"Sale/Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such Person of any property or assets of such Person which has
been or is being sold or transferred by such Person after its acquisition
thereof or the completion of construction or commencement of operations thereof
to such lender or investor or to any other Person to whom funds have been or are
to be advanced by such lender or investor on the security of such property or
asset.
"Strategic Equity Investor" means any Person that, as of the date of
determination, has a Market Capitalization or Consolidated Net Worth of at least
$2.0 billion and that derives a substantial portion of its revenues from a
business related to the Permitted Business.
"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to any other Indebtedness of the
Company.
"Subsidiary" means, with respect to any Person, (a) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors shall at the time be owned, directly or
indirectly, by such Person, or (b) any other Person of which at least a majority
of voting interest is at the time, directly or indirectly, owned by such Person.
"Total Consolidated Indebtedness" means, at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Company and the
Restricted Subsidiaries outstanding as of such date of determination.
"Total Incremental Equity" means, at any time of determination, the sum of,
without duplication, (a) the aggregate net cash proceeds received by the Company
from capital contributions in respect of existing Capital Stock (other than
Disqualified Stock) or the issuance and sale of Capital Stock (other than
Disqualified Stock but including Capital Stock issued upon the conversion of
convertible Indebtedness or from the exercise of options, warrants or rights to
purchase Capital Stock (other than Disqualified Stock)) subsequent to May 5,
1998, other than to a Subsidiary of the Company, plus (b) 80 percent of the Fair
Market Value of property (other than cash and Cash Equivalents) received by the
Company after May 5, 1998 as a contribution of capital or from the sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, minus (c) any amounts included in clause (a) above to
the extent used to make a Restricted Payment pursuant to clauses (2) or
(3)(A)(x) of the covenant described under "--Certain Covenants--LIMITATION ON
RESTRICTED PAYMENTS."
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--Certain
Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES." Any such
designation may be revoked by a Board Resolution delivered to the Trustee,
subject to the provisions of such covenant.
"Voting Stock" means, with respect to any Person, the Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors
or other members of the governing body of such Person.
"voting power" means, with respect to the Capital Stock of any Person,
relative voting power in any general election of directors or other members of
the governing body of such Person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by the Company or another
Wholly Owned Restricted Subsidiary. For the purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a Restricted
Subsidiary.
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BOOK-ENTRY; DELIVERY AND FORM
Notes sold in this offering in reliance on Rule 144A will be represented by
one or more permanent global Notes (each a "Restricted Global Note" and
together, the "Global Notes") in definitive, fully registered form and without
interest coupons, and will be deposited with the Trustee as custodian for, and
registered in the name of, a nominee of DTC.
THE GLOBAL NOTES
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). QIBs may hold their interests in a Restricted
Global Note directly through DTC if they are participants in such system, or
indirectly through organizations which are participants in such systems.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with applicable procedures of DTC, in addition to those provided for under the
Indenture.
Payments of the principal of, premium, if any, on and interest on, the
Global Notes will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee or any Paying Agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Notes or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of a Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note, as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Note
held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the sole responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. If a holder
requires physical delivery of a certificated Note for any reason, such holder
must transfer its interest in the Global Note in accordance with DTC's
applicable procedures.
The Company expects that DTC will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose accounts the
DTC interests in the Global Notes is credited and only in respect of such
portion of the aggregate principal amount of Notes as to which such participant
or participants has or have given such direction. However, if there is an Event
of Default under the Notes, DTC will exchange the applicable Global Note for
certificated Notes, which it will distribute to its participants.
The Company understands that: DTC is a limited-purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the
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Exchange Act. DTC was created to hold securities for its participants and
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among its participants, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC, its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Company
within 90 days, the Company will issue certificated Notes. Holders of an
interest in a Global Note may receive a certificated Note in accordance with
DTC's rules and procedures in addition to those provided for under the
Indenture.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the material United States federal income
tax considerations relevant to the exchange offer and the purchase, ownership
and disposition of the new notes, but does not purport to be a complete analysis
of all the potential tax effects thereof. This discussion applies only to
initial investors who held the old notes and will hold the new notes as capital
assets. The Internal Revenue Service may not agree with the following
discussion. Further, the discussion does not address all aspects of taxation
that may be relevant to particular holders in light of their personal
circumstances, including the effect of any foreign, state or local tax laws, or
to certain types of holders subject to special treatment under the United States
federal income tax laws, including dealers in securities, insurance companies,
foreign persons, financial institutions, tax-exempt entities and persons holding
the old notes or the new notes as part of a straddle, hedge or conversion
transaction. Moreover, the effect of any applicable state, local or foreign tax
laws is not discussed.
The discussion of the United States federal income tax considerations set
forth below is based upon currently existing provisions of the Internal Revenue
Code of 1986, as amended, judicial decisions, and administrative interpretations
all of which are subject to change, possibly with retroactive effect. BECAUSE
INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH PROSPECTIVE PARTICIPANT IN THE
EXCHANGE OFFER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO ITS PARTICULAR
TAX SITUATION AND THE PARTICULAR TAX EFFECTS OF ANY STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
EXCHANGE OF NOTES
The exchange of new notes for old notes pursuant to the exchange offer will
not be treated as a significant modification of the old notes under applicable
United States Treasury Regulations. As a result, the exchange will be treated
for United States federal income tax purposes as merely a registration and
continuation of the old notes. As a result, no gain or loss will be recognized
by any holder of the old notes by reason of its participation in the exchange
offer. Each such holder's adjusted basis and holding period in the new notes
will be the same as such holder's adjusted basis and holding period in the old
notes. Similarly, since the new notes and the old notes are treated as one and
the same for United States federal income tax purposes, any acquisition premium,
market discount or other tax attributes associated with the old notes will
continue to apply to the new notes.
SALE OR OTHER DISPOSITION OF NOTES
In general, upon the sale, exchange or redemption of a new note, a holder
will recognize taxable gain or loss equal to the difference between
- the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption, not including any amount
attributable to accrued but unpaid interest, and
- the holder's adjusted tax basis in the new note.
An initial holder's adjusted tax basis in a new note generally will be equal to
the cost of the old note to such holder increased by the amount of any market
discount previously included in income by the holder with respect to such old
note or the new note received in exchange therefor and reduced by the amount of
any principal received by the holder.
Subject to the market discount rules, gain or loss realized on the sale,
exchange or redemption of a new note will be capital gain or loss, which capital
gain or loss will be long term capital gain or loss if the holder held the new
notes for more than one year. Long term capital gain recognized by individual
holders generally will be subject to a maximum United States federal income tax
rate of 20%.
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Beginning in 2001, the rate of tax on gains from certain property held more than
five years will be further reduced to 18%. A holder's holding period with
respect to the old notes surrendered in the exchange offer shall be included in
the holder's holding period with respect to the new notes received in such
exchange. The characterization of income as capital gain or loss is also
relevant for purposes of, among other things, limitations with respect to the
deductibility of capital losses.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of United States federal income tax at a rate of 31% may
apply to payments made in respect of a new note to a holder that is not an
exempt recipient and that fails to provide certain identifying information, such
as the holder's taxpayer identification number, in the manner required.
Generally, individuals are not exempt recipients, whereas corporations and
certain other entities are exempt recipients. Payments made in respect of a new
note must be reported to the Internal Revenue Service, unless the holder is an
exempt recipient or otherwise establishes an exemption.
If in connection with the acquisition and ownership of the old notes a
holder provided identifying information, such the holder's taxpayer
identification number, in the manner required or otherwise established an
exemption from backup withholding, such compliance with the backup withholding
and information reporting rules will continue in respect of the new notes.
Any amounts withheld under the backup withholding rules from a payment to a
holder of a new note will be allowed as a refund or credit against such holder's
United States federal income tax, provided that the required information is
furnished to the Internal Revenue Service.
The Treasury Department has issued the final Treasury regulations relating
to back-up withholding which are effective for payments made after December 31,
2000. In general, the final Treasury regulations do not significantly alter the
substantive withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the
final Treasury regulations, special rules apply which permit the shifting of
primary responsibility for withholding to certain financial intermediaries
acting on behalf of beneficial owners. A holder of a new note should consult
with its tax advisor regarding the application of the backup withholding rules
to its particular situation, the availability of an exemption therefrom, the
procedure for obtaining such an exemption, if available, and the impact of the
final Treasury regulations on payments made with respect to new notes after
December 31, 2000.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NEW NOTES IN
LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES
TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NEW NOTES, INCLUDING
THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN UNITED STATES AND OTHER TAX LAWS.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer receiving new notes for its own account in
connection with the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. Participating
Broker-Dealers may use this prospectus during the period referred to below in
connection with resales of the new notes received in exchange for old notes if
such old notes were acquired by such Participating Broker-Dealers for their own
accounts. We agreed that this prospectus may be used by a Participating
Broker-Dealer in connection with resales of such new notes for a period ending
150 days after the effective date of the registration statement (subject to
extension under certain
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limited circumstances described herein) or, if earlier, when all such new notes
have been disposed of by such Participating Broker-Dealer. See "The Exchange
Offer--Terms of the Exchange Offer."
We will not receive any cash proceeds from the issuance of the new notes
offered by this prospectus. New notes received by participating Broker-Dealers
for their own accounts in connection with the exchange offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the new notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such new
notes. Any Participating Broker-Dealer that resells new notes that were received
by it for its own account in the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act. Any profit on any such
resale of new notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver any
by delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
Brobeck, Phleger & Harrison LLP, Broomfield, Colorado, will pass upon the
validity of the notes for us.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1998
and 1999, for the period from February 27, 1997 through December 31, 1997 and
for the years ended December 31, 1998 and 1999, included in this registration
statement, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4, of which this prospectus is a part, under the Securities
Act with respect to the exchange offer contemplated hereby. Statements contained
in this prospectus concerning the provisions of any document are not necessarily
complete. You should refer to the copy of these documents filed as an exhibit to
the periodic reports filed by us with the SEC for a more complete understanding
of the matter involved. Each statement concerning these documents is qualified
in its entirety by such reference.
We are also subject to the informational requirements of the Securities
Exchange Act of 1934. In accordance with the Exchange Act, we file reports,
proxy statements and other information with the SEC. The registration statement,
including the attached exhibits and schedules, may be inspected and copied at
the public reference facilities maintained by the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, New York, New
York 10048, and 500 West Madison Street, Chicago, Illinois 60661. Please call
the SEC at 1-800-SEC-0330 for further information about the public reference
rooms. The SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. Copies of the registration statement and the reports, proxy and
information statements and other information that we file with the SEC may be
obtained from the SEC's Internet address at http://www.sec.gov.
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The SEC allows us to "incorporate by reference" into the prospectus the
information we have filed with them. The information incorporated by reference
is an important part of this prospectus and the information that we file
subsequently with the SEC will automatically update this prospectus. The
information incorporated by reference is considered to be part of this
prospectus. We incorporate by reference any filings we make with the SEC under
the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934, as amended, after the initial filing of this registration statement
that contains this prospectus and prior to the time we issue all the new notes
offered by this prospectus.
You may request a copy of these documents, at no cost, by writing or
telephoning us at the following address:
Rhythms NetConnections Inc.
Attention: Investor Relations
9100 East Mineral Circle
Englewood, Colorado 80112
(303) 476-4200
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GLOSSARY OF TERMS
<TABLE>
<S> <C>
Asynchronous Transfer Mode... High bandwidth, low-delay, connection-oriented, packet-like
switching and multiplexing technique requiring 53-byte,
fixed-sized cells.
Backbone..................... An element of the network infrastructure that provides
high-speed, high capacity connections among the network's
physical points of presence, i.e., connection points and
Metro Service Centers. The backbone is used to transport end
user traffic across the metropolitan area and across the
United States.
Bandwidth.................... Refers to the maximum amount of data that can be transferred
through a computer's backbone or communication channel in a
given time. It is usually measured in Hertz, cycles per
second, for analog communications and bits per second for
digital communications.
Central Office............... Incumbent carrier facility where subscriber lines are joined
to ILEC switching equipment.
Collocation.................. A location where a competitive carrier network interconnects
with the network of an incumbent carrier inside an incumbent
carrier's central office.
Competitive Carrier.......... Category of telephone service provider, or carrier, that
offers local exchange and other services similar to and in
competition with those of the incumbent carrier, as allowed
by recent changes in telecommunications law and regulation.
A competitive carrier may also provide other types of
services such as long distance telephone, data
communications, Internet access and video.
Copper Line or Loop.......... A pair of traditional copper telephone lines using electric
current to carry signals.
Digital...................... Describes a method of storing, processing and transmitting
information through the use of distinct electronic or
optical pulses that represent the binary digits 0 and 1.
Digital transmission and switching technologies employ a
sequence of these pulses to convey information, as opposed
to the continuously variable analog signal. The precise
digital numbers preclude distortion, such as graininess or
"snow", in the case of video transmission, or static or
other background distortion in the case of audio
transmission.
Downstream................... Refers to the transmission speed of a connection between our
connection point and the end user.
DS-0......................... DIGITAL SERVICE 0. Standard telecommunications industry
digital signal format, which is distinguishable by bit
rate -- the number of binary digits transmitted per second.
DS-0 service has a bit rate of 64 Kilobits per second.
DS-1......................... DIGITAL SERVICE 1. In the digital hierarchy, this signaling
standard defines a transmission speed of 1.544 Mbps.
DS-3......................... DIGITAL SERVICE 3. In the digital hierarchy, this signaling
standard defines a transmission speed of 44.736 Mbps,
equivalent to 28 T-1 channels. This term is often used
interchangeably with T-3.
</TABLE>
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<TABLE>
<S> <C>
DSL.......................... DIGITAL SUBSCRIBER LINE. A transmission technology enabling
high-speed access in the local copper loop, often referred
to as the last mile between the network service provider --
I.E., an incumbent carrier, competitive carrier or an
internet service provider -- and end user.
E-Commerce................... ELECTRONIC COMMERCE. An Internet service that supports
electronic transactions between customers and vendors to
purchase goods and services.
Encryption................... Applying a specific algorithm to data so as to alter the
data's appearance and prevent other devices from reading the
information. Decryption applies the algorithm in reverse to
restore the data to its original form.
Firewall..................... A computer device that separates a local area network from a
wide area network and prevents unauthorized access to the
local area network through the use of electronic security
mechanisms.
Frame Relay.................. A form of packet switching with variable length frames that
may be used with a variety of communications protocols.
Incumbent Carrier............ A company providing local exchange services on the date of
enactment of the Telecommunications Act of 1996. These
companies consist of the Regional Bell Operating Companies,
GTE and numerous independent telephone companies.
Interconnection Agreement.... A contract between an incumbent carrier and a competitive
carrier for the connection of a competitive carrier network
to the public switched telephone network, as well as
competitive carrier access to incumbent carrier unbundled
network elements, e.g., copper loops. This agreement sets
out some of the financial agreement and operational aspects
of such interconnection and access.
Internet..................... An array of interconnected networks using a common set of
protocols defining the information coding and processing
requirements that can communicate across hardware platforms
and over many links; now operated by a consortium of
telecommunications service providers and others.
Internet Protocol............ A standard for software that keeps track of the
inter-network addresses for different nodes, routes outgoing
messages and recognizes incoming messages.
ISDN......................... INTEGRATED SERVICES DIGITAL NETWORK. A transmission method
that provides circuit-switched access to the public network
at speeds of 64 or 128 kbps for voice, data and video
transmission.
Internet Service Provider.... A company that provides direct access to the Internet.
Interexchange Carrier........ Usually referred to as a long-distance service provider.
There are many interexchange carriers, including AT&T, MCI
WorldCom, Sprint and Qwest.
kbps......................... KILOBITS PER SECOND. 1,000 bits per second.
Long Distance Carrier........ A long distance carrier providing services between local
exchanges on an intrastate or interstate basis, also
referred to in the industry as an "interexchange carrier". A
long distance carrier may also be a long distance resale
company.
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
Mbps......................... MEGABITS PER SECOND. Millions of bits per second.
Modem........................ An abbreviation of Modulator-Demodulator. An electronic
signal-conversion device used to convert digital signals
from a computer to analog form for transmission over the
telephone network. At the transmitting end, a modem working
as a modulator converts the computer's digital signals into
analog signals that can be transmitted over a telephone
line. At the receiving end, another modem working as a
demodulator converts analog signals back into digital
signals and sends them to the receiving computer.
Multiplexing................. An electronic or optical process that combines several lower
speed transmission signals into one higher speed signal.
Network...................... An integrated system composed of switching equipment and
transmission facilities designed to provide for the
direction, transport and recording of telecommunications
traffic.
OC-3......................... OPTICAL CARRIER 3. Standard telecommunications industry
digital single format, which is distinguishable by bit
rate -- the number of binary digits transmitted per second.
OC-3 service has a bit rate of 155.5 Mbps.
OC-12........................ OPTICAL CARRIER 12. Standard telecommunications industry
digital single format, which is distinguishable by bit
rate -- the number of binary digits transmitted per second.
OC-12 service has a bit rate of 622.8 Mbps.
Packets...................... Information represented as bytes grouped together through a
communication node with a common destination address and
other attribute information.
Resellers.................... Generally used to refer to a telecommunications provider who
does not own any switching or transmission facilities. In
reality, a large number of providers furnish services
through a combination of owned and resold facilities.
Router....................... A device that accepts the Internet Protocol from a local
area network or another wide area network device and
switches/routes Internet Protocol packets across a network
backbone. Routers also provide protocol conversion services
to transfer Internet Protocol packets over frame relay,
Asynchronous Transfer Mode, and other backbone network
services.
T-1.......................... This is a Bell System term for a digital transmission link
with a capacity of 1.544 Mbps.
TCP/IP....................... TRANSMISSION CONTROL PROTOCOL/INTERNET PROTOCOL. A set of
network protocols that allow computers with different
architectures and operating system software to communicate
with other computers on the Internet.
Upstream..................... Refers to the transmission speed of a connection between the
end user and our connection point.
</TABLE>
A-3
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONTENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Financial Statements:
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Comprehensive Income (Loss).... F-5
Consolidated Statements of Cash Flows..................... F-6
Consolidated Statements of Stockholders' Equity........... F-7
Notes to Consolidated Financial Statements................ F-9
Report of Independent Accountants on Financial Statement
Schedule.................................................. S-1
Schedule II--Valuation and Qualifying Accounts.............. S-2
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Rhythms NetConnections Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of comprehensive income, of cash flows,
and of stockholders' equity present fairly, in all material respects, the
financial position of Rhythms NetConnections Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for the period from February 27, 1997, (Inception) through December 31,
1997, and for each of the two years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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
Denver, Colorado
February 29, 2000, except for Note 10,
as to which the date is March 16, 2000
F-2
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 21,315 $ 48,247 $ 1,637
Short-term investments.................................... 115,497 292,008 1,044,736
Restricted cash........................................... -- 36,707 38,863
Accounts, loans, interest, and other receivables, net..... 2,376 10,844 19,570
Inventory................................................. 340 4,071 6,139
Prepaid expenses and other current assets................. 230 8,460 11,258
-------- -------- ----------
Total current assets.................................... 139,758 400,337 1,122,203
-------- -------- ----------
Equipment and furniture, net................................ 11,510 124,831 137,170
Collocation fees, net....................................... 13,804 57,421 64,547
Restricted cash............................................. -- 59,526 59,395
Deferred business acquisition costs, net of accumulated
amortization of $0, $4,765 and $6,327..................... -- 18,425 16,863
Deferred debt issue costs, net of accumulated amortization
of $216, $924 and $1,178.................................. 6,304 16,194 24,561
Other assets................................................ 350 8,690 12,936
-------- -------- ----------
TOTAL ASSETS................................................ $171,726 $685,424 $1,437,675
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 333 $ 333 $ 333
Accounts payable.......................................... 10,601 30,895 32,496
Interest payable.......................................... 39 8,787 24,397
Accrued expenses and other current liabilities............ 2,816 23,163 38,184
-------- -------- ----------
Total current liabilities............................... 13,789 63,178 95,410
Long-term debt.............................................. 472 111 56
Senior notes payable........................................ 157,465 505,696 811,992
Other liabilities........................................... 180 110 74
-------- -------- ----------
Total liabilities....................................... 171,906 569,095 907,532
-------- -------- ----------
Commitments and contingencies (Note 9)
Mandatorily redeemable common stock warrants................ 6,567 42 42
Mandatorily redeemable preferred stock...................... -- -- 465,793
-------- -------- ----------
Stockholders' equity (deficit):
Preferred stock........................................... 17 -- --
Common stock, $0.001 par value; 250,000,000 shares
authorized; 8,042,530, 78,255,707, and 78,452,789 shares
issued as of 1998, 1999 and 2000........................ 8 78 78
Treasury stock, at cost; 438,115, 988,894 and 1,107,440
shares as of 1998, 1999 and 2000........................ (18) (469) (499)
Additional paid-in capital................................ 37,212 373,604 371,562
Warrants.................................................. -- 10,397 74,373
Deferred compensation..................................... (5,210) (12,320) (10,350)
Accumulated deficit....................................... (38,756) (257,636) (375,667)
Accumulated other comprehensive income.................... -- 2,633 4,811
-------- -------- ----------
Total stockholders' equity (deficit).................... (6,747) 116,287 64,308
-------- -------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........ $171,726 $685,424 $1,437,675
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED THREE MONTHS ENDED
FEBRUARY 27, 1997, DECEMBER 31, MARCH 31,
(INCEPTION) THROUGH ------------------------ -------------------------
DECEMBER 31, 1997 1998 1999 1999 2000
------------------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Service and installation, net............ $ -- $ 528 $ 11,089 $ 660 $ 8,137
---------- ---------- ----------- ----------- -----------
Operating Expenses:
Network and service costs................ -- 4,695 68,161 6,138 39,894
Selling, marketing, general and
administrative......................... 2,342 22,428 110,947 13,064 59,648
Depreciation and amortization............ 1 1,081 12,639 782 9,400
Amortization of deferred business
acquisition costs...................... -- -- 4,765 131 1,563
Deferred compensation.................... 192 725 3,742 601 1,809
---------- ---------- ----------- ----------- -----------
Total operating expenses............... 2,535 28,929 200,254 20,716 112,314
---------- ---------- ----------- ----------- -----------
Loss from operations....................... (2,535) (28,401) (189,165) (20,056) (104,177)
---------- ---------- ----------- ----------- -----------
Other Income (Expense):
Interest income.......................... 114 5,813 22,673 1,749 8,274
Interest expense (including amortized
debt discount and issue costs)......... (1) (13,779) (52,537) (5,627) (22,164)
Other income............................. -- 33 149 35 36
---------- ---------- ----------- ----------- -----------
Total other income (expense)........... 113 (7,933) (29,715) (3,843) (13,854)
---------- ---------- ----------- ----------- -----------
Net Loss................................... $ (2,422) $ (36,334) $ (218,880) $ (23,899) $ (118,031)
========== ========== =========== =========== ===========
Preferred stock dividends and accretion.... -- -- -- -- 2,609
---------- ---------- ----------- ----------- -----------
Net Loss Available to Common
Shareholders............................. $ (2,422) $ (36,334) $ (216,247) $ (23,899) $ (120,640)
========== ========== =========== =========== ===========
Net Loss Per Common Share:
Basic.................................... $ (1.12) $ (12.18) $ (4.15) $ (5.38) $ (1.63)
========== ========== =========== =========== ===========
Diluted.................................. $ (1.12) $ (12.18) $ (4.15) $ (5.38) $ (1.63)
========== ========== =========== =========== ===========
Weighted Average Common Shares Outstanding:
Basic.................................... 2,161,764 2,984,216 52,770,402 4,440,052 74,148,386
========== ========== =========== =========== ===========
Diluted.................................. 2,161,764 2,984,216 52,770,402 4,440,052 74,148,386
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED THREE MONTHS ENDED
FEBRUARY 27, 1997, DECEMBER 31, MARCH 31,
(INCEPTION) THROUGH -------------------- --------------------
DECEMBER 31, 1997 1998 1999 1999 2000
------------------- -------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss............................ $(2,422) $(36,334) $(218,880) $(23,899) $(118,031)
Cumulative translation adjustment... -- -- -- -- 5
Gain on available-for-sale
securities........................ -- -- 2,633 -- 2,173
------- -------- --------- -------- ---------
Total comprehensive income (loss)... $(2,422) $(36,334) $(216,247) $(23,899) $(115,853)
======= ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED THREE MONTHS ENDED
FEBRUARY 27, 1997, DECEMBER 31, MARCH 31,
(INCEPTION) THROUGH --------------------- ----------------------
DECEMBER 31, 1997 1998 1999 1999 2000
-------------------- --------- --------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(2,422) $ (36,334) $(218,880) $(23,899) $ (118,031)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization of equipment, furniture,
and collocation fees................................ 1 539 12,639 651 9,400
Amortization of deferred business acquisition costs... -- -- 4,765 131 1,563
Amortization of debt discount and deferred debt issue
costs............................................... -- 13,882 23,939 5,612 6,550
Amortization of deferred compensation................. 265 725 3,742 601 1,809
Amortization of gain on sale of equipment to leasing
company............................................. -- -- (142) (35) (36)
Loss on sale of equipment to leasing company.......... -- 387 --
Changes in assets and liabilities:
Increase in accounts, loans, interest, and other
receivables, net.................................. -- (2,376) (8,468) (94) (8,726)
Increase in inventory............................... -- (340) (3,731) (680) (2,068)
Increase in prepaid expenses and other current
assets............................................ (95) (135) (8,230) 83 (2,798)
Increase in other assets............................ (32) (318) (382) (7) (4,247)
Increase in accounts payable........................ 388 2,287 11,807 (869) (11,328)
Increase in interest payable........................ -- 39 8,748 -- 15,610
Increase in accrued expenses and other current
liabilities....................................... 335 2,440 20,347 991 15,021
Increase in other liabilities....................... -- 180 72 37 --
------- --------- --------- -------- -----------
Net cash used for operating activities............ (1,560) (19,024) (153,774) (17,478) (97,281)
------- --------- --------- -------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments..................... -- (451,870) (451,660) (34,048) (2,186,886)
Maturities of short-term investments.................... -- 336,373 275,149 33,989 1,434,158
Purchases of government securities as restricted cash... -- -- (96,233) -- (2,025)
Investment in common stock.............................. -- -- (5,325) -- 2,178
Purchases of equipment and furniture.................... (1,018) (9,973) (147,358) (19,796) (20,169)
Payments of collocation fees............................ (327) (13,562) (45,974) (12,111) (8,696)
------- --------- --------- -------- -----------
Net cash used for investing activities............ (1,345) (139,032) (471,401) (31,966) (781,440)
------- --------- --------- -------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from leasing company for equipment............. -- 6,606 23,755 1,755 --
Proceeds from issuance of senior notes and warrants..... -- 150,365 325,000 -- 300,000
Payments of debt issue costs............................ -- (6,519) (10,598) (1,169) (8,621)
Proceeds from borrowings on long-term debt.............. 568 432 -- -- --
Repayments of long-term debt............................ -- (195) (361) (111) (55)
Proceeds from issuance of common stock.................. 13 242 248,748 1,406 728
Proceeds from issuance of preferred stock and
warrants.............................................. 12,490 18,292 75,000 60,000 527,160
Payments of equity issue costs.......................... -- -- (17,473) -- --
Bank overdraft.......................................... -- -- 8,487 -- 12,929
Purchase of treasury stock.............................. -- (18) (451) -- (30)
------- --------- --------- -------- -----------
Net cash provided by financing activities............... 13,071 169,205 652,107 61,881 832,111
------- --------- --------- -------- -----------
Net increase in cash and cash equivalents......... 10,166 11,149 26,932 12,437 (46,610)
Cash and cash equivalents at beginning of period.......... -- 10,166 21,315 21,315 48,247
------- --------- --------- -------- -----------
Cash and cash equivalents at end of period................ $10,166 $ 21,315 $ 48,247 $ 33,752 $ 1,637
======= ========= ========= ======== ===========
Supplemental schedule of cash flow information:
Cash paid for interest.................................. $ 3 $ 66 $ 19,850 $ 16 $ 5
Supplemental schedule of non-cash financing activities:
Equipment and furniture purchases payable............... $ 604 $ 7,363 $ 547 $ 19,890 $ 428
Business acquisition costs from issuance of preferred
stock and warrants.................................... $ -- $ -- $ 22,010 $ 10,250 $ --
Warrants issued to leasing companies.................... $ -- $ -- $ 1,180 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
$0.001 PAR VALUE $0.001 PAR VALUE AT COST ADDITIONAL
--------------------- -------------------- ------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
---------- -------- --------- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
Founders at inception............ -- $-- 2,161,764 $ 2 -- $ -- $ -- $ --
Issuance of Series A preferred
stock for cash................... 12,490,000 12 -- -- -- -- 12,477 --
Issuance of common stock upon
exercise of options.............. -- -- 320,458 -- -- -- 12 --
Grant of options to purchase Series
A preferred stock................ -- -- -- -- -- -- 73 --
Deferred compensation from grants
of options to purchase common
stock............................ -- -- -- -- -- -- 1,450 (1,450)
Amortization of deferred
compensation..................... -- -- -- -- -- -- -- 192
Net loss........................... -- -- -- -- -- -- -- --
---------- --- --------- --- ------- ---- ------- -------
Balance at
December 31, 1997................ 12,490,000 12 2,482,222 2 -- -- 14,012 (1,258)
Issuance of Series A preferred
stock for cash................... 365,094 1 -- -- -- -- 291 --
Issuance of Series B preferred
stock for cash................... 4,044,943 4 -- -- -- -- 17,996 --
Issuance of common stock upon
exercise of options.............. -- -- 5,560,308 6 -- -- 236 --
Purchase of treasury stock for
cash............................. -- -- -- -- 438,115 (18) -- --
Deferred compensation from grants
of options to purchase common
stock............................ -- -- -- -- -- -- 4,908 (4,908)
Amortization of deferred
compensation..................... -- -- -- -- -- -- -- 725
Reversal of deferred compensation
from cancellation of grants to
purchase common stock............ -- -- -- -- -- -- (231) 231
Net loss........................... -- -- -- -- -- -- -- --
---------- --- --------- --- ------- ---- ------- -------
Balance at
December 31, 1998................ 16,900,037 $17 8,042,530 $ 8 438,115 $(18) $37,212 $(5,210)
<CAPTION>
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
DEFICIT INCOME EQUITY (DEFICIT)
----------- ------------- ----------------
<S> <C> <C> <C>
Issuance of common stock to
Founders at inception............ $ -- $ -- $ 2
Issuance of Series A preferred
stock for cash................... -- -- 12,489
Issuance of common stock upon
exercise of options.............. -- -- 12
Grant of options to purchase Series
A preferred stock................ -- -- 73
Deferred compensation from grants
of options to purchase common
stock............................ -- -- --
Amortization of deferred
compensation..................... -- -- 192
Net loss........................... (2,422) -- (2,422)
-------- -------- --------
Balance at
December 31, 1997................ (2,422) -- 10,346
Issuance of Series A preferred
stock for cash................... -- -- 292
Issuance of Series B preferred
stock for cash................... -- -- 18,000
Issuance of common stock upon
exercise of options.............. -- -- 242
Purchase of treasury stock for
cash............................. -- -- (18)
Deferred compensation from grants
of options to purchase common
stock............................ -- -- --
Amortization of deferred
compensation..................... -- -- 725
Reversal of deferred compensation
from cancellation of grants to
purchase common stock............ -- -- --
Net loss........................... (36,334) -- (36,334)
-------- -------- --------
Balance at
December 31, 1998................ $(38,756) $ -- $ (6,747)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
$0.001 PAR VALUE $0.001 PAR VALUE AT COST
---------------------- --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998................................ 16,900,037 $ 17 8,042,530 $ 8 438,115 $ (18)
Issuance of common stock in initial public offering......... -- -- 10,781,250 11 -- --
Issuance of common stock upon exercise of options for
cash...................................................... -- -- 2,711,247 3 -- --
Issuance of common stock in secondary offering.............. -- -- 594,279 -- -- --
Issuance of common stock upon cashless exercise of
warrants.................................................. -- -- 4,954,085 5 -- --
Issuance of Series C preferred stock and warrants for
cash...................................................... 8,395,655 8 -- -- -- --
Issuance of Series D preferred stock and warrants for
cash...................................................... 441,176 -- -- -- -- --
Business relationship value arising from issuance of Series
C and D preferred stock................................... -- -- -- -- -- --
Costs arising from issuances of Series C and D preferred
stock..................................................... -- -- -- -- -- --
Conversion of preferred stock to common upon initial public
offering.................................................. (25,736,868) (25) 51,076,051 51 -- --
Costs arising from public offerings......................... -- -- -- -- -- --
Purchase of treasury stock for cash......................... -- -- -- -- 550,779 (451)
Issuance of warrants to leasing companies................... -- -- -- -- -- --
Issuance of warrants to business partner.................... -- -- -- -- -- --
Stock issuance under employee stock purchase plan........... -- -- 96,265 -- -- --
Deferred compensation from grants of options to purchase
common stock.............................................. -- -- -- -- -- --
Amortization of deferred compensation....................... -- -- -- -- -- --
Reversal of deferred compensation from cancellation of
grants to purchase common stock........................... -- -- -- -- -- --
Net loss.................................................... -- -- -- -- -- --
Unrealized gain on available-for-sale securities............ -- -- -- -- -- --
----------- ---- ---------- --- --------- -----
Balance at December 31, 1999................................ -- -- 78,255,707 78 988,894 (469)
Issuance of common stock upon exercise of options for
cash...................................................... -- -- 194,195 -- -- --
Issuance of Series E preferred stock warrants for cash...... -- -- -- -- -- --
Purchase of treasury stock for cash......................... -- -- -- -- 118,546 (30)
Accrued Series E and F preferred stock dividends............ -- -- -- -- -- --
Accretion of Series E and F preferred stock................. -- -- -- -- -- --
Stock issuance under employee stock purchase plan........... -- -- 2,887 -- -- --
Amortization of deferred compensation....................... -- -- -- -- -- --
Reversal of deferred compensation from cancellation of
grants to purchase common stock........................... -- -- -- -- -- --
Net loss.................................................... -- -- -- -- -- --
Total comprehensive income.................................. -- -- -- -- -- --
----------- ---- ---------- --- --------- -----
Balance at March 31, 2000 (unaudited)....................... -- $ -- 78,452,789 $78 1,107,440 $(499)
=========== ==== ========== === ========= =====
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE
CAPITAL WARRANTS COMPENSATION DEFICIT INCOME
---------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998................................ $ 37,212 $ -- $ (5,210) $ (38,756) $ --
Issuance of common stock in initial public offering......... 226,395 -- -- -- --
Issuance of common stock upon exercise of options for
cash...................................................... 3,333 -- -- -- --
Issuance of common stock in secondary offering.............. 17,233 -- -- -- --
Issuance of common stock upon cashless exercise of
warrants.................................................. 6,520 -- -- -- --
Issuance of Series C preferred stock and warrants for
cash...................................................... 60,368 7,124 -- -- --
Issuance of Series D preferred stock and warrants for
cash...................................................... 6,317 1,183 -- -- --
Business relationship value arising from issuance of Series
C and D preferred stock................................... 21,100 -- -- -- --
Costs arising from issuances of Series C and D preferred
stock..................................................... (245) -- -- -- --
Conversion of preferred stock to common upon initial public
offering.................................................. (26) -- -- -- --
Costs arising from public offerings......................... (17,224) -- -- -- --
Purchase of treasury stock for cash......................... -- -- -- -- --
Issuance of warrants to leasing companies................... -- 1,180 -- -- --
Issuance of warrants to business partner.................... -- 910 -- -- --
Stock issuance under employee stock purchase plan........... 1,769 -- -- -- --
Deferred compensation from grants of options to purchase
common stock.............................................. 11,428 -- (11,428) -- --
Amortization of deferred compensation....................... -- -- 3,742 -- --
Reversal of deferred compensation from cancellation of
grants to purchase common stock........................... (576) -- 576 -- --
Net loss.................................................... -- -- -- (218,880) --
Unrealized gain on available-for-sale securities............ -- -- -- -- 2,633
-------- ------- -------- --------- ------
Balance at December 31, 1999................................ 373,604 10,397 (12,320) (257,636) 2,633
Issuance of common stock upon exercise of options for
cash...................................................... 648 -- -- -- --
Issuance of Series E preferred stock warrants for cash...... -- 63,976 -- -- --
Purchase of treasury stock for cash......................... -- -- -- -- --
Accrued Series E and F preferred stock dividends............ (2,548) -- -- -- --
Accretion of Series E and F preferred stock................. (61) -- -- -- --
Stock issuance under employee stock purchase plan........... 80 -- -- -- --
Amortization of deferred compensation....................... -- -- 1,809 -- --
Reversal of deferred compensation from cancellation of
grants to purchase common stock........................... (161) -- 161 -- --
Net loss.................................................... -- -- -- (118,031) --
Total comprehensive income.................................. -- -- -- -- 2,178
-------- ------- -------- --------- ------
Balance at March 31, 2000 (unaudited)....................... $371,562 $74,373 $(10,350) $(375,667) $4,811
======== ======= ======== ========= ======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY(DEFICIT)
---------------
<S> <C>
Balance at December 31, 1998................................ $ (6,747)
Issuance of common stock in initial public offering......... 226,406
Issuance of common stock upon exercise of options for
cash...................................................... 3,336
Issuance of common stock in secondary offering.............. 17,233
Issuance of common stock upon cashless exercise of
warrants.................................................. 6,525
Issuance of Series C preferred stock and warrants for
cash...................................................... 67,500
Issuance of Series D preferred stock and warrants for
cash...................................................... 7,500
Business relationship value arising from issuance of Series
C and D preferred stock................................... 21,100
Costs arising from issuances of Series C and D preferred
stock..................................................... (245)
Conversion of preferred stock to common upon initial public
offering.................................................. --
Costs arising from public offerings......................... (17,224)
Purchase of treasury stock for cash......................... (451)
Issuance of warrants to leasing companies................... 1,180
Issuance of warrants to business partner.................... 910
Stock issuance under employee stock purchase plan........... 1,769
Deferred compensation from grants of options to purchase
common stock.............................................. --
Amortization of deferred compensation....................... 3,742
Reversal of deferred compensation from cancellation of
grants to purchase common stock........................... --
Net loss.................................................... (218,880)
Unrealized gain on available-for-sale securities............ 2,633
---------
Balance at December 31, 1999................................ 116,287
Issuance of common stock upon exercise of options for
cash...................................................... 648
Issuance of Series E preferred stock warrants for cash...... 63,976
Purchase of treasury stock for cash......................... (30)
Accrued Series E and F preferred stock dividends............ (2,548)
Accretion of Series E and F preferred stock................. (61)
Stock issuance under employee stock purchase plan........... 80
Amortization of deferred compensation....................... 1,809
Reversal of deferred compensation from cancellation of
grants to purchase common stock........................... --
Net loss.................................................... (118,031)
Total comprehensive income.................................. 2,178
---------
Balance at March 31, 2000 (unaudited)....................... $ 64,308
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Rhythms NetConnections Inc. (the Company), a Delaware corporation, was
organized under the name Accelerated Connections Inc. effective February 27,
1997. The Company's name was changed to Rhythms NetConnections Inc. as of
August 15, 1997. The Company is in the business of providing broadband local
access communication services to businesses and consumers. The Company's
services include high-speed "always on" connections to the Internet and to
private networks. The Company began offering commercial services in the U.S. in
April 1998.
The Company's ultimate success depends upon, among other factors, rapidly
expanding the geographic coverage of its network services; entering into
interconnection agreements with ILECs, some of which are competitors or
potential competitors of the Company; deploying network infrastructure;
attracting and retaining customers; accurately assessing potential markets;
continuing to develop and integrate its operational support system and other
back office systems; obtaining any required governmental authorizations;
responding to competitive developments; continuing to attract, retain and
motivate qualified personnel; and continuing to upgrade its technologies and
commercialize its network services incorporating such technologies. There can be
no assurance that the Company will be successful in addressing these matters and
failure to do so could have a material adverse effect on the Company's business,
prospects, operating results and financial condition. As the Company continues
the development of its business, it will seek additional sources of financing to
fund its development. If unsuccessful in obtaining such financing, the Company
will continue expansion of its operations on a reduced scale based on its
existing capital resources.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the transactions
and balances of Rhythms NetConnections Inc. and its wholly owned subsidiaries
Rhythms Links Inc. and Rhythms Links Inc.--Virginia. All significant
intercompany balances and transactions have been eliminated in consolidation.
INTERIM RESULTS (UNAUDITED): The interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and, therefore, do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
accruals, that are necessary for the fair statement of results for the unaudited
interim periods. The operating results for the interim periods are not
necessarily indicative of the results to be expected for a full fiscal year or
for any future periods. All information subsequent to March 16, 2000 is
unaudited.
USE OF ESTIMATES
The preparation of 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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates and assumptions.
F-9
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue consists of recurring fees for monthly DSL service, and nonrecurring
fees for equipment and installation. Customer contracts are renewable and range
from one to three years in duration with payments due on a monthly basis.
Monthly recurring service revenue is recorded in the month the services are
rendered. Revenue for installations is recognized to the extent of installation
costs in the month incurred. Costs in excess of revenue related to installation
services are deferred and amortized to network and service costs on a
straight-line basis over the term of the customer contracts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market funds,
certificates of deposit, obligations of the U.S. government and its agencies and
commercial paper with a maturity of three months or less at the time of
purchase. Included in accounts payable are outstanding checks in excess of cash
balances of $8.5 million at December 31, 1999.
SHORT-TERM INVESTMENTS
Short-term investments consist of obligations of the U.S. government and its
agencies and commercial paper that have a maturity between 91 days and one year
from the date of purchase. Management determines the appropriate classification
of marketable debt and equity securities at the time of purchase.
RESTRICTED CASH
Restricted cash is made up of a portfolio of U.S. government securities
purchased to secure payment of the first six scheduled interest payments on the
1999 senior notes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, short-term investments, accounts receivable, and accounts payable
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amounts reported for long-term debt other
than the 12 3/4% senior notes and 13 1/2% senior discount notes approximate fair
value based upon management's best estimates of what interest rates would be
available for the same or similar instruments. The senior notes are publicly
traded securities. The combined quoted fair market value and the combined
carrying amount of the senior notes at December 31, 1999 are $471.9 million and
$505.7 million, respectively.
INVESTMENT IN OCI COMMUNICATIONS INC.
On October 29, 1999, the Company completed a strategic investment in OCI
Communications Inc. (OCI), a provider of telecommunications services in Canada.
In exchange for a $5.3 million cash investment, the Company received warrants
convertible into 763,680 shares of Class B non-voting stock in OCI. These
warrants were converted in December 1999. As part of this investment, the
Company received various rights, including the ability to appoint a
representative to OCI's Board of Directors, among others. This investment is
classified as an available-for-sale security and is carried at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders'
F-10
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equity. As part of this strategic relationship, in January 2000, the Company
formed a joint venture with OCI to offer DSL-based services in selected Canadian
markets. See Note 10.
INVENTORY
Inventory consists of communications equipment that will be installed at
customer locations. Inventory is accounted for using the first-in, first-out
method at the lower of cost or market.
EQUIPMENT AND FURNITURE
Equipment and furniture consists of purchased equipment, furniture, computer
software, and leasehold improvements. Equipment and furniture is recorded at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three to seven years or the lease term, if
shorter. When equipment and furniture are retired, sold or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts,
and gains and losses resulting from such transactions are reflected in
operations.
COLLOCATION FEES
Collocation fees represent nonrecurring fees paid to secure central office
space for location of certain Company equipment. The fees are amortized over
their estimated useful lives of ten years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company investigates potential impairments of its long-lived assets on
an exception basis when evidence exists that events or changes in circumstances
may have made recovery of an asset's carrying value unlikely. An impairment loss
is recognized when the sum of the expected undiscounted future net cash flows is
less than the carrying amount of the asset. No such losses have been identified.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash equivalents and
short-term investments. Cash in excess of operating requirements is
conservatively invested in money market funds, certificates of deposit with high
quality financial institutions, obligations of the U.S. government and its
agencies, and commercial paper rated A-1, P-1 to minimize risk.
At December 31, 1998 and 1999, accounts receivable balances from two
significant customers were 22.4% and 33.2%, respectively, of the total net
accounts receivable balance and 50.4% and 40.8%, respectively, of revenues.
Ongoing credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains an allowance for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations. At December 31, 1998 and 1999, the allowance for
doubtful accounts was $50,000 and $0.4 million, respectively. The Company's
customer base is widespread geographically.
F-11
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred. Approximately $0.7 million and
$6.9 million of advertising costs were incurred in 1998 and 1999, respectively.
No such material amounts were incurred in 1997.
INCOME TAXES
The Company provides for income taxes utilizing the liability method. Under
the liability method, current income tax expense or benefit represents income
taxes expected to be payable or refundable for the current period. Deferred
income tax assets and liabilities are established for both the impact of
differences between the financial reporting bases and tax bases of assets and
liabilities and for the expected future tax benefit to be derived from tax
credits and tax loss carryforwards. Deferred income tax expense or benefit
represents the change during the reporting period in the net deferred income tax
assets and liabilities. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
NET LOSS PER SHARE
Basic earnings per share (EPS) is calculated by dividing the income or loss
available to common stockholders by the weighted average number of common shares
outstanding for the period without consideration for common stock equivalents.
Diluted EPS is computed by dividing the income or loss available to common
stockholders by the weighted average number of common shares outstanding for the
period in addition to the weighted average number of common stock equivalents
outstanding for the period. Shares subject to repurchase by the Company are
considered common stock equivalents for purposes of this calculation. Shares
issuable upon conversion of the Series A and Series B preferred stock, upon the
exercise of outstanding stock options and warrants and shares issued subject to
repurchase by the Company totaling 36,653,940 and 52,958,513, at December 31,
1997 and 1998, respectively, have been excluded from the computation since their
effect would be antidilutive. Shares issuable upon conversion of the exercise of
outstanding stock options and warrants and shares issued subject to repurchase
by the Company totaling 6,897,060 at December 31, 1999 have been excluded from
the computation since their effect would be antidilutive.
STOCK OPTIONS AND STOCK PURCHASE WARRANTS
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," is applied in accounting for all employee stock option and stock
purchase warrant arrangements. Compensation cost is recognized for all stock
options and stock purchase warrants granted to employees when the exercise price
is less than the market price of the underlying common stock on the date of
grant. Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation" requires pro forma disclosures
regarding earnings (loss) as if compensation cost for stock options and stock
purchase warrants had been determined in accordance with the fair value based
method prescribed in SFAS No.123. Estimates of the fair market value are made
for each stock option and stock purchase warrant at the date of grant by the use
of the Black-Scholes option pricing model.
F-12
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
No. 101), "Revenue Recognition in Financial Statements." SAB 101 provides
specific guidance, among other things, as to the recognition of revenue related
to up-front non-refundable fees and services charges received in connection with
a contractual arrangement. The Company will adopt SAB No. 101 as required in
2000. The Company is in the process of evaluating the impact on its consolidated
financial statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Company will adopt SFAS No. 133 as required in 2001. The Company expects that
adoption will have no impact on the consolidated financial statements.
RECLASSIFICATIONS
Certain balances in the 1997 and 1998 financial statements have been
reclassified to conform to the 1999 presentation. The reclassifications had no
effect on financial condition, results of operations or cash flows.
2. SHORT-TERM INVESTMENTS
The Company's marketable debt securities are classified as held-to-maturity
and carried at amortized cost, which approximates fair value. Short-term
investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term investments:
Commercial paper........................................ $ 33,170 $ 75,902
U.S. government securities.............................. 82,327 216,106
-------- --------
$115,497 $292,008
======== ========
</TABLE>
3. COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts, loans, interest and other receivables, net:
Interest............................................... $ 2,135 $ 5,011
Trade, net of allowance for doubtful accounts of $50
and $367 in 1998 and 1999, respectively.............. 197 4,016
Other receivables from third parties................... -- 1,701
Employee expense advances and loans.................... 44 116
------- --------
$ 2,376 $ 10,844
======= ========
</TABLE>
F-13
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Equipment and furniture, net:
Operating equipment.................................... $ 9,633 $101,611
Office furniture....................................... 917 4,815
Leasehold improvements................................. 668 3,199
Computer software...................................... 456 7,993
Computer equipment..................................... 274 17,239
Lab equipment.......................................... 17 605
Accumulated depreciation............................... (455) (10,631)
------- --------
$11,510 $124,831
======= ========
Collocation fees, net:
Collocation fees....................................... 13,889 59,860
Accumulated amortization............................... (85) (2,439)
------- --------
$13,804 $ 57,421
======= ========
Accrued expenses and other current liabilities:
Accrued payroll........................................ $ 1,524 $ 8,851
Carrier services and other operating costs............. 991 8,492
Other.................................................. 301 5,820
------- --------
$ 2,816 $ 23,163
======= ========
</TABLE>
F-14
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT
Outstanding debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Note payable to bank; due in monthly installments of $28;
interest at prime plus 0.25% (8.0% and
8.75%,respectively); collateralized by certain assets;
matures April 2001........................................ $ 805 $ 444
12 3/4% senior notes; due April 2009; unsecured............. -- 325,000(a)
13 1/2% senior discount notes; due May 2008; net of
unamortized discount of $109,304; unsecured............... 157,465 180,696(b)
-------- --------
Total debt.................................................. 158,270 506,140
Less current portion........................................ (333) (333)
-------- --------
$157,937 $505,807
======== ========
</TABLE>
- ------------------------
(a) Cash proceeds from the issuance of the 1999 senior notes were approximately
$314.5 million of which approximately $113.2 million was used to purchase a
portfolio of U.S. government securities to secure payment of the first six
scheduled interest payments on the 1999 senior notes. These senior notes are
unsecured obligations of the Company and mature on April 15, 2009. The notes
are redeemable at the Company's option, in whole or in part, at any time
after April 15, 2004, at predetermined redemption prices, together with any
accrued and unpaid interest through the date of redemption. Upon a change of
control, each holder of the senior notes may require the Company to purchase
the notes at 101% of the principal amount thereof, plus any accrued and
unpaid interest to the date of purchase. The 1999 senior notes contain
restrictive covenants, including limitations on future indebtedness,
restricted payments, transactions with affiliates, liens, sale of stock of
subsidiaries, entering new lines of business, dividends, mergers and
transfers of assets.
(b) The sale of the 1998 senior discount notes included warrants to purchase
4,732,800 shares of common stock at an exercise price of $0.004 per share.
The notes were issued at a discount and cash proceeds from the issuance of
the notes and warrants were $150.4 million. The value ascribed to the
warrants of $6.6 million resulted in additional debt discount. The debt
issue costs are being amortized to interest expense using the effective
interest method over the period that the notes are outstanding. The notes
will accrete in value through May 15, 2003, at a rate of 13 1/2% per annum,
compounded semi-annually; no cash interest will be payable prior to that
date. Upon a change in control or upon certain asset sales, the Company must
offer to repurchase all or a portion of the outstanding notes. In addition,
the Company has the option to repurchase the notes upon payment of a premium
of accreted value at that point in time. The notes contain restrictive
covenants including limitations on future indebtedness, restricted payments,
transactions with affiliates, liens, sale of stock of subsidiaries,
dividends, mergers and transfers of assets.
Effective November 20, 1998, the Company completed an exchange offer of the
13 1/2% senior discount notes that allowed for registration of such notes under
the Securities Act of 1933, as amended. Of the original issue notes,
$289.0 million were tendered for exchange. The registered notes have
F-15
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (CONTINUED)
substantially the same terms and conditions as the unregistered notes, except
that the registered notes are not subject to the restrictions on resale or
transfer that applied to the unregistered notes.
Effective September 17, 1999, the Company completed an exchange offer of the
12 3/4% senior notes that allowed for registration of such notes under the
Securities Act of 1933, as amended. The original issue notes of $325.0 million
were tendered for exchange. The registered notes have substantially the same
terms and conditions as the unregistered notes, except that the registered notes
are not subject to the restrictions on resale or transfer that applied to the
unregistered notes.
Future maturities of outstanding debt are $0.3 million in 2000,
$0.1 million in 2001, none in 2002, none in 2003, none in 2004, and
$615.0 million thereafter.
5. STOCKHOLDERS' EQUITY
The Company was initially capitalized in February 1997 with common stock.
On July 3, 1997, the Company issued 12,280,000 shares of its Series A
preferred stock to new and existing investors for an aggregate purchase price of
$12.3 million, which converted into 29,472,000 shares of common stock upon the
closing of the initial public offering of the Company's common stock as
discussed below. In addition, 210,000 shares of Series A preferred stock was
sold to certain investors for an aggregate purchase price of $0.2 million, which
converted into 504,000 shares of common stock upon the closing of the initial
public offering of the Company's common stock as discussed below. The Company
also issued 365,094 shares of Series A preferred stock at a purchase price of
$0.80 per share which converted into 876,226 shares of common stock upon the
closing of the initial public offering of the Company's common stock in
April 1999 as discussed below. On March 12, 1998, the Company issued 4,044,943
shares of its Series B preferred stock to new and existing investors at a price
of $4.45 per share. The Company received proceeds totaling $18.0 million, which
converted into 9,707,863 shares of common stock upon the closing of the initial
public offering of the Company's common stock in April 1999 as discussed below.
In March 1999, the Company issued 3,731,410 shares of Series C preferred
stock to MCI WorldCom's investment fund for an aggregate purchase price of
$30.0 million, which converted into 4,477,692 shares of common stock upon the
closing of the initial public offering of the Company's common stock in
April 1999 as discussed below. The terms of the transaction also provide for the
Company and MCI WorldCom to enter into various business relationships, including
MCI WorldCom's commitment to sell 100,000 of the Company's DSL lines over a
period of five years, subject to penalties for failure to reach target
commitments. This transaction included certain warrants as discussed in Note 6.
In March 1999, the Company issued 3,731,409 shares of Series C preferred
stock to Microsoft for an aggregate purchase price of $30.0 million, which
converted into 4,477,691 shares of common stock upon the closing of the initial
public offering of the Company's common stock in April 1999 as discussed below.
The terms of the transaction also provide for the Company and Microsoft to enter
into various business relationships. In connection with these business
relationships, the Company capitalized $10.0 million in business acquisition
costs that is being amortized to operating expense over a three-year period.
This transaction included certain warrants as discussed in Note 6.
F-16
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
In April 1999, the Company issued 932,836 shares of Series C preferred stock
to Qwest, which converted into 1,119,403 shares of common stock upon the closing
of the initial public offering of the Company's common stock in April 1999, as
discussed below. Also included was 441,176 shares of Series D preferred stock,
that converted into 441,176 shares of common stock upon the closing of the
initial public offering of the Company's common stock. The aggregate purchase
price for these transactions was $15.0 million. In accordance with provisions of
the agreement underlying this investment, the Company and Qwest have entered
into certain business relationships. In connection with this business
relationship, the Company capitalized $11.1 million in business acquisition
costs that is being amortized to operating expense over a five-year period. This
transaction included certain warrants as discussed in Note 6.
Effective April 12, 1999, the Company completed an initial public offering
of its common stock. A total of 10,781,250 common shares were issued at $21.00
per share; net proceeds to the Company were approximately $210.1 million after
payment of underwriting fees and related issue costs. Upon completion of the
offering, all classes of preferred stock automatically converted to common
stock, resulting in an additional 51,076,051 shares of common stock being issued
leaving no shares of preferred stock issued and outstanding.
Effective August 17, 1999, the Company completed a secondary public offering
of its common stock in a transaction that allowed certain holders of warrants
issued in connection with the 13 1/2% senior discount notes to exercise those
warrants and sell the resulting common stock at $29.00 per share. A total of
3,961,862 shares were issued in the transaction; the company received no
proceeds from the sale of these shares. In connection with the secondary
offering, the underwriters of the offering were allowed to purchase 594,279
shares of common stock from the Company for $29.00 per share. The sale of these
shares was completed on September 14, 1999 and the Company received proceeds of
$16.4 million, net of underwriting discount.
Effective November 4, 1998, the Company completed a two-for-one split of its
common stock. Effective March 19, 1999, the Company completed a six-for-five
split of its common stock. The accompanying consolidated financial statements
have been restated for all periods presented to reflect the stock splits.
6. STOCK OPTIONS AND WARRANTS
The Company has established the 1999 Stock Incentive Plan (the 1999 Plan) as
the successor equity incentive program to the 1997 Option/Stock Issuance Plan
(the 1997 Plan). The 1999 Plan provides for the grant of options to employees,
directors and outside consultants for purchase of up to an aggregate of
17,173,530 shares of common stock. All outstanding options under the 1997 Plan
were incorporated into the 1999 Plan, and no further options grants may be made
under the 1997 Plan. Options granted under the 1997 Plan are immediately
exercisable and expire within ten years after the date of grant. Shares acquired
upon exercise are subject to repurchase by the Company ratably over a four-year
period from the date of grant, at the option of the Company and at the exercise
price. Options granted under the 1999 Plan are exercisable ratably over a
four-year period from date of grant and expire within ten years of the date of
the grant. The 1999 Plan provides for both incentive option and non-statutory
option grants and for accelerated vesting in the event of a 50% or more change
in control of the Company.
F-17
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
The 1999 Plan activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE
SHARES FAIR VALUE EXERCISE PRICE
---------- ---------- --------------
<S> <C> <C> <C>
Granted, below market...................... 5,801,714 $ 0.29 $ 0.04
Exercised.................................. (320,458) 0.29 0.04
---------- ------ ------
Outstanding at December 31, 1997......... 5,481,256 $ 0.29 $ 0.04
Granted, below market...................... 3,364,680 $ 2.62 $ 0.84
Exercised.................................. (5,560,308) 0.30 0.04
Canceled................................... (136,348) 1.10 0.22
---------- ------ ------
Outstanding at December 31, 1998......... 3,149,280 $ 2.73 $ 0.89
Granted, at market......................... 6,160,030 $31.58 $31.58
Granted, below market...................... 2,081,298 6.36 12.54
Exercised.................................. (2,711,247) 3.11 1.23
Canceled................................... (962,100) 19.23 13.65
---------- ------ ------
Outstanding at December 31, 1999......... 7,717,261 $26.87 $25.12
========== ====== ======
</TABLE>
The following summarizes the outstanding and exercisable options under the
1999 Plan at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------- ----------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.21 to $ 0.25 174,384 8.53 years $ 0.23 174,384 $ 0.23
$ 1.67 to $ 1.88 481,223 8.86 years $ 1.72 481,223 $ 1.72
$ 3.33 to $ 6.37 897,176 9.08 years $ 4.37 897,176 $ 4.37
$14.23 to $16.00 1,780,598 9.26 years $15.93 1,702,262 $15.98
$43.50 to $56.94 940,680 9.47 years $52.65 -- --
$26.69 to $35.25 3,443,200 9.77 years $32.27 -- --
</TABLE>
During 1997, 1998, and 1999, options were granted to employees at less than
fair value on the date of grant, resulting in $1.5 million, $4.9 million, and
$11.4 million, respectively, of deferred compensation recorded as a reduction of
stockholders' equity. These amounts are being amortized as a charge to deferred
compensation expense over the vesting periods of the applicable options; such
amortization totaled $0.2 million, $0.7 million, and $3.7 million for the
periods ended December 31, 1997, 1998, and 1999, respectively.
An option to purchase 365,094 shares of Series A preferred stock at $0.80
per share was granted to an employee during 1997. The Company recorded $73,000
in compensation expense during 1997 related to this grant.
Had compensation expense for the Company's 1999 Plan and the preferred stock
option been determined based on the fair value method of accounting for
stock-based compensation, the Company's net loss and net loss per share for the
periods ended December 31, 1997, 1998, and 1999 would have
F-18
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
been increased by $11,000, $60,000, and $10.8 million and $0.01, $0.02, and
$0.20 per share, respectively. For purposes of determining this compensation
expense, the fair value of each option grant is estimated on the grant date
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the periods ended December 31, 1997, 1998,
and 1999, respectively: no dividend yield; risk-free interest rates of 5.3%,
4.9%, and 5.5%, respectively; expected volatility of nil for pre-initial public
offering grants; and 50% for post--initial public offering grants and expected
term of four years for common options and six months for the preferred option.
The following summarizes the issued, outstanding, and exercised warrants at
December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF
ORIGINAL NUMBER OF NUMBER OF
WARRANTS WARRANTS WARRANTS EXERCISE PRICE EXPIRATION
ISSUED EXERCISED OUTSTANDING PER SHARE DATE
--------- --------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Warrants issued with 13 1/2% senior discount
notes........................................ 4,732,800 4,701,973 30,827 $0.004 May 2008
Warrants issued with Series C preferred
stock........................................ 1,440,000 -- 1,440,000 6.70 March 2004
Warrants issued with Series C preferred
stock........................................ 136,996 136,996 21.00 April 2004
Warrants issued with Series D preferred
stock........................................ 180,000 -- 180,000 6.70 April 2004
May 1998 warrants issued with lease
agreement.................................... 574,380 258,472 315,908 1.85 March 2009
March 1999 warrants issued with lease
agreement.................................... 45,498 -- 45,498 10.55 March 2009
April 1999 warrants issued with lease
agreement.................................... 75,000 -- 75,000 10.55 April 2002
July 1999 warrants issued with lease
agreement.................................... 10,000 -- 10,000 50.00 July 2004
</TABLE>
In August 1999, after a "net exercise" of the warrants associated with the
13 1/2% senior discount notes, 3,961,862 of these shares were sold and an
additional 740,111 shares were sold by the selling stockholders in
November 1999. The Company received no proceeds from these sales. The remaining
warrants have an expiration date of May 15, 2008. The warrants may be required
to be repurchased by the Company for cash upon the occurrence of a repurchase
event, such as a consolidation, merger, or sale of assets to another entity, as
defined in the provisions of the Warrant Agreement, at a price to be determined
by an independent financial expert selected by the Company. In the event a
repurchase event occurs, the difference between the repurchase price and the
carrying value of the warrants would be charged to equity.
During May 1998, the Company entered into a 36-month lease line that
provides for $24.5 million in equipment on an operating lease basis. In
connection with this lease agreement, the Company issued 574,380 warrants to
purchase common stock at a price of $1.85 per share, exercisable immediately. In
March 1999, the Company entered into additional 36-month lease lines for an
aggregate of up to $24.0 million in lease financing. In connection with these
March 1999 leases, the Company issued warrants to purchase an aggregate of
45,498 shares of common stock at a price of $10.55 per share. These warrants are
immediately exercisable. In April 1999, the Company entered into an agreement
for up to $20.0 million in equipment lease financing and issued a warrant to
purchase up to 75,000 shares of common stock at an exercise price per share of
$10.55. This warrant is immediately exercisable. In July 1999, the Company
entered into an additional 36-month lease line for an aggregate of up to
$26.0 million in lease financing to be used for equipment. In connection with
this July 1999 lease, the Company issued a warrant to purchase 10,000 shares of
common stock at a price of $50.00 per share. This warrant is immediately
exercisable.
F-19
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
As of December 31, 1999, the Company had net operating loss carryforwards of
approximately $210.2 million, which are available to offset future taxable
income through 2019 for federal tax, a portion of which will be subject to the
limitations of Internal Revenue Code Section 382 relating to changes in
ownership of the Company. The deferred tax asset arising from the loss
carryforwards has been fully offset by a valuation allowance since the
utilization is uncertain. The valuation allowance increased by approximately
$1.0 million, $13.9 million, and $84.0 million during 1997, 1998, and 1999,
respectively, primarily as a result of the losses in each of these periods.
Components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 14,724 $ 85,028
Original issue discount and other..................... 178 13,885
-------- --------
Gross deferred tax asset................................ 14,902 98,913
Valuation allowance..................................... (14,902) (98,913)
-------- --------
Net deferred income taxes............................... $ -- $ --
======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Statutory federal tax rate...................... (34.0)% (34.0)% (35.0)%
State income tax, net of federal benefit........ (5.4)% (5.4)% (5.3)%
Other (including non-deductible items).......... (1.8)% 0.9% 1.7%
Deferred tax asset valuation allowance.......... 41.2% 38.5% 38.6%
------ ------ ------
--% --% --%
====== ====== ======
</TABLE>
8. RELATED TRANSACTIONS
The Company's in-house legal counsel is also a partner in a law firm used
externally by the Company. During 1998 and 1999, the Company incurred legal fees
and expenses of approximately $1.3 million and $2.4 million, respectively, to
the external firm in addition to the salary paid to the in-house counsel. At
december 31, 1999, the Company had a balance payable of approximately
$0.7 million to this entity.
Two members of the Company's Board of Directors serve as directors to a
company that supplies equipment to the Company. The total purchases during 1998
and 1999 from the equipment supplier were approximately $13.0 million and
$54.0 million, respectively. At December 31, 1999, the Company had a balance
payable of approximately $0.4 million to this entity.
One member of the Company's Board of Directors serves as President of MCI
WorldCom Venture Fund and a Senior Vice President of MCI WorldCom. In March
1999, the Company entered into a strategic arrangement with MCI WorldCom. No
revenue was received from MCI WorldCom in 1999 under this arrangement.
F-20
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain office equipment,
telecommunications equipment, network equipment and furniture under
non-cancelable operating lease agreements. The leases range in term from
24 months to 60 months and, in certain instances, provide for options to extend.
Rent expense under the operating leases for 1997, 1998, and 1999 totaled
$46,000, $2.0 million, and $21.0 million, respectively. Future minimum rental
payments under the leases are $41.1 million in 2000, $40.6 million in 2001,
$25.2 million in 2002, $3.5 million in 2003, $1.8 million in 2004, and $58,000
thereafter.
On February 18, 1999, the Company filed a complaint for declaratory relief
in San Diego County Superior Court, North County against Thomas R. Lafleur.
Mr. Lafleur is a former employee of the Company. After he left, he was sent a
check for the repurchase or buy-back of his unvested shares. Mr. Lafleur refused
to cash this check. The declaratory relief action is to determine that his
shares were unvested and thus properly repurchased. The Company has since
amended its complaint to allege additional causes of action, including fraud,
breach of contract, and interference with prospective economic advantage. On or
about March 26, 1999, Mr. Lafleur filed an answer to the complaint and also
filed a cross-complaint against the Company. The cross-complaint has been
amended a number of times and seeks compensatory and punitive damages. The
Company intends to defend vigorously against the claims asserted in the current
cross-complaint. The Company is currently accounting for these 438,115 shares as
treasury stock.
The Company is aware of the filing of a legal action by i2
Technologies, Inc. in the United States District Court in the Northern District
of Texas on January 7, 2000, challenging its use of the name "Rhythms" on
various grounds and alleging that its use of that name infringes certain
trademarks owned by i2 Technologies. The Company denies that it infringes any
legitimate trademark rights of i2 Technologies, in part on the grounds that the
Company has priority in the Rhythms name with respect to the goods and services
provided by it and that its use of those marks is not likely to cause confusion
among the consumers of our services and the services provided by i2
Technologies, respectively. The Company intends to vigorously defend the
continued use of its name in the manner in which we have used it in the past and
the Company's interests in the name "Rhythms."
In addition, the Company is subject to state commission, Federal
Communications Commission and court decisions as they relate to the
interpretation and implementation of the 1996 Telecommunications Act, the
interpretation of competitive carrier interconnection agreements in general and
our interconnection agreements in particular. In some cases, the Company may be
deemed to be bound by the results of ongoing proceedings of these bodies. The
Company therefore, may participate in proceedings before these regulatory
agencies or judicial bodies that affect, and allow it to advance, its business
plans.
10. SUBSEQUENT EVENTS
In January 2000, the Company formed a joint venture with OCI to offer
DSL-based services in selected Canadian markets. The Company and OCI each
received 100,000 shares of Class A voting stock. OCI also purchased 10,000,000
shares of Series A preferred shares with a redemption amount of US $1.00 per
share for $10.0 million. The Series A preferred shares have no voting or
conversion rights, but will earn dividends at a rate of six percent per annum
payable only upon redemption. To the extent the joint venture is unable to
receive sufficient financing through third parties, the Company and OCI shall be
obligated to provide additional capital contributions through installments.
F-21
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (CONTINUED)
In January and February 2000, the Company entered into an additional
36-month lease line for an aggregate of up to $50.0 million in lease financing
with GATX Capital Corporation to be used for network equipment. In
February 2000, the Company entered into an additional 36-month lease line for
$25.0 million in lease financing with Cisco Systems Capital Corporation to be
used for network equipment.
In February 2000, the Company issued $300.0 million aggregate principal
amount of 14% senior notes due 2010. Net proceeds of approximately
$291.3 million were raised. These senior notes are general unsecured obligations
of the Company and mature on February 15, 2010. The notes are redeemable at the
Company's option, in whole or in part, at any time after February 15, 2005, at
predetermined redemption prices, together with any accrued and unpaid interest
through the date of redemption. Upon a change of control, each holder of the
senior notes may require the Company to purchase the notes at 101% of the
principal amount thereof, plus any accrued and unpaid interest to the date of
purchase. The 2000 senior notes contain restrictive covenants, including
limitations on future indebtedness, restricted payments, transactions with
affiliates, liens, sale of stock of subsidiaries, entering new lines of
business, dividends, mergers and transfer of assets.
In February and March 2000, the Company issued 3,000,000 shares of 6 3/4%
Series F cumulative convertible preferred stock in a private placement. Net
proceeds were approximately $291.0 million. Each share of Series F preferred
stock is convertible into 2.35 shares of common stock at any time at a
conversion price of $42.56 per share, subject to adjustment. Holders of
Series F preferred stock are entitled to dividends on a cumulative basis at an
annual rate of 6 3/4%, payable quarterly in cash. The preferred stock is
redeemable at the Company's option, in whole or in part, at any time after
March 6, 2003, at predetermined redemption prices, together with any accrued and
unpaid dividends through the date of redemption. Upon a change of control, each
holder of the preferred shares may require the Company to purchase any or all of
the shares at 100% of the liquidation preference, plus any accrued and unpaid
dividends to the date of purchase. The Series F preferred stock is subject to
mandatory redemption on March 3, 2012.
In March 2000, the Company sold $250.0 million of 8 1/4% Series E
convertible preferred stock to Hicks, Muse, Tate & Furst Inc. (Hicks Muse). Each
share of Series E preferred stock is convertible into shares of common stock at
any time at a conversion price of $37.50 per share, subject to adjustment. In
addition, the Company issued Hicks Muse warrants to purchase 1,875,000 shares of
common stock at an exercise price of $45.00 per share, exercisable for three
years; 1,875,000 shares of common stock at an exercise price of $50.00 per
share, exercisable for five years; and 1,875,000 shares of common stock at an
exercise price of $55.00 per share, exercisable for seven years.
As part of the Hicks Muse agreement, holders of Series E preferred stock
affiliated with Hicks Muse have the right to appoint one representative to the
Company's Board of Directors provided that they continue to hold 40% of the
Series E preferred stock purchased by them or the underlying common stock or any
combination thereof. In addition, holders of the Company's Series E preferred
stock are be entitled to vote on all matters upon which the Company's common
stockholders can vote.
11. SUBSEQUENT EVENT (UNAUDITED)
In April 2000, the Company entered into a multiyear strategic relationship
with Excite @Home. Excite @Home is a leading broadband provider. Under the terms
of the agreement, the Company will
F-22
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
make a $15.0 million investment in @Home Solutions, an affiliate of Excite
@Home. The Company will become @Home Solutions' exclusive provider of a
residential DSL connectivity for Excite @Home in several specific markets
outside of Excite @Home's current cable footprint. Excite @Home will be a
preferred internet service provider (ISP) for new consumers in those markets.
The new relationship will offer broadband connectivity, a custom software
package, Excite for broadband content and ISP services such as e-mail.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited consolidated statement of
income data for each of the Company's last eight quarters. This data has been
derived from unaudited consolidated financial statements that have been prepared
on the same basis as the annual audited consolidated financial statements and,
in the opinion of the Company, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such
information. These unaudited quarterly results should be read in conjunction
with the consolidated financial statements and notes. The consolidated results
of operations for any quarter are not necessarily indicative of the results for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998:
Revenue................................................ $ 10 $ 71 $ 166 $ 281
Total costs and expenses............................... $ 2,536 $ 5,147 $ 8,935 $ 12,311
Loss from operations................................... $(2,526) $(5,076) $ (8,769) $(12,030)
Net loss............................................... $(2,380) $(6,769) $(11,881) $(15,304)
------- ------- -------- --------
Net loss per share (basic and diluted)................. $ (1.10) $ (2.84) $ (3.47) $ (0.68)
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999:
Revenue.............................................. $ 660 $ 1,641 $ 3,317 $ 5,471
Total costs and expenses............................. $ 20,716 $ 37,370 $ 55,980 $ 86,188
Loss from operations................................. $(20,056) $(35,729) $(52,663) $(80,717)
Net loss............................................. $(23,899) $(42,857) $(61,778) $(90,346)
-------- -------- -------- --------
Net loss per share (basic and diluted)............... $ (5.38) $ (0.68) $ (0.89) $ (1.23)
======== ======== ======== ========
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Rhythms NetConnections Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 29, 2000, except for Note 10, as to which the date is
March 16, 2000 included in this Registration Statement on Form S-4 also included
an audit of the financial statement schedule listed in the index on page F-1 of
this Registration Statement. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Denver, Colorado
February 29, 2000
S-1
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF CHARGED TO COSTS DEDUCTIONS/ BALANCE AT
PERIOD AND EXPENSES WRITE-OFFS END OF PERIOD
------------ ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for uncollectible trade
receivables:
Year ended December 31, 1997............. $ -- $ -- $ -- $ --
Year ended December 31, 1998............. $ -- $ 50 $ -- $ 50
Year ended December 31, 1999............. $ 50 $325 $ (8) $367
</TABLE>
S-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO]
RHYTHMS NETCONNECTIONS INC.
OFFER TO EXCHANGE ALL OUTSTANDING
14% SENIOR NOTES DUE 2010, SERIES A (UNREGISTERED)
FOR UP TO $300,000,000 IN PRINCIPAL AMOUNT OUTSTANDING OF
14% SENIOR NOTES DUE 2010, SERIES B (REGISTERED)
-----------------------------
PROSPECTUS
-----------------------------
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law permits indemnification
of the Registrant's officers and directors under certain conditions and subject
to certain limitations. Section 145 of the Delaware General Corporation Law also
provides that a corporation has the power to purchase and maintain insurance on
behalf of its officers and directors against any liability asserted against such
person and incurred by him or her in such capacity, or arising out of his or her
status as such, whether or not the corporation would have the power to indemnify
him or her against such liability under the provisions of Section 145 of the
Delaware General Corporation Law.
Article VII, Section 1 of the Registrant's Restated Bylaws provides that the
Registrant shall indemnify its directors and executive officers to the fullest
extent not prohibited by the Delaware General Corporation Law. The rights to
indemnify thereunder continue as to a person who has ceased to be a director,
officer, employee or agent and inure to the benefit of the heirs, executors and
administrators of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding by reason of the fact that he or she is
or was a director or officer of the Registrant (or was serving at the
Registrant's request as a director of officer of another corporation) shall be
paid by the Registrant in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he or she
is not entitled to be indemnified by the Registrant as authorized by the
relevant section of the Delaware General Corporation Law.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article V, Section (A) of the Registrant's Restated Certificate of Incorporation
provides that a director of the Registrant shall not be personally liable for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Registrant
or its stockholders, (ii) for acts or omissions not in good faith or acts or
omissions that involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived any improper personal benefit.
The Registrant has entered into indemnification agreements with each of its
directors and executive officers. Generally, the indemnification agreements
attempt to provide the maximum protection permitted by Delaware law as it may be
amended from time to time. Moreover, the indemnification agreements provide for
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to the
Registrant (except to the extent the court determines he or she is fairly and
reasonable entitled to indemnity for expenses), for settlements not approved by
the Registrant or for settlements and expenses if the settlement is not approved
by the court. The indemnification agreements provide for the Registrant to
advance to the individual any and all reasonable expenses (including legal fees
and expenses) incurred in investigating or defending any such action, suit or
proceeding. In order to receive an advance of expenses, the individual must
submit to the Registrant copies of invoices presented to him or her for such
expenses. Also, the individual must repay such advances upon a final judicial
decision that he or she is not entitled to indemnification.
The Registrant has purchased director's and officers' liability insurance.
The Registrant intends to enter into additional indemnification agreements with
each of its directors and executive officers to effectuate these indemnity
provisions.
The Registrant has an insurance policy covering the directors and officers
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
II-1
<PAGE>
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant.
3.2(2) Certificate of Designation of Series 1 Junior Participating
Preferred Stock of Registrant.
3.3(2) Restated Bylaws of the Registrant.
3.4(7) Certificate of Designation of 6 3/4% Series F Convertible
Preferred Stock of Registrant.
3.5(7) Certificate of Designation of 8.25% Series E Convertible
Preferred Stock of Registrant.
4.1(2) Form of Certificate of common stock.
4.2(1) Indenture, dated as of May 5, 1998, by and between the
Registrant and State Street Bank and Trust Company of
California, N.A., as trustee, including form of the
Registrant's 13 1/2% Senior Discount Notes due 2008,
Series A and form of Registrant's 13 1/2% Senior Discount
Notes due 2008, Series B.
4.3(1) Warrant Agreement, dated as of May 5, 1998, by and between
the Registrant and State Street Bank and Trust Company of
California, N.A.
4.4(1) Warrant Registration Rights Agreement, dated as of May 5,
1998, by and among the Registrant and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Penner & Smith Incorporated, and
Donaldson, Lufkin & Jenrette Securities Corporation.
4.5(2) Warrant to Purchase Shares of Common Stock, dated May 19,
1998, by and between the Registrant and Sun Financial
Group, Inc.
4.6(2) Common Stock Purchase Warrant, dated March 3, 1999, by and
between the Registrant and MCI WorldCom Venture Fund, Inc.
4.7(2) Common Stock Purchase Warrant, dated March 16, 1999, by and
between the Registrant and Microsoft Corporation.
4.8(2) Warrant to Purchase Shares of Common Stock, dated March 31,
1999, by and between Registrant and GATX Capital
Corporation.
4.9(2) Warrant Purchase Agreement, dated as of April 6, 1999, by
and between Registrant and MCI WorldCom Venture Fund, Inc.
4.10(2) Common Stock Purchase Warrant, dated April 6, 1999, by and
among the Registrant and MCI WorldCom Venture Fund, Inc.
4.11(2) Common Stock Purchase Warrant, dated April 6, 1999, by and
among the Registrant and U.S. Telesource, Inc.
4.12(2) Common Stock Purchase Warrant, dated April 5, 1999, by and
among the Registrant and Cisco Systems Capital Corporation.
4.13(2) Rights Agreement, dated April 2, 1999, by and among
Registrant and American Securities Transfer & Trust, Inc.
4.14(3) Indenture, dated as of April 23, 1999, by and between the
Registrant and State Street Bank and Trust Company of
California, N.A., as trustee, Including form of the
Registrant's 12 3/4% Senior Notes due 2009, Series A and
form of the Registrant's 12 3/4% Senior Notes due 2009,
Series B.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
<C> <S>
4.15(3) Notes Registration Rights Agreement, dated as of April 23,
1999, by and among the Registrant and Merrill Lynch & Co.,
Merrill Lynch, Pierce Fenner & Smith Incorporated, Salomon
Smith Barney Inc. and Chase Securities Inc.
4.16(3) Pledge and Escrow Agreement, dated as of April 23, 1999,
from the Registrant as Pledgor to State Street Bank and
Trust Company of California, N.A., as trustee.
4.17(4) Amendment No. 1 to Warrant Agreement, dated as of August,
1999 between the Registrant and State Street Bank and Trust
Company of California, N.A.
4.18(7) Indenture, dated February 23, 2000, by and between the
Registrant and State Street Bank and Trust Company of
California, N.A., as trustee, including form of the
Registrant's 14% Senior Notes due 2010, Series A and form of
the Registrant's 14% Senior Notes due 2010, Series B.
4.19(7) Notes Registration Statement, dated as of February 23, 2000,
among the Registrant, Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner and Smith Incorporated, and Salomon Smith
Barney Inc., Chase Securities Inc., and Credit Suisse First
Boston.
4.20(7) Registration Rights Agreement, dated March 3, 2000, by and
among the Registrant and Merrill Lynch, Pierce, Fenner and
Smith Incorporated and Salomon Smith Barney Inc.
4.21(7) Registration Rights Agreement, dated March 16, 2000, by and
among the Registrant and the entities listed on Schedule I
thereto.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
9.1(1) Voting Trust Agreement, dated as of May 5, 1998, by and
among Sprout Capital VII, L.P., Donaldson Lufkin & Jenrette
Securities Corporation, and First Union Trust Company,
National Association, as trustee.
9.2(1) Voting Trust Agreement, dated as of March 12, 1998, by and
between Enron Communications Group, Inc. and the Registrant,
as trustee.
10.1(1) Series A Preferred Stock Purchase Agreement, dated July 3,
1997, by and among the Registrant and the Investors listed
on Schedule A thereto.
10.2(1) Subsequent Closing Purchase Agreement, dated December 23,
1997, by and among the Registrant and the Investors listed
on Schedule A thereto.
10.3(1) Series B Preferred Stock Purchase Agreement, dated
March 12, 1998, by and among the Registrant and the
Investors listed on Schedule A thereto.
10.4(2) Enterprise Services Solution Agreement between Cisco
Systems, Inc. and the Registrant, dated December 3, 1998
10.5(2) Series C Preferred Stock Purchase Agreement, dated March 3,
1999, by and among the Registrant and MCI WorldCom Venture
Fund, Inc.
10.6(2) Amended and Restated Investors' Rights Agreement, dated
March 3, 1999, by and among the Registrant and the Investors
listed on Schedule A thereto.
10.7(2) Agreement, dated March 3, 1999, by and between the
Registrant and MCI WorldCom, Inc.
10.8(2) Series C Preferred Stock and Warrant Purchase Agreement,
dated March 16, 1999, by and among the Registrant and
Microsoft Corporation.
10.9(2) Amended and Restated Investors' Rights Agreement, dated
March 16, 1999, by and among the Registrant and the
Investors listed on Schedule A thereto.
10.10(2) Distribution Agreement, dated March 16, 1999, by and among
the Registrant and Microsoft Corporation.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
<C> <S>
10.11(1) Master Lease Agreement No. 1642 and Addendum thereto, each
dated November 19, 1997, and Second Addendum thereto, dated
as of May 19, 1998, between the Registrant and Sun Financial
Group, Inc.
10.12(2) Business Lease (Single Tenant) between the Registrant and BR
Venture, LLC dated September 1998.
10.13(1) Employment Agreement between the Registrant and Catherine M.
Hapka, dated June 10, 1997.
10.14(1) 1997 Stock Option/Stock Issuance Plan.
10.15(2) 1999 Stock Incentive Plan.
10.16(2) 1999 Employee Stock Purchase Plan.
10.17(1) Form of Indemnification Agreement between the Registrant and
each of its directors.
10.18(1) Form of Indemnification Agreement between the Registrant and
each of its officers.
10.19(2) QuickStart Loan and Security Agreement, dated October 29,
1997, between the Registrant and Silicon Valley Bank.
10.20(2) Third Addendum, dated March 31, 1999, to Master Lease
Agreement, dated November 19, 1997, by and among Company and
GATX Capital Corporation
10.21(2) Master Lease Agreement, dated March 31, 1999, by and among
Company and GATX Capital Corporation.
10.22(2) First Addendum, dated March 31, 1999, to Master Lease
Agreement, dated March 31, 1999, by and among Company and
GATX Capital Corporation.
10.23(2) Amendment No. 1, dated April 6, 1999, to Framework
Agreement, dated March 3, 1999, by and among the Registrant
and MCI WorldCom, Inc.
10.24(2) Series C Preferred Stock and Warrant Purchase Agreement,
dated April 6, 1999, by and among the Registrant and U.S
Telesource, Inc.
10.25(2) Series D Preferred Stock Purchase Agreement, dated April 6,
1999, by and among the Registrant and the Investors listed
on Schedule A thereto.
10.26(2) Amended and Restated Investors' Rights Agreement, dated
April 6, 1999, by and among the Registrant and the Investors
listed on Schedule A thereto.
10.27(2) Lease Agreement, dated April 5, 1999, by and among the
Registrant and Cisco Systems Capital Corporation.
10.28(3) Amendment No. 2, dated May 10, 1999, to Framework Agreement,
dated March 3, 1999, by and among the Registrant and MCI
WorldCom, Inc.
10.29(4) Employment Agreement with Steve Stringer.
10.30(2) Employment Agreement with Michael Lanier.
10.31(5) Master Lease Agreement, dated July 30, 1999, by and between
the Company and GATX Capital Corporation
10.32(6) ACI Plus Service Agreement, dated April 6, 1999, by and
between the Company and Qwest Communications Corporation.
10.33(7) Joint Venture Agreement, dated January 1, 2000, by and
between the Company, Rhythms Links, Inc. and Optel
Communications Corporation.
10.34(7) Preferred Stock and Warrant Purchase Agreement, dated
February 6, 2000 by and between the Registrant and the
Purchasers listed on Schedule I thereto.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
<C> <S>
10.35(7) Purchase Agreement, dated February 16, 2000, by and between
the Registrant and the Initial Purchasers listed on Schedule
I thereto.
10.36(7) Purchase Agreement, dated February 28, 2000 by and between
the Registrant and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Salomon Smith
Barney Inc.
10.37(7) Employment Agreement with David J. Shimp.
10.38(7) Employment Agreement with Scott C. Chandler.
10.39(4) Plus Service Agreement, dated April 6, 1999, by and between
the Registrant and Qwest Communications Corporation.
10.40 Sublease, dated January 1, 2000, by and between the
Registrant and Cyprus Amax Minerals Company
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers
23.2 Consent of Brobeck, Phleger & Harrison LLP (filed with
Exhibit 5.1).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility of Trustee on Form T-1.
99.1 Form of Letter of Transmittal
99.2 Form of Guarantee
99.3 Exchange Agency Letter Agreement
</TABLE>
- ------------------------
(1) Previously filed with the Commission as an exhibit to the registration
statement on Form S-4 (File No. 333-59393) and incorporated herein by
reference.
(2) Previously filed with the Commission as an exhibit to the registration
statement on Form S-1 (File No. 333-72409) and incorporated herein by
reference.
(3) Previously filed with the Commission as an exhibit to the registration
statement on Form S-4 (File No. 333-82637) and incorporated herein by
reference.
(4) Previously filed with the Commission as an exhibit to the registration
statement on Form S-1 (File No. 333-82867) and incorporated herein by
reference.
(5) Previously filed with the Commission as an exhibit to Form 10-Q filed
November 11, 1999 and incorporated herein by reference.
(6) Previously filed with the Commission as an exhibit to Form 10-Q filed
August 11, 1999 and incorporated herein by reference.
(7) Previously filed with the Commission as an exhibit to Form 10-K filed
March 30, 2000 and incorporated herein by reference.
(b) Financial Statement Schedules included separately in the Registration
Statement.
All other schedules are omitted because they are not required, are not
applicable or the information is included in the Financial Statements or notes
thereto.
II-5
<PAGE>
UNDERTAKINGS
We hereby undertake to file an application for the purpose of determining
the eligibility of the trustee to act under subsection (a) of Section 310 of the
Trust Indenture Act ("Act") in accordance with the rule and regulations
prescribed by the SEC under Section 305(b)(2) of Act.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of Regulation S-X at the state of any delayed offering or
throughout a continuous offering. Financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, provided, that
the registrant includes in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this paragraph (a)(4) and
other information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration statements on
Form F-3, a post-effective amendment need not be filed to include financial
statements and information required by Section 10(a)(3) of the Act or Rule 3-19
of this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Form F-3.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to
II-6
<PAGE>
the securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Triangle pursuant to the foregoing provisions, Delaware Corporation law, the
Underwriting Agreement or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefor, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the question has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Denver, State of Colorado, on the 22nd day of May,
2000.
<TABLE>
<S> <C> <C>
RHYTHMS NETCONNECTIONS, INC.
By: /s/ JOHN W. BRAUKMAN
----------------------------------------
John W. Braukman
CHIEF FINANCIAL OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Catherine M. Hapka and Scott C. Chandler, and
each of them, as such person's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his or her
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ CATHERINE M. HAPKA Chairman of the Board and May 22, 2000
------------------------------------ Chief Executive Officer
Catherine M. Hapka (Principal Executive Officer)
/s/ STEVE STRINGER President and Chief Operating Officer May 22, 2000
------------------------------------
Steve Stringer
/s/ JOHN W. BRAUKMAN Chief Financial Officer May 22, 2000
------------------------------------ (Principal Financial and Accounting
John W. Braukman Officer)
/s/ KEVIN R. COMPTON Director May 22, 2000
------------------------------------
Kevin R. Compton
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ KEITH B. GEESLIN Director May 22, 2000
------------------------------------
Keith B. Geeslin
/s/ SUSAN MAYER Director May 22, 2000
------------------------------------
Susan Mayer
/s/ WILLIAM R. STENSRUD Director May 22, 2000
------------------------------------
William R. Stensrud
/s/ JOHN L. WALECKA Director May 22, 2000
------------------------------------
John L. Walecka
/s/ EDWARD J. ZANDER Director May 22, 2000
------------------------------------
Edward J. Zander
/s/ MICHAEL LEVITT Director May 22, 2000
------------------------------------
Michael Levitt
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant.
3.2(2) Certificate of Designation of Series 1 Junior Participating
Preferred Stock of Registrant.
3.3(2) Restated Bylaws of the Registrant.
3.4(7) Certificate of Designation of 6 3/4% Series F Convertible
Preferred Stock of Registrant.
3.5(7) Certificate of Designation of 8.25% Series E Convertible
Preferred Stock of Registrant.
4.1(2) Form of Certificate of common stock.
4.2(1) Indenture, dated as of May 5, 1998, by and between the
Registrant and State Street Bank and Trust Company of
California, N.A., as trustee, including form of the
Registrant's 13 1/2% Senior Discount Notes due 2008,
Series A and form of Registrant's 13 1/2% Senior Discount
Notes due 2008, Series B.
4.3(1) Warrant Agreement, dated as of May 5, 1998, by and between
the Registrant and State Street Bank and Trust Company of
California, N.A.
4.4(1) Warrant Registration Rights Agreement, dated as of May 5,
1998, by and among the Registrant and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Penner & Smith Incorporated, and
Donaldson, Lufkin & Jenrette Securities Corporation.
4.5(2) Warrant to Purchase Shares of Common Stock, dated May 19,
1998, by and between the Registrant and Sun Financial
Group, Inc.
4.6(2) Common Stock Purchase Warrant, dated March 3, 1999, by and
between the Registrant and MCI WorldCom Venture Fund, Inc.
4.7(2) Common Stock Purchase Warrant, dated March 16, 1999, by and
between the Registrant and Microsoft Corporation.
4.8(2) Warrant to Purchase Shares of Common Stock, dated March 31,
1999, by and between Registrant and GATX Capital
Corporation.
4.9(2) Warrant Purchase Agreement, dated as of April 6, 1999, by
and between Registrant and MCI WorldCom Venture Fund, Inc.
4.10(2) Common Stock Purchase Warrant, dated April 6, 1999, by and
among the Registrant and MCI WorldCom Venture Fund, Inc.
4.11(2) Common Stock Purchase Warrant, dated April 6, 1999, by and
among the Registrant and U.S. Telesource, Inc.
4.12(2) Common Stock Purchase Warrant, dated April 5, 1999, by and
among the Registrant and Cisco Systems Capital Corporation.
4.13(2) Rights Agreement, dated April 2, 1999, by and among
Registrant and American Securities Transfer & Trust, Inc.
4.14(3) Indenture, dated as of April 23, 1999, by and between the
Registrant and State Street Bank and Trust Company of
California, N.A., as trustee, including form of the
Registrant's 12 3/4% Senior Notes due 2009, Series A and
form of the Registrant's 12 3/4% Senior Notes due 2009,
Series B.
4.15(3) Notes Registration Rights Agreement, dated as of April 23,
1999, by and among the Registrant and Merrill Lynch & Co.,
Merrill Lynch, Pierce Fenner & Smith Incorporated, Salomon
Smith Barney Inc. and Chase Securities Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
4.16(3) Pledge and Escrow Agreement, dated as of April 23, 1999,
from the Registrant as Pledgor to State Street Bank and
Trust Company of California, N.A., as trustee.
4.17(4) Amendment No. 1 to Warrant Agreement, dated as of August,
1999 between the Registrant and State Street Bank and Trust
Company of California, N.A.
4.18(7) Indenture, dated February 23, 2000, by and between the
Registrant and State Street Bank and Trust Company of
California, N.A., as trustee, including form of the
Registrant's 14% Senior Notes due 2010, Series A and form of
the Registrant's 14% Senior Notes due 2010, Series B.
4.19(7) Notes Registration Statement, dated as of February 23, 2000,
among the Registrant, Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner and Smith Incorporated, and Salomon Smith
Barney Inc., Chase Securities Inc., and Credit Suisse First
Boston.
4.20(7) Registration Rights Agreement, dated March 3, 2000, by and
among the Registrant and Merrill Lynch, Pierce, Fenner and
Smith Incorporated and Salomon Smith Barney Inc.
4.21(7) Registration Rights Agreement, dated March 16, 2000, by and
among the Registrant and the entities listed on Schedule I
thereto.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
9.1(1) Voting Trust Agreement, dated as of May 5, 1998, by and
among Sprout Capital VII, L.P., Donaldson Lufkin & Jenrette
Securities Corporation, and First Union Trust Company,
National Association, as trustee.
9.2(2) Voting Trust Agreement, dated as of March 12, 1998, by and
between Enron Communications Group, Inc. and the Registrant,
as trustee.
10.1(1) Series A Preferred Stock Purchase Agreement, dated July 3,
1997, by and among the Registrant and the Investors listed
on Schedule A thereto.
10.2(1) Subsequent Closing Purchase Agreement, dated December 23,
1997, by and among the Registrant and the Investors listed
on Schedule A thereto.
10.3(1) Series B Preferred Stock Purchase Agreement, dated
March 12, 1998, by and among the Registrant and the
Investors listed on Schedule A thereto.
10.4(2) Enterprise Services Solution Agreement between Cisco
Systems, Inc. and the Registrant, dated December 3, 1998
10.5(2) Series C Preferred Stock Purchase Agreement, dated March 3,
1999, by and among the Registrant and MCI WorldCom Venture
Fund, Inc.
10.6(2) Amended and Restated Investors' Rights Agreement, dated
March 3, 1999, by and among the Registrant and the Investors
listed on Schedule A thereto.
10.7(2) Agreement, dated March 3, 1999, by and between the
Registrant and MCI WorldCom, Inc.
10.8(2) Series C Preferred Stock and Warrant Purchase Agreement,
dated March 16, 1999, by and among the Registrant and
Microsoft Corporation.
10.9(2) Amended and Restated Investors' Rights Agreement, dated
March 16, 1999, by and among the Registrant and the
Investors listed on Schedule A thereto.
10.10(2) Distribution Agreement, dated March 16, 1999, by and among
the Registrant and Microsoft Corporation.
10.11(1) Master Lease Agreement No. 1642 and Addendum thereto, each
dated November 19, 1997, and Second Addendum thereto, dated
as of May 19, 1998, between the Registrant and Sun Financial
Group, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.12(2) Business Lease (Single Tenant) between the Registrant and BR
Venture, LLC dated September 1998.
10.13(1) Employment Agreement between the Registrant and Catherine M.
Hapka, dated June 10, 1997.
10.14(1) 1997 Stock Option/Stock Issuance Plan.
10.15(2) 1999 Stock Incentive Plan.
10.16(2) 1999 Employee Stock Purchase Plan.
10.17(1) Form of Indemnification Agreement between the Registrant and
each of its directors.
10.18(1) Form of Indemnification Agreement between the Registrant and
each of its officers.
10.19(1) QuickStart Loan and Security Agreement, dated October 29,
1997, between the Registrant and Silicon Valley Bank.
10.20(2) Third Addendum, dated March 31, 1999, to Master Lease
Agreement, dated November 19, 1997, by and among Company
and GATX Capital Corporation
10.21(2) Master Lease Agreement, dated March 31, 1999, by and among
Company and GATX Capital Corporation.
10.22(2) First Addendum, dated March 31, 1999, to Master Lease
Agreement, dated March 31, 1999, by and among Company and
GATX Capital Corporation.
10.23(2) Amendment No. 1, dated April 6, 1999, to Framework
Agreement, dated March 3, 1999, by and among the Registrant
and MCI WorldCom, Inc.
10.24(2) Series C Preferred Stock and Warrant Purchase Agreement,
dated April 6, 1999, by and among the Registrant and U.S
Telesource, Inc.
10.25(2) Series D Preferred Stock Purchase Agreement, dated April 6,
1999, by and among the Registrant and the Investors listed
on Schedule A thereto.
10.26(2) Amended and Restated Investors' Rights Agreement, dated
April 6, 1999, by and among the Registrant and the Investors
listed on Schedule A thereto.
10.27(2) Lease Agreement, dated April 5, 1999, by and among the
Registrant and Cisco Systems Capital Corporation.
10.28(4) Amendment No. 2, dated May 10, 1999, to Framework Agreement,
dated March 3, 1999, by and among the Registrant and MCI
WorldCom, Inc.
10.29(4) Employment Agreement with Steve Stringer.
10.30(4) Employment Agreement with Michael Lanier.
10.31(5) Master Lease Agreement, dated July 30, 1999, by and between
the Company and GATX Capital Corporation
10.32(6) ACI Plus Service Agreement, dated April 6, 1999, by and
between the Company and Qwest Communications Corporation.
10.33(7) Joint Venture Agreement, dated January 1, 2000, by and
between the Company, Rhythms Links, Inc. and Optel
Communications Corporation.
10.34(7) Preferred Stock and Warrant Purchase Agreement, dated
February 6, 2000 by and between the Registrant and the
Purchasers listed on Schedule I thereto.
10.35(7) Purchase Agreement, dated February 16, 2000, by and between
the Registrant and the Initial Purchasers listed on Schedule
I thereto.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.36(7) Purchase Agreement, dated February 28, 2000 by and between
the Registrant and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Salomon Smith
Barney Inc.
10.37(7) Employment Agreement with David J. Shimp.
10.38(7) Employment Agreement with Scott C. Chandler.
10.39(4) Plus Service Agreement, dated April 6, 1999, by and between
the Registrant and Qwest Communications Corporation.
10.40 Sublease, dated January 1, 2000, by and between the
Registrant and Cyprus Amax Minerals Company
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers
23.2 Consent of Brobeck, Phleger & Harrison LLP (filed with
Exhibit 5.1).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility of Trustee on Form T-1
99.1 Form of Letter of Transmittal
99.2 Form of Guarantee
99.3 Exchange Agency Letter Agreement
</TABLE>
- ------------------------
(1) Previously filed with the Commission as an exhibit to the registration
statement on Form S-4 (File No. 333-59393) and incorporated herein by
reference.
(2) Previously filed with the Commission as an exhibit to the registration
statement on Form S-1 (File No. 333-72409) and incorporated herein by
reference.
(3) Previously filed with the Commission as an exhibit to the registration
statement on Form S-4 (File No. 333-82637) and incorporated herein by
reference.
(4) Previously filed with the Commission as an exhibit to the registration
statement on Form S-1 (File No. 333-82867) and incorporated herein by
reference.
(5) Previously filed with the Commission as an exhibit to Form 10-Q filed
November 11, 1999 and incorporated herein by reference.
(6) Previously filed with the Commission as an exhibit to Form 10-Q filed
August 11, 1999 and incorporated herein by reference.
(7) Previously filed with the Commission as an exhibit to Form 10-K filed
March 30, 2000 and incorporated herein by reference.
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF RHYTHMS NETCONNECTIONS INC.,
a Delaware corporation
Rhythms NetConnections Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Rhythms NetConnections Inc. The original
Certificate of Incorporation of the corporation was filed with the Secretary of
State of the State of Delaware on February 27, 1997.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, the Restated Certificate of Incorporation was adopted by the
corporation's Board of Directors and stockholders, the stockholders of the
corporation having approved the Restated Certificate of Incorporation by the
written consent of the holders of at least a majority of the outstanding shares
in accordance with Section 228 thereof. The Restated Certificate of
Incorporation restates, integrates and amends the provisions of the existing
Restated Certificate of Incorporation of this corporation.
3. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby restated and further amended to read in its entirety as
follows:
ARTICLE I
The name of this corporation is Rhythms NetConnections Inc.
ARTICLE II
The address of this corporation's registered office in the State of
Delaware is 30 Old Rudnick Lane, City of Dover, County of Kent 19901. The name
of its registered agent at such address is CorpAmerica, Inc.
ARTICLE III
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may now or hereafter be organized under the Delaware
General Corporation Law.
ARTICLE IV
(A) CLASSES OF STOCK. This corporation is authorized to issue two classes
of stock, denominated Common Stock and Preferred Stock. The Common Stock shall
have a par value of $0.001 per share and the Preferred Stock shall have a par
value of $0.001 per share. The total number of shares of Common Stock which the
Corporation is authorized to issue is Two Hundred Fifty Million shares
(250,000,000), and the total number of shares of Preferred Stock which the
Corporation is authorized to issue is five million (5,000,000), of which one
million
<PAGE>
(1,000,000) shares shall be designated Series 1 Junior Participating Preferred
Stock (the "Series 1 Preferred Stock") and the remaining shares shall be
undesignated as to series.
(B) ISSUANCE OF UNDESIGNATED PREFERRED STOCK. The Preferred Stock may be
issued from time to time in one or more series. The Board of Directors is hereby
authorized, by filing one or more certificates pursuant to the Delaware General
Corporation Law (each, a "Preferred Stock Designation"), to fix or alter from
time to time the designations, powers, preferences and rights of each such
series of Preferred Stock and the qualifications, limitations or restrictions
thereof, including without limitation the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices, and the liquidation
preferences of any wholly-unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be decreased in accordance with the
foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
(C) RIGHTS PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SERIES 1 JUNIOR
PARTICIPATING PREFERRED STOCK.
1. DIVIDENDS AND DISTRIBUTIONS.
a. Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and superior to
the Series 1 Preferred Stock with respect to dividends, each holder of a share
of Series 1 Preferred Stock, in preference to the holders of shares of Common
Stock, par value $0.001 per share (the "Common Stock"), of the Corporation, and
of any other junior stock, shall be entitled to receive, when declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the last day of March, June, September and December
in each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share Series 1 Preferred Stock,
in an amount per share (rounded to the nearest cent) equal to, subject to the
provision for adjustment hereinafter set forth, One Thousand (1,000) times the
aggregate per share amount of all cash dividends, and One Thousand (1,000) times
the aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in shares of Common Stock or
a subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of a share or fraction of Series 1
Preferred Stock. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series 1 Preferred
Stock were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying
2
<PAGE>
such amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
b. The Corporation shall declare a dividend or distribution on
the shares of Series 1 Preferred Stock as provided in paragraph (a) of this
Section immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided,
however, that, in the event no dividend or distribution shall have been declared
on the Common Stock during the period between any Quarterly Distribution Date
and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per
share of Series 1 Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
c. Dividends shall begin to accrue and be cumulative on each
outstanding share of Series 1 Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such share of Series 1
Participating Preferred Stock, unless the date of issue of such share is prior
to the record date for the first Quarterly Dividend Payment Date, in which case
dividends on such share shall begin to accrue from the date of issue of such
share, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of Series
1 Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
shares of Series 1 Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be allocated
pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series 1 Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than 60 days prior to the date fixed for the payment thereof.
2. VOTING RIGHTS. The holders of shares of Series 1 Preferred Stock
shall have the following voting rights:
a. Subject to the provision for adjustment hereinafter set forth,
each share of Series 1 Preferred Stock shall entitle the holder thereof to One
Thousand (1,000) votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the number of votes per share to which holders of shares of
Series 1 Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
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b. Except as otherwise provided herein, in any other Certificate
of Designations creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series 1 Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
c. Except as set forth herein, or as otherwise provided by law,
holders of Series 1 Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
3. CERTAIN RESTRICTIONS.
a. Whenever quarterly dividends or other dividends or
distributions payable on the Series 1 Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series 1 Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series 1
Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series 1
Preferred Stock, except dividends paid ratably on the shares of Series 1
Preferred Stock and all such parity stock on which dividends are payable or
in arrears in proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series 1 Preferred
Stock, provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series 1 Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series 1 Preferred Stock, or any shares of
stock ranking on a parity with the Series 1 Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon
such terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
b. The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless
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the Corporation could, under paragraph (a) of this Section, purchase or
otherwise acquire such shares at such time and in such manner.
4. REACQUIRED SHARES. Any shares of Series 1 Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
5. LIQUIDATION, DISSOLUTION OR WINDING UP.
a. Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series 1 Preferred Stock unless, prior thereto, the holders
of shares of Series 1 Preferred Stock shall have received One Thousand Dollars
($1,000) per share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series 1 Preferred Stock shall be
entitled to receive an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 1,000 times the aggregate amount to
be distributed per share to holders of shares of Common Stock, or (2) to the
holders of shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series 1 Preferred Stock,
except distributions made ratably on the Series 1 Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or winding up. In the
event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series 1 Preferred
Stock were entitled immediately prior to such event under the proviso in clause
(1) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
b. In the event, however, that there are not sufficient assets
available to permit payment in full to the Series 1 Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series 1 Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
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c. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
6. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series 1 Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to One Thousand (1,000) times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series 1 Preferred Stock shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
7. NO REDEMPTION. The shares of Series 1 Preferred Stock shall not
be redeemable.
8. RANK. The Series 1 Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of the Corporation's Preferred Stock.
9. AMENDMENT. The Restated Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series 1 Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least a majority of the outstanding shares of Series 1 Preferred Stock, voting
together as a single class.
(D) RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior or equal rights of holders
of all classes of stock at the time outstanding having prior or equal rights as
to dividends, the holders of the Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
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2. REDEMPTION. The Common Stock is not redeemable upon demand of any
holder thereof or upon demand of this corporation.
3. VOTING RIGHTS. The holder of each share of Common Stock shall have
the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the Bylaws of this corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE V
(A) EXCULPATION. A director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived any
improper personal benefit. If the Delaware General Corporation Law is hereafter
amended to further reduce or to authorize, with the approval of the
corporation's stockholders, further reductions in the liability of the
corporation's directors for breach of fiduciary duty, then a director of the
corporation shall not be liable for any such breach to the fullest extent
permitted by the Delaware General Corporation Law as so amended.
(B) INDEMNIFICATION. To the extent permitted by applicable law, this
corporation is also authorized to provide indemnification of (and advancement of
expenses to) such agents (and any other persons to which Delaware law permits
this corporation to provide indemnification) through bylaw provisions,
agreements with such agents or other persons, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or non-statutory), with respect to actions for breach of duty to the
corporation, its stockholders, and others.
(C) EFFECT OF REPEAL OR MODIFICATION. Any repeal or modification of any of
the foregoing provisions of this Article V shall be prospective and shall not
adversely affect any right or protection of a director, officer, agent or other
person existing at the time of, or increase the liability of any director of the
corporation with respect to any acts or omissions of such director occurring
prior to, such repeal or modification.
ARTICLE VI
Elections of directors need not be by written ballot except and to the
extent provided in the Bylaws of the corporation. The Directors shall be
classified into three classes, as nearly equal in number as possible as
determined by the Board of Directors, with the term of office of the first class
to expire at the 2000 Annual Meeting of Stockholders, the term of office of the
second class to expire at the 2001 Annual Meeting of Stockholders and the term
of office of the third class to expire at the 2002 Annual Meeting of
Stockholders. At each Annual Meeting of Stockholders following such initial
classification and election, Directors elected to succeed those Directors whose
terms expire shall be elected for a term of office to expire at the third
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succeeding Annual Meeting of Stockholders after their election. Additional
directorships resulting from an increase in the number of Directors shall be
apportioned among the classes as equally as possible as determined by the Board
of Directors.
ARTICLE VII
No holder of shares of stock of the corporation shall have any preemptive
or other right, except as such rights are expressly provided by contract, to
purchase or subscribe for or receive any shares of any class, or series thereof,
of stock of the corporation, whether now or hereafter authorized, or any
warrants, options, bonds, debentures or other securities convertible into,
exchangeable for or carrying any right to purchase any share of any class, or
series thereof, of stock; but such additional shares of stock and such warrants,
options, bonds, debentures or other securities convertible into, exchangeable
for or carrying any right to purchase any shares of any class, or series
thereof, of stock may be issued or disposed of by the Board of Directors to such
persons, and on such terms and for such lawful consideration as in its
discretion it shall deem advisable or as the corporation shall have by contract
agreed.
ARTICLE VIII
The corporation is to have a perpetual existence.
ARTICLE IX
The corporation reserves the right to repeal, alter, amend or rescind any
provision contained in this Restated Certificate of Incorporation and/or any
provision contained in any amendment to or restatement of this Restated
Certificate of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred on stockholders herein are granted subject to
this reservation.
ARTICLE X
The Board of Directors may from time to time make, amend, supplement or
repeal the Bylaws by the requisite affirmative vote of Directors as set forth in
the Bylaws; provided, however, that the stockholders may change or repeal any
bylaw adopted by the Board of Directors by the requisite affirmative vote of
stockholders as set forth in the Bylaws; and, provided further, that no
amendment or supplement to the Bylaws adopted by the Board of Directors shall
vary or conflict with any amendment or supplement thus adopted by the
stockholders.
ARTICLE XI
No action shall be taken by the stockholders of the corporation except at
an annual or special meeting of stockholders called in accordance with the
Bylaws, and no action shall be taken by the stockholders by written consent.
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ARTICLE XII
Advance notice of stockholder nominations for the election of directors and
of business to be brought by stockholders before any meeting of the stockholders
of the corporation shall be given in the manner provided in the Bylaws of the
corporation.
ARTICLE XIII
This certificate shall be effective as of April 12, 1999 at 9:00 a.m.
eastern daylight savings time.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed under the seal of the corporation as of this 8th day of April, 1999.
RHYTHMS NETCONNECTIONS INC.,
a Delaware corporation
By:
-----------------------------
Catherine Hapka, President
[SIGNATURE PAGE TO RESTATED CERTIFICATE OF INCORPORATION
OF RHYTHMS NETCONNECTIONS INC.
<PAGE>
EXHIBIT 5.1
[BROBECK, PHLEGER & HARRISON LLP LETTERHEAD]
May 23, 2000
Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, Colorado 80112
Re: NEW 14% SENIOR NOTES DUE 2010 COVERED BY
REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
We are counsel to Rhythms NetConnections Inc., a Delaware corporation (the
"Company"), in connection with the filing by the Company with the Securities and
Exchange Commission (the "Commission") of a registration statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). The Registration Statement relates to the proposed issuance
by the Company of $300 million in aggregate principal amount of its new 14%
Senior Notes due 2010, Series B (registered) (the "New Notes") in connection
with the proposed exchange of $1,000 principal amount of the New Notes for each
$1,000 principal amount of its outstanding 14% Senior Notes due 2010, Series A
(unregistered) (the "Old Notes"). The Old Notes are, and the New Notes will upon
issuance be, covered by that certain indenture dated February 23, 2000 (the
"Indenture") by and between the Company and State Street Bank and Trust Company
of California, N.A., as trustee (the "Trustee"). This opinion letter is
delivered in accordance with the requirements of Item 601(b)(5) of
Regulation S-K under the Securities Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of: (i) the Registration
Statement, in the form filed with the Commission; (ii) the charter documents of
the Company, as currently in effect; (iii) the Indenture; (iv) the form of the
New Notes; and (v) resolutions of the Board of Directors of the Company relating
to, among other things, the issuance and exchange of the New Notes for the Old
Notes and the filing of the Registration Statement. We also have examined such
other documents as we have deemed necessary or appropriate as a basis for the
opinions set forth below.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents. As to certain facts
material to this opinion, we have relied without independent verification upon
oral or written statements and factual representations of officers and other
representatives of the Company and others.
Based upon the foregoing, and subject to the assumptions and limitations set
forth herein, we are of the opinion that, when (i) the Registration Statement,
as finally amended (including all necessary post-effective amendments, if any),
shall have become effective under the Securities Act and (ii) the New Notes are
duly executed, attested, issued and delivered by duly authorized officers of the
Company, and authenticated by the Trustee, all in accordance with the terms of
the Indenture and the prospectus contained in the Registration Statement,
against surrender and cancellation of a like principal amount of Old Notes, the
New Notes issued by the Company will be legally issued, and the New Notes will
constitute valid and binding obligations of the Company, enforceable against the
Company in accordance with their terms, except to the extent that enforcement
thereof may be limited by (i) bankruptcy, insolvency, reorganization,
arrangement, moratorium, fraudulent conveyance and
<PAGE>
other laws relating to or affecting creditors' rights generally and
(ii) general principles of equity, whether such enforcement is considered in a
proceeding in equity or at law.
We observe that the Indenture and the New Notes purport to be governed by
the laws of the State of New York, and our opinion is accordingly limited to
such laws.
We have relied on the Form T-1 and the certificates delivered by the Trustee
as to the qualifications, authority, legal power and eligibility of the Trustee
to act as trustee under the Indenture and to perform in accordance with the
terms of the Indenture its duties thereunder.
This opinion is given in respect of the Indenture and the New Notes only,
and we express no opinion as to the legality, validity or binding effect of any
related document, instrument or agreement or any other matter beyond the matters
expressly set forth herein. This opinion speaks only as of its date, and we
affirmatively disclaim any obligation to update this opinion letter to disclose
to you facts, events or changes of law or interpretation of law occurring,
arising or coming to our attention after the date hereof.
This opinion is intended to be filed as an exhibit to the Registration
Statement for the benefit of the investors acquiring the New Notes to be issued
pursuant thereto and may not be otherwise used or relied upon and may not be
otherwise disclosed, quoted, filed with a governmental agency or otherwise
referred to without our prior written consent. However, we consent to the use of
our name under the caption "Legal Matters" in the Registration Statement and
prospectus and any amendments thereto. In giving such consent, we do not admit
that we are experts within the meaning of the Securities Act or the rules and
regulations thereunder or that this consent is required by Section 7 of the
Securities Act.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
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SUBLEASE
THIS SUBLEASE, made as of this 1st day of January, 2000, by and between
CYPRUS AMAX MINERALS COMPANY, a wholly owned subsidiary of Phelps Dodge
Corporation, qualified to do business in the State of Colorado and having an
office at 9100 East Mineral Circle, Englewood, Colorado, (hereinafter called the
"Sublessor") and RHYTHMS NETCONNECTIONS, INC. a Delaware corporation qualified
to do business in the State of Colorado and having an office at 6933 S. Revere
Parkway, Englewood, Colorado (hereinafter called the "Sublessee").
W I T N E S S E T H
WHEREAS, by a certain Lease Agreement dated April 30, 1987 (the "Initial
Lease"), Panorama Park Venture I Limited Partnership (hereinafter called the
"Venture") leased to Sublessor's predecessor-in-interest that certain building
located at 9100 East Mineral Circle, Englewood, CO (hereinafter called the
"Leased Premises") together with all attached fixtures and chattels or
appurtenances as are used in connection therewith and with all respective
easements, rights and appurtenances relating thereto, all on the terms and
conditions set forth in the Initial Lease; and
WHEREAS, PERA, a Colorado general partnership (the "Overlandlord"), is the
successor in interest to the Venture; and
WHEREAS, the Initial Lease was extended through September 30, 1999 by
virtue of Sublessor's exercise of its first option under the Lease; and
WHEREAS, the Initial Lease was amended by that certain Lease Amendment
Number One dated June 23, 1987, was further amended by that certain Second
Amendment to Lease dated September 29, 1988, and was further amended by that
certain Third Amendment to Lease dated as of October 1, 1993 which provided in
part for an extension of the term of the Initial Lease through October 1, 2008
(collectively, the "Initial Lease Amendments");
WHEREAS, the Initial Lease, together with the Initial Lease Amendments, are
hereinafter referred to as the "Master Lease;" and
WHEREAS, a copy of the Master Lease, attached hereto as Exhibit A,
consisting of the Initial Lease and the Initial Lease Amendments, warranted by
Sublessor to be true and correct, has been delivered to Sublessee, the receipt
of which is hereby acknowledged; and
WHEREAS, Sublessee desires to sublease from Sublessor the Leased Premises
(that comprises a total of approximately 153,048 rentable square feet of the
Leased Premises) substantially described in Exhibit B attached hereto and
incorporated herein by this reference, to be progressively occupied by Sublessee
during the year 2000 in three phases. The first phase shall consist of Sublessee
occupying approximately 52,000 rentable square feet, as depicted on Exhibit B-1
attached hereto and incorporated herein by this reference, with such occupancy
by Sublessee to commence on January 1, 2000 (the "First Phase"). The second
phase shall consist of
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approximately 41,362 rentable square feet, as depicted on Exhibit B-2 attached
hereto and incorporated herein by this reference, with occupancy by Sublessee to
commence on July 1, 2000 (the "Second Phase"). The third phase shall consist of
approximately 59,686 rentable square feet, as depicted on Exhibit B-3 attached
hereto and incorporated herein by this reference, with occupancy by Sublessee to
commence on July 1, 2000 (the "Third Phase"); and
WHEREAS, the parties desire that they enter into a sublease agreement for
the term, at the rate, and upon and subject to the covenants, conditions,
limitations, exceptions and reservations contained in this Sublease.
NOW, THEREFORE, the parties hereto, for themselves, their successors and
assigns hereby covenant and agree as follows:
ARTICLE 1
BASIC SUBLEASE PROVISIONS
1.1 SUBLEASED PREMISES. Sublessor hereby subleases to Sublessee and Sublessee
hereby rents from Sublessor premises located at 9100 East Mineral Circle,
Englewood, Colorado 80112 and further described on Exhibit B attached hereto
consisting of approximately 153,048 rentable square feet (such space being
hereinafter called the "Office Premises"), with occupancy thereof to be in
accordance with the following three phase schedule, together with Sublessee's
right to use the Common Area Facilities (as defined in paragraph 5.1 hereof),
and the right to use and occupy the Parking Areas (as defined in paragraph 5.2
hereof), all for the term hereinafter stated, for the rent hereinafter reserved,
and upon and subject to the covenants, terms, conditions, limitations,
exceptions and reservations of this Sublease. The Office Premises, Common Area
Facilities and Parking Areas are hereinafter collectively called the Subleased
Premises. The Subleased Premises also include the fixtures, improvements and any
other property now installed. Sublessee shall have the right to pass in and out
of all corridors necessary to access the Subleased Premises.
For Phase 2 and Phase 3 Sublessor shall utilize reasonable efforts to vacate
contiguous blocks of space and make such space available for Sublessee earlier
than contemplated herein for Phase 2 and Phase 3. In such event, Sublessee shall
have the option to occupy the space made available, but shall have no obligation
to do so. In the event Sublessee occupies such space earlier than provided
below, Sublessee shall be responsible for paying rent, and all additional
charges for the space so occupied commencing on the sixtieth day after Sublessee
occupies said portion of Phase 2 or Phase 3. Subject to the foregoing paragraph,
the schedule for occupancy by Sublessee shall be as follows:
a. Sublessee shall be granted the right to possession of the initial portion of
the First Phase, as depicted on Exhibit B-1(a) attached hereto and incorporated
herein by this reference, commencing on January 1, 2000, and the Sublessee shall
be granted the right to possession of the second portion of the First Phase, as
depicted on Exhibit B-1(b) attached hereto, on January 17, 2000, and the
Sublessee shall be granted the right to possession of the remaining portion of
the First Phase as depicted on Exhibit B-1(c) attached hereto, on February 1,
2000, comprising a total of approximately 52,000 rentable square feet.
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b. Sublessee shall be granted the right to possession of the Second Phase,
consisting of approximately 41,362 rentable square feet, as depicted on Exhibit
B-2 attached hereto and incorporated herein by this reference, commencing on
July 1, 2000
c. Sublessee shall be granted the right to possession of the Third Phase,
consisting of approximately 59,686 rentable square feet, as depicted on Exhibit
B-3 attached hereto and incorporated herein by this reference, commencing on
July 1, 2000;
At anytime prior to June 30, 2000 either Sublessor or Sublessee may cause a
measurement to be made of any rentable square feet in the Office Premises
occupied by Sublessee or made available for occupancy to Sublessee by Sublessor,
as the case may be, and in such event the number of rentable square feet shall
be adjusted to the actual square feet measured which such actual measurement
shall be in force and effect through June 30, 2000.
In any event, Sublessor shall make available for occupancy, and Sublessee shall
assume the occupancy of, the entire 153,048 of rentable square feet of the
Office Premises no later than July 1, 2000. Sublessor and Sublessee acknowledge
and agree that the Office Premises constitute exactly 153,043 rentable square
feet and that, commencing on September 1, 2000, Sublessee shall pay Fixed Rent
and all Additional Charges based upon the occupancy of exactly 153,043 rentable
square feet. Sublessor and Sublessee further acknowledge and agree that the
Subleased Premises, as defined herein, shall constitute the entire amount of the
"Premises" and the "Building," as defined in the Master Lease, and that as of
July 1, 2000 Sublessee shall occupy the entire amount of the Subleased Premises.
1.2 USE. Sublessee shall use the Office Premises for general office and related
purposes consistent with the Master Lease only, the Common Area Facilities on
the terms and conditions set forth in paragraph 5.1 hereof; and the Parking
Areas only for the parking of motor vehicles used by Sublessee, Sublessee's
employees and business invitees. With respect to each of the foregoing
restrictions on the use of different portions of the Subleased Premises,
Sublessee agrees to abide by such restrictions unless Sublessor gives its
advance written consent to another use. Sublessee will not use or suffer or
permit the use of the Subleased Premises, or any part thereof, in any manner,
which would violate the provisions of the Master Lease.
1.3 TERM. The term of this Sublease shall commence pursuant to the three phase
schedule set forth hereinabove, and shall end at twelve o'clock midnight on
September 30, 2008 (hereinafter called the "Expiration Date"), or shall end on
such earlier date pursuant to any of the conditions of limitation or other terms
and conditions of this Sublease. If the Leased Premises, or any part thereof,
are not available for possession on the dates specified above, the respective
commencement dates shall be extended one (1) day for each day of delay. Such
shall be the sole and exclusive remedy of Sublessee.
1.4 SPACE PLANNING ALLOWANCE. Sublessor shall provide to Sublessee a one (1)
time space planning allowance of five cents per rentable square foot, consisting
of a total amount of Seven Thousand Six Hundred Fifty Two and 40/100 Dollars
($7,652.40). Sublessor shall pay Space Planning Allowance to Sublessee upon full
execution of this Sublease and approval.
1.5 TENANT IMPROVEMENT ALLOWANCE. Sublessor shall provide to Sublessee a Tenant
Improvement Allowance of Five Dollars ($5.00) per rentable square foot of the
Office Premises. Sublessee shall provide to Sublessor invoices and receipts and
other reasonably required
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documentation of expenditures up to and including Five Dollars ($5.00) per
square foot of rentable area in the Leased Premises Sublessee makes for tenant
improvements. Reimbursement to Sublessee from Sublessor shall commence on the
first day of the month subsequent to Sublessor receiving such invoices and
receipts and shall be in the form of a monthly rent credit to Sublessee,
amortized twenty four (24) months at the rate of ten percent (10%) per annum.
Sublessee agrees to obtain a minimum of three (3) bids from contractors approved
by both Sublessor (such approval not to be unreasonably withheld) and Sublessee
for review and approval by Sublessor. Sublessee shall manage the tenant finish
construction. Sublessor shall have no responsibility for management supervision
of the tenant finish construction.
1.6 SUBLESEE'S INSPECTION OF THE LEASED PREMISES. Sublessee represents that it
has inspected the Subleased Premises and is generally familiar with the
condition of every part thereof. Sublessee agrees that it enters into this
Sublease without any representations or warranties by Sublessor, its officers,
employees, agents, or representatives as to the condition of the Subleased
Premises, except as otherwise provided for herein. Within three (3) days of the
date this Sublease is fully executed, Sublessor shall deliver to Sublessee and
Overlandlord all available surveys relating to the existence (if any) of
hazardous materials in the Subleased Premises and all available reports relating
to the compliance (or lack thereof) of the Subleased Premises with the
provisions of the Americans With Disabilities Act. Subject to the foregoing
Space Planning Allowance and the Tenant Improvement Allowance, Sublessee agrees
to accept the Subleased Premises "as is" in its condition as of the dates set
forth in Section 1.1 relating to the phased occupancy by Sublessee, without
requiring any alteration, addition, improvement, installation, repair or
decoration to be made by Sublessor or at Sublessor's expense. Sublessor may make
certain furniture and equipment available for Sublessee to purchase. In the
event that Sublessee declines to purchase the furniture and/or equipment,
Sublessor shall remove the same. Sublessee shall only proceed with alterations
to the Leased Premises as are permitted, in writing, by Sublessor and
Overlandlord in accordance with the provisions of Paragraph 6.1 hereinbelow.
Sublessor represents that it has the right to request that Overlandlord permit
Sublessee to sublease the premises, and that, to the best of Sublessor's
knowledge, it is not in material default of any of its obligations under the
Master Lease.
ARTICLE 2
RENT
2.1 OFFICE SPACE FIXED RENT. Subject to the early occupancy provisions set forth
in Article I of this Sublease, Sublessee agrees to pay Sublessor the sum per
rentable square foot per month set forth in the Master Lease, per the number of
rentable square feet occupied by Sublessee, in monthly installments (hereinafter
called "Fixed Rent"). The Fixed Rent and subsequent adjustments, if any, shall
be calculated on a rentable square foot basis. Notwithstanding the date for
Sublessee's occupancy of portions of the Leased Premises, but subject to the
adjustment for any delay due to Sublessor in delivering the Subleased Premises
to Sublessee, the Fixed Rent shall commence to be due and payable as follows:
For Phase One the Fixed Rent shall be paid commencing on April 1 of 2000 and
shall continue through the end of the lease term. For Phase Two the Fixed Rent
shall commence to be paid on September 1 of 2000 and continue through the end of
the lease term. For Phase Three the Fixed Rent shall commence to be paid on
September 1 of 2000 and continue through the end of the lease term. Rent shall
be paid by Sublessee in advance on the first day of each and every calendar
month
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during the term of this Sublease, commencing as set forth hereinabove. In the
event, however, Sublessee occupies a portion of Phase Two or Phase 3 prior to
July 1, 2000, Sublessee shall commence to be liable for Fixed Rent, and all
Additional Charges, sixty (60) days subsequent to date of the early occupancy of
any such portion of Phase 2 or Phase 3 by Sublessee based upon the rentable
square feet occupied prior to July 1, 2000. Payments of rent and additional rent
shall be made by Sublessee without any deduction or set-off except as expressly
set forth herein.
2.2 ADDITIONAL CHARGES. Fixed rent, in accordance with the terms of the Master
lease, is to be triple net to the Overlandlord, and shall be triple net to
Sublessor under this Sublease. Sublessee shall pay to Sublessor all sums due to
the Overlandlord as Additional Rent, for Building Costs as are set forth in the
Master Lease, and all additional sums as set forth in the Master Lease as the
obligation of Tenant (collectively, the "Additional Rent" or the "Additional
Charges"), prior to the date that such sums are due and payable by Tenant in
accordance with the terms of the Master Lease. Additional Rent, and all
additional charges due from Sublessor to Overlandlord in accordance with the
terms of the Master Lease, shall be paid per rentable square foot occupied by
Sublessee, commencing in accordance with the Fixed Rent commencement dates set
forth for each of the three phases for occupancy set forth in Section 2.1.
Notwithstanding the foregoing, in the event the Sublessee accepts occupancy of a
portion of Phase 2 or Phase 3 prior to the scheduled dates set forth in Section
1.1 Sublessee's payment of Additional Rent shall be in proportion to the amount
of rentable square feet which is occupied by Sublessee and on which Sublessee is
obligated to pay Fixed Rent.
2.3 PAYMENT. The Fixed Rent, and Additional Rent or other charges herein
reserved or payable, shall be paid to Sublessor at its offices: Cyprus Amax
Minerals Company/Phelps Dodge Corporation, Mark Fitzgerald, Land and Water
Resources, 2600 North Central Ave., Phoenix, Arizona, 85004 or at such other
place as Sublessor may designate, in lawful money of the United States of
America, as and when the same become due and payable, without demand therefor
and without any deduction, set-off or abatement whatsoever, except as otherwise
expressly provided in this Sublease. All sums due and payable as Fixed Rent or
additional rent which are not paid within ten (10) days after the due date shall
incur a late charge of five-percent of the payment due, and shall in addition
bear interest from and after the due date at the rate of ten percent (10%) per
annum. Notwithstanding the foregoing Sublessee shall not be liable to pay a late
charge if such late payment is the first late payment in any calendar year,
however, interest shall accrue and be due and payable on such amount.
ARTICLE 3
SECURITY DEPOSIT
3.1 SECURITY DEPOSIT. Upon execution of this Sublease, Sublessee shall deposit
with Sublessor a security deposit in the amount of Two Million Dollars
($2,000,000.00). Sublessor shall hold such sum in federally insured interest
bearing account(s) with interest accruing thereon being paid by Sublessor to
Sublessee annually. In no event shall Sublessor be responsible for the amount of
interest earned upon the security deposit. In addition, Sublessee shall provide
to Sublessor a clean, irrevocable and unconditional letter of credit in the
amount of One Million Dollars ($1,000,000.00) issued for the benefit of
Sublessor by a federally insured
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banking institution on a date no later than thirty (30) days subsequent to the
execution of this Sublease. Such letter of credit shall be maintained by
Sublessee, and renewed no later than thirty (30) days prior to any applicable
date of expiration, through and until December 31, 2001. On December 31, 2001,
Sublessee shall deposit with Sublessor the sum of Five Hundred Thousand Dollars
($500,000.00) as an additional security deposit. In the event that any portion
of the security deposit is used, applied or retained as a result of an uncured
default by Sublessee, Sublessee shall replenish any and all amounts used or
applied. On December 31, 2003, and on each successive December 31st thereafter,
Sublessor shall, provided Sublessee is not at any applicable time in default
under any obligation under this Sublease beyond any applicable cure period, pay
to Sublessee twenty-five percent (25%) of the balance existing as a security
deposit under this Sublease as of December 31, 2003. In no event however, shall
the total security deposit decline to an amount less than Five Hundred Thousand
Dollars ($500,000.00). Provided Sublessee is not in default under this Sublease
beyond the expiration of the applicable notice and cure period, within thirty
(30) days after the expiration or earlier termination of the Term of this
Sublease, Sublessor shall return such Security Deposit to Sublessee, less such
portion thereof as Sublessor shall have appropriated to satisfy any of Tenant's
obligations, or any uncured default by Sublessee, under the Sublease.
ARTICLE 4
OPERATING EXPENSES
4.1 OPERATING EXPENSES. Intentionally omitted.
ARTICLE 5
SUBLESSOR'S AFFIRMATIVE OBLIGATIONS
5.1 COMMON AREA FACILITIES. Prior to July 1, 2000, Sublessor shall make
available, at no additional charge to Sublessee, use of the following
facilities:
(i) the existing rest rooms, cafeteria area, Locker Room and Exercise Room
on an "as available basis" together with the right to the nonexclusive
use, in common with others, of all other facilities designated for
common use, in the Subleased Premises, (collectively, the "Common Area
Facilities").
Thereafter Sublessor shall have no obligation to Sublessee to maintain or
administer any facilities within the Subleased Premises.
5.2 PARKING SPACES. Sublessee shall have the use of all the existing parking
spaces on the site of the Leased Premises, excluding two hundred (200) spaces
reserved for Sublessor's use through July 1, 2000. Subsequent to July 1, 2000,
Sublessee shall be entitled to a reasonable number of parking spaces in
proportion to the number of square feet Sublessee occupies in the Leased
Premises to the total available (unless more is made available by the
Sublessor). Use of
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such outside surface parking spaces by Sublessee, its employees and invitees is
included in the Fixed Rent.
5.3 PROPERTY MANAGEMENT AND JANITORIAL SERVICES. Sublessee shall be entitled to
any of those services provided by Overlandlord in accordance with the terms of
the Master Lease. Sublessor and Sublessee agree that Sublessor shall have no
responsibility to provide any property management, janitorial or other services
to Sublessee, unless hereafter agreed upon by the parties. Notwithstanding the
foregoing, Sublessee agrees to utilize the current janitorial service through
June 30, 2000, and shall be responsible for the pro rata charges associated
therewith. In the event that any warranties on equipment in the Leased Premises
are assigned to Sublesee, they shall be assigned to Sublessee without recourse
against Sublessor, on the dates Sublessee becomes obligated for the payment of
Fixed Rent. Any costs incurred by Overlandlord or Sublessor for property
management and janitorial services shall be included as Additional Charges as
specified in Article IV of the Master Lease.
5.4. UTILITIES. From January 1, 2000 through and including June 30, 2000
Sublessor shall receive invoices for and make all payments regarding the costs
of operating, maintaining and repairing the services to be maintained by Tenant
as described in the Master Lease, with such costs to be considered Additional
Charges. From and after June 30, 2000, Sublessee shall receive all invoices and
be directly responsible for the cost of operating, maintaining and repairing the
services described in Article VI or other portion of the Master Lease with
respect to the Subleased Premises. Sublessor shall remain responsible for any
such services relating to any portion of the Leased Premises not included in the
Subleased Premises through June 30, 2000 and for any portion of the premises not
turned over by that date. To the extent that utilities may be provided to the
Subleased Premises by Sublessor or Overlandlord, the cost of these utilities
shall be included as Additional Charges as specified in Article IV of the Master
Lease. Sublessee shall inform Sublessor of any failure by Overlandlord to
provide services or other obligations under the Master Lease. In the event a
failure occurs, Sublessee shall take any and all actions reasonably necessary to
enforce its rights and cause Overlandlord to perform as required. Sublessor
shall not have any responsibility to Sublessee to compel Overlandlord's
performance thereof.
ARTICLE 6
SUBLESSEE'S AFFIRMATIVE OBLIGATIONS
6.1 ALTERATIONS. Sublessor agrees to provide Sublessee and Overlandlord with "as
built" plans and specifications for the Subleased Premises, to the extent that
Sublessor has possession of the same within three (3) days of the execution of
this Sublease. Sublessee agrees that any alteration, addition, improvement,
installation and decoration (hereinafter collectively called "Alteration") in
the Subleased Premises after the Commencement Date shall be made only (i) with
the prior written consent of Sublessor, which consent shall not be unreasonably
withheld, conditioned or delayed (and the Overlandlord, if required by the terms
of the Master Lease); (ii) by workmen or contractors approved by Sublessor,
which approval shall not be unreasonably withheld, conditioned or delayed; (iii)
in full compliance with all laws, ordinances and regulations of applicable
authorities (including any fire insurance rating organizations having
jurisdiction over the Subleased Premises); and (iv) in accordance with the
provisions of the Master Lease. At the expiration of the term of this Sublease,
Sublessee shall not be required to remove any Alteration unless Sublessee agrees
to such removal as a condition to obtaining the consent of Sublessor or the
Overlandlord to such Alteration, but shall be responsible for restoring
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the Subleased Premises to the condition existing on the Commencement Date,
subject only to normal wear and tear.
6.2 MAINTENANCE. Subject to Overlandlord's responsibilities under Section 7.01
of the Master Lease, Sublessee shall take good care of the Subleased Premises
and the fixtures and appurtenances therein. All damage or injury to the
Subleased Premises and to its fixtures, glass, appurtenances and equipment
caused by the moving of property by Sublessee in or out of the Subleased
Premises, or by the installation or removal by Sublessee of furniture, fixtures
or other property, or resulting from carelessness, omission, neglect or improper
conduct of Sublessee, its agents, servants or employees, shall be repaired,
restored or replaced promptly by Sublessee, at its sole cost and expense, to the
satisfaction of Sublessor. All of said repairs and replacements required to be
made by Sublessee shall be in quality and class substantially equal to the
original work or installation and shall be done in a good and workmanlike
manner.
6.3 CONSENT OF OVERLANDLORD. Whenever in this Sublease the Sublessee is required
to obtain the consent of Sublessor, Sublessee shall also be required to obtain
the consent of Overlandlord. Whenever the consent of Landlord is required to be
secured from Landlord by Tenant, as set forth in the Master Lease, Sublessee
shall be required to obtain the consent of both Sublessor and Overlandlord.
Overlandlord may extend or withhold its consent to any action contemplated under
the Master Lease in accordance with the terms and conditions therein. If such
consent to be obtained is set forth in this Sublease, but not in the Master
Lease, the consent of Overlandlord shall not be unreasonably withheld.
ARTICLE 7
SUBLESSOR'S COVENANTS AND REPRESENTATIONS
7.1 COVENANTS AND REPRESENTATIONS. Sublessor covenants and represents to
Sublessee as follows that:
(a) the Master Lease is in full force and effect, Sublessor has received no
notice of default and, to the best of Sublessor's knowledge, no default
exists thereunder;
(b) Sublessor will use reasonable efforts to obtain written approval and
consent from Overlandlord as required in the Master Lease to enter into
this Sublease.
ARTICLE 8
INSURANCE
8.1 INSURANCE. Sublessee shall indemnify and hold Sublessor, its agents and
employees, harmless from and against all claims for damages to persons or
property by reason of Sublessee's use or occupancy of the Leased Premises, and
the use and occupancy of the Leased Premises by Sublessee's agents, employees,
contractors, invitees, and licensees, for any reason or purpose, save and except
those claims for damages which arise directly out of the grossly negligent or
intentional acts or omissions of Sublessor, its agents, employees, contractors
or invitees. Sublessee shall maintain, at its own cost and expense throughout
the term of this Sublease, insurance with respect to the Subleased Premises of
the type and in the amounts reasonably
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acceptable to Sublessor. Such policies shall name Sublessor and Overlandlord
(hereinafter called "Additional Insureds") as additional insureds and shall be
primary and non-contributing with any other insurance carried by the Additional
Insureds. Such policies may be carried under Sublessee's blanket policy covering
the Subleased Premises and other locations owned or occupied by Sublessee, in
which case Sublessee may deliver to Sublessor certificates of such insurance in
lieu of insurance policies. All insurance policies required to be maintained
pursuant to this Sublease shall require twenty (20) days written notice to
Sublessor and Overlandlord prior to cancellation thereof.
8.2 WAIVER OF SUBROGATION. Sublessee and Sublessor hereby waive any and all
rights of recovery or subrogation against the other party for or arising out of
damage to the Leased Premises, the Subleased Premises or Sublessee's personal
property, or injury to persons, whether or not such damage, destruction or
injury shall have been caused by the negligence of such party, its agents,
servants or employees and shall obtain waivers of subrogation in each others
favor from their respective insurance companies .
ARTICLE 9
LOSS OF SUBLEASED PREMISES
9.1 CASUALTY. If the Subleased Premises shall be damaged by fire or other
casualty, or be condemned or taken in any manner for a public or quasi-public
use (and if this Sublease shall not have been terminated as provided in the
Master Lease) Sublessee agrees that Sublessor's obligation to repair, restore or
rebuild the Subleased Premises shall be determined in accordance with the Master
Lease. If the Subleased Premises or any part thereof shall be damaged by fire or
other casualty, Sublessee shall give prompt written notice to Sublessor.
9.2 PARTIAL DESTRUCTION. If less than substantially all of the Subleased
Premises shall be rendered untenantable by fire or other casualty, or be
condemned or taken in any manner for a public or quasipublic use, the Fixed
Rent, apportioned according to the area of the Subleased Premises (based on the
rentable square footage set forth in paragraph 1.1) shall be abated for the
period from the date of such damage to the date when the damage shall have been
repaired, unless Sublessor is unable to collect the insurance proceeds
applicable to such damage because of some action or inaction on the part of
Sublessee or its employees, licensees or invitees; or (ii) Sublessor shall make
available to Sublessee, during the period of such repair, other space in the
vicinity of the Subleased Premises which is reasonably suitable for the
temporary carrying on of Sublessee's business. Notwithstanding the foregoing, if
the damage results in a material interference with the ability of the Sublessee
to conduct its business for a period of 90 days, the Sublessee shall thereupon
have the right to terminate this Sublease, notwithstanding that the damage was
caused by some action or inaction on the part of Sublessee or its employees,
licensees or invitees.
9.3 SUBSTANTIAL DESTRUCTION. If the Subleased Premises should be totally
destroyed by fire or other casualty, or if the Subleased Premises are damaged so
that rebuilding cannot be reasonably completed within one hundred twenty (120)
working days after the date of the written notification by Sublessee to
Sublessor of the destruction, as determined by an independent, licensed
architect chosen by Sublessor this Sublease may be terminated by either party,
and the rent shall be abated for the unexpired portion of this Sublease,
effective as of the date of the damage. Unless the Sublessor is grossly
negligent, then Sublessor shall not be liable for any
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inconvenience or annoyance to Sublessee or injury to the business of Sublessee
resulting in any way from damage from fire or other casualty or the repair
thereof. Sublessee understands that Sublessor and the Overlandlord will not
carry insurance of any kind on Sublessee's goods, furniture or furnishings or on
any fixtures, equipment, improvements or installations removable by Sublessee in
accordance with the provisions of the Master Lease and this Sublease (herein
collectively called "Sublessee's Property") and that neither Sublessor nor the
Overlandlord shall be obligated to repair any damage thereto or replace same.
9.4 CONDEMNATION. In the event of any condemnation or taking of the Subleased
Premises, or any portion thereof, Sublessor's rights are limited by the Master
Lease. In the event of a taking of all or a portion of the Subleased Premises,
Sublessee shall not be entitled to receive any part of any award made in the
condemnation proceeding; provided, however, that nothing contained herein shall
be deemed to preclude Sublessee from intervening for Sublessee's own interest in
such proceeding to claim or receive from the condemning authority any
compensation to which Sublessee may otherwise be lawfully entitled in such case
in respect to a taking of Sublessee's Property excluding improvements to and
fixtures in the Subleased Premises; and Sublessee shall be entitled to the
benefit of any diminution in rent granted to Sublessor under the Master Lease
which is applicable to the portion of the Subleased Premises so condemned or
taken. Notwithstanding the foregoing, if the damage results in a material
interference with the ability of the Sublessee to conduct its business for a
period of 90 days, the Sublessee shall thereupon have the right to terminate
this Sublease.
9.5 YEAR 2000. Sublessor and Overlandlord expressly disclaim any and all
representations, covenants or warranties regarding the Leased Premises in the
event a Year 2000 impairing event occurs. This provision shall be broadly
construed to protect the Sublessor and Overlandlord.
ARTICLE 10
DEFAULT
10.1 SUBLESSOR'S REMEDIES. In the event of any default on the part of Sublessee
under any of the terms, provisions, covenants or agreements of the Master Lease
or of this Sublease and Sublessee's failure to cure any such default within the
applicable notice and cure period as stated in the Master Lease or this
Sublease, Sublessor shall have the same rights and remedies against Sublessee
under this Sublease as are available to the Overlandlord against Sublessor under
the provisions of the Master Lease including, but not limited to, those under
Paragraph XIV of the Master Lease.
10.2 SUBLESSEE'S REMEDIES. In the event of any default on the part of Sublessor
under any of the terms, provisions, covenants or agreements of the Master Lease
or of this Sublease, except as otherwise specifically provided herein, Sublessee
shall have the right to seek direct damages or specific performance, but shall
not have the right to terminate this Sublease. Except to the extent of the gross
negligence or willful misconduct of Sublessor. Sublessee expressly waives its
rights to seek consequential damages from Sublessor and Overlandlord.
ARTICLE 11
SUBLEASE
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11.1 INCORPORATION OF THE MASTER LEASE. Nothing contained herein shall be deemed
to increase or expand the rights of Sublessee to an extent greater than that of
Sublessor as Tenant under the Master Lease. The terms, covenants, conditions,
and agreements of the Master Lease, other than the payment of the Basic Rent,
Operating Expenses, additional rent and other charges therein set forth for the
period prior to September 1, 2000, are incorporated in and made part of this
Sublease as though fully set forth herein, but only to the extent such terms,
covenants, conditions and agreements apply to the Subleased Premises hereunder.
In the incorporation of such terms, conditions and agreements, however, if there
is a conflict between the terms of the Master Lease and the terms of this
Sublease, the terms of this Sublease shall control, except in the event the
Master Lease sets forth greater obligations or greater restrictions on the
"Tenant" under the Master Lease, in which event the terms and conditions of the
Master Lease as applicable to Tenant thereunder shall be assumed and performed
by Sublessee in accordance with the terms of the Master Lease. In the event
there has been a breach of the Master Lease or a violation of the conditions
prior to January 1, 2000, Sublessor shall indemnify and hold Sublessee from and
against any claim of Overlandlord related thereto. References to the "Premises"
shall refer to the Subleased Premises to the extent such references are
applicable. This Sublease is subject to and subordinate to, all of the terms,
covenants, provisions, conditions and agreements contained in the Master Lease
and the matters to which the Master Lease is subject and subordinate. This
Sublease shall also be subject to any amendments or supplements to the Master
Lease hereafter made between the Overlandlord and Sublessor, provided that any
such amendment or supplement to the Master Lease will not materially change any
of the Sublessee's right or obligations under this Sublease, including without
limitation that any such amendment or supplement will not prevent or adversely
affect the use by Sublessee of the Subleased Premises in accordance with the
terms of this Sublease, shorten the term of this Sublease, or require Sublessee
to pay any charges not otherwise agreed to be paid by Sublessee as expressly
written in this Sublease.
11.2 SUBLESSEE'S DUTIES REGARDING MASTER LEASE. With respect to those provisions
of the Master Lease not specifically excluded as provided in Section 11.1,
Sublessee covenants and agrees as follows:
(a) to perform and observe all of the terms, covenants, conditions and
agreements of the Master Lease to be performed on the part of Sublessor
with respect to the Subleased Premises.
(b) that Sublessee will not do or cause to be done or suffer or permit any
act or thing to be done which would or might cause the Master Lease or the
rights of Sublessor as tenant thereunder to be cancelled, terminated or
forfeited, or which would make Sublessor liable for any damages, claim or
penalty; and
(c) to indemnify and save harmless Sublessor and its officers, directors,
agents and employees from and against all liability (statutory or
otherwise), claims, suits, demands, damages, judgments, costs, interest or
expenses (including reasonable attorneys' fees and disbursements incurred
in the defense thereof) to which Sublessor or any officer, director, agent
or employee may be subject, or suffer by reason of, Sublessee's default or
breach of any term, covenant, condition or agreement for which Sublessee is
responsible under the Master Lease as incorporated herein subject to the
limitations contained in Section
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11.1, or any injury to or death of any person or persons or damage to
property (including any loss of the use thereof) or otherwise arising from
the use or occupancy of the Subleased Premises or of any business conducted
therein, or from any work or thing whatsoever done or any condition created
by or any other act or omission of Sublessee, its assignees or subtenants,
or their respective employees, agents, contractors, licensees, or invitees
in or about the Subleased Premises. This indemnity shall not apply to any
matter caused wholly or in part by Sublessor's gross negligence or
intentional acts or intentional omissions.
11.3 APPROVAL OF OVERLANDLORD. This Sublease is subject to the approval of
Overlandlord and shall not be in force and effect until such time as it is
approved by Overlandlord.
ARTICLE 12
NONDISTURBANCE
12.1 QUIET POSSESSION. So long as Sublessee is not in default beyond the
expiration of the applicable notice and cure period, Sublessee shall quietly
enjoy the Subleased Premises without hindrance or molestation by Sublessor or by
any other person lawfully claiming the same, subject, however, to the covenants,
agreements, terms, provisions and conditions of this Sublease, the Master Lease
and to the matters to which the Master Lease is subject and subordinate.
12.2 NOTICE OF DEFAULT AND RIGHT TO CURE. Sublessor shall provide Sublessee with
copies of any written notice to or from Overlandlord specifying an Event of
Default by Sublessor under the terms of the Master Lease within forty-eight (48)
hours of Sublessor's receipt from or delivery of the notice to Overlandlord.
Upon demand from Sublessee, Sublessor shall take all action reasonably necessary
to avoid termination of the Master Lease or disturbance of Sublessee's use and
occupancy of the Subleased Premises as a result of such Event of Default,
including, if necessary or appropriate, the initiation, at Sublessor's sole cost
and expense, of legal action in a court of competent jurisdiction seeking a
judicial determination as to whether an Event of Default has occurred and/or a
stay of Overlandlord's rights under the Master Lease to terminate the Master
Lease or to reenter and repossess the Subleased Premises, or any part thereof,
or otherwise to disturb Sublessee's use and occupancy of the Subleased Premises,
or any part thereof, under the terms of this Sublease. Sublessor shall keep
Sublessee fully advised as to Sublessor's efforts to cure or resolve any
allegation of an Event of Default and shall provide Sublessee, at Sublessor's
expense, with copies of all correspondence, and documentation, including but not
limited to, any pleadings filed by or on behalf of Sublessor or Overlandlord in
the course of any litigation which involves an alleged Event of Default,
relating thereto. If Sublessor fails to timely cure an Event of Default or
contest the same by appropriate legal proceedings or, having initiated such
contest fails to secure a stay of Overlandlord's rights under the Master Lease
as referenced above and, as a result thereof, Overlandlord has threatened to
disturb Sublessee's use or occupancy of the Subleased Premises or any part
thereof, Sublessee shall have the right, but not the duty, to take whatever
action is reasonably necessary to cure the Event of Default. All costs, expenses
and fees (including reasonable attorneys' fees) incurred by Sublessee in the
course of curing an Event of Default shall be fully recoverable from all
12
<PAGE>
payments (including Fixed Rent and additional rent) that come due to Sublessor
under this Sublease. Sublessor shall indemnify, protect, save and hold Sublessee
harmless from all causes of action, claims, demands, damages, liability, costs,
expenses and fees (including reasonable attorneys' fees) incurred by Sublessee
arising directly or as a consequence of an Event of Default for which Sublessor
is responsible or relating to Sublessee's efforts to cure an Event of Default.
ARTICLE 13
NOTICE
13.1 NOTICE. Any notice, request, demand or other communication (hereinafter
collectively called "Communications") permitted or required to be given by the
terms and provisions of this Sublease or by any law or governmental regulation,
either by Sublessor to Sublessee or by Sublessee to Sublessor, shall be in
writing. Unless otherwise required by such law or regulation, all Communications
shall be given and shall be deemed to have been served and given when either
personally delivered, transmitted by facsimile (fax) machine or electronic mail,
by nationally recognized overnight courier, or three (3) days after deposited in
the United States mail, certified return receipt requested, or registered, with
postage thereon fully paid, to the addresses set forth below:
If to Sublessor:
Cyprus Amax Minerals Company/Phelps Dodge
Corporation
Land and Water Resources 2600 North Central Ave.
Phoenix, Arizona 85004
Attention: Mark Fitzgerald
Telephone: (602) 234-8278
Facsimile: (602) 234-8067
With a Copy to:
General Counsel
Cyprus Amax Minerals Company/Phelps Dodge Corporation
2600 North Central Avenue
Phoenix, Arizona 85004
With a copy to:
Asset Manager
LaSalle Investment Management
950 17th Street
Suite 1850
Denver, Colorado 80202
13
<PAGE>
If to Sublessee:
Rhythms NetConnections, Inc.
6933 S. Revere Parkway
Englewood, CO 80112
Attention:
Telephone:
Facsimile:
With a Copy To:
Jeffrey Blumenfeld, Esq.
Blumenfeld & Cohen
1625 Massachusetts Avenue, NW
Suite 300
Washington, D.C. 20036
Asset Manager
LaSalle Investment Management
951 17th Street
Suite 1850
Denver, Colorado 80202
Either party may, by notice as aforesaid, designate a different address for
Communications to it.
ARTICLE 14
ASSIGNMENT AND SUBLETTIING
14.1 ASSIGNMENT BY SUBLESSEE. Sublessee shall not assign or transfer all or any
part of the Subleased Premises or Sublessee's leasehold estate hereunder without
Sublessor's prior written consent, which consent may be withheld in Sublessor's
reasonable discretion, and Sublessee shall also obtain the consent of the
Overlandlord in accordance with the terms of the Master Lease. Notwithstanding
the foregoing, Sublessor agrees that it will not withhold its consent to an
assignment of this Sublease to any corporation into which Sublessee is merged or
with which Sublessee is consolidated, provided that such assignee shall execute,
acknowledge and deliver to Sublessor an agreement in form and substance
satisfactory to Sublessor whereby such assignee shall agree (i) to be bound by
and upon all of the covenants, agreements, terms, provisions and conditions set
forth in this Sublease on the part of Sublessee to be performed; and (ii) that
the provisions of this Article 14 shall continue to be binding upon it with
respect of all future assignments and transfers.
14.2 SUBLETTING BY SUBLESSEE. If Sublessee desires to sublet all or a major
portion of the Subleased Premises, the Sublessee must obtain Sublessor's and
Overlandlord's prior written consent, which consent may be withheld in
Sublessor's or Overlandlord's reasonable discretion.
14
<PAGE>
14.3 COLLECTION OF RENTS. If this Sublease is assigned or transferred, whether
or not in violation of the provisions of this Article 14, Sublessor may, and is
hereby empowered to, collect rent from the assignee. In such event, Sublessor
may apply the net amount received by it to the Fixed Rent and other payments
herein reserved or provided for; and no such collection shall be deemed a waiver
of the covenant herein against assignment or an acceptance of the assignee as a
tenant under this Sublease or a release of Sublessee from the further
performance of the covenants of Sublessee herein contained. If the Subleased
Premises or any part thereof is sublet or occupied by others, whether or not in
violation of the provisions of this Sublease, Sublessor is hereby empowered, in
the event of default by Sublessee, to collect rent from the subtenants or other
occupants so long as such default or any other default shall continue; and to
apply the same to the curing of any default hereunder in any order of priority
Sublessor may elect, any unexpended balance to be applied by Sublessor against
any rental or other obligations subsequently becoming due.
14.4 CONTINUING LIABILITY. Except as otherwise specifically provided in this
paragraph, the making of any assignment, or subletting in whole or in part by
either party to this Sublease, whether or not in violation of the provisions of
this Sublease, shall not operate to relieve the assigning party from its
respective obligations under this Sublease. The assigning party shall remain
liable for the due performance of all the covenants, agreements, terms and
conditions set forth herein to the full end of the term of this Sublease.
14.5 SUBLESSOR'S CONSENT. Any consent by Sublessor shall be given within thirty
(30) days of written request therefor, or, if consent is not given, Sublessor
shall provide Sublessee with a written explanation of the denial of consent
within said thirty (30) day period. Any consent by Sublessor that may hereafter
be given to any act of assignment or subletting shall be held to apply only to
the specific transaction thereby approved. Such consent shall not be construed
as a waiver of the duty of Sublessee or its successors or assignees to obtain
from Sublessor a consent to any other subsequent assignment, or subletting or as
a modification or limitation of the rights of Sublessor with respect to the
foregoing covenants by Sublessee. Except as otherwise expressly provided in this
Article 14, Sublessee will not, by operation of law or otherwise, assign,
mortgage or encumber this Sublease or sublease or offer or advertise all or any
part of the Subleased Premises for subletting, or permit the Subleased Premises
or any part thereof to be used or occupied by others.
ARTICLE 15
SIGNS
15.1 Sublessee at its sole cost and expense and upon receiving Sublessor's and
the Overlandlord's prior written approval, which approval shall not be
unreasonably withheld, shall have the right to install or utilize a monument
sign on East Mineral Circle and to erect or place a sign on the building so long
as such signs are reasonably acceptable to Sublessor and Overlandlord, and
comply with all applicable laws, rules, ordinances, covenants, restrictions and
regulations and shall obtain the consent of Overlandlord in accordance with the
terms of the Master Lease.
ARTICLE 16
15
<PAGE>
MISCELLANEOUS
16.1 BINDING EFFECT. The covenants, agreements, terms, provisions and conditions
of this Sublease shall bind and inure to the benefit of the respective
successors and assigns of the parties with the same effect as if mentioned in
each instance where a party is named or referred to, except that no violation of
the provisions of Article 14 shall operate to vest any rights in any successor,
assignee or legal representative of Sublessee.
16.2 CHOICE OF LAW. This Sublease shall be interpreted, construed and enforced
in accordance with the laws of the State of Colorado.
16.3 ARBITRATION. In the event that a dispute arises between the parties,
Sublessor and Sublessee stipulate and agree that Article XXVIII of the Master
Lease shall control.
16.4 SOLE AGREEMENT. This Sublease and the Exhibits attached hereto, set forth
the entire agreement between the parties. This Sublease supersedes all prior
negotiations and agreements between Sublessor and Sublessee with respect to the
subject matter of this Sublease. No modification or alteration of this Sublease
shall be effective unless reduced to writing and executed by Sublessor or
Sublessee.
16.5 SUBLESSOR'S CONSENT. Whenever the consent of Sublessor is required to be
given under the provisions of this Sublease, Sublessor shall be deemed not to
have unreasonably withheld its consent if the Overlandlord has refused or
withheld its consent thereto for any reason.
16.6 OVERLANDLORD'S CONSENT. This Sublease is subject to and contingent upon
Overlandlord's consent.
16.7 AUTHORITY OF PARTIES. Each party warrants that it is authorized to enter
into this Sublease, that the person signing on its behalf is duly authorized to
execute this Sublease, and that no other signatures are necessary.
16.8 COOPERATION OF SUBLESSOR. Subsequent to the execution of this Sublease,
Sublessor shall enter into negotiations with Sublessee regarding the possible
shared use of the data center existing within the Leased Premises during the
first six (6) months of this Sublease. Subject to the approval of the
Overlandlord, and provided it is in compliance with all laws, ordinances,
covenants, conditions and restrictions, Sublessee may install and operate during
the term of this Sublease one or more satellite antenna receiving dishes or
microwave antenna on the roof of the building containing the Leased Premises at
such a location as to be reasonably determined by Overlandlord, Sublessor and
Sublessee. Subject to the approval of the Overlandlord, and provided it is in
compliance with all laws, ordinances, covenants, conditions and restrictions,
Sublessee may install and operate during the term of this Sublease a back-up
generator outside the Leased Premises at such a location as to be reasonably
determined by Overlandlord, Sublessor and Sublessee.
16.9 BROKERAGE. Sublessee hereby represents that Grubb & Ellis Company is
Sublessee's exclusive agent in connection with this sublease transaction.
Sublessor hereby warrants that Cushman & Wakefield is Sublessor's exclusive
agent in connection with this sublease transaction. Sublessor and Sublessee
hereby agree to indemnify and hold harmless the other
16
<PAGE>
party in the event the other party shall be liable to any brokerage commission
to any third party retained or employed by the other party to this sublease not
identified herein. Overlandlord shall have no obligation to pay leasing
commissions to any broker, agent or third party. Sublessee shall indemnify and
hold Overlandlord harmless from and against any claim for a brokerage commission
claimed to be due by any party from Overlandlord.
IN WITNESS WHEREOF, Sublessor and Sublessee have duly executed this
Sublease as of the day and year first above written.
SUBLESSOR
CYPRUS AMAX MINERALS COMPANY
By__________________________
Name _______________________
Title_________________________
Date:________________________
SUBLESSEE
RHYTHMS NETCONNECTIONS, INC.
By__________________________
Name _______________________
Title_________________________
Date:________________________
The undersigned, Phelps Dodge Corporation, hereby guarantees to Sublessee
the return of the Security Deposit, as set forth in Paragraph 3.1, or such
portion as shall be due Sublessee, in accordance with the terms and conditions
of this Sublease.
GUARANTOR:
PHELPS DODGE CORPORATION
By:__________________________
Name: _______________________
Title:_________________________
Date:________________________
17
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
our report dated February 29, 2000, except for Note 10, as to which the date is
March 16, 2000 relating to the financial statements and financial statement
schedule of Rhythms NetConnections, Inc., which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
PricewaterhouseCoopers LLP
Denver, Colorado
May 23, 2000
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
---------
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) /X/
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
United States 06-1143380
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
633 West 5th Street, 12th Floor, Los Angeles, California 90071
(Address of principal executive offices) (Zip Code)
Lynda A. Vogel, Senior Vice President and Managing Director
633 West 5th Street, 12th Floor, Los Angeles, California 90071
(213) 362-7399
(Name, address and telephone number of agent for service)
RHYTHMS NETCONNECTIONS INC.
(Exact name of obligor as specified in its charter)
DELAWARE 33-0747515
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 SOUTH REVERE PARKWAY
ENGLEWOOD, COLORADO
80112-3931
(Address of principal executive offices) (Zip Code)
14% SENIOR NOTES DUE 2009
(TYPE OF SECURITIES)
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO
WHICH IT IS SUBJECT.
Comptroller of the Currency, Western District Office, 50 Fremont
Street, Suite 3900, San Francisco, California, 94105-2292
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee or of its parent,
State Street Bank and Trust Company.
(See notes on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF
ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN
EFFECT.
A copy of the Articles of Association of the trustee, as now in
effect, is on file with the Securities and Exchange Commission as an
Exhibit with corresponding exhibit number to the Form T-1of Western
Digital Corporation, filed pursuant to Section 305(b)(2) of the Trust
Indenture Act of 1939, as amended (the "Act"), on May 12, 1998
(Registration No. 333-52463), and is incorporated herein by reference.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE
BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A Certificate of Corporate Existence (with fiduciary powers) from
the Comptroller of the Currency, Administrator of National Banks is on
file with the Securities and Exchange Commission as an Exhibit with
corresponding exhibit number to the Form T-1 of Western Digital
Corporation, filed pursuant to Section 305(b)(2) of the Act, on May
12, 1998 (Registration No. 333-52463), and is incorporated herein by
reference.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE
TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS
SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE.
Authorization of the Trustee to exercise fiduciary powers
(included in Exhibits 1 and 2; no separate instrument).
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect, is on
file with the Securities and Exchange Commission as an Exhibit with
corresponding exhibit number to the Form T-1 of Western Digital
Corporation, filed pursuant to Section 305(b)(2) of the Act, on May
12, 1998 (Registration No. 333-52463), and is incorporated herein by
reference.
1
<PAGE>
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS
IN DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(b) OF THE ACT.
The consent of the trustee required by Section 321(b) of the Act
is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING
AUTHORITY.
A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority is annexed hereto as Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility, which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company of California,
National Association, a national banking association, organized and existing
under the laws of the United States of America, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Los Angeles, and State of California, on the 22nd
of May, 2000.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, NATIONAL ASSOCIATION
By: /S/ Scott C. Emmons
---------------------------------
Scott C. Emmons
Vice President
2
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act
of 1939, as amended, in connection with the proposed issuance by Rhythms
NetConnections Inc. of its 14% Senior Notes due 2009, we hereby consent that
reports of examination by Federal, State, Territorial or District authorities
may be furnished by such authorities to the Securities and Exchange Commission
upon request therefor.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, NATIONAL ASSOCIATION
By: /S/ Scott C. Emmons
---------------------------------
Scott C. Emmons
Vice President
Dated: May 22, 2000
3
<PAGE>
EXHIBIT 7
Consolidated Report of Condition and Income for A Bank With Domestic Offices
Only and Total Assets of Less Than $100 Million of State Street Bank and Trust
Company of California, a national banking association duly organized and
existing under and by virtue of the laws of the United States of America, at the
close of business MARCH 31, 2000, published in accordance with a call made by
the Federal Deposit Insurance Corporation pursuant to the required law: 12
U.S.C. Section 324 (State member banks); 12 U.S.C. Section 1817 (State nonmember
banks); and 12 U.S.C. Section 161 (National banks).
<TABLE>
<CAPTION>
Thousands
ASSETS of Dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin ............................... 6,121
Interest-bearing balances ........................................................ 0
Securities .......................................................................... 38
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary .............................................. 0
Loans and lease financing receivables:
Loans and leases, net of unearned income .............................. 0
Allowance for loan and lease losses ................................... 0
Allocated transfer risk reserve ....................................... 0
Loans and leases, net of unearned income and allowances .......................... 0
Assets held in trading accounts ..................................................... 0
Premises and fixed assets ........................................................... 22
Other real estate owned ............................................................. 0
Investments in unconsolidated subsidiaries .......................................... 0
Customers' liability to this bank on acceptances outstanding ........................ 0
Intangible assets ................................................................... 0
Other assets ........................................................................ 1,213
-----
Total assets ........................................................................ 7,394
=====
LIABILITIES
Deposits:
In domestic offices .............................................................. 0
Noninterest-bearing ................................................ 0
Interest-bearing ................................................... 0
In foreign offices and Edge subsidiary ........................................... 0
Noninterest-bearing ................................................ 0
Interest-bearing ................................................... 0
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary .............................................. 0
Demand notes issued to the U.S. Treasury and Trading Liabilities .................... 0
Other borrowed money ................................................................ 0
Subordinated notes and debentures ................................................... 0
Bank's liability on acceptances executed and outstanding ............................ 0
Other liabilities ................................................................... 3,530
Total liabilities ................................................................... 3,530
-----
EQUITY CAPITAL
Perpetual preferred stock and related surplus ....................................... 0
Common stock ........................................................................ 500
Surplus ............................................................................. 750
Undivided profits and capital reserves/Net unrealized holding gains (losses) ........ 2,614
Cumulative foreign currency translation adjustments ................................. 0
Total equity capital ................................................................ 3,864
-----
Total liabilities and equity capital ................................................ 7,394
=====
</TABLE>
4
<PAGE>
I, John J. Saniuk, Vice President and Comptroller of the above named bank do
hereby declare that this Report of Condition and Income for this report date
have been prepared in conformance with the instructions issued by the
appropriate Federal regulatory authority and is true to the best of my knowledge
and belief.
/S/ John J. Saniuk
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
/S/ Alan D. Greene
/S/ Bryan R. Calder
/S/ Lynda A. Vogel
5
5
<PAGE>
LETTER OF TRANSMITTAL
RHYTHMS NETCONNECTIONS INC.
OFFER TO EXCHANGE ITS NEW
14% SENIOR NOTES DUE 2010, SERIES B (REGISTERED)
FOR ANY AND ALL OUTSTANDING
14% SENIOR NOTES DUE 2010, SERIES A (UNREGISTERED)
PURSUANT TO THE PROSPECTUS, DATED , 2000.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON
[ ] 2000, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE
WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
<TABLE>
<S> <C> <C>
BY REGISTERED OR CERTIFIED MAIL: BY HAND DELIVERY TO 4:30 PM: BY HAND DELIVERY AFTER 4:30 PM
ON EXPIRATION DATE:
State Street Bank and Trust State Street Bank and Trust State Street Bank and Trust
Company of California, N.A. Company of California, N.A. Company of California, N.A.
c/o State Street Bank and c/o State Street Bank and c/o State Street Bank and
Trust Company Trust Company Trust Company
2 Avenue de Lafayette, Fifth 2 Avenue de Lafayette, Fifth 2 Avenue de Lafayette, Fifth
Floor Floor Floor
Boston, MA 02111-1724 Boston, MA 02111-1724 Boston, MA 02111-1724
Attn: Ralph Jones Attn: Ralph Jones Attn: Ralph Jones
(Above information to be provided.)
</TABLE>
FOR INFORMATION CALL:
Ralph Jones
--------------------
PHONE: (617) 662-1548
FACSIMILE: (617) 662-1452
DELIVERY OF INSTRUMENTS TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR BY A
METHOD NOT SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received the Prospectus,
dated [____________], 2000 (the "Prospectus") of Rhythms NetConnections Inc., a
Delaware corporation (the "Company"), and this Letter of Transmittal (this
"Letter of Transmittal"), which together constitute the Company's offer (the
"Exchange Offer") to exchange $1,000 in principal amount of its 14% Senior Notes
due 2010, Series B (Registered) (the "New Notes") for each $1,000 in principal
amount of its issued and outstanding 14% Senior Notes due 2010, Series A
(Unregistred) (the "Old Notes") from the holders thereof. Capitalized terms used
herein and not otherwise defined shall have the meanings herein as ascribed
thereto in the Prospectus.
This Letter of Transmittal is to be used if certificates for the Old Notes
are to be forwarded herewith. If delivery of the Old Notes is to be made through
book-entry transfer into the Exchange Agent's account at The Depository Trust
Company ("DTC"), this Letter of Transmittal need not be delivered; PROVIDED,
HOWEVER, that tenders of the Old Notes must be effected in accordance with DTC's
Automated Tender Offer Program procedures and the procedures set forth in the
Prospectus under the caption "The Exchange Offer--Terms of the Exchange Offer"
and "Book-Entry Transfer; Delivery and Form."
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. If (a) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or
(d) the Shelf Registration Statement or the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective or usable
in connection with resales of Transfer Restricted Securities during the periods
specified in the
<PAGE>
Registration Rights Agreement (each such event referred to in clauses
(a) through (d) above a "Registration Default"), then interest ("Additional
Interest") will accrue on the Old Notes (in addition to the stated interest on
the Old Notes) from and including the date on which any such Registration
Default shall occur to but excluding the date on which all Registration Defaults
have been cured. Additional Interest will accrue at a rate of 0.50% per annum
over the rate at which interest is then otherwise accruing during the 90-day
period immediately following the occurrence of any Registration Default and
shall increase by 0.25% per annum at the end of each subsequent 90-day period,
but in no event shall such Additional Interest exceed 2.00% per annum. Holders
of Old Notes accepted for exchange will be deemed to have waived the right to
receive any other payments or accrued interest on the Old Notes.
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the latest time and date to which the Exchange Offer is extended. The
Company shall notify the holders of the Old Notes of any extension by means of a
press release or other public announcement prior to 9:00 A.M., New York City
time, on the next business day after the previously scheduled Expiration Date.
This Letter of Transmittal is to be completed by a holder of Old Notes if
certificates are to be forwarded herewith. Holders of Old Notes whose
certificates are not immediately available, or who are unable to deliver their
certificates and all other documents required by this Letter of Transmittal or
confirmation of the book-entry tender of their Old Notes into the Exchange
Agent's account at DTC (a "Book-Entry Confirmation") to the Exchange Agent on or
prior to the Expiration Date, must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The Exchange Offer--Terms of the
Exchange Offer" section of the Prospectus. See Instruction 1. Delivery of
documents to DTC does not constitute delivery to the Exchange Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
2
<PAGE>
List below the Old Notes to which this Letter of Transmittal relates. If the
space provided below is inadequate, the certificate numbers and principal amount
of Old Notes should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DESCRIPTION OF OLD NOTES
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(1) (2) (3)
AGGREGATE
NAME(S) AND ADDRESS(S) OF RCERTIFICATEOLDERPRINCIPAL AMOUNTS PRINCIPAL AMOUNT
(PLEASE FILL IN, INUMBER(S) OF OLD NOTE(S) TENDERED
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
TOTAL
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Unless otherwise indicated in this column, a holder will be deemed to have
transferred ALL of the Old Notes represented by the Old Notes indicated in
column 2. See Instruction 2. Old Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple
thereof. See Instruction 1.
- --------------------------------------------------------------------------------
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s): _______________________________________
Window Ticket Number (if any): _________________________________________
Date of Execution of Notice of Guaranteed Delivery _____________________
Name of Institution which guaranteed delivery __________________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: __________________________________________________________________
Address: _______________________________________________________________
3
<PAGE>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY AND FOLLOW THE INSTRUCTIONS
BEGINNING ON PAGE 6 HEREOF.
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
dhereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Old Notes tendered hereby will have been acquired in the ordinary course of
business of the person receiving each New Note, whether or not such person is
the undersigned, that neither the holder of such Old Notes nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such New Notes and that neither the holder of such Old Notes nor
any such other person is an "affiliate," as defined in Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act"), of the Company.
BY TENDERING EXISTING NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (I) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY, (II) ANY NEW NOTES TO BE RECEIVED BY THE UNDERSIGNED
ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (III) THE UNDERSIGNED
HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN A
DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF NEW NOTES TO BE
RECEIVED IN THE EXCHANGE OFFER, AND (IV) IF THE UNDERSIGNED IS NOT A
BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE
IN, A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF SUCH NEW NOTES.
BY TENDERING EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER AND EXECUTING THIS
LETTER OF TRANSMITTAL, A HOLDER OF EXISTING NOTES WHICH IS A BROKER-DEALER
REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY
THE STAFF OF THE DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE
COMMISSION TO THIRD PARTIES, THAT SUCH EXISTING NOTES WERE ACQUIRED BY SUCH
BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR
OTHER TRADING ACTIVITIES (SUCH A BROKER-DEALER WHICH IS TENDERING EXISTING NOTES
IS HEREIN REFERRED TO AS A "PARTICIPATING BROKER-DEALER") AND IT WILL DELIVER
THE PROSPECTUS (AS, AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH NEW
NOTES (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH
PARTICIPATING BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN
"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM TIME
TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER IN CONNECTION WITH RESALES
OF NEW NOTES RECEIVED IN EXCHANGE FOR EXISTING NOTES, WHERE SUCH EXISTING NOTES
WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN ACCOUNT AS A
RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES, FOR A PERIOD OF
ONE YEAR FROM THE EFFECTIVE DATE OF THE EXCHANGE OFFER REGISTRATION STATEMENT ON
FORM S-4 (I.E. THROUGH , 2001) OR, IF EARLIER, UNTIL ALL SUCH NEW
NOTES HAVE BEEN DISPOSED OF BY SUCH PARTICIPATING BROKER-DEALER. IN THAT REGARD,
EACH PARTICIPATING BROKER-DEALER, BY TENDERING SUCH EXISTING NOTES AND EXECUTING
THIS LETTER OF TRANSMITTAL, AGREES THAT, UPON RECEIPT OF NOTICE FROM THE COMPANY
OF THE OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY
STATEMENT CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY
MATERIAL RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT
NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED THEREIN, IN LIGHT OF THE
CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF
CERTAIN OTHER EVENTS SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT,
4
<PAGE>
SUCH PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE OF NEW NOTES PURSUANT TO
THE PROSPECTUS UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO
CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE NEW NOTES MAY BE RESUMED, AS THE CASE MAY BE.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter of Transmittal and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer, Withdrawal of Tenders" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at DTC. Similarly,
unless otherwise indicated under the box entitled "Special Delivery
Instructions" below, please send the New Notes (and, if applicable, substitute
certificates representing Old Notes for any Old Notes not exchanged) to the
undersigned at the address shown above in the box entitled "Description of Old
Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED
THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE.
5
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Old Notes; Guaranteed Delivery
Procedures.
This Letter of Transmittal is to be completed by holders of Old Notes if
certificates are to be forwarded herewith. Certificates for all physically
tendered Old Notes as well as a properly completed and duly executed Letter of
Transmittal (or manually signed facsimile hereof) and any other documents
required by this Letter of Transmittal must be received by the Exchange Agent at
the address set forth herein on or prior to the Expiration Date, or the
tendering holder must comply with the guaranteed delivery procedures set forth
below. Old Notes tendered hereby must be in denominations of principal amount of
$1,000 and any integral multiple thereof.
Holders whose certificates for Old Notes are not immediately available or
who cannot deliver their certificates and all other required documents to the
Exchange Agent on or prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer of the Old Notes into the Exchange Agent's
account at DTC on a timely basis, may tender their Old Notes pursuant to the
guaranteed delivery procedures set forth in "The Exchange Offer, Guaranteed
Delivery Procedures" section of the Prospectus. Pursuant to such procedures,
(i) such tender must be made through an Eligible Institution (as defined below),
(ii) prior to the Expiration Date, the Exchange Agent must receive from such
Eligible Institution a Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by facsimile transmission, mail or hand delivery),
setting forth the name and address of the holder of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the Expiration Date, the
certificates for all physically tendered Old Notes and any other documents
required by this Letter of Transmittal, or a Book-Entry Confirmation, as the
case may be, will be delivered by the Eligible Institution to the Exchange
Agent, and (iii) the Exchange Agent must receive certificates for all physically
tendered Old Notes, in proper form for transfer, and all other documents
required by this Letter of Transmittal, or a Book-Entry Confirmation, as the
case may be, within three NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
The method of delivery of this Letter of Transmittal, the Old Notes and all
other required documents is at the election and risk of the tendering holders,
but the delivery will be deemed made only when actually received or confirmed by
the Exchange Agent. If Old Notes are sent by mail, it is suggested that the
mailing be made sufficiently in advance of the Expiration Date to permit the
delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
See "The Exchange Offer" section in the Prospectus.
2. Partial Tenders (not applicable to holders who tender by book-entry
transfer).
If less than all of the Old Notes evidenced by a submitted certificate are
to be tendered, the tendering holder(s) should fill in the aggregate principal
amount of Old Notes to be tendered in the box above entitled "Description of Old
Notes, Principal Amount Tendered." A reissued certificate representing the
balance of untendered Old Notes will be sent to such tendering holder, unless
otherwise provided in the appropriate box on this Letter of Transmittal,
promptly after the Expiration Date. All of the Old Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
3. Signatures on this Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures.
If this Letter of Transmittal is signed by the registered holder of the Old
Notes tendered hereby, the signature must correspond exactly with the name as
written on the face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of
certificates.
When this Letter of Transmittal is signed by the registered holder or
holders of the Old Notes specified herein and tendered hereby, no endorsements
of certificates or separate bond powers are required. If, however, the New Notes
are to be issued, or any untendered Old Notes are to be reissued, to a person
other than the registered holder, then endorsements of any certificates
transmitted hereby or separate bond powers are required. Signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
6
<PAGE>
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate bond powers, in
either case signed exactly as the name or names of the registered holder or
holders appear(s) on the certificate(s) and signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
Endorsements on certificates for Old Notes or signatures on bond powers
required by this Instruction 3 must be guaranteed by a firm which is a member of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States or by such other Eligible
Institution within the meaning of Rule 17(A)(d)-15 under the Securities Exchange
Act of 1934, as amended (each an "Eligible Institution").
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of Old Notes (which term, for purposes of the Exchange Offer, includes
any participant in the DTC system whose name appears on a security position
listing as the holder of such Old Notes) tendered who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
this Letter of Transmittal, or (ii) for the account of an Eligible Institution.
4. Special Issuance and Delivery Instructions.
Tendering holders of Old Notes should indicate in the applicable box the
name and address to which New Notes issued pursuant to the Exchange Offer and/or
substitute certificates evidencing Old Notes not exchanged are to be issued or
sent, if different from the name or address of the person signing this Letter of
Transmittal. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated. Holders tendering Old Notes by book-entry transfer may request that
Old Notes not exchanged be credited to such account maintained at DTC as such
holder may designate hereon. If no such instructions are given, such Old Notes
not exchanged will be returned to the name and address of the person signing
this Letter of Transmittal.
5. Tax Identification Number.
Federal income tax law generally requires that a tendering holder whose Old
Notes are accepted for exchange must provide the Company (as payor) with such
holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
below, which in the case of a tendering holder who is an individual, is his or
her social security number. If the Company is not provided with the current TIN
or an adequate basis for an exemption, such tendering holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. In addition, delivery to
such tendering holder of New Notes may be subject to backup withholding in an
amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, or (ii) the
holder has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends, or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Certificate
of Foreign Status included herewith. If the Old Notes are in more than one name
or are not in the name of the actual owner, such holder should consult the W-9
Guidelines for information on which TIN to report. If such holder does not have
a TIN, such holder should consult the W-9 Guidelines for instructions on
applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write
"applied for" in lieu of its TIN. Note: Checking this box and writing "applied
for" on the form means that such holder has already applied for a TIN or that
such holder intends to apply for one in the near future. If such holder does not
provide its TIN to the Company within 60 days, backup withholding will begin and
continue until such holder furnishes its TIN to the Company.
7
<PAGE>
6. Transfer Taxes.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New
Notes and/or substitute Old Notes not exchanged are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
holder of the Old Notes tendered hereby, or if tendered Old Notes are registered
in the name of any person other than the person signing this Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
transfer of Old Notes to the Company or its order pursuant to the Exchange
Offer, the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted herewith, the amount of such transfer taxes will be billed directly to
such tendering holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes specified in this Letter of
Transmittal.
7. Waiver of Conditions.
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
8. No Conditional Tenders.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter of
Transmittal, shall waive any right to reserve notice of the acceptance of their
Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated to
give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. Mutilated, Lost, Stolen or Destroyed Old Notes.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
8
<PAGE>
10. Requests for Assistance or Additional Copies.
Questions relating to the procedure for tendering may be directed to the
Exchange Agent, at the address and telephone number indicated above. To obtain
additional copies of the Prospectus and this Letter of Transmittal, you should
contact Georgeson Shareholder Communications, Inc., the Information Agent, at:
2 AVENUE DE LAFAYETTE, FIFTH FLOOR
BOSTON, MA 02111-1724
TEL: (617) 662-1548
<TABLE>
<S> <C>
- --------------------------------------------- ---------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4) (SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for To be completed ONLY If certificates for Old
Old Notes not exchanged and/or New Notes are Notes not exchanged and/or New Notes are to be
to be issued in the name of and sent to issued in the name of and sent to someone
someone other than the person or persons whose other than the person or persons whose
signature (s) appear (s) on this Letter of signature (s) appear (s) on this Letter of
Transmittal above, or if Old Notes delivered Transmittal below.
by book-entry transfer which are not accepted
for exchange are to be returned by credit to
an account maintained at DTC other tan the
account indicated below.
Issue: New Notes and/or Old Notes Mail: New Notes and/or Old Notes to:
Name(s) Name(s)
(PLEASE TYPE OR (PLEASE TYPE OR
PRINT) PRINT)
(PLEASE TYPE OR (PLEASE TYPE OR
PRINT) PRINT)
Address: Address:
Zip Code Zip Code
(COMPLETE SUBSTITUTE
FORM W-9)
Credit unexchanged Old Notes for
"Debentures" delivered by book-entry transfer
to the DTC account set forth below:
(DTC ACCOUNT NUMBER, IF APPLICABLE)
- ---------------------------------------------- ----------------------------------------------
</TABLE>
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH THE
CERTIFICATES FOR OLD NOTES) AND ALL OTHER REQUIRED DOCUMENTS HEREBY, A
BOOK-ENTRY CONFIRMATION OR THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY
THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
9
<PAGE>
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9)
<TABLE>
<S> <C>
Dated: , 2000
X , 2000
X , 2000
SIGNATURE(S) OF OWNER(S) DATE
Area Code and Telephone Number
If a holder is tendering any Old Notes this Letter of Transmittal must be signed by the
registered holder(s) as the name(s) appear(s) on the certificate(s) of the Old Notes by any
person(s) authorized to become registered holder(s) by endorsements and documents transmitted
herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person
acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3.
Name(s):
(PLEASE TYPE OR PRINT)
Capacity:
Address:
(INCLUDING ZIP CODE)
SIGNATURE GUARANTEE
(if requested by Instruction 3)
Signature Guaranteed by an Eligible Institution
(TITLE)
(NAME AND FIRM)
- ------------------------------------------------
</TABLE>
10
<PAGE>
------------------------------------------------------------------------
SUBSTITUTE FORM W-9
---------------------------------------------------------
To Be Completed by All Tendering Noteholders
(See Instruction 5)
Sign this Substitute Form W-9 in Addition to the Signature(s) Required Above
PAYOR'S NAME: STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
<TABLE>
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE Part 1: PLEASE PROVIDE YOUR TIN TIN
FORM W-9 (either your social security number or employer identification number) in
Department of the Treasury the space above and certify by signing and dating below.
----------------------------------------------------------------------------
Internal Revenue Service Part 2: Awaiting TIN
SIGN THIS FORM and THE CERTIFICATION OF AWAITING TAXPAYER IDENTIFICATION
Payer's Request for Taxpayer NUMBER BELOW.
Identification Number (TIN)
----------------------------------------------------------------------------
and Certification Part 3: Exempt
See enclosed Guidelines for additional information and SIGN THIS FORM.
- -------------------------------------------------------------------------------------------------------------------------
CERTIFICATION--Under penalties of perjury, I certify that:
(1) the number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be
issued to me); or
(2) I am not subject to backup withholding because (i) I am exempt from backup withholding, or (ii) I have not been
notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to
report all interest or dividends, or (iii) the IRS has notified me that I am no longer subject to backup withholding;
and
(3) Any other information provided on this form is true and correct.
CERTIFICATION INSTRUCTIONS--You must cross out item (iii) in (2) above if you have been notified by the IRS that you are
subject to backup withholding because of underreporting interest or dividends on your tax return and you have not been
notified by the IRS that you are no longer subject to backup withholding.
Signature
------------------------------------------------------------------------------------------------------------------------ Date
------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
---------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 2
OF THE SUBSTITUTE FORM W-9
---------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I understand
that if I do not provide a taxpayer identification number by the time of
payment, 31% of all payments made to me on account of the New Notes shall be
retained until I provide a taxpayer identification number to the Exchange Agent
and that, if I do not provide my taxpayer identification number within 60 days,
such retained amounts shall be remitted to the Internal Revenue Service as
backup withholding and 31% of all reportable payments made to me thereafter will
be withheld and remitted to the Internal Revenue Service until I provide a
taxpayer identification number.
Signature
- ---------------------------------------------------------------- Date
- -------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER FOR
ADDITIONAL INFORMATION.
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN--The Taxpayer Identification Number for most individuals is your social
security number. Refer to the following chart to determine the appropriate
number:
<TABLE>
<CAPTION>
GIVE THE SOCIAL SECURITY GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT NUMBER OF FOR THIS TYPE OF ACCOUNT IDENTIFICATION NUMBER OF
- ------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
1. Individual The individual 6. Sole proprietorship The owner(3)
2. Two or more The actual owner of the 7. A valid trust, estate Legal entity(4)
individuals (joint account or, if combined or pension trust
account) funds, the first
individual on the
account(1)
3. Custodian account of The minor(2) 8. Corporate The Corporation
a minor (Uniform Gift to
Minors Act)
4. a. The unusual The grantor-trustee(1) 9. Association, club, The Organization
revocable savings trust religious, charitable,
(grantor is also educational or other
trustee) tax-exempt organization
b. So-called trust The actual owner(1) 10. Partnership The partnership
account that is not a
legal or valid trust
under state law
5. Sole proprietorship The owner(3) 11. A broker or The broker or nominee
registered nominee
12. Account with the The public entity
Department of
Agriculture
</TABLE>
- ------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
12
<PAGE>
(3) Show the individual's name. You may also enter your business name or "doing
business as" name. You may use either your Social Security number or your
employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
B. Exempt Payees. The following lists exempt payees. If you are exempt, you
must nonetheless complete the form and provide your TIN in order to
establish that you are exempt. Check the box in Part 3 of the form, sign and
date the form.
For this purpose, Exempt Payees include: (1) a corporation; (2) an
organization exempt from tax under section 501(a), or an individual
retirement plan (IRA) or a custodial account under section 403(b)(7);
(3) the United States or any of its agencies or instrumentalities; (4) a
state, the District of Columbia, a possession of the United States, or any
of their political subdivisions or instrumentalities; (5) a foreign
government or any of its political subdivisions, agencies or
instrumentalities; (6) an international organization or any of its agencies
or instrumentalities; (7) a foreign central bank of issue; (8) a dealer in
securities or commodities required to register in the United States or a
possession of the United States; (9) a real estate investment trust;
(10) an entity registered at all times during the tax year under the
Investment Company Act of 1940; (11) a common trust fund operated by a bank
under section 584(a); and (12) a financial institution.
C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know
your number, obtain Form SS-5, application for a Social Security Number, or
Form SS-4, Application for Employer Identification Number, at the local
office of the Social Security Administration or the Internal Revenue Service
and apply for a number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payors who must report
the payments to IRS. IRS uses the numbers for identification purposes.
Payors must be given the numbers whether or not recipients are required to
file tax returns. Payors must generally withhold 31% of taxable-interest,
dividend, and certain other payments to a payee who does not furnish a
taxpayer identification number. Certain penalties may also apply.
E. Penalties
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you
fail to furnish your taxpayer identification number to a payor, you are
subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect.
(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS. If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being
due to negligence and will be subject to a penalty of 5% on any portion of
an under-payment attributable to that failure unless there is clear and
convincing evidence to the contrary.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you
make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
13
<PAGE>
NOTICE OF GUARANTEED DELIVERY
This form or one substantially equivalent hereto must be used to accept the
offer for all outstanding 14% Senior Notes due 2010 (the "Old Notes") of Rhythms
NetConnections Inc. (the "Company") in exchange for the Company's 14% Senior
Notes due 2010 made pursuant to the prospectus, dated February 16, 1999 (the
"Prospectus"), and the related letter of transmittal (the "Letter of
Transmittal"), if (i) certificates for Old Notes are not immediately available,
(ii) the Old Notes, the Letter of Transmittal and all other required documents
cannot be delivered or transmitted by facsimile transmission, mail or hand
delivery to The State Street Bank and Trust Company of California, N.A. (the
"Exchange Agent") as set forth below on or prior to 5:00 P.M., New York City
time, on the Expiration Date, or (iii) the procedures for delivery of the Old
Notes through book-entry transfer into the Exchange Agent's account at The
Depository Trust Company ("DTC") in accordance with DTC's Automated Tender Offer
Program cannot be completed on a timely basis. See "The Exchange Offer--Terms of
the Exchange Offer" section in the Prospectus. Capitalized terms not defined
herein are defined in the Prospectus.
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<S> <C> <C>
BY REGISTERED OR CERTIFIED MAIL: BY HAND DELIVERY TO 4:30 PM: BY HAND DELIVERY AFTER 4:30 PM ON
EXPIRATION DATE:
State Street Bank and Trust Company State Street Bank and Trust Company State Street Bank and Trust Company
of California, N.A. of California, N.A. of California, N.A.
c/o State Street Bank and Trust c/o State Street Bank and Trust c/o State Street Bank and Trust
Company Company Company
2 Avenue de Lafayette, Fifth Floor 2 Avenue de Lafayette, Fifth Floor 2 Avenue de Lafayette, Fifth Floor
Boston, MA 02111-1724 Boston, MA 02111-1724 Boston, MA 02111-1724
Attn: Ralph Jones Attn: Ralph Jones Attn: Ralph Jones
</TABLE>
(Above information to be provided.)
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the Letter of
Transmittal, the undersigned hereby tenders to the Company the principal amount
of Old Notes set forth below, pursuant to the guaranteed delivery procedures
described in "The Exchange Offer, Guaranteed Delivery Procedures" section of the
Prospectus.
<TABLE>
<S> <C>
Principal Amount of Old Notes Tendered: (1) PLEASE SIGN HERE
$ X
X
Signature(s) of Owner(s) or Date
Authorized Signatory
Certificate Nos. (if available): Area Code and Telephone Number:
Total Principal Amount Represented by Old Must be signed by the holder(s) of the Old
Notes Certificate(s): Notes as their name(s) appear(s) on
certificates for Old Notes or on a security
$ position listing, or by person(s) authorized
to become registered holder(s) by endorsement
and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a
trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person
acting in a fiduciary or representative
capacity, such person must set forth his or
her full title below.
If Old Notes will be delivered by book-entry Please print name(s) and address(es)
transfer into Exchange Agent's account with Name(s):
The Depository Trust Company, provide account
number:
Capacity:
Account Number: Address(es):
</TABLE>
All authority herein conferred or agreed to be conferred shall survive the death
or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
- ------------------------
(1) Must be in denominations of principal amount of $1,000 and any integral
multiple thereof.
2
<PAGE>
GUARANTEE
The undersigned, an Eligible Institution within the meaning of Rule
17(A)(d)-15 under the Securities Exchange Act of 1934, as amended, hereby
guarantees that (i) the certificates representing the principal amount of Old
Notes tendered hereby, in proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal (or a manually signed
facsimile thereof), any required signature guarantee and any other documents
required by the Letter of Transmittal, or (ii) timely confirmation of the
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC
pursuant to the procedures set forth in "The Exchange Offer, Book-Entry
Transfer; Delivery and Form" section of the Prospectus, will be received by the
Exchange Agent at the address set forth above, no later than three New York
Stock Exchange trading days after the date of execution hereof.
________________________________________________________________________________
NAME OF FIRM
________________________________________________________________________________
ADDRESS
________________________________________________________________________________
________________________________________________________________________________
ZIP CODE
________________________________________________________________________________
Area Code & Telephone No.
________________________________________________________________________________
AUTHORIZED SIGNATURE
________________________________________________________________________________
TITLE
________________________________________________________________________________
Name: (PLEASE TYPE OR PRINT)
________________________________________________________________________________
Dated:
________________________________________________________________________________
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
3
<PAGE>
EXCHANGE AGENT AGREEMENT
State Street Bank and Trust Company
of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, CA 90071
Ladies and Gentlemen:
Rhythms NetConnections Inc. (the "Company") proposes to make an
offer (the "Exchange Offer") to exchange its 14% Senior Notes due 2010, Series
A (the "Old Securities") for its 14% Senior Notes due 2010, Series B (the "New
Securities"). The terms and conditions of the Exchange Offer as currently
contemplated are set forth in a prospectus, dated May __, 2000 (the
"Prospectus"), proposed to be distributed to all record holders of the Old
Securities. The Old Securities and the New Securities are collectively
referred to herein as the "Securities."
The Company hereby appoints State Street Bank and Trust Company of
California, N.A. to act as exchange agent (the "Exchange Agent") in connection
with the Exchange Offer. References hereinafter to "you" shall refer to State
Street Bank and Trust Company of California, N.A.
The Exchange Offer is expected to be commenced by the Company on or
about May __, 2000. The Letter of Transmittal accompanying the Prospectus (or
in the case of book entry securities, the ATOP system) is to be used by the
holders of the Old Securities to accept the Exchange Offer and contains
instructions with respect to the delivery of certificates for Old Securities
tendered in connection therewith.
The Exchange Offer shall expire at 5:00 P.M., New York City time, on
__________ or on such later date or time to which the Company may extend the
Exchange Offer (the "Expiration Date"). Subject to the terms and conditions
set forth in the Prospectus, the Company expressly reserves the right to
extend the Exchange Offer from time to time and may extend the Exchange Offer
by giving oral (confirmed in writing) or written notice to you before 9:00
A.M., New York City time, on the business day following the previously
scheduled Expiration Date.
The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Old Securities not
theretofore accepted for exchange, upon the occurrence of any of the
conditions of the Exchange Offer specified in the Prospectus under the
caption "The Exchange Offer -- Conditions." The Company will give oral
(confirmed in writing) or written notice of any amendment, termination or
non-acceptance to you as promptly as practicable.
In carrying out your duties as Exchange Agent, you are to act in
accordance with the following instructions:
1. You will perform such duties and only such duties as are
specifically set forth in the section of the Prospectus captioned "The
Exchange Offer" or as specifically set forth
<PAGE>
herein; PROVIDED, HOWEVER, that in no way will your general duty to act in
good faith be discharged by the foregoing.
2. You will establish an account with respect to the Old
Securities at The Depository Trust Company (the "Book-Entry Transfer
Facility") for purposes of the Exchange Offer within two business days after
the date of the Prospectus, or, if you have already established an account
with the Book-Entry Transfer Facility suitable for the Exchange Offer, you
will identify such pre-existing account to be used in the Exchange Offer, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of the Old Securities by
causing the Book-Entry Transfer Facility to transfer such Old Securities into
your account in accordance with the Book-Entry Transfer Facility's procedure
for such transfer.
3. You are to examine each of the Letters of Transmittal and
certificates for Old Securities (or confirmation of book-entry transfer into
your account at the Book-Entry Transfer Facility) and any other documents
delivered or mailed to you by or for holders of the Old Securities to
ascertain whether: (i) the Letters of Transmittal and any such other documents
are duly executed and properly completed in accordance with instructions set
forth therein and (ii) the Old Securities have otherwise been properly
tendered. In each case where the Letter of Transmittal or any other document
has been improperly completed or executed or any of the certificates for Old
Securities are not in proper form for transfer or some other irregularity in
connection with the acceptance of the Exchange Offer exists, you will (unless
we have advised you that we waive such irregularity) endeavor to inform the
presenters of the need for fulfillment of all requirements and to take any
other action as may be necessary or advisable to cause such irregularity to be
corrected.
4. With the approval of the President, Senior Vice President,
Executive Vice President, or any Vice President of the Company (such approval,
if given orally, to be confirmed in writing) or any other party designated by
such an officer in writing, you are authorized to waive any irregularities in
connection with any tender of Old Securities pursuant to the Exchange Offer.
5. Tenders of Old Securities may be made only as set forth in the
Letter of Transmittal and in the section of the Prospectus captioned "The
Exchange Offer -- Terms of the Exchange Offer", and Old Securities
shall be considered properly tendered to you only when tendered in accordance
with the procedures set forth therein.
Notwithstanding the provisions of this paragraph 5, Old Securities
which the President, Senior Vice President, Executive Vice President, or any
Vice President of the Company shall approve as having been properly tendered
shall be considered to be properly tendered (such approval, if given orally,
shall be confirmed in writing).
6. You shall advise the Company with respect to any Old Securities
received subsequent to the Expiration Date and accept its instructions with
respect to disposition of such Old Securities.
2
<PAGE>
7. You shall accept tenders:
a. in cases where the Old Securities are registered in two or
more names only if signed by all named holders;
b. in cases where the signing person (as indicated on the
Letter of Transmittal) is acting in a fiduciary or a representative capacity
only when proper evidence of his or her authority so to act is submitted; and
c. from persons other than the registered holder of Old
Securities provided that customary transfer requirements, including any
applicable transfer taxes, are fulfilled.
You shall accept partial tenders of Old Securities where so
indicated and as permitted in the Letter of Transmittal and deliver
certificates for Old Securities to the transfer agent for split-up and return
any untendered Old Securities to the holder (or such other person as may be
designated in the Letter of Transmittal) as promptly as practicable after
expiration or termination of the Exchange Offer.
8. Upon satisfaction or waiver of all of the conditions to the
Exchange Offer, the Company will notify you (such notice, if given orally, to
be confirmed in writing) of its acceptance, promptly after the Expiration
Date, of all Old Securities properly tendered and you, on behalf of the
Company, will exchange such Old Securities for New Securities and cause such
Old Securities to be cancelled. Delivery of New Securities will be made on
behalf of the Company by you at the rate of $1,000 principal amount of New
Securities for each $1,000 principal amount of the corresponding series of Old
Securities tendered promptly after notice (such notice if given orally, to be
confirmed in writing) of acceptance of said Old Securities by the Company;
provided, however, that in all cases, Old Securities tendered pursuant to the
Exchange Offer will be exchanged only after timely receipt by you of
certificates for such Old Securities (or confirmation of book-entry transfer
into your account at the Book-Entry Transfer Facility), a properly completed
and duly executed Letter of Transmittal (or facsimile thereof) with any
required signature guarantees and any other required documents. You shall
issue New Securities only in denominations of $1,000 or any integral multiple
thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable, except
that, subject to the terms and upon the conditions set forth in the Prospectus
and the Letter of Transmittal, Old Securities tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date.
10. The Company shall not be required to exchange any Old
Securities tendered if any of the conditions set forth in the Exchange Offer
are not met. Notice of any decision by the Company not to exchange any Old
Securities tendered shall be given (and confirmed in writing) by the Company
to you.
11. If, pursuant to the Exchange Offer, the Company does not
accept for exchange all or part of the Old Securities tendered because of an
invalid tender, the occurrence of certain other events set forth in the
Prospectus under the caption "The Exchange Offer -- Conditions" or otherwise,
you shall as soon as practicable after the
3
<PAGE>
expiration or termination of the Exchange Offer return those certificates for
unaccepted Old Securities (or effect appropriate book-entry transfer),
together with any related required documents and the Letters of Transmittal
relating thereto that are in your possession, to the persons who deposited
them.
12. All certificates for reissued Old Securities, unaccepted Old
Securities or for New Securities shall be forwarded by first-class mail.
13. You are not authorized to pay or offer to pay any concessions,
commissions or solicitation fees to any broker, dealer, bank or other persons
or to engage or utilize any person to solicit tenders.
14. As Exchange Agent hereunder you:
a. shall have no duties or obligations other than those
specifically set forth herein or as may be subsequently agreed to in writing
by you and the Company;
b. will be regarded as making no representations and having
no responsibilities as to the validity, sufficiency, value or genuineness of
any of the certificates or the Old Securities represented thereby deposited
with you pursuant to the Exchange Offer, and will not be required to and will
make no representation as to the validity, value or genuineness of the
Exchange Offer;
c. shall not be obligated to take any legal action hereunder
which might in your reasonable judgment involve any expense or liability,
unless you shall have been furnished with reasonable indemnity;
d. may reasonably rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter, telegram
or other document or security delivered to you and reasonably believed by you
to be genuine and to have been signed by the proper party or parties;
e. may reasonably act upon any tender, statement, request,
comment, agreement or other instrument whatsoever not only as to its due
execution and validity and effectiveness of its provisions, but also as to the
truth and accuracy of any information contained therein, which you shall in
good faith believe to be genuine or to have been signed or represented by a
proper person or persons;
f. may rely on and shall be protected in acting upon written
or oral instructions from any officer of the Company;
g. may consult with your counsel with respect to any
questions relating to your duties and responsibilities and the advice or
reasonable written opinion of such counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted to be taken by you hereunder in good faith and in accordance with the
advice or opinion of such counsel; and
4
<PAGE>
h. shall not advise any person tendering Old Securities
pursuant to the Exchange Offer as to the wisdom of making such tender or as to
the market value or decline or appreciation in market value of any Old
Securities.
15. You shall take such action as may from time to time be
requested by the Company or its counsel (and such other action as you may
reasonably deem appropriate) to furnish copies of the Prospectus, Letter of
Transmittal and the Notice of Guaranteed Delivery (as defined in the
Prospectus) or such other forms as may be approved from time to time by the
Company, to all persons requesting such documents and to accept and comply
with telephone requests for information relating to the Exchange Offer,
provided that such information shall relate only to the procedures for
accepting (or withdrawing from) the Exchange Offer. The Company will furnish
you with copies of such documents at your request. All other requests for
information relating to the Exchange Offer shall be directed to the Company,
Attention: Frank Paganelli.
16. You shall advise by facsimile transmission, e-mail, or
telephone, and promptly thereafter confirm in writing to Richard Plumridge, of
Brobeck, Phleger & Harrison LLP, and Frank Paganelli of the Company and such
other person or persons as it may request, weekly (and more frequently during
the week immediately preceding the Expiration Date and if otherwise reasonably
requested) up to and including the Expiration Date, as to the number of Old
Securities which have been tendered pursuant to the Exchange Offer and the
items received by you pursuant to this Agreement, separately reporting and
giving cumulative totals as to items properly received and items improperly
received. In addition, you will also inform, and cooperate in making
available to, the Company or any such other person or persons upon oral
request made from time to time prior to the Expiration Date of such other
information as it or he or she reasonably requests. Such cooperation shall
include, without limitation, the granting by you to the Company and such
person as the Company may request of access to those persons on your staff who
are responsible for receiving tenders, in order to ensure that immediately
prior to the Expiration Date the Company shall have received information in
sufficient detail to enable it to decide whether to extend the Exchange Offer.
You shall prepare a final list of all persons whose tenders were accepted,
the aggregate principal amount of Old Securities tendered, the aggregate
principal amount of Old Securities accepted and deliver said list to the
Company.
17. Letters of Transmittal and Notices of Guaranteed Delivery shall
be stamped by you as to the date and the time of receipt thereof and shall be
preserved by you for a period of time at least equal to the period of time you
preserve other records pertaining to the transfer of securities. You shall
dispose of unused Letters of Transmittal and other surplus materials by
returning them to the Company.
18. You hereby expressly waive any lien, encumbrance or right of
set-off whatsoever that you may have with respect to funds deposited with you
for the payment of transfer taxes by reasons of amounts, if any, borrowed by
the Company, or any of its subsidiaries or affiliates pursuant to any loan or
credit agreement with you or for compensation owed to you hereunder.
5
<PAGE>
19. For services rendered as Exchange Agent hereunder, you shall be
entitled to such compensation and to reimbursement for your reasonable
expenses (including reasonable fees and expenses of your counsel) as set forth
on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus and the Letter
of Transmittal and further acknowledge that you have examined each of them.
Any inconsistency between this Agreement, on the one hand, and the Prospectus
and the Letter of Transmittal (as they may be amended from time to time), on
the other hand, shall be resolved in favor of the latter two documents, except
with respect to the duties, liabilities and indemnification of you as Exchange
Agent, which shall be controlled by this Agreement.
21. The Company covenants and agrees to indemnify and hold you
harmless in your capacity as Exchange Agent hereunder against any loss,
liability, cost or expense, including reasonable attorneys' fees and expenses,
arising out of or in connection with the acceptance or administration of your
duties hereunder, including, without limitation, in connection with any act,
omission, delay or refusal made by you in reliance upon any signature,
endorsement, assignment, certificate, order, request, notice, instruction or
other instrument or document reasonably believed by you in good faith to be
valid, genuine and sufficient and in accepting any tender or effecting any
transfer of Old Securities reasonably believed by you in good faith to be
authorized, and in delaying or refusing in good faith to accept any tenders or
effect any transfer of Old Securities; provided, however, that the Company
shall not be liable for indemnification or otherwise for any loss, liability,
cost or expense to the extent arising out of your gross negligence or willful
misconduct. You shall promptly notify the Company of any action, proceeding,
suit or claim by letter or by facsimile confirmed by letter, but failure to so
notify the Company shall not relieve the Company of any liability hereunder
except to the extent that the Company is materially adversely affected
thereby. The Company shall be entitled to participate at its own expense in
the defense of any such claim or other action, and, if the Company so elects,
the Company shall assume the defense of any suit brought to enforce any such
claim. In the event that the Company shall assume the defense of any such
suit, the Company shall not be liable for the fees and expenses of any
additional counsel thereafter retained by you so long as the Company shall
retain counsel reasonably satisfactory to you to defend such suit, and so long
as you have not determined, in your reasonable judgment, that a conflict of
interest exists between you and the Company.
22. This Agreement and your appointment as Exchange Agent hereunder
shall be construed and enforced in accordance with the laws of the State of
California applicable to agreements made and to be performed entirely within
such state, and without regard to conflicts of law principles, and shall inure
to the benefit of, and the obligations created hereby shall be binding upon,
the successors and assigns of each of the parties hereto.
23. This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
24. In case any provision of this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
6
<PAGE>
25. This Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party to
be charged. This Agreement may not be modified orally.
26. Unless otherwise provided herein, all notices, requests and
other communications to any party hereunder shall be in writing (including
facsimile or similar writing) and shall be given to such party, addressed to
it, at its address or telecopy number set forth below:
If to the Company:
Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, Colorado 80112
Facsimile: (303) 476-4201
Attention: Frank Paganelli
If to the Exchange Agent:
State Street Bank and Trust Company of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Facsimile: (213) 363-7365
Attention: Corporate Trust Administration
(Rhythms NetConnections, Inc. 14% Senior Notes due 2010/2000 exchange)
27. Unless terminated earlier by the parties hereto, this Agreement
shall terminate 90 days following the Expiration Date. Notwithstanding the
foregoing, Paragraphs 19 and 21 shall survive the termination of this
Agreement. Upon any termination of this Agreement, you shall promptly deliver
to the Company any certificates for Securities, funds or property then held by
you as Exchange Agent under this Agreement.
28. This Agreement shall be binding and effective as of the date
hereof.
7
<PAGE>
Please acknowledge receipt of this Agreement and confirm the
arrangements herein provided by signing and returning the enclosed copy.
Rhythms NetConnections Inc.
By:
--------------------
Frank Paganelli
ASSISTANT GENERAL COUNSEL
Accepted as of the date first above written:
STATE STREET BANK AND TRUST
OF CALIFORNIA, N.A.,
as Exchange Agent
By:
------------------------
Name:
---------------------
Title:
---------------------
